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| Updated March 2009 |
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| Financial regulatory reform - The current structure of financial regulatory reform is outdated, disjointed and ineffective. It has resulted in a regulatory environment where financial firms are sanctioned for technical violations of rules while macro systemic financial risks are relatively unregulated. RBDA supports the fundamental reform of the U.S. financial regulatory system that provides for prudential, principles-based regulation, consolidates regulatory agencies, and provides authority to regulate risk on a systemic basis. Any new regulatory structure should distinguish between those companies and institutions that pose systemic risk and those that do not. |
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| Assistance for variable rate municipal bonds - The credit crisis has made it exceedingly difficult for certain states and localities to obtain bank-sponsored liquidity facilities necessary to issue variable-rate bonds for infrastructure and other investment. The federal government should institute a temporary program to provide letters of credit or standby bond purchase agreements to states and localities for a fee in conjunction with variable rate bond issues. |
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| Credit enhancement for municipal bonds - The municipal bond market has suffered the loss of most of the "monoline" bond insurers who previously provided credit enhancement services for states and localities. As a result, some municipal bond issuers are unable to sell bonds at reasonable terms. Congress is considering a federally sponsored program that would directly or indirectly replace some of the lost credit enhancement capacity for the market. Any federal credit enhancement program should be structured so it can be implemented quickly and should account for the unique needs of the municipal market. |
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| Regulation of "independent" municipal financial advisors - States and localities that issue municipal bonds often hire financial advisors (FAs) to help guide them through the issuance process. Sometimes these advisors are registered broker-dealers, which generally are regulated by the SEC, FINRA, the MSRB and perhaps others, and sometimes these advisors are so-called "independent" financial advisory firms that are generally unregulated. In order to better protect state and local bond issuers and to level the competitive playing field among various categories of advisory firms, FAs who are not registered broker-dealers should be subject to a similar regulatory scheme as those who are broker-dealers. |
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| Regulatory and enforcement environment - The enforcement practices of the SEC and FINRA are overly proscriptive and adversarial. A more cooperative, prudential approach to regulation would reduce compliance costs while improving the ability of enforcement staff to supervise firms under their authority. Such an approach to enforcement has proven successful in the bank regulatory arena and for the securities industry in other countries. |
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| Auction rate securities - The auction rate securities (ARS) market has been plagued by a nearly complete disappearance of liquidity. Although some ARS issuers have restructured or refunded their bonds, tens of billions of dollars of bonds are still outstanding and cannot be sold or traded. Federal regulators should encourage ARS issuers to restructure or refund their outstanding securities and should help address any hurdles those issuers may face. Alternatively, ARS should be treated as "troubled assets" in any troubled asset purchase program implemented by the federal government. |
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| Municipal bond rating scale - Currently, some rating agencies rate municipal debt on a different rating scale than other credit products. The result is that municipal bonds generally are assigned lower ratings than if they were rated on the "global scale." Rating municipal bonds on the global scale would reduce financing costs for state and local governments. In 2008 the House Financial Services committee approved legislation (H.R. 6308) mandating rating municipal debt on the same scale as other debt products. |
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| Expansion of TRACE - The FINRA's TRACE system has had some unintended, negative consequences for market liquidity in certain sectors of the corporate bond market. Applying a TRACE-like system to other sectors of the fixed-income market such as mortgage- or asset-backed securities could negatively affect liquidity there, also. Any plan to enhance transparency for mortgage- or asset-backed securities should reflect the unique characteristics of those market sectors. |
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| Definition of market maker - In enforcing markup and other regulations, the FINRA has a two-standard system for "market makers" and non market makers. Generally, the FINRA does not recognize middle-market firms as market makers in the debt markets, resulting in stricter application of regulations. FINRA should be more transparent in defining what constitutes market maker and apply market maker status to a larger universe of dealers. |
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| Explore the prospect for an alternative trade order management system - Middle-market dealers are hit particularly hard by dependence on the trade order management system of what is essentially a monopoly information vendor. The RBDA is exploring alternatives for partnering with a technology provider in developing a less costly alternative. |
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