Bonds

Broker-dealers remain hopeful for policy issues vital to the municipal bond market including restoring advance refunding and raising the bank-qualified limit following a Bond Dealers of America fly-in event Thursday.

Representatives of BDA member firms descended on Congress in a lobbying blitz that included visits with lawmakers on the House Financial Services Committee and the Senate Finance Committee, as well as regulators at the Municipal Securities Rulemaking Board, Financial Industry Regulatory Authority, Securities and Exchange Commission, and the Treasury.

A discussion with the House Ways and Means Committee centered on the perennial hot button issues of lifting the cap for bank-qualified bonds and legislation that would restore advance refunding. The Investing in Our Communities Act, which would restore the ability of municipalities to advance refund on a tax-exempt basis, was introduced in March.

“Having one of the Republican members introduce the bill, having two other Republicans join the bill on committee, that’s making a big difference,” said Brett Bolton VP, federal legislative & regulatory policy, Bond Dealers of America. ”There are sixteen co-sponsors in the Senate and a pretty good number in the House. It’s progressing in a bipartisan manner.”

Advance refunding was eliminated by the Tax Cuts and Jobs Act in 2017, to compensate for the loss of tax revenue caused by rate cuts. Muni market supporters have been trying to claw it back ever since. BDA also pushed lawmakers on changing the regulation of bank-qualified bonds, a touchstone for smaller issuers, regional banks, and broker-dealers.    

Muni groups would like to raise the cap on how much an issuer can issue in a calendar year and maintain the ability to sell debt directly to banks as bank-qualified from the current cap of $10 million. Bolton sees an ally in the current Ways and Means leadership. 

“Chairman Smith comes from a rural district,” said Bolton. “Senator Crapo is the ranking member on the senate side and Mr. Wyden, who’s the Chair of Senate Finance, they really understand the need for rural infrastructure financing. It’s incredible that the limit has not been raised since 1986.”

The Government Finance Officers Association identified the bank-qualified issue as long hanging fruit at its conference in May. 

Other matters put before Congress and the regulators included the contentious one-minute trading rule floated by SEC Chair Gary Gensler last year that would reduce bond transaction reporting times from fifteen minutes to one minute. MSRB and FINRA have been trying to come up with regulations to make that happen while many muni market advocates remain opposed to the rule change, including the Securities Industry and Financial Markets Association, BDA, and American Securities Association.

“We strongly oppose this change because it is not supported by the data or by any market failure, which means it’s a needless overreach by the all-knowing government to interfere with a fully functioning and efficient market,” said Chris Iacovella, President, CEO, American Securities Association. 

“We’re opposed to that proposal,” said Michael Decker SVP, Research and Public Policy, BDA, “We don’t think it’s necessary. We don’t think that either the MSRB or FINRA have justified, why it’s necessary and what benefits would accrue to market that would justify the costs and risks associated with implementing it.” 

Muni leaders also remain concerned about the possible elimination of tax-exempt munis as the size of the national debt balloons. 

“The scenario I think most likely is the municipal bond tax exemption, along with most other tax-expenditures, could be eliminated when lawmakers begin to take steps to seriously bring the U.S. debt-to-GDP ratio down,” said Tom Kozlik, head of public policy and municipal strategy, Hilltop Securities. “The public finance community needs to focus on educating D.C. lawmakers about the benefits of the municipal bond tax-exemption while raising awareness for new elements.”

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