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Federal Public Policy/Advocacy Priorities

A Message from the BDA:

 

As 2013 comes to a close, we have prepared an end-of-the year wrap-up of legislative and regulatory advocacy issues affecting middle market broker dealers. But first, I want to send a special thank you to our membership. Almost six years ago, the BDA was organized with a modest 14 member firms. Today, we proudly represent 53 member firms and we continue to grow. We are recognized on Capitol Hill, in the offices of the industry's Regulators and in the media as a go-to resource to provide that much needed voice for middle market and regional dealers.

 

I want to thank our membership for working hand-in-hand with BDA staff as we promote the voice of middle market dealers and continue to build and strengthen our advocacy initiatives. Never hesitate to call or email if you need anything from your trade association.

 

Have a safe Holiday Season and a Happy New Year!

 

Sincerely,

Mike Nicholas

CEO
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 generated support for 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 93 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 hosted 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. The coalition will remain active into 2014 as Congress continues to address tax reform and respond to budgetary pressures. 

 

TMPG & FINRA TBA Market Margin Requirements 

  

On December 5, FINRA's Board considered amendments to FINRA Rule 4210 (Margin Requirements) to establish margin requirements for TBA transactions, Specified Pool Transactions and transactions in Collateralized Mortgage Obligations with extended settlement dates.  FINRA is expected to release a proposed rule on those topics within the next few days.

 

Also in December, BDA members met with representatives of the New York Fed and TMPG to discuss agency MBS margining requirements and other issues affecting middle market dealers.  The New York Fed and TMPG have expressed a desire to establish a more robust dialogue with middle-market dealers regarding topics such as the TMPG margining best practices that must be implemented by December 31, 2013.  BDA members were able to discuss issues ranging from challenges in managing investment advisor accounts acting on behalf of numerous subaccounts to the costliness of deploying third-party provider systems that aim to assist in the implementation of the margining requirements but provide an incomplete solution.  Members also highlighted challenges with MSFTAs that contain extraneous, one-sided provisions, and identified unique challenges with  the collection of margin on sub accounts for new issue CMOs.  

 
Tax Reform
 

Despite numerous working groups, white papers and hearings, the year ended without a comprehensive tax reform bill marked up despite pledges from both Finance Committee Chairman Max Baucus (D-MT) and Ways and Means Committee Chairman Dave Camp (R-MI).  It is rumored that the House Ways and Means Committee will try again to take up tax reform in the first quarter of 2014.  BDA, both through the MBFA coalition and individually, has urged policymakers not to cut, cap or limit the tax exemption on municipal bonds and also emphasized that direct-pay bonds should be an option in the marketplace but not a replacement for tax-exempt bonds.

 

Early in the year, the House Ways and Means Committee 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 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].    

 

Budget and Sequestration

 

In December, House and Senate Budget Committee Chairs Paul Ryan (R-WI) and Patty Murray (D-WA) reached a two-year bipartisan agreement of their budget conference committee regarding top-line spending numbers for FY 2014 and FY 2015, and partially replaced sequestration in the process.  The House and Senate each passed the bill prior to recessing for the year. 

 

In a wrinkle for direct-pay bonds, the agreement does not provide headroom on mandatory sequestration for FY 2014 and FY 2015 - only discretionary sequestration.  Reimbursements for BABs is mandatory spending.  So, cuts to reimbursements on direct-pay bonds remains in place and for FY 2014, that level is 7.2%.  These reimbursements would continue to be cut each year of sequestration unless Congress acts.  Moreover, one of the ways the agreement was paid for is to require that mandatory programs be sequestered for two years beyond the original sequestration termination date of 2021 - through 2023.  Direct-pay reimbursements would be cut in 2022 and 2023 at the same rate as 2021 - a percentage yet to be determined by OMB, but in those out years, a percentage representing a severe cut.

 

Notably, this agreement does not include any new revenues from tax increases or closing tax loopholes.  Instead, the deal would raises revenue through a combination of spending cuts to non-entitlement programs and other budget savings.  The agreement does not address the issue of raising the debt limit, which is expected to be reached in mid-February.
 

Legislative Reform of the GSEs

 

The House Financial Services Committee (HFSC) approved a bill this year 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 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.

 

IRS Proposes Regulations on Issue Price

 

On September 13, 2013, the IRS released two sets of proposed regulations that would make a number of significant changes to the arbitrage restrictions applicable to tax-exempt bonds, particularly the "issue price" rules.  BDA filed its comments on December 16, available [here] with the referenced enclosure [here].

 

For additional information, Nixon Peabody has prepared an analysis, available [here], regarding these two sets of proposed regulations released by the IRS September 13 that would modify the long-standing rules for determining issue price by:

  • Increasing the percentage of bonds that must be sold to establish the issue pricefrom 10 percent to 25 percent, and
  • Eliminating an issuer's ability to rely on its reasonable expectations regarding the issue price. 

Other aspects of the Proposed Regulations are changes to the rules for swaps and

other "qualified hedges," and changes to the rules related to financing of working

capital expenditures.  The IRS will hold a public hearing on February 5, 2014.

 
Municipal Best Execution

 

On October 7, BDA filed comments with the MSRB, available [here], regarding their release inquiring whether to require the use of specific procedures designed to promote fair pricing (known as "best execution"). A copy of the MSRB's press release and links to the concept release are available [here].

 

BDA's comments:

  • Draw distinctions between the municipal and corporate bond markets and urge the MSRB not to simply cut and paste from rule 5310;
  • Recommend that any rule provide for policies and procedures to be put in place rather than being applied on a trade-by-trade basis;
  • Advise that a best execution rule may be workable for bonds that dealers purchase for their customers, but that for bonds that they sell, best execution through multiple venues is unworkable as the market is often illiquid and in those cases, the MSRB should look to the current fair pricing rule regime.
  • Recommend that SMMPs be excluded from the protection of the rule.

The MSRB is expected to release a proposed rule taking comments into account in the coming weeks.
  
Volcker Rule
 

On December 10, the final version of the Volcker Rule was approved by the Board

of Governors of the Federal Reserve System, Commodity Futures Trading Commission,

Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency

and the Securities and Exchange Commission. The final rules become effective April

1, 2014. The Federal Reserve Board has extended the conformance period until July

21, 2015.

 

The rule bans proprietary trading, with key exceptions. With respect to the market

making exception, according to the Rule, a trading desk would be required to routinely

stand ready to purchase and sell one or more types of financial instruments, but

the trading desk's inventory in these types of financial instruments would have

to be designed not to exceed, on an ongoing basis, the reasonably expected near-term

demands of customers.

 

Of note, and as BDA had recommended in numerous meetings and letters, the final

rule ensures that all state and local government securities are excluded from the

proprietary trading ban, not just general obligation bonds. BDA also expressed

concern over treating Tender Option Bond Trusts as covered funds but the rule does

not exempt such funds from being defined as covered funds.

 

Relevant Materials for the Final Rule may be found below:

Background and BDA's Previous Letters:

 

In its initial comments on the Volcker rule, the BDA submitted a letter calling

for expansion of the municipal bond exemption, exempting TOB trusts and a clear

and workable market maker and underwriter exemption. You can find that letter,

dated February 2012, [here].

 

The BDA also submitted a letter to the SEC to outlining a proposed solution to the

concerns raised regarding how to develop a balanced market maker exception that

preserves customer-facing, fixed income principal trading. You can find that letter,

dated November 2012, [here].
 

Definition of Municipal Advisor

 

On September 18, the SEC approved the Final Municipal Advisor registration rule. In November, the registration rule was published in the Federal Register and it is scheduled

to take effect Monday, January 13, 2014. You can find the rule [here].  Nixon Peabody has prepared an analysis of the rule for BDA members, available [here].

 

The BDA and its members have met with the SEC's Office of Municipal Securities and

Commissioners and as a result, developed letters seeking clarification concerning

several aspects of the Final Rule, including with regard to:

  • The definition of advice;
  • What constitutes engagement in the underwriter exclusion;
  • Seeking flexibility within the RFP exclusion;
  • Addressing how the final rule will be able to work for underwriters who becomefiduciaries on a transaction, and
  • Seeking a delay of the effective date until 90 days after the publication of clarifications. 

The BDA submitted the letter to the SEC on November 21, 2013 and held a follow up

meeting to discuss that letter on December 4, 2013.   A copy of the letter seeking

a delay of the effective date is available [here]. BDA's November 21 letter seeking clarifications is available [here] and its December 9 follow-up letter is available [here].

 
Fiduciary Duty Application to Broker Dealers 

 

On November 22, 2013, the SEC's Investor Advisory Committee voted in favor of new

ethical standards for securities brokers requiring brokers to act as fiduciaries

when giving personalized investment advice. The Committee approved the Subcommittee's recommendation on broker-dealer fiduciary duty which you can find [here].

 

The recommendation stated:

  • The SEC should "conduct a rule making to impose a fiduciary duty on broker-dealers when they provide personalized investment advice to retail investors"
  • The subcommittee favors an approach involving "rule making under the Investment Advisers Act to narrow the broker-dealer exclusion from the Act while providing a safe harbor for brokers who do not engage in broader investment advisory services or hold themselves out as providing such services"
  • The committee also recommended that "as part of its rule making, the Commission should adopt a uniform, plain English disclosure document to be provided to customers and potential customers of broker-dealers and investment advisers that covers basic information about the nature of services offered, fees and compensation, conflicts of interest and disciplinary record"
  • The committee also provided guidance if the SEC chooses to issue a rule under section 913 of the Dodd Frank Act

 It should be noted that the Dodd Frank Act does not require the SEC to follow the

committee's recommendations but we should expect the committee's recommendations

to be taken seriously.   The 21-member committee consists of academics and representatives of public and private sectors.  BDA has met with the SEC on this issue and will continue to engage them and monitor its progress on a potential proposed rulemaking in 2014. 
 

CUSIP

 

The BDA continues to work with the Investment Advisers Association, the Investment Company Institute and the Government Finance Officers Association to seek SEC review of the practices employed by Standard & Poor's and the American Bankers Association for assessing licensing fees for use of CUSIP identifiers.

 

Additionally, we would like to bring your attention to new actions initiated by SEC Commissioner Dan Gallagher to replace the usage of "CUSIP" with generally available security identifier ("security identifier") for rules under consideration by the SEC going forward.  The rationale for this is that although the CUSIP number is in common use domestically for this purpose, there is anticipation that other suitable identifiers may become available in the future.