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BDA Advocacy Agenda
Federal Policy FocusOCTOBER 2022
Federal Policy Focus
OCTOBER 2022
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.
Statutory Pay as You Go, or PAYGO if not waived by legislative action at the end of the 2022 calendar year potentially could 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)
What is PAYGO
Pay as You Go or PAYGO is a sequestration measure designed to encourage Congress to offset the cost of any legislation that increases spending on entitlement programs or reduces revenues so it doesn’t expand the deficit. Under PAYGO, Congress must pay for such legislation by reducing other entitlement spending or increasing other revenues. This program was first enacted during the 1990's and has since been reenacted in 2010 in its current form, statutory PAYGO.
Congress can, however, waive PAYGO for a particular bill with the support of 60 senators and the majority of the House. Some notable instances of this include the response to the Great Recession, the permanent extension of most of the Bush tax cuts at the end of 2012 and the 2017 Tax Cuts and Jobs Act.
Since the onset of the COVID-19 pandemic, Congress has been on somewhat of a spending spree including the 2021 American Rescue Plan Act (ARPA). Leaders chose a short term fix to PAYGO for ARPA last December, waiving the payments for a year--kicking the can to the end of the 2023 calendar year--creating the current fiscal dilemma.
Based on Office of Management and Budget (OMB) data, unless Congress acts before the end of the calendar year, direct payment bond payments will be cut by $14 billion, effectively eliminating these bond payments starting in 2023 and lasting through 2026 according to the OMB.
BDA and Coalition Advocacy
Last month, the issuer coalition the Public Finance Network submitted a letter to Congressional Leadership highlighting this issue.
The letter can be viewed here.
The BDA/MBFA also continues direct advocacy with key contacts on Capitol Hill, ensuring that policy makers understand the magnitude of the problems that would occur with continued inaction.
While not underestimating the concern, the likelihood of PAYGO not being waived remains low. While ARPA was a partisan package, precedent exists for a PAYGO waiver for a similarly partisan package, the Tax Cuts and Jobs Act. Thus, we fully expect Congress to take similar action.
At this point, it's more of a timing and finding a proper vehicle for the waiver. The most likely scenario will be in a year end spending bill, or as a part of the ongoing appropriations process.
Infrastructure and Municipal Bonds in 2022
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.
These provisions included:
- The reinstatement of tax-exempt advance refundings
- Raise the BQ debt limit to 30 million and tie it to inflation,
- Creation of a new direct-pay bond with a varied reimbursement rate from 35%-28% over its lifespan, and
- Expand the definition of exempt facility bonds.
- $288 billion for prescription drug pricing reform,
- $124 billion for IRS tax enforcement,
- $369 billion for climate and energy, and
- Amends the carried interest loophole.
Potential Lame Duck Spending Package
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.
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 agencies have requested public comment on the proposal, due October 3.
In comments on the proposals BDA told the agencies ``we strongly oppose the Proposals and we urge the MSRB and FINRA to abandon these initiatives and continue to allow the industry to improve reporting times organically."
BDA also told the regulatory agencies "If it was possible for dealers to report 100 percent of trades within one minute, they would already be adhering to that standard since the Rules explicitly or effectively require reporting as soon as practicable. If dealers are already reporting trades as fast as they can, it is unreasonable to impose a one-minute requirement they cannot always meet."
Our letter also focused on the effects of the proposals on small dealers, among other issues, citing comments in the MSRB proposal that one-minute reporting could drive some firms out of the secondary trading business. "Regulating firms out of business would be an unacceptable outcome of the Proposals. Any marginal benefits associated with faster trade reporting would be undercut by negative outcomes for small firms and their customers," we wrote.
BDA's letter is available here.
Dues/ Fees Structure
The MSRB recently proposed* amendments to its Rules A-11, A-12, and A-13 related to fees. The MSRB has amended these rules to increase fees for both dealers and MAs and to change the way fees are set on an annual basis. The fee increase for 2023 is not a proposal; the MSRB has the authority to amend its fees without SEC approval. Amendments to fee rules do require SEC approval.
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 in order 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.
In our comments to the MSRB, BDA opposed the MSRB proposal, not because of the proposed fee-setting scheme, but because the proposal, which resulted from an extensive Board review of the MSRB’s finances, fails to address the longstanding mismatch where broker-dealers pay 90+ percent of the MSRB’s industry-derived revenue. We told the MSRB “Because it fails to address the gross imbalance in MSRB revenue derived from BDs and MAs, BDA cannot support the Proposal.” We also critiqued the MSRB for opacity in its budgeting process.
The MSRB's fee change FAQ is available here. The rule change filing is available here. BDA’s comment letter is available here.
* The MSRB originally published their fee change proposal on June 9, 2022, and BDA submitted its response on July 6, 2022. On July 28, 2022 the MSRB withdrew its original fee proposal and on July 29 resubmitted the proposal with fairly minor changes to supporting documentation.
FINRA Rule 11880
BDA is pursuing a change in regulation to address a mismatch between the SEC Net Capital Rule and FINRA Rule 11880 which governs the settlement of syndicate accounts on corporate bond and equity issuances. FINRA rules allow syndicate lead managers 90 days after deal closing to close syndicate accounts and return funds to co-managers. However, the SEC capital rule specifies that receivables older than 30 days cannot count towards regulatory capital compliance. So co-managers’ funds are locked up for the final 60 of the 90 days until the syndicate account is closed.
In May, FINRA’s Board of Governors approved an amendment to FINRA Rule 11880 to shorten the time to settle syndicate accounts. Under FINRA’s proposal, which reflects a compromise agreement between BDA and a group of bulge brackets previously opposed to any change in the Rule, 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.
On August 18, 2022 FINRA sent a formal rule change proposal to the SEC for approval with a compliance implementation deadline of January 1, 2023. The SEC completed the comment period process, and Commission approval is expected soon. BDA’s latest comment letter to the SEC on the proposal is here.
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 filed 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 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 April 24, 2023.
FINRA's proposal that is the subject of the Commission review is available here.
The BDA filing is available here.
Rule ATS
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 provisions 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 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). That would include Communication Protocol Systems (“CPS”)—platforms which provide messaging and seller-buyer matching services but not trade execution— 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 said "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.
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 lays out a plan for SEC enforcement of Rule 15c2-11 with respect to quotations for fixed income securities.
The No-Action letter presents a three-phase approach to enforcing Rule 15c2-11 in the fixed income markets. In Phase 1, which began on January 3, 2022, dealers are required to make a determination that securities fall under the set of products which the SEC has exempted from the Rule. Under Phase 2 in 2023, 144A securities where issuer financial disclosures are not available publicly would no longer be exempt from the requirements of the Rule. Under Phase 3, which would begin in 2024, published quotations for securities exempt from the Rule will need to also display a link to issuer disclosure information on the screen.
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.
In September 2021 the SEC issued a staff no-action letter confirming that Rule 15c2-11 does indeed apply to relevant fixed income quotations and specified that they will begin enforcing the Rule with respect to fixed income on January 3, 2022. In December 2021 the SEC issued the more detailed no-action letter with exemptions.
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.
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