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| Regulatory Reform Analysis for RBDA Member Firms |
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| Updated May 2010 |
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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The current structure of financial regulatory reform is outdated, disjointed and ineffective.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 not result in a two-tier system that favors the largest institutions. |
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Bank Qualified Bonds
Bank qualified bonds allow small municipal governments and authorities to directly place debt with banks, primarily community banks, which are then able to deduct a portion of the interest costs associated with these bonds. The American Recovery and Reinvestment Act of 2009 (ARRA) increased the annual issuance limit for bank qualified bonds from $10 Million to $30 Million annually and expanded the use to small colleges and hospitals. As a result, the bank qualified market more than doubled in one year from $15 billion to $33 billion, netting billions of dollars of savings for state and local governments and providing a new opportunity for portfolio diversification for investors seeking less risky investments. RBDA strongly supports federal legislation to permanently extend the bank-qualified provisions in ARRA. |
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Build America Bonds
Build America Bonds (BABs) were created in 2009 and are taxable bonds issued by State and local governments in which the Treasury makes direct payments to issuers to subsidize a portion of their borrowing costs. BABs have proven to be a highly-effective, low-risk financing tool for state and local governments and a key component to added liquidity in the bond market. Over $64 Billion in BABs were issued in 2009 and an estimated $85-$100 Billion may be issued in 2010. New investors (such as pension funds) who were previously unable to avail themselves of tax-exempt investments flocked with confidence to the security of BABs. RBDA strongly supports permanent extension and expansion of the BABs program as the cornerstone for market liquidity and cost-effective financing for State and local governments which leads to the creation of new jobs and the funding of essential capital projects including schools, hospitals, roads, and bridges. |
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Expansion of TRACE
The RBDA is concerned that application of TRACE to the mortgage and asset-backed securities markets will negatively affect liquidity and have an adverse effect on investors, which in the MBS / ABS markets are primarily institutional. The RBDA is also very concerned about current TRACE application to government agency securities and the reporting loophole which has been created for bank affiliated broker dealers. Bank BDs that report these transactions on the bank balance sheet are not required to file with TRACE, thus significantly distorting the data which is disseminated by FINRA. Requiring one but not both parties in these transactions to report to TRACE facilitates regulatory imbalance and provides a competitive advantage for one dealer over the other. |
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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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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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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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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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