Advocacy Update
The BDA continues to lead the dealer community’s response to the economic turmoil resulting from the COVID-19 outbreak. The BDA has remained in contact with policymakers and leaders at the Federal Reserve, Treasury, and Capitol Hill and key agencies throughout this event, and continues to take steps to strengthen the municipal and corporate markets working in lockstep with membership.
The BDA has worked to guide the Fed in the development of the Municipal Liquidity Facility, successfully advocated to Members of Congress to support muni market provisions in the CARES Act, with support of the issuer community, succeeded in requesting the Fed to proactively expand the Money Market Mutual Fund Liquidity Facility to include VRDN’s and bank certificates of deposit, convinced the Fed to expand participation in the Secondary Market Corporate Credit Facility beyond primary dealers, and called on Congress to Act swiftly to include infrastructure in “phase 5” stimulus, including BDA priorities such as AR, BQ Debt, and PAB expansion among other provisions.
Recently the Treasury announced to Congress their intention to allow the MLF to sunset at the end of 2020 per the original legislative language provided. The BDA continues to monitor the situation.
The BDA continues to lead the industry response to the PFM and NAMA requests for exemptive relief on private placements. First and foremost, the BDA continues to press the SEC to withdraw the Temporary Conditional Exemption they imposed in June or at least to allow the Exemption to expire as scheduled after December 31 and to formally withdraw the broader and permanent exemption proposed in December.
Following the SEC’s early summer announcement that they are proceeding with a limited and temporary version of exemptive relief for MA’s, the BDA responded immediately. If the SEC does not repeal the temporary exemption, we have urged them to let it expire at the end of the year. The BDA also partnered with multiple Members of Congress in opposition to the proposed exemptive order and the temporary exemption. Representative French Hill (R-AR), following advice from the BDA, pressed SEC Chairman Clayton on these problematic aspects, and the BDA continues to work with Congressman Hill on the next steps to be taken. The Congressman was featured on the recent BDA webinar series and discussed his thoughts on the order as it stands currently, and possible long-term outcomes.
The Congressman, who was recently featured on a BDA webinar, followed up with the SEC in a bipartisan letter with Congressman Vicente Gonzalez (D-TX) calling on the SEC to not extend the rule beyond December 31, 2020.
The BDA continues to press for a stimulus package that features an infrastructure component to further embolden the municipal bond market. While no stimulus package has included municipal bond provisions, with support of the BDA, the House recently released its Surface Transportation Reauthorization package, which includes several BDA member priorities, including a reinstatement of advance refundings and a BABs-like product with an initial 42-percent subsidy rate, among several others.
Congress has punted the issues to early 2021, and the BDA believes that municipal priorities are well-positioned for consideration early next year.
BDA is pursuing a change to the SEC Net Capital rule as it relates to the settlement of syndicate accounts on corporate bond issuances. There currently exists a mismatch between the SEC’s capital rule and the FINRA syndicate closing rule. FINRA rules allow syndicate lead managers 90 days after deal closing to close syndicate accounts and return funds to comanagers. However, the SEC capital rule specifies that receivables older than 30 days cannot count towards regulatory capital compliance. So comanagers’ funds are locked up for the final 60 of the 90 days until the syndicate account is closed. In late 2019, the BDA wrote FINRA calling to amend FINRA Uniform Practice Code Rule 11880 (“Rule 11880”) to reduce the maximum time to settle syndicate accounts from the current 90 days. The BDA believes reducing the time to settle syndicate accounts would streamline the corporate bond and equity issuance process and reduce counterparty credit risk. However, FINRA has indicated that there are too many new issue transactions where lead managers need the full 90 days that FINRA rules provide. Consequently, we are refocusing our efforts on the SEC’s Net Capital Rule. The current version of the receivables provision of the rule was put in place in 1987. Rule 15c3-1, which specifies that dealers may count certain receivables towards regulatory capital, but only receivables 30 days old or younger. Underwriting receivables due to co-managers in underwriting syndicate do not count as regulatory capital after 30 days. Additionally, the MSRB amended its Rule G-11 governing underwriting syndicates in 2009, reducing the time to settle a syndicate from 90 days after closing to 30. Since our letter to FINRA, we have had continuing conversations with FINRA and SEC staff on this issue. SEC staff have expressed some initial willingness to revisit capital regulations that prohibit dealers from counting receivables longer than 30 days from counting towards compliance with regulatory capital rules. We will continue the dialog with SEC staff on the issue
FINRA Rule 4210 (Margin Requirements) are the margin requirements that determine the amount of collateral customers are expected to maintain in their margin accounts, including both strategy-based margin accounts and portfolio margin accounts. The BDA believes that the amendments are anti-competitive to smaller and mid-size broker-dealers and believe that FINRA should revise the amendments to allow dealers to either charge margin or to take a “capital charge in lieu of margin” on certain transactions.
FINRA has indicated that they have accepted the BDA proposal. They have also indicated that they will adopt other changes to the 4210 amendments and delay the compliance deadline for the rule beyond March 24, 2021, the current deadline. The BDA is continuing to work with FINRA on the proposal, including an upcoming call with the regulator to discuss how the capital charge will work in practice.
The BDA is exploring the prospect of pressing the SEC to amend the 2013 municipal advisor rule. A strong case can be made that the SEC interpreted the statute too narrowly. The SEC has the statutory authority, for example, to exempt underwriting firms from treatment as a MA at the time the dealer discloses to the issuer that they are seeking business as an underwriter rather than when the firm is formally engaged. BDA is drafting an appeal to the SEC to reopen the MA rule with the notion of revising the definition of underwriter in the context of potential treatment as a MA.
BDA is drafting a comprehensive review of fixed income regulation with the theme of promoting principles of fairness and efficiency in securities regulation to be published later this year. This project, with the working title of “Bond Markets 2020,” is designed to guide regulators’ general thinking on fixed income regulation issues rather than advance specific regulatory priorities.
The SEC recently halted a plan to test whether delayed disclosure of corporate bond trades would boost market liquidity after BDA and others lobbied against the proposal. The move comes after widespread opposition from firms like Vanguard, Citadel, and others. BDA was the only sell-side trade group to join in opposition to the proposal. The TRACE pilot, as proposed, was to review the impact of giving traders two full days before having to reveal the largest block trade transactions. BDA opposed the pilot program as BDA member firms believe the proposed 48-hour delay in disseminating trade information would introduce significant and damaging opacity to the market, disadvantage retail investors, and include no incentive for middle-market firms to increase their capital commitment or provision of liquidity.
The SEC recently approved changes to MSRB Rules A-3 and A-6 related to board composition. Among other changes, the amendments will decrease the Board size from 21 to 17 in 2021 and 15 in 2022 and thereafter. There will be eight public board members and seven industry representatives. Of the seven industry directors, at least two will be representatives of non-dealer Municipal Advisors. In a victory for BDA, the MSRB dropped a provision from the first proposed changes which would have specified that one of the two MA seats on the board could have been filled by a MA who is affiliated with a broker-dealer that does not underwrite municipal securities.