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Federal Public Policy/Advocacy Priorities
April, 2014
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 initiated lobbying visits and letters in response to proposals by Ways and Means Committee Chairman Dave Camp (R-MI) to impose a 10% surtax on previously tax exempt municipal bond interest income for high earners, and a White House proposal, repeated in their most recent budget release, to impose a 28% limit on municipal bond interest.  The letter to Chairman Camp is available [here], and the White House letter is available [here].

 

In the weeks ahead, MBFA will release a white paper providing more information about the impacts of he surtax and cap, and will host a Municipal Bonds 101 Panel featuring financial, legal and local elected official representatives in order to continue to educate staff on Capitol Hill. 

 

TMPG & FINRA TBA Market Margin Requirements 

  
On March 28, BDA filed comments, available [here], on FINRA Notice 14-02, "Proposed Amendments to FINRA Rule 4210" regarding TBA margining.

Among other items, the comments assert that, in order to appropriately balance the essential liquidity provided by middle market dealers with its desire to address systemic risk, FINRA should consider:

  • Exempting MBS specified pools, ARM and CMO markets from the rule at this time, applying the rule to the TBA market alone, or applying the rule to at least T+3 for those three markets.
  • NOT requiring collection of 2% maintenance margin from non-exempt accounts as it had proposed.  Should this be required, FINRA should conside exempting trades below $500,000.
  • On capital charges, allowing each broker-dealer to assign a threshold amount to each counterparty, below which there should be no capital charges required, up to a maximum of $100,000.
  • Raising concentration limit thresholds. 
  • Recognizing the challenges in addressing and educating retail customers as firms adapt to the rule, and the challenges of margining numerous subaccounts of investment advisor accounts.
  • Recognizing the significant time and monetary investment that the rule will require, particularly for firms who have not been involved in margining in the past, and the cost-prohibitive nature of many third-party vendor solutions. 
BDA staff and members met with FINRA staff in New York prior to submitting the comments, and will continue to actively dialogue with FINRA on the proposal, which is likely to be finalized in 2015.   
 
Tax Reform
 

Ways and Means Committee Chairman Dave Camp (R-MI), who has announced he will not seek re-election, recently released a draft tax reform proposal.  BDA has submitted a letter, available [here], and will be meeting with his staff regarding provisions affecting municipal bonds.  Congress will not act on tax reform in 2014, but the proposal may provide a blueprint for the next Committee Chairman, rumored to be Representative Paul Ryan (R-WI).  Provisions of concern to BDA members would:

  • Create new 10 and 25 percent individual tax brackets, plus a 10 percent "surtax" on top of the 25 percent tax bracket that applies to a modified adjusted gross income (MAGI) above $400,000 for singles and $450,000 for married couples that would, among other deductions and exemptions, apply to interest on tax exempt bonds - both new issues and outstanding bonds. 
  • Repeal the special treatment for bank-qualified bonds, eliminating tax relief needed for banks to be able to, economically, purchase tax-exempt bonds from small issuers.  Related provisions establish somewhat less flexible tax rules for corporate investors in tax-exempt bonds than those applicable under current law. 
  • Repeal the interest exclusion for future issuances of private activity bonds and advance refunding bonds, and repeal tax credit bond programs.  
  • Repeal the exclusion for interest on United States savings bonds used to pay qualified higher education expenses. 
  • Modify the Tax Treatment of "Market Discount," requiring purchasers of bonds at a discount in the secondary market to include the discount in taxable income over the post-purchase life of the bond, rather than only upon retirement of the bond or resale of the bond by the purchaser. Any loss that results from the retirement or resale of such a bond would be treated as an ordinary (rather than capital) loss to the extent of previously accrued market discount. 
  • Repeal the 4% Low Income Housing Tax Credit and make a variety of changes to the program, beyond the private activity bond repeal. 
  • Repeal a number of expired programs, such as Enterprise Communities and Empowerment Zones, Liberty Zone, GO Zone and DC Zone designations and the associated special tax benefits.
 

Budget and Sequestration

 

In December, House and Senate Budget Committee Chairs Paul Ryan (R-WI) and Patty Murray (D-WA) reached a two-year agreement regarding top-line spending numbers for FY 2014 and FY 2015, and partially replaced sequestration in the process.   In a wrinkle for direct-pay bonds, the agreement did 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 will 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 FY 2023.  

 

On March 10, the OMB released its reported to Congress, available [here], on sequestration's impact for FY 2015.  OMB announced that the cuts to non-exempt, nondefense mandatory programs would be 7.3%, beginning October 1, 2014.  For the current fiscal year, the cuts are only 7.2% - so next year's cuts are slightly more severe.  (Note that the impact of the cuts is not cumulative, and so the percentage reduction can subtracted each year from the full reimbursement payment that would otherwise have been owed).

 

BDA has learned that despite the increase for next year, the cuts may actually decrease slightly in the out years.  This is because Medicare costs, which fall under the the same "non-exempt, nondefense mandatory program" category as direct-pay bond reimbursements, will increase more quickly relative to other budget items and thus absorb the lion's share of the cuts, pursuant to the Budget Control Act.

 

Legislative Reform of the GSEs

 

 Senate Banking Committee Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID) have introduced legislation to reform Fannie Mae and Freddie Mac.  A section-by-section analysis is available [here]. The Senate Banking Committee could consider the Johnson-Crapo bill this spring. The proposed legislation would:

  • Wind down and eliminate Fannie Mae and Freddie Mac over a five-year period.
  • Transition from the old system to the new system by providing specific benchmarks and timelines to guide a newly created Federal Mortgage Insurance Corporation (FMIC) and market participants.
  • Transfer appropriate functions to the modernized, streamlined and accountable FMIC, modeled in part after the FDIC, including its regulatory authority. The FMIC will have a five member bipartisan board not made up of other regulators.
  • Mandate ten percent private capital, up front, and create a mortgage insurance fund for the system to protect taxpayers against future bailouts.
  • Create a member-owned securitization platform that will issue a single, standardized FMIC-wrapped security, and permit private label securities to be issued in a manner that encourages standardization and improved market liquidity.
  • Establish a mutual cooperative jointly owned by small lenders to provide a cash window for individual eligible loans, and small lenders could retain servicing rights. The existing FHLBs will continue to exist as aggregators and can be members of the platform and the mutual cooperative.
  • Provide rules of the road for servicers that choose to participate in the FMIC system. The current CFPB rules create a floor, and additional requirements for qualified services will be added on top.
  • Maintain a multifamily market by building upon successful risk-sharing mechanisms and products and providing access to a broad range of markets. 
  • Require strong underwriting standards that mirror the definition of "qualified mortgage", and set down payment requirement at 5 percent (with a short phase-in), except for first-time homebuyers at 3.5 percent.
  • Facilitate the broad availability of credit for eligible single-family and multifamily borrowers, monitor consumer and market access to credit, and provide market based incentives and transparency to serve underserved areas.
  • Eliminate affordable housing goals and establish housing-related funds that would focus on ensuring there is sufficient decent housing available. The funds are NOT paid for with tax dollars, but through a small FMIC user fee (10 basis points) that only those who choose to use the system pay.
  • Allow current conforming loan limits to be maintained so that mortgage credit continues to be available in high cost areas. Maintain broad liquidity in the To-Be-Announced (TBA) market and direct FMIC to take into account the impact of new products on the TBA market.
The push for GSE reform is expected to continue into the next Congress, given strong bipartisan and White House support for the initiative.
 

IRS Proposed 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.  The proposal would, notably, require that the issue price be determined on the first price at which 25 percent of each maturity of bonds is sold to the public, and eliminate the ability of an issuer to rely on reasonable expectations of the sales price of the bonds on the sale date to establish the issue price.  Nixon Peabody prepared an analysis of the proposed rule, available [here].

 

BDA filed its comments on December 16, available [here] (with the referenced enclosure [here]), and raised significant concerns with many aspects of the proposal -- particularly, the removal of the ability for issuers to rely upon reasonable expectations.  

 

BDA testified at an IRS/Treasury public hearing on February 5, and will be meeting next month with Treasury staff for an informal dialogue.  It does not appear that finalization of the rule is imminent and many stakeholders are united in presenting concerns, particularly regarding the removal of the ability to utilize reasonable expectations.

 
Municipal Best Execution

 

On March 21, BDA filed comments, available [here], on MSRB Notice 2014-02, "Request for Comment on Draft Best- Execution Rule, Including Exception for Transactions with Sophisticated Municipal Market Professionals."

 

The comments assert the following:

  • MSRB's proposed rule should better reflect FINRA Rule 5310 by considering that in instances in which quotations are inaccessible, "reasonable steps" should be employed through the maintenance of appropriate policies and procedures;
  • As previously recommended by BDA, we agree with the MSRB's proposal to exempt Sophisticated Municipal Market Professionals (SMMPs) from the protection of the rule;
  • A better definition of "Similar Securities" that will be clear for examiners but factor in the judgement of dealers should be developed.  

BDA staff and members will continue to dialogue with the MSRB and SEC on the best execution rule, and will be meeting with MSRB staff in the weeks ahead. 
  

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 was scheduled

to take effect Monday, January 13, 2014.  On Monday, January 13, the SEC officially delayed the implementation date of the registration rule through July 1, 2014.  

 

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 become fiduciaries on a transaction, and
  • Seeking a delay of the effective date until 90 days after the publication of clarifications. 

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].  SEC published clarifications on many of the topics requested by BDA on January 10, and BDA continues to engage with the SEC on clarifications that may improve the workability of the rule.  

 
MSRB G-42 
 

On March 10, BDA filed comments to the MSRB regarding their proposed Rule G-42 on duties of non-solicitor municipal advisors, available [here].  Highlights of BDA's comments include the following:

  • Principal Transactions - the MSRB has set forth a proposal that is overly broad and seemingly counter to the SEC approach to limit the prohibition on "role-switching" to specific issuances or transactions;
  • Fiduciary Standard - the proposed fiduciary standard should more appropriately mirror existing fiduciary standards utilized in the legal profession such that conflicts can be disclosed and potentially, waived as opposed to mandating blanket prohibitions;
  • Obligated persons - the MSRB should avoid ensnaring obligated persons which may not desire or require the protection of the rule;
  • Review of the Official Statement - if an MA is assigned the role of developing the OS, there should not be a mechanism for that MA to opt out of performing a thorough review;
  • Documentation of the Municipal Advisory Relationship - only when advice is given such that the municipal entity desires and expects that advice to carry a fiduciary dusty should the relationship be required to be evidenced in writing;
  • Economic Analysis - small MAs should not be exempted from the requirements of the rule;
  • Disclosure of Liability Insurance Coverage - MAs should be required to disclose the mechanism and amount of financial resources that would be available to a municipal entity client if needed;
  • Recommendations and suitability - if a client has stated its goals and objectives, the MA should not need to step into the shoes of the client to examine, analyze or assess the client's stated objective or goals.

BDA staff will continue to dialogue and meet with the SEC and MSRB on the MA Rule and related MSRB rulemakings.

 
Fiduciary Duty to Retail Investors

 

SEC Chair Mary Jo White said earlier this year that pushing the commission to decide on whether to pursue a fiduciary duty rule for broker-dealers providing advice to retail is a top priority.  However, in it's request for information last year, the SEC did not receive much substantive data for the regulatory analysis to gauge the potential impact of a rule. 

 

Most recently, Chair White has directed agency staff to draft an options document that outlines ways the regulator can reform rules governing investment advisers and brokers. As a way to more fully inform the Commission's decision on this matter, staff has been directed to evaluate all of the potential options available to the commission, including a uniform fiduciary standard for broker-dealers and investment advisers when dealing with retail customers, and other measures that may be more targeted and achievable in the shorter term. This guidance would give the commission a foundation for determining whether to advance a proposal to raise investment-advice standards for brokers.

 

Additionally, the Labor Department is working on its own fiduciary-duty proposal for investment advice to retirement plans and has promised a thorough cost-benefit analysis and there continues to be much talk about the need for greater cooperation between DOL and the SEC.
 

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.