MSRB rule changes, muni bond tax-exemption and other regulatory news

September 24, 2024 6:00 AM

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Between the anticipated departure of the head of the Federal Reserve Bank of Philadelphia and shifting spending priorities from the Senate Banking Committee, the past few months in the bond markets have been full of regulatory shifts — and the upcoming presidential election promises to bring more change.

Research published in January by The Bond Buyer polled more than 70 professionals across the public finance industry about their expectations for it in 2024. The top three concerns were interest rate changes, confidence in financial markets/market volatility and the 2024 U.S. federal elections.

Other noteworthy findings included the perception of the Securities and Exchange Commission's implementation of the Financial Data Transparency Act. Issuers were the least optimistic, with 61% saying the FDTA will have some level of negative impact on muni disclosures in the market. Conversely, asset managers and other advisory entities were more upbeat, with 52% saying the legislation will have a positive impact.

"One of the great things about FDTA, particularly stage two, is that we do have a lot [of] discretion about whether things are feasible, practical, necessary, so if some alternative solution presents itself, then people can make a comment or an argument that this or that may not be necessary because an alternative solution presented itself," Dave Sanchez, chief of the SEC's Office of Municipal Securities, said during a panel discussion at the National Federation of Municipal Analysts Annual Conference in May.

Looking ahead to November, industry experts are reviewing each candidate's history and campaign statements to better predict what bond-focused priorities would be at the center of either administration.

Former President Donald Trump earlier this month teased the idea of creating a sovereign wealth fund in the U.S. to pool capital for supporting various infrastructure projects, which would be a first for the country.

"We'll create America's own sovereign wealth fund to invest in great national endeavors for the benefit of all of the American people," Trump said to the Economic Club of New York. "We're going to have a sovereign wealth fund, or we can name it something different."

Vice President Kamala Harris is expected to continue with her focus on affordable housing and other programs to help those with income of less than $100,000 per year.

"My administration will provide first-time home buyers with $25,000 to help with the down payment on a new home," Harris said during a speech in Raleigh, N.C., last month.

Read on to learn more about the biggest regulatory items impacting the bond markets and how issuers and advisors are adapting to the changes.

Dave Sanchez, director of the Office of Municipal Securities at the U.S. Securities and Exchange Commission, said areas like climate-risk disclosure and timely audit filings are easy areas for regulators to check.

Donna Aberico

SEC municipal bond head preaches diligence to industry professionals

Leading officials with the SEC are preaching heightened diligence to issuers and municipal experts on numerous areas of compliance, such as late audits and unscrupulous conduit deals.

"If you guys aren't able to have this discipline on your own, this is where outside forces will start to want to impose discipline," Dave Sanchez, chief of the SEC's Office of Municipal Securities, said during the Government Finance Officers Association's Debt Committee's annual meeting.

Sanchez additionally highlighted that the SEC is paying close attention to joint power authorities and charter schools amid relatively high default activity. Data from a Municipal Market Analytics report recorded 67 charter school impairments in progress.

Other notable barometers that regulators could focus on include the time taken for muni issuers to submit audited financial statements to the Municipal Securities Rulemaking Board, a figure that has been on the rise since 2018 and hit its peak of 209 days last year. "The change wasn't very dramatic, but people will continue to focus on this," Sanchez said.

Read more:

'Take it seriously,' SEC's Sanchez warns municipal bond market

Michael Decker, senior vice president of federal policy and research at the Bond Dealers of America.

Changes to MSRB Rule G-27 fall short of industry expectations

Following the Municipal Securities Rulemaking Board's new amendments to Rule G-27 on supervision filed to the SEC in May, industry experts remain unconvinced that the changes go far enough to alleviate concerns surrounding investment bankers and other traders associated with public offerings and private placements.

The MSRB's recent adjustments solidify the establishment of an employee's private residence as a residential supervisory location after being temporarily in effect for the past few years. This aims to align the regulation with FINRA's Rule 3110.

"The Residential Supervisory Location concept provides insufficient flexibility to support remote work because it applies only to supervisory functions within the firm," Michael Decker, senior vice president of research and public policy at the Bond Dealers of America, wrote in a comment letter to the SEC. "The RSL concept does not apply to investment bankers involved in structuring public offerings or private placements nor to traders involved in order execution or market making."

The primary disparity Decker highlighted is between dealers subject to location-based supervision requirements and non-dealer muni advisors that are not.

Read more:

Amendments to MSRB Rule G-27 don't go far enough

"It was an opaque process, but we did hear of efforts behind closed doors to expand the scope of FDTA to include security-level identifiers, even though they are not mentioned once in the actual text," said Matthew Bastian, senior director, CUSIP Global Services.

Rick Schwab e:rick@rickschwab.ne

CUSIP leaders critique FDIC proposal to use FIGI as identifier

In late July, members of the Federal Deposit Insurance Corp. board submitted a proposal to swap out CUSIP numbers with Financial Instrument Global Identifiers in collaboration with the SEC, Treasury and other federal agencies. The proposal centers around new rules under the Financial Data Transparency Act and their implementation.

Matthew Bastian, senior director of CUSIP Global Services, told The Bond Buyer's Scott Sowers last month that a change from CUSIP to FIGI would introduce instability to the muni market as the MSRB "embraced CUSIP in 1983 and since then the muni market has depended on the reliability of the CUSIP system," he said.

"This includes granular features that may go unrecognized, such as our use of different base issuer numbers depending on the revenue stream and how we treat partial pre-refundings," Bastian said.

Changes in standards are slated to be ironed out in December 2024 before specific rulemaking is issued before 2026.

Read more:

CUSIP returns fire over plan to use FIGI as identifier

An Oklahoma judge issued a permanent injunction against the enforcement of a 2022 state law meant to protect the state’s oil and natural gas businesses by prohibiting governmental contracts with companies determined to be "boycotting" the fossil fuel industry.

Bloomberg News

Oklahoma judge permanently halts state anti-ESG law

Oklahoma County District Court Judge Sheila Stinson rendered a permanent injunction in July against the Energy Discrimination Elimination Act, preventing enforcement of the controversial 2022 state law.

Stinson first issued a temporary injunction in May against the legislation, which forbids state and local governments from striking up contracts worth $100,000 or more with organizations that have been identified by the Oklahoma Treasurer's Office to be "boycotting" the fossil fuel industry.

Her decision to issue a permanent injunction was a result of the act "being unconstitutionally vague and violative of Oklahoma's Constitutional requirement that all pension benefits be used for the benefit of beneficiaries," according to Collin Walke, the attorney for a state pension recipient who filed the lawsuit last year against Oklahoma Treasurer Todd Russ.

Notable institutions that landed on the blacklist include Wells Fargo, JP Morgan Chase and Bank of America, among others.

Read more:

Judge permanently prohibits enforcement of Oklahoma's anti-ESG law

Ed Oswald, a tax partner at Orrick Herrington & Sutcliffe in Washington D.C., said next year will bring opportunities and risks for the municipal bond market.

Burwell Photography - John Burwe

Future tax revisions could energize municipal bond tax-exemption

The upcoming presidential election promises to bring numerous changes to federal tax policy, an important one being the future of the municipal market's tax exemption.

The 2017 Tax Cuts and Jobs Act is set firmly in Congress' regulatory crosshairs as numerous provisions approach the December 2025 expiration date. This has issuers and dealers alike worried if the tax-exemption afforded to muni bonds would be eliminated to cover ground in budget deficits.

"Given that we have a unique group of circumstances coming together in 2025, it represents an opportunity for the municipal market to make its case in terms of what it does for communities and providing infrastructure and to expand its capabilities," Edwin Oswald, a tax partner at Orrick Herrington & Sutcliffe in Washington, D.C., told The Bond Buyer's Caitlin Devitt in June.

But "with the national debt now playing more of a role, [people will] always look for revenue offsets, and tax-exempt bonds will be part of that conversation," Oswald said.

Read more:

Looming tax cliff puts municipal bond tax exemption back in play