BDA Advocacy Agenda

Federal Policy Focus

April 2023

Capitol Hill and Municipal Bonds in 2023

Following a Congress in which trillions of dollars was spent of infrastructure including an expansion of private activity bonds, expectations have been lowered heading into the 118th Congress for additional action on key municipal bond provisions. With near misses on key legislation such as the reinstatement of tax-exempt advance refundings, raising of the BQ debt limit as well a new direct-pay bond program during the Build Back Better debates of 21/22, what is the state of play in 2023?
Following a hotly contested midterm elections, Republicans have taken over the House (albeit with a razor thin majority), and Democrats retained control of the Senate likely setting up 2 years of gridlock in Washington heading into the 2024 presidential election cycle. While gridlock has some positives for municipals, i.e., the tax exemption remains far off the chopping block, can any offensive efforts to advance muni legislation be successful?

Congressional Outlook for Municipals

As noted, Congress has been on somewhat of a spending spree since the beginning of COVID in 2020. This included the bipartisan infrastructure package known as the Infrastructure Investment and Jobs Act (IIJA) as well the much-slimmed Build Back Better package renamed as the Inflation Reduction Act (IRA). While the IIJA did include a PAB expansion, the IRA did nothing to further munis as well included a corporate minimum tax of 15% that some believe could negatively impact the municipal bond tax-exemption with some corporations having to pay tax on their muni holdings.
The BDA alongside the Public Finance Network has spent considerable time and effort to grow bipartisan support of munis including the expansion of the House Municipal Finance Caucus and these efforts are beginning to show results.
*Following extensive advocacy from the BDA and PFN, in March, legislation that would reinstate tax-exempt advance refundings was introduced by Rep. Dutch Ruppersberger (D-MD) and Rep. David Kustoff (R-TN). Rep. Kustoff sits on the powerful House Committee on Ways and Means which is the committee of jurisdiction for tax policy an important development for the trajectory of the legislation.
We also fully expected other key provisions to be introduced in the coming months including legislation to raise the bank qualified debt limit to $30 million tied to inflation by Rep. Terri Sewell (D-AL) and continue working to find a Republican counterpart for this effort.
While we expect odds of advancement of these key bills this Congress remain low, having support on key House Committees is invaluable for the longer-term efforts of the muni community.
The BDA is planning to have multiple DC fly-ins throughout 2023 focusing on these legislative issues as well regulatory issues at the MSRB, FINRA, and the SEC. Details will be released in the coming months.

Sequestration and Direct Pay Bonds

Due to Congressional spending following the onset of the COVID pandemic, a Congressional budget control measure which was reenacted in 2010 has the potential to interrupt federal payments to issuers of a plethora of direct-pay bonds. Following extensive advocacy from the BDA and the greater Public Finance Network, a 2-year waiver of PAYGO was passed in the 2022 year-end spending deal.
Statutory Pay as You Go, or PAYGO if not waived by legislative action at the end of the 2022 calendar likely would have eliminate bond payments to a figure of upwards of 14 billion dollars, as well impact other headline grabbing discretionary spending programs such as Medicare, customs and border patrol, and farm support programs. It should be noted that in its current form enacted in 2010, no PAYGO cuts have occurred.
Specifically, unless new legislation is enacted that will waive PAYGO, these bond types are potentially impacted:
  • Build America Bonds (BAB),
  • Qualified School Construction Bonds (QSCB),
  • Qualified Zone Academy Bonds (QZAB),
  • New Clean Renewable Energy Bonds (New CREB), and
  • Qualified Energy Conservation Bonds (QECB)
PFN and the BDA will continue conversation with Congressional Leaders throughout this Congress working to ensure that a PAYGO waiver does not become an issue once the two-year extension lapses in 2024.

SEC proposed Rule Best Execution

The SEC in December voted to approve a proposed new SEC Rule Best Execution which would impose a best execution standard on securities trades including fixed income. The new rule would be in addition to existing best execution rules at the MSRB and FINRA. Dealers would be required to be in compliance with all three as appropriate.
The proposed rule would require dealers to produce written supervisory procedures around their best execution requirements. Dealers would be required to survey “material liquidity sources” to ensure they execute customer trades at the best available price. Certain trades, including all principal and riskless principal trades, would be subject to heightened compliance standards including documenting how the firm determined best execution. Trades with institutional customers would be partly exempt from the Rule, although institutional customers are not defined in the proposal.
On March 31 BDA filed a comment letter with the SEC in opposition to the proposal. In the letter we ask the SEC to abandon the initiative because it is unnecessary, overly restrictive, and needlessly expensive. If the SEC moves forward with the proposal, we asked that it be amended to make it more workable with the following changes:
  • Remove riskless principal trades from the definition of conflicted trade.
  • Define institutional investor to encompass existing definitions in FINRA and MSRB rules and clarify the scope and focus of the institutional investor exemption in the context of fixed income.
  • Make it clear that last look and internalizing fixed income trades to the benefit of customers would not violate Regulation Best Execution or cause a trade to be treated as “conflicted.”
  • For conflicted trades, eliminate the requirement to survey a broader range of markets beyond material potential liquidity sources and to separately document the best execution analysis for every trade.
  • Eliminate the requirement to provide annual best execution reports to firms’ boards of directors.
  • Permit dealers to use the introducing broker partial exemption when its executing broker is affiliated.
BDA's comment letter is available here.

One Minute Trade Reporting

Both FINRA and the MSRB have issued coordinated proposals to reduce the trade reporting deadlines for the TRACE and RTRS systems from the current “as soon as practicable but no later than 15 minutes” to just one minute.
Both the FINRA and MSRB proposals feature significant analyses of trade reporting speeds. The MSRB proposal states that 77 percent of municipal trades are already reported within one minute, and the FINRA proposal states that 82 percent of TRACE-eligible trades are reported within one minute. Both proposals suggest that moving all trades to a one-minute standard is doable and cost-effective while requesting comment on possible problems and issues.
BDA provided comments to both agencies in October. We told MSRB and FINRA that “there are good reasons why dealers are not already reporting 100 percent of trades within one minute despite both Rules explicitly or effectively requiring trade reporting ‘as soon as practicable.’” We cite several situational reasons why some trades cannot be reported within one minute, including, for example, if that firm has never traded that bond before or for trades entered manually. We asked both agencies to withdraw their proposals. Short of that we said “If the MSRB and FINRA decide to move forward with one-minute reporting despite the predictable negative outcomes, we recommend significant changes to the Proposals, including maintaining 15-minute reporting for trades executed by telephone, manually inputted into RTRS or TRACE, cleared through third-party clearing firms, allocated to a dually registered RIA’s sub-accounts, or trades that require a dealer to populate their security record before reporting.”
The comments received by both agencies were overwhelmingly opposed to the proposal. We will continue to press the MSRB and FINRA on their trade reporting initiative.

FINRA Rule 4210

FINRA's proposed Covered Agency Transaction (CAT) amendment to their Rule 4210 on margin is currently in Commission review in response to a petition BDA and BDA member Brean Capital files earlier this year. In a Commission review, each commissioner’s office must conduct a review of the proposal. The review cannot be delegated to SEC division staff. At the conclusion of the review, the SEC will decide whether to sustain their January 2022 decision to approve the amendment, currently stayed pending the outcome of the review, or to reject the proposal. There is no deadline for Commission action.
The proposed amendment would require FINRA-member dealers to collect customer variation margin on most sales of new-issue agency MBS or take a comparable capital charge when the market moves against a customer position.
In a statement we filed in response to the review, BDA told the SEC that "Maintaining the stay is imperative given the many and immediate harms that the Proposed Rule Change would have on market participants." We also told the Commission that they "should deny the 2021 Proposed Rule Change and continue to deny effectiveness to SR-FINRA-2015-036, insofar as that Rule would subject forward-settling transactions in federal government mortgage-backed securities ("Agency MBS") to margin requirements."
In an additional, expected action, FINRA recently extended the deadline for compliance with the 2016 changes to Rule 4210, already approved by the Commission, to October 24, 2023.
FINRA's proposal that is the subject of the Commission review is available here.
The BDA filing is available here.

FINRA proposes changes to TRACE reporting for Delayed Treasury Spot Trades

FINRA late last year proposed changes to their TRACE reporting rules for Delayed Treasury Spot Trades (DTSTs), corporate bond trades where a spread to Treasuries is agreed to by both parties to the trade early in the day but where the dollar price is established, and actual execution takes place later in the day at an agreed upon time. Under the proposal dealers would be required to report to TRACE trade details, including the spread to Treasuries and the reference security, at the time the spread is agreed to and report the dollar price later in the day when it is established.
In our letter to FINRA on the proposal, BDA opposed the change “because it would create a cumbersome and expensive mechanism for trade reporting and because FINRA has not appropriately scoped the full effects of the proposal, relying instead on estimates of the volume of trades that would be affected.” We told FINRA that a large majority of trade reporting is conducted by OMS vendors and that those vendors system architecture does not currently support reporting trades before they are fully executed with a known dollar price. Adapting systems to accommodate the rule change would be expensive and time consuming.
We also critiqued FINRA’s economic analysis of the proposal on the basis that it uses speculative assumptions about the volume of trades that would be affected by the rule changes. Instead of moving forward with the current proposal we asked FINRA to consider a rule change where DTSTs would continue to be reported when all trade terms including the dollar price are known, but those trade reports would be flagged as DTSTs and would include the time that the spread to Treasuries was established.
We also raised the issue of the DTST proposal in the context of a previous FINRA proposal to shorten the TRACE trade reporting time from 15 minutes after execution to one minute. “If FINRA adopts both one-minute trade reporting and dual reporting for DTST trades as proposed in the Notice, we ask that the proposals be adopted separately with a long period of time between the effective dates of both amendments in order to ensure firms are fully prepared to comply with both,” we said.
We plan to maintain our advocacy around this proposal.

SEC Rule 15c2-11

On December 16, 2021, the SEC issued a staff No-Action letter related to SEC Rule 15c2-11. The No-Action letter for the first time specified that quotations for fixed income securities are subject to SEC Rule 15c2-11, a decades old rule previously assumed to apply to over-the-counter equities.
SEC Rule 15c2-11 requires dealers to review issuer financial information prior to publishing quotes to “quotation mediums” for over-the-counter securities. 2020 amendments to the Rule specify that the issuer financial information must also be publicly accessible.
On November 30, 2022 the SEC issued a third staff no-action letter related to applying Rule 15c2-11 to fixed income quotations. Under the revised approach, the no-action letter that applied to bond quotations in 2022 will effectively remain in place for 2023 and 2024. The principal change is that dealers can continue to publish quotations for 144A securities if the issuer’s financial are available to potential buyers; they do not have to be available publicly.
BDA has been working with SIFMA on this issue. There is currently a joint BDA-SIFMA working group focused on identifying and addressing key compliance questions associated with applying 15c2-11 to fixed income quotations.

FINRA Corporate Reference Database

BDA in February filed a comment letter with the SEC raising concerns over a FINRA proposal to establish a Corporate Bond New Issue Reference Data Service. BDA told the SEC “We are especially concerned about the costs and burdens the Proposal would place on mid-size and regional broker-dealers and about FINRA’s weak accounting for costs FINRA itself would incur around implementing the Proposal.”
FINRA in 2019 proposed to establish and operate a Corporate Bond New Issue Reference Data Service, a database of corporate bond new issues. The proposal arose from a recommendation to establish a corporate bond reference database from the SEC's now idle Fixed Income Market Structure Advisory Committee. Under the proposal underwriters would be required to submit to FINRA 32 descriptive data fields for the new corporate deals they underwrite. FINRA would repackage and sell the data via subscriptions.
BDA told the SEC “Throughout the rulemaking process around the Proposal, FINRA has failed to provide robust cost estimates either for expenses that would be incurred by firms themselves or costs that would be incurred by FINRA.” “We urge the Commission withhold further support of the Proposal until the SEC and the public have a full accounting of the project’s costs,” we told the SEC.
The SEC approved the FINRA proposal under delegated authority in December 2019. Since then, the FINRA proposal has gone into “Commission review” with the approval stayed. Bloomberg has also challenged the FINRA proposal in litigation. Recently the DC Circuit Court ruled in that case “the Commission failed to respond adequately to Bloomberg’s concerns about the cost of building and maintaining the program and the extent to which those costs – which could conceivably amount to millions, or tens of millions of dollars – will be borne by market participants.”
FINRA's proposal as approved by the SEC is available here. The request for comment we responded to today is available here. BDA's comment letter is available here.
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