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Federal Public Policy/Advocacy Priorities

As Congress breaks for its recess August 2 - September 9, we wanted to let you know the status of BDA's federal advocacy priorities.  This is a document - per the BDA board's request - that we distribute periodically to keep you abreast of BDA priorities as they evolve.  You can also find information on the BDA's advocacy priorities and related comment letters, industry initiatives, op-eds and more on the BDA website at www.bdamerica.org.

The BDA continues to strive to be your tangible advocate in Washington, DC.

Please contact the BDA if you have any questions or comments regarding the most updated list of current advocacy priorities.
MBFA Defends Municipal Bonds

 

Municipal Bonds for America, a national coalition founded by BDA and committed to protecting the tax exempt status of municipal bonds, continues to provide leadership in advocacy on Capitol Hill.

  • MBFA has succesfully advanced a bipartisan resolution, House Joint Resolution 112, by Rep. Neal (D-MA) and Terry (R-NE), that celebrates the 100-year anniversary of the municipal exemption.  The resolution has grown to gain 87 bipartisan House cosponsors. 
  • A letter to House leadership by Reps. Ruppersberger (D-MD) and Hultgren (R-IL) which was supported by MBFA members garnered a total of 139 signatures. 
  • On the Senate side, MBFA launched a campaign and visited 100 Senate offices to let Senators know that if they will be starting with a "blank slate" in tax reform, the municipal bond exemption is part of that "blank slate," as it is included in the original, 1913 Federal Tax Code under the doctrine of reciprocal immunity.   

MBFA will host a Municipal Bonds 101 Panel August 6, featuring financial, legal and local elected official representatives in order to continue to educate staff on Capitol Hill. 

 
Tax Reform
 

Chairman Baucus has said that the Finance Committee will mark up a tax bill this fall. The House Ways and Means Committee Chairman Dave Camp (R-MI) has also committed to considering a tax reform bill in his Committee before the end of the year. The House Ways and Means Committee recently concluded working groups on tax reform, and BDA was invited to provide testimony, available [here], to the Financial Services working group.  

 

Finance Committee Chairman Baucus (D-MT) and Ranking Member Hatch (R-UT) recently sent a letter to the full Senate outlining their "blank slate" approach for tax reform - removing all tax preferences from the tax code to pay for lower tax rates for businesses and individuals.  They asked all Senators to submit, by July 26, a list of provisions that should be maintained.  BDA sent a letter to all Senate offices highlighting the market impact of any cut, cap or limit to the exemption, in addition to meeting with Senate staff in key offices. A copy of the letter is available [here].    

 

While some submissions were private and it is not possible to know the scope of support for the exemption within this process, several Senators indicated their support either in public letters or conversations with constituents, including Senators Cardin (D-MD), Cantwell (D-WA), Sanders (I-VT), Begich (D-AK), and Coons (D-DE).

 

 

Legislative Reform of the GSEs

 

The House Financial Services Committee (HFSC) recently approved a bill that would reform the government sponsored enterprises (GSEs).  The bill, known as the Protecting American Taxpayers and Homeowners Act (PATH Act), would liquidate the U.S.-owned home financiers Fannie Mae and Freddie Mac and limit government mortgage guarantees.

 

The PATH Act was sponsored by HFSC Chairman Jeb Hensarling (R-TX). The legislation was approved along a mostly party-line vote of 30-27. Congressmen Gary Miller (R-CA) and Mike Fitzpatrick (R-PA) were the only Republicans opposing the bill, and all of the committee Democrats at the meeting opposed the measure.

 

The PATH Act would eliminate Fannie Mae and Freddie Mac within five years and replace them with a National Mortgage Market Utility to securitize mortgages. Unlike the Corker-Warner Senate bill, the HFSC measure would not include any government guarantee for mortgages securitized through the new entity, even in a crisis.  The full House is likely to consider the PATH Act later this year, but this approach is not likely to gain traction in the Senate.

 

The PATH Act was proposed by Chairman Hensarling as an alternative to a bipartisan Senate GSE reform measure, known as the Corker-Warner bill.  In the near term, the Senate Banking Committee (SBC) has approved a more limited FHA solvency bill sponsored by SBC Chairman Tim Johnson and Ranking Member Mike Crapo, rather than GSE reform. The SBC is unlikely to consider the issue of GSE reform until next year, at the earliest.

 
Municipal Best Execution

 

The MSRB has announced that is will soon publish a concept release on the merits of requiring municipal securities dealers to take specific steps to obtain the best price for investors buying and selling municipal securities.  BDA understands that MSRB will unveil the concept release early this month.  The MSRB plans to seek public comment on whether such a standard is necessary for the municipal market, the benefits that would be attained, as well as on the costs of establishing a more structured approach for documenting how dealers satisfy their existing obligation to obtain a fair price for investors." BDA is engaged in a dialogue with MSRB and SEC, and working to develop input that will help to shape a municipal "best exeuction" proposal.
  
Volcker Rule
 
A proposed Volcker Rule was issued in 2011, and BDA submitted comments on February 13, 2012, available here.  Although municipal securities are supposed to be exempt from the Volcker Rule, the proposed rule only exempts securities issued by general governments, not by agencies or authorities. In addition, the proposed exception for market making is unworkable in the context of principal trading. The net result will be less liquidity for investors and greater volatility. The rule as proposed will put particular stress on middle-market, bank-affiliated broker-dealers - firms that did not contribute to the financial crisis and do not pose a systemic risk.  
 
BDA submitted to the SEC a recommendation to develop a principal trading safe harbor within the market maker exception, in order to preserve customer-facing principal trading that is essential to liquidity in fixed-income markets.  BDA members had a successful follow-up meeting with the SEC in February, and the recommendation appeared to be well-received. The Volcker Rule appears unlikely to be finalized until year-end or later, and BDA will use this time to continue to advance this proposal.
 

Definition of Municipal Advisor

 

Dodd-Frank required the regulation of independent municipal advisors who are not affiliated with broker-dealers -- similar to regulations that already apply to BD-affiliated municipal advisors -- in order to protect issuers.  The BDA believes implementing this requirement is an urgent priority and expressed concern about the SEC's proposed definition of municipal advisor, which was overly broad.  

 

The BDA continues to press Congress, the SEC and the MSRB on the issue. Congressman Stivers (R-OH), along with Rep. Gwen Moore (D-WI) and others reintroduced a bill to clarify the definition of municipal advisor that unanimously passed the House of Representatives last year.  BDA supports this bill, H.R. 797, available [here], and testified in support of a similar bill last Congress.  BDA has met with the SEC on several occasions to urge them to move forward with the an improved definition and regulation of non-dealer municipal advisors in a manner that preserves the role of underwriters under the current MSRB regulatory framework. A BDA letter to the head of the Municipal Securities office, John Cross, is available [here].  

 

It is unclear when the rulemaking will be finalized, and BDA will continue to work to advance it as a priority at the Commissioner level.  When it is final, the MSRB will promulgate regulations that harmonize the definition with its rules, including the relation of underwriter disclosures to issuers under G-17 and unaffiliated municipal advisors, the fees that the unaffiliated municipal advisors will pay to support the MSRB, and other issues identified in this table.  

 
Fiduciary Duty Application to Broker Dealers 

The SEC has published a request for data and other information to assist the agency in considering whether to make new rules about the standards of conduct and regulatory obligations for broker-dealers and investment advisers when they provide personalized investment advice about securities to retail customers.  This includes consideration of applying a fiduciary duty to broker-dealers when providing investment advice to retail customers.  

 

This information request indicates that the rulemaking process will be a lengthy one, probably at least a year if not more.  The information submitted must be analyzed by the SEC and a proposed rule will still need to be issued by the SEC before a final rule could be adopted.

 

The concept of a fiduciary duty for broker dealers arises in other contexts as well.  The CFTC is likely to propose a related duty for swaps involving municipal and other entities; dealer municipal advisors already have a fiduciary duty and DOL is considering issuing a fiduciary duty rule for ERISA plans.  The BDA has met with SEC Commissioners and staff on the proposal, and is closely monitoring the actions of the CFTC and DOL.  
 
Sequestration

 

Sequestration took effect March 2.  The legislation effectively cut by 8.7% reimbursement payments to issuers of direct pay bonds, including Build America Bonds.  It is not clear whether or how Congress will address sequestration for FY 2014, but the outcome could be an even deeper cut to the reimbursement payments.  There are significant implications arising from make-whole and par call provisions for some direct pay bonds that are potentially triggered by such federal actions.  BDA has distributed an updated analysis of sequestration, including the latest guidance from OMB and IRS.  The updated memo, prepared by Nixon Peabody at BDA's request, is available [here].