Archive from News and Commentary

Ratings to Be Recalibrated


Moody's has announced that it will recalibrate municipal ratings over a four week period beginning in April 2010.  Recalibration will put municipal issuers on Moody's global rating scale which is the scale used for corporate obligations.  The global scale emphasizes expected loss, which includes an assessment of both probability of default and loss in the event of a default, while the municipal scale emphasizes distance to distress.  General obligation bond ratings will change by an average of two notches higher than the current rating with a range of zero to three notches.  Ratings at or above Aa3 on the municipal scale will receive less upward movement than those rated below Aa3.  Ratings that are not dependent on the issuer's primary rating (GO rating), such as water and sewer bonds will be recalibrated with a similar approach using an algorithm that establishes comparability with the global scale ratings. Ratings based on downward notching (e.g. appropriation-backed debt, lease obligations and moral obligations) will continue to be rated based on an issuer's primary rating and notching down.  [3/20/2010] 


On March 25, 2010 Fitch Ratings announced that it will recalibrate municipal ratings. The recalibration will take place on April 5. General Obligation Bonds rated A+ or higher will be upgraded one notch and bonds rated from BBB- to A will be upgraded by two notches. Water/sewer and public power distribution credits will be adjusted upward in the same manner as General Obligation Bonds.  [3/28/2010] 

Municipal Broadband

Tax Reform - Detrimental Bond Provisions

Municipal Bonds Face Uncertain Future

The credit crisis virtually curtailed municipal borrowing.  To assist in alleviating the credit crisis, several new forms of borrowing were created by the American Recovery and Reinvestment Act including, among others, Qualified School Construction Bonds (a type of tax credit bonds), Recovery Zone Economic Development Bonds, and Build America Bonds.  The Act also expanded authorization of various tax credit bonds. The Qualified School Construction Bonds and other tax credit bond programs have been unpopular due to lack of tax credit stripping guidelines and an extremely limited market for the bonds. In contrast, Recovery Zone Economic Development Bonds and Build America Bonds, which are subsidized taxable bonds, have been very popular and have expanded and improved the market for municipal bonds.  The subsided taxable bonds issuance dates are scheduled to expire at the end of this year.

In a recent document, the Obama administration recommended that the Build America Bond program be made permanent, although with a lower subsidy than the current 35% rate. In contrast, this week Sens. Ron Wyden, D-Ore., and Judd Gregg, R-N.H., introduced new tax legislation that would eliminate tax-exempt bonds beginning in 2011, change the tax exemption for state and local bonds to a tax credit, and prohibit the advance refunding of bonds.    [2/26/2010] 

Rating Agency Legislation

On Wednesday, October 28, 2009, the House Financial Services Committee passed HR 3890, the Accountability and Transparency in Rating Agencies Act.  The Act is intended to (i) create accountability by imposing liability, (ii) impose a duty to supervise employees, (iii) create independent boards or directors,
(iv) mitigate conflicts of interest, and (v) provide greater public disclosure. A provision of the bill that was designed to ensure that municipal bonds are rated more similarly to corporate bonds was amended by Rep Hensarling prior to adoption.  The bill now requires the Securities and Exchange Commission to conduct a study of the treatment of different classes of bonds within 6 months after the date of enactment of the Act, which is then to be submitted to the Committee on Financial Services of the House of Representative and the Committee on Banking, Housing, and Urban Development of the Senate.

Howard Selected for Winning Women Award

In April 2009, Joy A. Howard, principal of WM Financial Strategies, was selected as the recipient of Winning Women’s “Entrepreneur” award for contributions to economic development in St. Charles County, Missouri.  Winning Women is a group whose mission is promoting women in business, education, government and health initiates to advance economic growth. [5/01/2009] 

SIFMA Model Bond Purchase Agreement Disavows Underwriters Fiduciary Responsibilities

On September 17 the Securities Industry and Financial Markets Association (SIFMA) released an exposure draft of a model municipal bond purchase agreement. The model includes a provision that clearly states that an underwriter does not act in a fiduciary capacity to issuers.  The provision of the model agreement defining the underwriter’s role is as follows “The Issuer acknowledges and agrees that (i) the purchase and sale of the Securities pursuant to this Agreement is an arm’s-length commercial transaction between the Issuer and the Underwriters, (ii) in connection with such transaction, each Underwriter is acting solely as a principal and not as an agent or a fiduciary of the Issuer, (iii) the Underwriters have not assumed (individually or collectively) a fiduciary responsibility in favor of the Issuer with respect to the offering of the Securities or the process leading thereto (whether or not any Underwriter, or any affiliate of an Underwriter, has advised or is currently advising the Issuer on other matters) or any other obligation to the Issuer except the obligations expressly set forth in this Agreement and (iv) the Issuer has consulted with its own legal and financial advisors to the extent it deemed appropriate in connection with the offering of the Securities.” Also see the Bloomberg Article "Sifma's Model Bond Purchase Agreement to Protect Underwriters."  [10/05/2008] 

Lehman's Bankruptcy Disrupts Muni Market

Lehman Brothers filed for Chapter 11 bankruptcy on Monday and Merrill Lynch was sold to Bank of America on Sunday. Collectively these events created a historic day on Wall Street which included a 504 drop in the Dow Jones Industrial Average.  The full impact of these events on the economy may not be known for months; however it is certain that it will impact the municipal market as well as other sectors of the financial industry. In addition to ranking among the top ten senior managing underwriters, Lehman Brother's served as remarketing agent on billions of variable rate demand bonds and has written billions of municipal swap contracts. Since 2004 Lehman Brother's ranked sixth as senior managing underwriter on all issues and Merrill Lynch ranked fourth.  With the collapse of Bear, Stearns and the departure of UBS Securities from the municipal market earlier this year, only JPMorgan, Citi, Morgan Stanley and Goldman, Sachs remain among the top Wall Street-based senior managers.  [9/16/2008]

Barclays, Britain's third biggest bank, announced on Wednesday that it will acquire the investment banking and capital markets business of Lehman Brothers for 1.75 billion dollars.  Of Lehman's 26,000 employees, approximately 10,000 will join Barclays. The acquisition is subject to regulatory approval.  [9/18/2008] 

Barclays, resumed the municipal bond trading desk and remarketing operations of Lehman Brothers on Thursday. Barclays has not announced how many of the employees will retain their jobs.  [9/28/2008] 

Disclosure Non-Compliance Report

A study was released by DPC Data Inc., one of the four nationally recognized municipal securities information repositories, indicating that governments are not complying with their continuing disclosure obligations.  The study shows that more than 50% of bonds sold between 1996 and 2005 have one or more years of disclosure delinquency and that more than 25% are in chronic delinquency. As of 2006, the last reporting year tracked by the study, more than $348 billion bonds in par amount had disclosure delinquency. [See "Estimating Municipal Securities Continuing Disclosure Compliance"] [9/06/2008] 

  Auction Rate Securities

Auction rate securities, relatively new to the municipal market, may already be obsolete.  Like variable rate obligations, issuers were promised the benefit of lower short-term rates on their long-term obligations.  Interest rates were reset periodically (e.g. every 7 days) through an auction process and were supported by bond insurance.  With rating downgrades of insurers, auctions began to fail. According to Bloomberg more than 60% of auctions have failed in the past two months. In a failed action the interest rates are set by the securities' documents and in some cases have been as high as 20%. For investors, the failed auction has made their investment illiquid. As a result, securities investigations are now underway for both issuers and investors.  [See the Bloomberg article "Auction-Bond Probes Widen as Cuomo Subpoenas 18 Firms"] [4/19/2008] 

A team of securities regulators from several states, led by representatives from the Missouri secretary of state's office raided the St. Louis headquarters of Wachovia Securities, seeking documents and records on the company's sales practices relating to auction rate securities. Missouri had requested assistance because Wachovia had been delaying in responding to prior subpoenas for records. The probe was the outcome of more than 70 complaints from investors holding about $40 million in auction rate securities that no longer have liquidity.   [See The Bond Buyer article "Missouri Officials Probe Wachovia in St. Louis"] [7/20/2008] 

Rating Agency Changes Proposed

SEC Proposes New Rating Agency Rules

As an outgrowth of the subprime mortgage crisis, for which rating agencies have received partial blame, the Securities and Exchange Commission is proposing rules to improve transparency and accountability.  The proposed rules, which are subject to a 30 day comment period, include requiring rating agencies to retain records of all rating actions, making such records publicly available after 6 months, differentiating the rating on structured products (e.g. collateralized debt obligations) and prohibiting gifts and entertainment in excess of $25 from the borrower or issuer being rated or from the underwriters.

Proposed Rating Agency Legislation

Barney Frank, head of the House Financial Services Committee has proposed legislation that would require rating agencies to use the same standards of rating municipalities as those used for corporations.  If approved, a large number of municipal issuers would receive rating upgrades.  Frank has also proposed legislation that would increase the bank qualified bond limit from $10 million to $30 million.

Moody's Implements Global Ratings Scale

On September 2, 2008 Moody's announced that it will begin recalibrating U.S. public finance ratings to it global scale. The change will bring state and municipal bond ratings in line with its corporate ratings. Moody's indicated that based on its preliminary analysis "on average, state and local government general obligation ratings will likely be two notches higher on the global scale."  Moody's also noted that ratings at or above Aa3 are generally likely to receive less upward movement than those rated below Aa3. The change was in response to complaints by government officials that the current scale results in artificially low credit ratings and higher interest cost.  Moody's will begin the transitions in October and is expected to be completed January 2009.

Moody's and Fitch Delay Global Ratings Scale

Both Moody's Investors Service and Fitch Ratings announced today that they will be deferring implementing the Global Ratings Scale for municipal bonds due to the current market turmoil.

Lindbergh School District Saves Big with 17 Bond Bids

WM Financial Strategies, as financial advisor to Lindbergh R-8 School District Missouri, recently completed the sale of $8,410,000 of General Obligation Refunding Bonds.  The refunding was projected to result in savings in the range of $250,000.  Excellent timing, a Aa2 bond rating and a competitive sale with 17 bids resulted in savings of $617,445. [See the Article from the local press.] [1/20/2008] 

Florida Local Government Investment Fund Frozen

Florida officials suspended withdrawals from an investment pool today.  The pool was designed to provide local governments with a low-risk investment option for funds. The suspensions follow an investigation of the fund by Bloomberg.  According to Bloomberg " The $27 billion Florida pool, the largest in the U.S., has invested $2 billion in SIVs and other subprime-tainted debt, state records show. About $725 million of these holdings have already defaulted." The findings led to a run on the fund with withdrawals exceeding $10 billion, or one third of the fund assets, in the past few weeks.  The fund's trustees (Governor Charlie Crist, Chief Financial Officer Alex Sink and Attorney General Bill McCollum) rejected making a withdrawal exception for payrolls. According to an article by MSNBC "the suspension of withdrawals will stay in effect until December 4 when the board meets to consider how to shore up the pool."  (See the Bloomberg article "Florida Halts Withdrawals From Local Investment Funds.")  [11/29/2007] 

Late last week Florida's fund trustees hired BlackRock Inc. to develop a plan for the fund.  Yesterday, the fund's trustees agreed to the plan which included splitting the fund and isolating downgraded and defaulted investments that comprised approximately 14% of the pool investments. Local government investors will be permitted to withdraw the greater of 15% or $2,000,000 of their investments.  Additional withdrawals will be at a fee that is expected to be reduced as the fund stabilizes.   [12/05/2007] 

The Florida Local Government Investment Pool (LGIP) reopened on December 6. Local governments withdrew more than $1.7 billion on Thursday and Friday.  According to documents at the LGIP website, there will be no restrictions on withdrawals of new deposits and restrictions on current investments are expected to eventually be eliminated, however no date or conditions are indicated.

Subprime Lending Impacting Muni-Bonds

For several months the municipal bond market has experienced volatility (significant changes in yields on a day-to-day basis) due to the subprime lending crisis.  The subprime lending crises has raised concerns that there could be global credit tightening, two million home foreclosures and a further deterioration of the housing market (new construction, sales and market value).  The entire economy could be affected and speculation continues as to whether the Federal Open Market Committee will continue to reduce the Federal Funds Rate.

In November, yields on ten-year Treasury bonds declined by 21 basis points while the yields on 10 year municipal bonds rose by approximately 11 basis points. The widening of the spread between tax-exempt and Treasury bonds is being blamed on concerns that the credit of AAA bond insurers' has weakened due to subprime loan exposure (see "Municipal Bond Insurance" below). Among the ramifications of downgraded insurers would be the sale of bonds from municipal bond funds that hold AAA rated bonds and a decline in the value of downgraded insured bonds. Bloomberg has reported that there are $2.4 trillion of insured bonds.
[12/15/2007] return

What's in Your Money Market?

In October 2007, Bloomberg published the article "Unsafe Havens" noting that U.S. money market funds have invested $11 billion in subprime debt. The investments consist of commercial paper (short-term debt) from structured investment vehicles (SIVs) that hold subprime mortgages. Bloomberg also noted that "As a sign of stability, money market funds never allow their share price to rise above or fall under $1 for each dollar invested." When necessary fund managers typically provide capital support to their money markets to prevent a drop below $1.00 per share, known as "breaking the buck".  Prior to this week, investors have not lost money on a US money market fund since 1994 when investors were paid 96 cents a share by Community Bankers Mutual Fund of Denver and the fund was liquidated. You may not have heard the "breaking the buck" alarm go off this week when the General Electric bond fund (GEAM Trust Enhanced Cash Trust) returned money to investors at 96 cents on the dollar.  An estimated $200 million value had been lost on mortgage-back securities.  [11/18/2007]

On September 17, 2008,  Reserve Primary Fund had to "break the buck" (see prior paragraph) when the money market fund's assets declined due to holdings in Lehman Brothers securities.  The value of the fund's shares fell to 97 cents and a seven-day freeze was placed on investor redemptions.    [9/18/2008]

Following the demise of Reserve Primary Fund additional funds incurred losses. Bank of New York Mellon Corp's Institutional Cash Reserves, a private fund, fell to
$ .991 a share
.  Investors withdrew $169 billion from money market funds throughout the United States, effectively creating a "run on banks". To bolster market confidence the Treasury implemented a new money market fund guarantee program, The program will be in effect for one year for eligible funds that pay a participation fee.  [9/21/2008]

The Davis Case - Municipal Bond Tax Exemption

A case involving state taxation of municipal bonds will be heard during the fall term of the US Supreme Court that begins Monday (November 5, 2007). The case (Davis v. Department of Revenue of Kentucky) involves whether interest income on non-Kentucky municipal bonds can be taxed while exempting interest on bonds issued within the state.  Because the majority of states have similar rules regarding the taxation of municipal bonds, the Supreme Court's ruling could have far reaching implications. In Kentucky, the state court sided against George and Catherine Davis, the couple that filed a class-action lawsuit in 2003, a state appellate court reversed, finding that Kentucky's law violates the constitutional dormant Commerce Clause, and Kentucky's Supreme Court declined to take the case. Many legal experts believe the Supreme Court will allow states to continue to tax out-of-state bonds while exempting their own obligations. Precedent was recently set in United Haulers v. Oneida-Herkimer which gave states and localities the ability to regulate solid waste disposal (See The Bond Buyer article). In the event the Supreme Court upholds the appeals court decision states will either have to tax all municipal bonds or make all municipal bonds tax-exempt.  In either case the value of municipal bonds would be affected.   

On Monday, Supreme Court justices heard arguments in the Davis case. Several of the justices signaled that they support the Kentucky law, that is the ability of the State to tax out-of-state municipal bonds while exempting bonds issued in Kentucky. (See the transcript of proceedings.) A decision is expected by the end of June.   [11/06/2007]

Today, in a 7 to 2 decision, the US Supreme Court overturned the Kentucky appellate court ruling.  As a result, a state can tax interest on out-of-state municipal bonds and exempt the interest on bonds issued within the state. [5/19/2008]

GFOA Questions GASB's Role

At its December 2006 meeting the Government Finance Officers Association (GFOA) voted to reassess the role of the Governmental Accounting Standards Board (GASB) as the accounting authority for state and local governments. GASB was established more than 20 years ago to create a financial reporting model. GFOA believes that role has been accomplished and that GASB now continues to make changes that unnecessarily complicate financial reporting.  Among GASB's proposed future changes is the development of economic condition reporting.  GFOA is exploring whether government accounting standards should be transferred to the Financial Accounting Standards Board (FASB) and is requesting the assistance of other state and local governments to assist in its efforts to reassess the role of GASB.  [3/17/2007]

This week, at a meeting in Los Angeles, Christopher Cox, Chairman of the Securities and Exchange Commission (SEC), indicated that he wants GASB to have more authority and to provide the SEC oversight control. Presently, the SEC has no authority over GASB and compliance with GASB's accounting rules is voluntary by State and local governments. Cox indicated that he will ask Congress to consider giving the SEC oversight authority over GASB. [7/21/2007]

On July 26, Christopher Cox, sent members of the Senate Banking Committee and House Financial Services Committee a letter and 12-page white paper requesting additional municipal bond disclosure and SEC oversight authority over GASB.   [7/28/2007]

Shrewsbury's Capital Appreciation Bonds Sold Competitively

On July 24, Shrewsbury completed the sale of $2,060,000 of General Obligation Capital Appreciation Bonds.  This was the first capital appreciation bond issue sold by competitive bidding in the State of Missouri.  See the article "City Completes First Competitive Bond Sale."  [7/24/2007]

Lindbergh School District Bonds Sold Competitively

On March 13, Lindbergh School District, Missouri, sold $32,000,000 of general obligation bonds by competitive bidding.  Competitive bidding was selected to insure the lowest financing costs and, in this case, the difference between the high and low bid equated to almost $700,000.  In addition to insuring favorable financing costs, the competitive sale was selected because it provides a completely objective basis for selection of the underwriter. Competitive sales are viewed favorably by taxpayers that pay for the bonds as well as by the media.  See the article "Lindbergh taxpayers save nearly $700,000 in Prop R bond sale - School district saves by seeking competitive bids for bonds instead of negotiated sale."  [3/21/2007]

MSRB's Gift Giving Rules

This week, the Municipal Securities Rulemaking Board ("MSRB") published a notice reminding broker-dealers of the gift-giving limits under Rule G-20. In general,
Rule G-20 prohibits dealers from giving any thing of value including gifts and entertainment in excess of $100 per year to any person.  The MSRB noted that frequent or excessive gift giving could raise questions of propriety and could be a violation of rule G-17 which relates to fair business practices.  The MSRB also noted that Rule G-17 and the application of gift-giving under Rule G-20 are "designed to avoid conflicts of interest and to promote fair practices in the municipal securities market."  The MSRB made reference to the National Association of Securities Dealers' recently published guidance to the NASD's Rule 3060 (relating to personal gifts/exclusions;  promotional items; aggregation of gifts; valuation of gifts; gifts incidental to business entertainment; and supervision and recordkeeping) noting that "this guidance applies as well to the comparable provisions of MSRB Rule G-20."   [1/31/2007]

Switching Role from Financial Advisor to Underwriter

Rule G-23 of the Municipal Securities Rulemaking Board ("MSRB") prohibits broker-dealers (underwriters) from serving as both underwriter and financial advisor for the same transaction. Subject to certain restrictions, however, Rule G-23 permits a broker-dealer serving as financial advisor to terminate this role and then serve as underwriter for the same transaction. Last year the National Association of Independent Public Finance Advisors (an association of financial advisors that do not underwrite bonds) recommended that changes be made to Rule G-23 to limit this practice. The MSRB (a self-regulatory agency whose board is comprised primarily of broker-dealers) made no changes to the rule. In March 2006, the Government Finance Officers Association ("GFOA") responded with a statement titled "MSRB's Rule G-23: Who's Protecting Whom" that suggested that the MSRB may not have adequately reviewed the adequacy of Rule G-23 as presently written.  According to "The Bond Buyer," on January 18, 2007 the GFOA's governmental debt management committee decided to address the issue through a future revision to its recommended practice called "Selecting and Managing the Method of Sale of State and Local Government Bonds". "The Bond Buyer" also reported that some of the GFOA members said the draft should "urge issuers not to allow dealers to switch roles in the same deals, state that issuers should not decide on the method of sale based solely on the underwriter's recommendation, acknowledge that issuers and underwriters have competing interests and state that the issuer’s overall objective should be getting the lowest cost of funds for taxpayers."   [1/22/2007]

Once again, the National Association of Independent Public Finance Advisors is requesting that the MSRB consider changes to Rule G-23.  The request was made public last week with the release of a letter and exhibits. The National Association of Independent Public Finance Advisors has requested that the amendments to Rule G-23 include the following: a broker-dealer that switches from an advisory role to underwriter must (i) disclose that conflicts of interest do exist, (ii) must obtain explicit approval from policy makers to make the change, and (iii) completely terminate its role as financial advisor to the issuer.  [6/09/2007]

Martha Mahan Haines, Chief of the Securities and Exchange Commission's Office of Municipal Securities, warned dealers to comply with Rule G-23 when switching roles from financial advisor to underwriter. The statements were made this week, at the annual Fixed Income Legal and Compliance Conference in New York. In a June 14 article in The Bond Buyer, Haines was quoted as saying, with respect to issuers, that "they are the seller, the underwriter is the buyer, and like any other sales transaction, the buyer is not representing the seller".  [6/14/2007]

The Government Finance Officers Association (GFOA) is developing a new recommended practice regarding competitive and negotiated bond sales.  The document, approved by the debt committee on June 9th, includes recommendations on the use of financial advisors including that financial advisors should not be broker/dealers.  In a June 15 Bloomberg column, Joe Mysak discusses the recommended practice. [6/15/2007]

The Government Finance Officers Association (GFOA) debt committee will propose a "recommended practice" to the GFOA executive board that strongly discourages an issuer from allowing a broker dealer from switching roles as a financial advisor to an underwriter.  The proposed recommended practice is intended to go further than the MSRB's rule G-23 due to concerns regarding "inherent conflicts of interest." [11/08/2008]

On October 17, 2008, the Government Finance Officers Association (GFOA) adopted two new "Recommended Practices" relating to "Selecting Financial Advisors" and "Selecting Underwriters for Negotiated Bond Sales."  As part of the Recommended Practices, "GFOA recommends that a firm hired as a financial advisor should not be allowed to resign in order to underwrite the proposed negotiated sale of bonds."  GFOA also noted that "In considering the roles of underwriter and financial advisor, it is the intent of the Recommended Practice to set a higher standard than is required under MSRB Rule G-23, because disclosure and consent are not sufficient to cure the inherent conflict of interest." 

SEC Recommends Changing Rule G-23

On May 7, 2010, Mary Schapiro, chairman of the Securities and Exchange Commission, said "Financial Advisers should be prohibited from resigning as financial advisor to an issuer, and then underwriting that issuer's bonds, as they are currently allowed to do under MSRB rule G-23. Right now, a financial professional advising a municipality can guide the municipality towards securities tailored to his firm's advantage, then resign and act as underwriter. This is a classic example of conflict of interest." In addition, she indicated that the MSRB should change G-23 to forbid this practice.  [5/07/2010] 

MSRB Amends Rule G-23

On August 17, 2010 the MSRB, at the request of the SEC, proposed changes to Rule G-23 that will preclude broker-dealer that serve as financial advisor from switching to an underwriter for that transaction.  A comment period was held and at its meeting on October 22, 2010 the MSRB voted to amend the Rule. The Rule change will be filed with the SEC in the near future.  The proposed amendments are available at  [10/30/2010] 

Municipal Market Investments Investigated

GIC Bid Rigging

On January 7, 2005, The Bond Buyer reported that the Internal Revenue Service and Securities and Exchange Commission were investigating possible bid rigging practices involving guaranteed investment contracts (GICs) in the municipal market. 

This week Bloomberg reported that as many as 30 firms are now under investigation by the Justice Department and the Securities and Exchange Commission and have been served with subpoenas. The Justice Department is seeking evidence on how GICs relating to municipal bonds are awarded.

GICs are sometimes used as the investment vehicle for bond proceeds.  When the proceeds are yield restricted, the issuer must obtain three or more bids. When a GIC is used as the investment vehicle, an issuer generally selects its GIC provider through a competitive bidding process, often hiring a GIC broker to conduct the bidding.  On January 7, 2005, The Bond Buyer reported that "bid rigging can occur when only one of the firms vying to provide the GIC submits a financially viable, bona fide bid and the other two firms submit courtesy bids that are unrealistic and that virtually guarantee the company with the viable bid will win the bidding process." The rigging takes place in exchange for undisclosed kick-backs or fees.  Another practice under investigation, as reported in The Bond Buyer on November 17, 2006, is when the bidding process is structured to allow the provider to underpay for a GIC and then over pay for other investment agreements and remarketing fees, effectively diverting arbitrage back to the GIC broker or underwriter. For additional information see the 11/16/2006 article at 

Investigation of Other Investments

On November 21, 2006, The Bond Buyer reported that the Justice Department's and Securities Exchange Commission's investigations extend beyond GICs. Dozens of firms have been subpoenaed for information relating to "virtually every investment product or derivative they have brokered, provided, or otherwise been involved with in connection with the municipal bond transactions over the past six to 14 years." According to The Bond Buyer the Justice Department's investigation includes forward supply, purchase or delivery agreements, repurchase agreements, swaps, options, and swaptions. The SEC has requested information regarding guaranteed investment contracts, repurchase agreements, flexible repurchase agreements, collateralized certificates of deposit, forward delivery agreements, forward supply agreements, put agreements, interest rate swaps, and basis swaps. [11/22/2006]

Continuing Developments In Municipal Investment Investigation

Market participants continue to speculate which firms have been subpoenaed, what will be found in the investigation and what will be the outcome.  See the 12/7/2006 article at 

Disclosures are now being made by the firms that have been subpoenaed.   See the 5/18/2007 article at  [5/22/2007]

According to The Bond Buyer, in an article published February 11, the Securities and Exchange Commission has notified at least three firms that it is planning to bring securities fraud charges against them. [2/17/2008] 

According to The Bond Buyer, in an article published today, two class action suits have been filed by seven issuers against 37 firms for alleged bid-rigging and price-fixing in the municipal market.  Earlier this month The Wall Street Journal reported that Federal authorities are preparing to charge more than two dozen people and a handful of financial firms over bid-rigging. See the article "Charges Near In Investigation of Muni Cash." [3/14/2008]  

A multi-state attorneys general investigation of anti-competitive practices in connection with GICs and derivatives in now underway. At least 38 broker-dealers, investment advisory companies and other firms received subpoenas or document requests.  [7/30/2008]  


NABL Proposes Changing "Issue Price" Definition

The National Association of Bond Lawyers ("NABL") is proposing a change to the definition of "issue price".  The recommendation was outlined in a 14 page paper submitted to the Treasury Department last week.  "Issue price" is used in several municipal bond computations including the computation of bond yield. Under current tax rules the "issue price" is the price at which a substantial amount (not less than 10%) of each maturity of bonds is sold to the public.  NABL's paper was prompted by a study released in June that indicated that some underwriters are failing to meet the 10% tax rule requirement and that between 5.4% and 15.9% of issues are not sold at or below the reoffering price. A safe harbor rule is being recommended by NABL under which the "issue price" would be the offering price that the underwriter shows prospective investors.  [9/02/2006]   

Credit Rating Agency Duopoly Relief Act

On November 29, 2005, The House Committee on Financial Services held a field hearing on the Credit Rating Agency Duopoly Relief Act of 2005 (H.R. 2990). The Bill, introduced by Rep. Michael Fitzpatick in June 2005, is intended to improve the quality of ratings by fostering competition, transparency, and accountability in the credit rating agency industry. The Act would amend the Securities Exchange Act of 1934 and replace the designation of "Nationally Recognized Statistical Rating Organization" with "Nationally Registered Statistical Rating Organizations." In order to qualify as a Statistical Rating Organization under the Act, the organization's primary business must be the issuance of publicly available ratings for at least the most recent three consecutive years and the organization must employ either a quantitative or qualitative model, or both, to determine its publicly available ratings. Nationally Registered Statistical Rating Organizations would be subject to SEC oversight. (For further information see Municipal Bond Ratings on this site, the Bond Market Association's testimony, Standard & Poor's commentary and the Library of Congress for the status of the Act and full text. [11/30/2005]

Further legislation is being explored for the regulation of rating agencies.  On March 7, the U.S. Senate Banking Committee held a hearing on the regulation of credit rating agencies.  The credit-rating agencies were among the parties blamed by lawmakers for the accounting failures at Enron Corp. Critics of the rating agencies' business practices are calling for legislation to implement Securities and Exchange Commission oversight. [3/11/2006]

Last week the House Financial Services Committee approved the Credit Rating Agency Duopoly Relief Act with an amendment that exempts rating agencies that do not want to be NRSROs from registering with the SEC. If enacted, the measure would become effective on January 1, 2008. The bill would eliminate the SEC's current NRSRO designation process.  As a result, the rating agencies that are presently NRSRO would lose their NRSRO status and would have to register with the SEC. A time schedule has not be set for action by the full House and there is no comparable legislation in the Senate.  [6/26/2006]

On Thursday, July 13, the House approved the Credit Rating Agency Duopoly Relief Act. The Act is intended to foster competition among rating agencies and improve transparency in ratings. The Senate Banking Committee is drafting a similar bill that could be introduced as early as next week.  [7/15/2006]

On Wednesday, August 2, the Senate Banking Committee approved the Credit Rating Agency Duopoly Relief Act with certain amendments. The amendments included a provision that makes it clear that the Securities and Exchange Commission will have no enforcement authority over rating criteria and methodologies used by rating agencies and a provision to clarify that rating agencies are not waiving their First Amendment free speech protections.  The Act is expected to be approved by Congress later this year. [8/5/2006]  

On September 27, 2006 the final bill to modify the regulation of rating agencies was adopted and now awaits the president's signature. The bill establishes a system under which rating agencies that have been in business for at least three years could voluntarily register with the SEC as statistical ratings organizations. The rating agencies that are presently NRSROs would lose their status and would have to reregister.  Registration would require filing information on the methodologies used in assigning ratings, performance measurement statistics, any conflicts of interest, and organization structure. While the SEC would not be able to regulate the substance of the ratings agencies' methodologies, the SEC would have authority to take actions against a NRSRO to prohibit abusive or noncompetitive practices or  whose ratings deviated from its procedures, policies, methodologies, or criteria. [9/30/2006]  return

Municipal Broadband

Telecommunications legislation in pending in the Senate that includes provisions permitting municipalities to build broadband networks. Similar legislation was passed by the house in June 2006. The legislation gives preferential treatment to municipalities whereby they can provide broadband service within their community even if private telecom firms are willing to provide identical or better service.  The legislation also prohibits states from preventing municipalities from offering broadband services.  There has been a growing interest by cities to provide wireless and wire delivered broadband internet access for the same reasons that cities offer other utility services. Broadband is of interest to public finance professionals since bonds or lease obligations may be required to finance the broadband infrastructure.    [6/30/2006] 

The Government Finance Officers Association, National League of Cities and other organizations representing local government are asking for assistance to defeat the passage of "The Advanced Telecommunications Opportunities Reform Act" (H.R. 5252).  The organizations believe the bill will harm consumers, cities and counties.  The following link is to their position statement:   [9/16/2006] 

Tax Reform Panel Recommends Detrimental Bond Provisions

On November 1, 2005, the President's Advisory Panel on Tax Reform released its final tax change recommendations.  The Advisory Panel's recommendations include the elimination of the tax-exemption of interest on municipal bonds purchased by corporations.  The Advisory Panel recommends that "because of the flexibility businesses have to deduct interest, the exclusion from business income for state and local tax-exempt bond interest be eliminated."  According to the Bond Market Association more than 30% of municipal bonds are purchased by corporations. 

On a more positive note, the Advisory Panel did not include a provision to eliminate advance refundings and proposes the repeal of the alternative minimum tax.  [11/13/2005]  

President Bush did not mention overhauling the tax code during his State of the Nation speech. Political observers believe the plan is on hold at least until November.  [2/11/2006] returnarrow

Rule G-23

MSRB Requests Comments on Rule G-23

Rule G-23 of the Municipal Securities Rulemaking Board (MSRB) places restrictions on the activities of broker-dealers that serve as financial advisor and subsequently serve as underwriter for the same transaction.  In recent months the National Association of Independent Public Finance Advisors (NAIPFA) has asserted that the rule is outdated and is being abused or circumvented to the determent of issuers.  Although the MSRB has not proposed any changes to the rule, the MSRB has announced that it will seek comments on the rule for a period of 60 days, ending January 17, 2006.  In its statement to the press, the MSRB indicated that it is particularly interested in obtaining comments from issuers regarding the impact any change in the rule might have on them.   [11/19/2005]

MSRB Receives Comments on Rule G-23

January 17, 2006 was the deadline for submission of comments on Rule G-23 to the Municipal Securities Rule Making Board (MSRB) as described above.  According to a January 18 article in "The Bond Buyer" at least 74 comment letters were submitted. Of the 67 letters opposing changes to the rule, 42 were from Texas issuers and some appeared to be form letters containing the same or similar language.  [1/18/2006]  

MSRB Leaves Rule G-23 Unchanged

Following the January 17, 2006 deadline for submission of comments on Rule G-23 to the Municipal Securities Rule Making Board (MSRB) as described above, additional letter were submitted.  The MSRB ultimately received 116 letters of which 102 were opposed to any changes.  Most of the letters were from Texas issuers. Last week the MSRB choose not to modify the existing rule.

Peculiar Predicament With Chapter 100 Bonds

Bonds Determined to Be Invalidly Issued

A ruling on October 4, 2005, by the Missouri Court of Appeals-Western District invalidated bonds issued by the City of Peculiar under Chapter 100 of the Missouri Revised Statutes (the "Act").  The bonds, issued to finance an electric power plant, had been sold to Aquila, Inc, the company that constructed the plant.

Under the Act, municipalities can issue bonds, without voter approval, to finance industrial development projects. The Act defines industrial projects as, the purchase, construction, extension and improvement of warehouses, distribution facilities, research and development facilities, office industries, agricultural processing industries, service facilities which provide interstate commerce, and industrial plants, including buildings, fixtures, and machinery.  The municipality holds title to the bond-financed property and leases the property to a corporation. As a result, corporations are exempt from property taxation on the bond-financed property.

Last year, a citizens group, StopAquila.Org, filed a law-suit with the Cass County Circuit Court to halt the sale of the bonds to Aquila, Inc., StopAquila argued that the bonds could not be issued under the Act and required voter approval under the Missouri Constitution. The Circuit Court ruled in favor of the City rather than StopAquila.  The appellate court reversed the ruling. 

In its ruling, the Appellate Court determined that the bonds could not be issued under the Act because the power plant is not an industrial development project that can be financed under the Act.  [11/03/2005] 

Supreme Court Overturns Ruling

Earlier this week, by a 5-to-2 vote, the Missouri Supreme Court found that the City of Peculiar acted within its authority in authorizing the bonds. The Supreme Court, upheld the trial court's decision which had determined that the bonds did not require voter approval because the project was being leased to a corporation for commercial purposes. The finding by the Missouri Supreme Court that the plant qualifies as "commercial" reduces the possibility that future financings will come into question.  [12/24/2006] 

Parks Improve Property Values

The Illinois Association of Park Districts engaged Economics Research Associates (ERA) to research literature relating to the real estate impact generated by parks.  ERA found that neighborhood and community parks have a potentially positive impact on surrounding residential communities.  ERA noted the following:

bullet Neighborhood parks can provide up to a 20% increase in housing values for those homes facing the park. Benefits from a neighborhood park can extend to approximately 600 feet, with houses nearer to the park receiving the majority of the benefit.

bullet Community parks may provide benefits up to 33% of the residential real estate value. Homes within 1,000 feet of a large community park may receive a 9% increase in home value. Positive externalities of a community park may extend up to 2,000 feet.

bullet  ERA's approach also looked at value enhancements generated by other park/ open space formats, including greenways, which are noted in the body of this report.  [9/25/2005] 

Pay-to-Play Loophole Closed

On March 14, 2005, the Municipal Securities Rule Making Board ("MSRB") announced that it will seek SEC approval of a new Rule G-38 that will prohibit dealers from payments to persons who are not affiliated with the dealer firm for soliciting municipal securities business on their behalf.

The MSRB's Rule G-38 prohibits firms from engaging in a practice known as "pay-to-play" whereby broker dealers make political contributions to issuer officials in order to obtain municipal securities business.  An extensive study, completed in early 2004 by "The Bond Buyer," found that many broker-dealers are hiring consultants in various fields  that have made substantial political contributions to issuer officials.   The MSRB made similar findings and expressed concern that some firms may be hiring consultants  in order to funnel campaign contributions to issuers and circumvent rule G-38.  To preserve the integrity of the municipal securities market, the MSRB proposed a new rule prohibiting broker-dealers from hiring consultants for the solicitation of municipal securities business on their behalf. 

Rule G-38 now prohibits engaging consultants to obtain municipal securities business.  The full text of the rule is available at the MSRB's website. 

Contributions for Bond Elections Equate to Pay-to-Play

Rule G-37 of the Municipal Securities Rulemaking Board prohibits firms from engaging in a practice known as "pay-to-play" whereby broker dealers make political contributions to issuer officials in order to obtain municipal securities business.  According to an article published in "The Bond Buyer" on February 2, 2005, at The Bond Market's Association's 10th Legal and Compliance Conference, Martha Mahan Haines, chief of the SEC's Office of Municipal Securities, suggested that contributions for bond referenda is a pay-to-play activity.  Although she stressed that she was expressing her own personal view, she suggested that activities that circumvent rule G-37 could lead federal regulators to revisit the rule and consider whether it needs tightening.   [2/02/2005]  


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