Federal Policy Focus

July 2022

Following extensive Congressional action on infrastructure in 2021 that included a substantial expansion of Private Activity Bonds, talk of additional measures this spring has slowed drastically. The bipartisan infrastructure package that provided PAB use expansion for broadband and carbon capture, as well doubled the high bond cap, was meant to set the stage for additional and more robust infrastructure legislation this year. However, at this time it seems that Congressional Democrats cannot find a path forward.

Build Back Better Social Infrastructure Package

Following passage of the Bipartisan Infrastructure Framework, Congress continued to press forward on a sprawling social infrastructure spending package early last fall , the Build Back Better Act. Initial drafts that totaled nearly $3.5 trillion in new spending included a vast expansion of municipal finance tools.

It seems like party leaders remain focused on raising the corporate and high earner tax-rates, as well working to bring cost down on items such as medication. As we have noted throughout, it remains very unlikely that anything passes as there are multiple camps of thinking within the democratic caucus on current tax-rates and reversing any of the 2017 tax Cuts and Jobs Act decreases will be a challenge in this environment.We also continue to work with our partners on Capitol Hill and within the issuer community to monitor and lay groundwork for inclusion of key muni provisions into the potential lame duck spending package that would follow the November midterm elections.

Congress this spring passed a funding measure that will keep the government fully funded through late 2022, setting the stage for the additional spending bill. While odds for inclusion of key muni provisions into a lame duck bill are low, we are told on the Hill that this is a possible avenue and it is being discussed.

This spring, the BDA filed a comment letter with the MSRB on their Request for Information on municipal securities with "ESG" labeling. BDA focused on three central themes in our response:

In discussing the MSRB's lack of authority to regulate issuer disclosure, BDA told the Board "This lack of authority means there is no meaningful action the MSRB could take to address any hypothetical issues associated with issuer ESG designations, so the purpose of the Notice is unclear."

BDA's comment letter is available here.

A key element of the MSRB's rule changes involve a new "Annual Rate Card" approach to setting fees. Rather than fee rates being fixed from year to year, fee rates will change annually based on the MSRB's trailing year revenue and projected market activity. If the MSRB generates an unbudgeted surplus in a particular year, fees the next year would be reduced to maintain a target level of liquid reserves. If the MSRB generates less revenue than anticipated, fee rates the following year would increase to address the shortfall. The stated reason for the change is to establish greater predictability and stability in MSRB revenues.

The MSRB released a FAQ document addressing some of the details of its new fees. One relevant point in the FAQ is "the relative contribution of each fee to overall revenue" will be "consistent with actual performance over the past two years," indicating that the relative contributions of dealers and non-dealer MAs to the MSRB's revenue will remain roughly the same.

The FAQ document also includes the first "Annual Rate Card" for the new fee system to be in effect from October 1, 2022, through December 31, 2023. (Future rate card will cover calendar years.) Dealer MSRB fees for next year will rise:

• The new issue underwriting fee, currently at $0.0275 per bond, will increase eight percent to $0.0297.
• The secondary transaction fee, currently at $0.0100 per bond, will increase seven percent to $0.0107.
• The trade count fee, currently at $1 per ticket, will increase 10 percent to $1.10.
• The Municipal Advisor professional fee will also increase six percent from $1000 per registered professional to $1060.

As stated, this is an announced rule change, not a proposal. Still, the SEC will accept public comment on the rule change once it is formally published.

The MSRB's fee change FAQ is available here. The rule change filing is available here.

In May, FINRA announced that at their Board of Governors meeting , a proposal to amend FINRA Rule 11880 to shorten the time to settle syndicate accounts. Although the announcement is not specific as to the terms of the amendment, we have been informed unofficially by FINRA staff that their Board approved the "70-30 approach" that arose from a compromise between the BDA coalition and the bulge bracket firms that were opposed to a strict 30-day syndicate settlement.

If FINRA follows the proposal that was agreed to by BDA and the bulge brackets, then under the amendment, syndicate bookrunners would be required to pay out 70 percent of gross underwriting spread to syndicate members within 30 days of deal closing. The remaining 30 percent, net of syndicate expenses, would be required to be paid within 90 days.

The next step in the rulemaking process is for FINRA to transmit a formal rule change proposal to the SEC for approval. FINRA staff have told us that the Board directed staff to move as quickly as possible with the goal of having this rule change fully implemented by the end of the year. There will be an additional public comment period when the proposal is under consideration at the SEC, and BDA will submit comments in favor of FINRA's proposal. BDA, together with BDA member firm Brean Capital, recently submitted a statement to the SEC in opposition to FINRA's proposed Covered Agency Transaction (CAT) amendment to their Rule 4210 on margin. 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.BDA's statement comes in response to the SEC requesting comments on the CAT amendment in the context of their Commission-level review of the proposal. That review is a result of BDA's and Brean's previous filing where we requested that review. The Commission's action also stayed their previous approval of the proposal.In the statement, prepared by outside counsel at Cooper & Kirk and Olshan Frome Wolosky, 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."

There is no deadline for the Commission to complete their review of the CAT amendment. We will continue to press the Commission to reject FINRA's proposal. Please call if you have any questions.

FINRA's proposal that is the subject of the Commission review is available here.

The BDA filing is available here. BDA submitted two comment letters to the SEC on their far-reaching proposal to amend Rule ATS. Rule ATS is the 1998 regulation governing alternative trading systems. The SEC has proposed to amend Rule ATS to eliminate the current exemption from registration for ATSs that support trading in government securities and to require Communication Protocol Systems (CPS), messaging systems which may connect buyers and sellers but generally do not support trade execution, to register as ATS. In BDA's first comment letter on the Rule ATS proposal we generally supported the headline proposals on the basis that entities that provide similar services should be regulated similarly.

Rule 15c2-11 is the SEC Rule requiring traders to review certain issuer information and disclosures before "publishing" a "quotation" to a "quotation medium." Before late last year the Rule was widely believed to apply only to OTC equities. Last year the SEC announced that Rule 15c2-11 also applies to quotations for fixed income products except municipals and governments. The SEC also published a no action letter that exempts some but not all fixed income products from Rule 15c2-11.

In our second comment letter, made possible by the SEC’s extending the comment letter period, BDA raised the issue that based on previous SEC guidance, some have reasonably interpreted "quotation medium" to include all ATSs which are not Interdealer Quotation Systems (IDQS), including CPS which would be treated as ATS under the proposal. BDA today told the SEC "one element of addressing 15c2-11 and fixed income for some firms will be to seek and provide liquidity through platforms which are not quotation mediums in order to avoid the expense and risk of complying with the Rule." We also wrote "if all non-IDQS ATSs are quotation mediums as the Commission has previously suggested, the fallout from the decision to apply Rule 15c2-11 to fixed income would be even larger than we initially anticipated." BDA’s comment letters are available here and here.