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BDA Advocacy Agenda
Federal Policy FocusJANUARY 2022
Federal Policy Focus
JANUARY 2022
Infrastructure and Municipal Bonds
Follow extensive campaign trail promises and years of discussion surrounding infrastructure policy, Congress and the Biden Administration this year took bold action and passed a $1 trillion dollar bipartisan infrastructure package that provides nearly $600 billion in grant money while expanding usage of private activity bonds.
These municipal financing tools include:
- The Rural Broadband Financing Flexibility Act (S.1676) is the template for adding broadband as an allowable use for private activity bonds (PABs). This would allow states to issue PABs to finance broadband deployment, specifically for projects in rural areas where a majority of households do not have access to broadband.
- Carbon Capture Improvement Act (S. 1829) allows carbon capture and direct air capture (DAC) technologies to be eligible for PAB financing. Private activity bond financing encourages commercial deployment, which is essential for bringing costs down and developing these technologies to scale. These bonds would be 75% exempt from the volume cap.
- The bill increases the current cap of tax-exempt highway or surface freight transfer facility bonds from $15 billion to $30 billion as proposed by the bipartisan BUILD Act (S.881). Currently, $14,989,529,000 billion of the $15 billion caps has been issued or allocated. Increasing the cap will allow state and local governments to enter into additional public-private partnerships to supplement future surface transportation projects with private investment.
Grant money will be funneled through the Department of Transportation and other agencies for distribution to state and localities over the coming years, and the BDA continues to work with the Department on key financing issues.
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, 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 life span, and
- Expand the definition of exempt facility bonds.
At this time, prospects for Build Back Better appear slim. Democrats apparently do not have sufficient votes in the Senate even for a simple majority vote required under the budget reconciliation process with Senator Joe Manchin (D-WV) formally announcing he will be unable to support the sprawling $1.75 trillion dollar Build Back Better Act after months of negotiation with Congressional Democrats and the Biden Administration. The surprise announcement comes after weeks of apparent progress with the Administration and the moderate Senator, possibly imperiling the entire package.
While this is a major setback if not a fatal blow to the BBB package, Manchin has now stated that if Leaders take additional steps to redo the package more in line of his thinking than he possibly will change his position and vote for the package--a move that will likely infuriate the more progressive factions of the party and potential further lowering chances of passage.
As we have previously noted, all muni provisions were trimmed out of the package earlier this fall in an effort to cut the overall cost of the package in half. While probabilities remain low that the provisions could be brought back into a revamped package, we continue to advocate for this possibility and press for inclusion in other future spending and tax packages in 2022.
Next steps remain unknown, however Senate Leaders claim that they will bring the package to the floor for debate and vote in early 2022 regardless of Manchin's status.
FINRA 4210 Amendments
FINRA Rule 4210 governs customer margin requirements. FINRA has had a multi-year project to amend Rule 4210 to apply margin requirements to trades with extended settlements even for DVP accounts. Among other issues BDA has raised around 4210, we requested that dealers be permitted to take a capital charge in lieu of customers posting margin for certain extended settlement trades.
FINRA in 2021 issued two proposals regarding Rule 4210. The first, a concept release, would apply margin requirements to when-issued transactions that settle outside normal settlement windows (BDA's comment letter). The second FINRA proposal, focused on “covered agency transactions” (CAT), or new issues of agency-backed MBS, was issued by the SEC as a rule proposal (BDA's comment letter). We told FINRA that the Rule under both proposals would severely disadvantage regional and middle-market firms. We asked FINRA to revise the Rule so that, for example, margin requirements would not apply as long as an MBS trade settled by the published good delivery date.
Since then, FINRA has sent their CAT proposal to the SEC for approval. In response the SEC initiated a proceeding around the proposal where Commissioners are examining the issue in greater detail. In the context of the proceeding, BDA together with Brean Capital filed a brief reiterating our opposition to the proposal. (BDA's Comment Letter). FINRA filed a rebuttal in response. The SEC currently has until January 20, 2022 to approve or disapprove the FINRA CAT proposal.
In November FINRA approved an amendment to Rule 4210 extending the compliance deadline for extended settlement trades to April 26, 2022, although that deadline will almost certainly be extended further to accommodate the SEC’s proceeding on the CAT proposal.
Corporate Syndicate Rule
BDA has been 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 leads managers 90 days after deal closing to close syndicate accounts and pay out funds to co-managers. However, the SEC capital rule specifies that syndicate receivables cannot count towards regulatory capital compliance. So, co-managers funds are locked up for 90 days after deal closing until the syndicate account is closed.
BDA and a group of CEOs of minority-, women-, and veteran-owned firms recently met with SEC Chair Gary Gensler on the issue, and Chair Gensler indicated his support for reducing the 90-day deadline of the FINRA rule. BDA is preparing a comment letter in support of FINRA’s proposal which we will file by the mid-January deadline.
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 will begin on January 3, 2022, dealers will be 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 not 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.
The December No-Action letter is unworkable because there is insufficient time before January 3, 2022 for dealers to build compliance systems and procedures to ensure compliance with the terms of the exemption. BDA has communicated this to SEC staff, and we will follow up with a reaction in writing.
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.
Rule 15c2-11 has existed for some time. Many have assumed that the rule does not apply to fixed income products. But in its release announcing the changes last year, the SEC specified that the rule does apply to fixed income products except for municipals.
BDA met with SEC staff in the spring about a blanket exemption from Rule 15c2-11 for fixed income products, and we sent a draft exemptive relief request to the staff of the SEC Division of Trading and Markets. Subsequent to that, the SEC informed us that SIFMA is pursuing a similar exemptive relief request and asked the two organizations to combine efforts. Based on that request, BDA and SIFMA had a series of meetings with four of the five SEC commissioners on Rule 15c2-11, in August sent a joint exemptive relief request to the staff of the SEC’s Division of Trading and Markets requesting a broad exemption from the Rule for fixed income products, and conducted follow-up meetings with staff.
In September 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. Subsequent to that, BDA and SIFMA met again with Trading and Markets staff on the issue. They asked BDA and SIFMA to prepare a “term sheet” outlining on a product-by-product basis which fixed income securities should be exempt from the Rule and detailing the availability of issuer disclosure information for each product category. We transmitted that document to the SEC in September.
MSRB draft compliance resource for new issue pricing
The MSRB recently requested comment on a draft compliance resource related to dealer and MA duties with respect to new issue pricing. BDA has conducted a member call to discuss the issue, and we will file a comment letter by the January deadline.
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