More state lawmakers target muni underwriters' firearm policies

Republican lawmakers in several states are trying to follow in the footsteps of Texas by pushing bills that would subject banks to a litmus test over their treatment of the firearm industry in order to participate in municipal bond financings.

A law that took effect Sept. 1 in Texas prohibits governmental entities from entering into contracts with businesses, including banks that underwrite bonds, unless there is written verification in the contracts that their policies do not result in the refusal or termination of services for any firearm entity or trade association.

Similar bills have been introduced in Arizona, Indiana, Kansas, Kentucky, Ohio, Oklahoma, and West Virginia, according to Mark Oliva, public affairs director at the National Shooting Sports Foundation, a firearm industry trade association, who said the measures are focused on the muni market.

“We’re actively working in these states to get laws like this to end discriminatory practices against the constitution,” he said. “Our industry, the firearm industry, is a constitutionally protected industry. Firearm manufacturers are doing everything in accordance with the laws.

What you’re seeing is corporate activism from the boardroom.”

The proliferation of this kind of legislation will likely add to the anxiety of bankers on the front lines of public finance.

“It’s frustrating from the bankers’ perspective to face these kinds of restrictions on their business that have nothing to do with the municipal market,” said a muni industry observer, who declined to be named.

Matt Fabian, a partner at Municipal Market Analytics, said issuers are probably more at risk than underwriters.

“Underwriters don’t make much for underwriting a new issue anymore, and bigger companies are better able to absorb the low issuance fees,” he said. “So if a state excludes the larger underwriters, it may slightly raise local issuers’ cost of capital. A bigger effect is on individual bankers at the affected shops and their related production, but the firms overall have less to lose.”

None of the bills have been passed out of their originating chamber. Regular legislative sessions have already ended in two of the states: Indiana and West Virginia.

Oklahoma House Bill 3144 won approval from the chamber’s Public Safety Committee on a 5-2 vote earlier this month. A summary of the measure said it “provides that a governmental entity may not enter into a contract with a company for the purchase of goods or services unless the contract contains a written verification from the company that it does not have a practice, policy, guidance, or directive that discriminates against a firearm entity or firearm trade association and will not discriminate during the term of the contract against a firearm entity or firearm trade association.”

Adrian Beverage, president and CEO of the Oklahoma Bankers Association, said the group is not supportive of the current language in the bill.

“We continue to work, however, with all parties involved as the process continues," he added.

State Sen. Casey Murdock, the bill’s Senate sponsor, said while “big power banks with all the money are stifling business,” the measure faces an uphill battle. “It’s got a lot of heavy hitters that are going to be fighting this. All good legislation that’s actually accomplishing something takes a couple of years to get it passed,” he added.

A bill in the Arizona House (HB 2472) would allow financial institutions to be sued over policies that discriminate against the firearm industry and possibly be dropped from doing business with the state government. The measure, which lists 21 out of the chamber’s 31 Republicans as sponsors, has not yet progressed out of committee. Wyoming’s governor signed a similar bill into law last April.

Last year, Louisiana's GOP-dominated legislature passed HB 597, but Gov. John Bel Edwards vetoed it in July.

“This bill will come at a significant cost to Louisiana taxpayers and will have no effect on changing the policies of any financial institution,” Edwards, a Democrat, said in his veto message.

In Ohio, HB 297 was the subject of two hearings after being introduced last May, but remains in committee. Senate Bill 482 in Kansas was recommended for passage out of committee earlier this month. Kentucky’s HB 123 was moved to the House Appropriations and Revenue Committee last week.

Back in Texas, the bond underwriting business has been shaken up since SB 19 took effect Sept. 1. Citigroup, JPMorgan Chase, Bank of America, and Wells Fargo, which have all ranked in the top 10, were identified by bill sponsors as targets of the legislation when it was debated last April.

Goldman Sachs, which withdrew from a deal after the law took effect, has not underwritten Texas bonds since then, according to Refinitiv data.

Republican sponsors said in their analysis of the legislation that it was necessary to “ensure that any company in Texas with a policy that attempts to restrict gun or ammunition sales will not be allowed to benefit from tax dollars through state contracts.”

Citigroup and Wells Fargo have remained active in the bustling Texas muni market and were among 38 bond firms that since September submitted letters for the benefit of underwriting syndicate representatives verifying they do not discriminate against the firearms industry, according to a list posted on the Municipal Advisory Council of Texas website. Bond issuance out of Texas totaled $52.57 billion in 2021, the second biggest amount of debt behind California.

In 2018, 2019, and 2020 Citigroup was the top underwriter of Texas debt, but it fell to 10th place last year, according to Refinitiv data. Between Sept. 1, when the law took effect, and March 10, Citigroup ranked 22nd, down from fifth place during the same period in 2020-21.

RBC Capital Markets took over as the number one underwriter last year, after placing third in 2020 and fourth in 2019. Raymond James was in the top spot since September.

Citigroup’s continuing municipal underwriting business in Texas has drawn a complaint.

Oliva said the shooting sports foundation’s objection to the bank’s winning competitive bid for $26.4 million of Alamo Heights Independent School District unlimited tax refunding bonds in November has not yet been resolved. The group sent a letter to Texas Attorney General Ken Paxton contending “all available evidence indicates that Citi has done nothing to end its publicly declared discrimination.”

Paxton’s office did not respond to requests for comment, while a Citigroup spokesman declined to comment. The deal closed Dec. 14.

In 2018, Citigroup announced a U.S. commercial firearms policy that requires new retail sector clients to adhere to “best practices” of prohibiting firearm sales to someone who has not passed a background check or is under age 21, and not selling bump stocks or high-capacity magazines. The move followed a shooting at Marjory Stoneman Douglas High School in Parkland, Florida, that left 17 people dead, igniting demand for tougher gun control.

After the Alamo Heights deal, Citi went on to win other competitive bond issues in Texas — $42.7 million of Commerce Independent School District bonds in January and $52 million of Upper Brushy Creek Water Control and Improvement District unlimited tax bonds in February.

Wells Fargo fell to 14th place in 2021 among underwriters from ninth place in 2020, Refinitiv data showed. It is in seventh place since the beginning of September with 16 deals for state and local governmental entities in Texas. The firm declined to comment about its muni bond business in Texas.

Bank of America, which announced in 2018 that it would halt financing for companies that manufactured military-style weapons for civilians, was the senior manager in October for North Texas Higher Education Authority taxable student loan asset-backed debt, which a bank spokesman said was outside of the scope of the law.

JPMorgan Chase, meanwhile, remains on the sidelines of the state’s muni market.

“While our business practices are not in conflict with these laws, we have decided against bidding on most contracts with Texas public entities right now until it becomes more clear how these laws will be interpreted and enforced,” the bank said in a statement.