BDA Advocacy Agenda

Federal Policy Focus

Fall 2023

BDA Capitol Hill Muni Advocacy

The BDA continues to lead industry effort’s promoting municipal bonds on Capitol Hill. The BDA alongside the Public Finance Network has spent considerable time and effort to grow bipartisan support of the tax-exemption, as well serval additional muni provisions including the restoration of tax-exempt advance refundings and the reintroduction of legislation to raise the bank qualified limit and these efforts are beginning to show results.

Support for Advance Refundings and Munis Remains Bipartisan

A longstanding priority of the BDA and following an advocacy push, legislation has been introduced in both Chamber of Congress that includes robust bipartisan support to restore tax-exempt advance refundings. The Investing in our Communities Act was introduced this Spring by Representatives David Kustoff (D-TN) of the House Ways and Means Committee and Dutch Ruppersberger (D-MD) Co-Chair of the House Municipal Finance Caucus. On the Senate side, Roger Wicker (R-MS) and Debbie Stabenow (D-MI) reintroduced the LOCAL Infrastructure Act and are accompanied by 16 bipartisan co-sponsors, a high water mark in support in the upper chamber. Having support of a sitting Member of the Ways and Means Committee sponsor this legislation and having robust support in the Senate cannot be understated, however, many hurdles need to be cleared for passage. It should be noted that Majority staff in the House have softened their stance on the legislation but noted that there is no immediate push to pass this year, instead look towards the end of this Congress next year. 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 and continue to work to position these provisions for the future deliberations around the sunsetting provisions in the 2017 Tax Cuts and Jobs Act legislation.

BDA Hosts Advocacy Fly-In

In late June, the BDA hosted a DC advocacy fly-in, meeting with the MSRB, FINRA, the SEC, U.S. Department of Treasury, and key senior Congressional Committee staff to discuss the BDA’s regulatory and legislative fixed-income priorities.    The BDA was met with positive and productive conversations covering a wide range of regulatory and legislative topics and priorities. Events such as this are key to ensure policy makers hear from industry experts and are invaluable events helping to direct decisions in DC. The meetings focused on a plethora of key market issues and priorities, including:

Market structure and current business conditions in a volatile market,
One minute trade reporting,
The continued importance of tax-exemption,
Restoration of tax-exempt advance refundings,
The need to raise the bank qualified debt limit and work to rebrand the tool focusing on rural benefits, and
Potential for a bi-partisan tax deal in 2024 as vehicle.
- It should be noted at this point, the House majority cannot advance a tax partisan tax package out of Committee do to the NE Republicans demanding action on SALT.

The group met key market regulators at the MSRB, FINRA, and the SEC followed by discussions with the U.S. Department of Treasury Offices of State and Local Finance and Tax Policy. Following agency meetings, the group lobbied key policy makers on the Hill including:

Senior Senate Finance Majority Tax Staff
Senior Senate Finance Minority Tax Staff
House Ways and Means Majority Senior Counsel
House Financial Services Senior Counsel

The BDA plans to host DC fly-in’s regularly throughout the year. If you are interested in participating in future advocacy fly-in's, please email Brett Bolton at bbolton@bdamerica.org.

Proposed Review of MSRB Rule G-38 and SEC 206(4)-5

Legislation has been recently introduced in the House Financial Services Committee and passed Committee via a party line vote that proposes a Commission review of MSRB Rule G-38 the Solicitation of Municipal Securities Business, and SEC Rule 206(4)-5 known as Pay-to-Play. The bill has been proposed by Rep. Andy Barr (R-KY) and has been widely panned by the issuer community. This language was part of a broader anti ESG initiative, and was included in HR 4767 the Protecting Americans Retirement Savings from Politics Act that was passed through the committee late in July. While not including language for Rule changes, the proposed legislation instructs the SEC to review both Rules over a year long period to determine:

The effectiveness of each covered rule, including whether each covered rule accomplishes the intended effect of such covered rule and has any un- intended adverse effects,
The frequency and scope of enforcement actions undertaken pursuant to each covered rule and
The degree to which persons subject to each covered rule have in effect policies and procedures intended to ensure compliance with each such covered rule and are disadvantaged from participating in the political process generally and in relation to persons who solicit or receive government business or government licenses, permits, and approvals other than in connection with the offer or sale of municipal securities; and
Any potential overlap with state and local laws covering the same issues.

At this point, the BDA has more questions regarding the legislation than answers.

We have discussed the legislation with Mr. Barr’s staff as well some Senate counterparts and continue to investigate the origin of the legislation and potential next steps. The Committee also called for a review of issuers practices regarding the frequency ESG disclosures from muni issuers. It is also unclear how much support such a review has the full Chamber and Senate. We will provide further details as the emerge.

FINRA Rule 4210

The SEC on July 27 announced that they have approved amendments to FINRA Rule 4210, FINRA’s margin rule, applying the rule to “covered agency transactions,” or new-issue agency MBS trades. Under the now-approved amendments, firms will be required to collect and hold variation margin on relevant trades that settle on a schedule longer than T+2 (T+1 once the new clearing rules have taken effect) when the price has moved against the dealer’s counterparty to the trade. Because sales of new-issue MBS settle on a monthly schedule rather than T+2, virtually all trades in new-issue agency MBS will be potentially subject to margining. If firms are unable or unwilling to collect margin, the amendments provide for dealer capital charges in lieu of margin. FINRA has announced that the compliance deadline for the CAT amendment is May 22, 2024.

BDA member Brean Capital has initiated litigation against the SEC to have the CAT amendment ruled illegal. They have also requested a stay pending the outcome of the litigation. Their case is based on the notion that the Exchange Act grants the Fed, not FINRA, the authority to regulate margin.

BDA opposes the CAT amendments. While we have successfully delayed these rule changes since 2016, our advocacy options are now exhausted. The rule changes announced in July will severely threaten some firms’ ability to continue to participate in the agency MBS market.

The SEC first approved margin requirement changes to FINRA Rule 4210 for MBS trades in 2015 with a 2016 compliance deadline. That version of the rule has largely never taken effect. In January 2022 the SEC approved the CAT amendments under delegated staff authority. BDA and its members then petitioned the SEC to conduct a “Commission review” of the proposal, which they granted. That stayed the January 2022 approval pending the Commission review. Yesterday’s announcement represents the conclusion of the Commission review and the SEC’s final action on the amendments. The July 4210 announcement is available here. The FINRA proposal approved by the SEC is available here.

One Minute Trade Reporting

The MSRB announced on July 28 that the Board has approved filing with the SEC proposed changes to MSRB Rule G-14 to shorten the time dealers have to report trades to the RTRS from 15 minutes to one minute. Both FINRA and the MSRB 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 one minute. There will be two significant exceptions to the amendment. Please note that this description is not official and is based on informal conversations with staff.

Firms with limited municipal trading activity will be exempt from the 1-minute requirement. Activity will be measured by annual trade count. The Rule will include a hard trade count number. If actual trade count experience is below that figure, the firm will be exempt from the one-minute requirement for the next year and will continue to have a 15-minute deadline. We will need to wait for the actual filing, which will also include guidance and examples, to know details about how the trade count test will apply.
Manual trades will be exempt from the one-minute requirement and will continue to be subject to the 15-minute deadline. Manual trades will be defined in the Rule and will include trades conducted by telephone and others. The manual trade definition will not be limited to mode of execution. Trades that require manual post-trade processing will also be included. Additional details as well as guidance and examples will be in the proposal sent to the SEC.

The FINRA Board also met in July, and their proposal related to a one-minute reporting deadline for corporate bond trades reported to TRACE was on the agenda. It is likely that the FINRA board approved a one-minute reporting proposal similar to the MSRB’s and have been waiting for the MSRB to act before announcing it. If that is the case, we can expect an filings from both FINRA and the MSRB soon. Once we have seen the proposals to be sent to the SEC, we will organize BDA’s response.

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 comply 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.

The next step is for the SEC to consider and vote on a final rule. Unofficial indications are that that could come by the end of the year.

BDA's comment letter is available here.

Financial Data Transparency Act

Congress in 2022 enacted the Financial Data Transparency Act (FDTA) as part of the National Defense Authorization Act. The law includes provisions that will require municipal issuers and certain others to make information disclosures in “machine readable” format. The SEC is charged with developing a “taxonomy” around the design of the reporting scheme that tracks issuer accounting and disclosures. There is a four-year implementation period for the FDTA involving a rulemaking initiative and an implementation period. The SEC at a recent conference on municipal disclosure informed the market that the process has begun internally at the SEC. The municipal issuer community is resisting these requirements on the grounds that machine-readable disclosure documents are not needed or wanted by the market and that compliance would be expensive, especially for smaller issuers. In addition to issuer financial disclosures, the FDTA requires that certain information reporting by dealers must also be in machine readable format. This could include, for example, VRDO remarketing reports to the MSRB’s SHORT system under MSRB Rule G-34. BDA is closely monitoring the SEC’s activities around the FDTA and will engage as appropriate.