Archive from News and Commentary

DisclosureUSA May be Forced to Close

Digital Assurance Certification (DAC), a web-based disclosure and information dissemination service provider, was recently granted a patent for its system. On January 19, DAC filed a lawsuit against the Municipal Advisory Council of Texas, the operator of DisclosureUSA for patent infringement. DisclosureUSA is a Central Post Office for continuing disclosure documents which offers free filing and dissemination services to issuers. In contrast to DisclosureUSA, DAC charges fees for its services. Since DisclosureUSA operates at no change there is speculation that DisclosureUSA may not have the funds to fight the suit or to obtain some sort of license from DAC. [1/26/2007]

On January 31 the Municipal Advisory Council of Texas announced that it plans to fight the patent infringement lawsuit filed against it by DAC. Sidley Austin LLP will represent the Municipal Advisory Council of Texas on a pro bono basis.
[2/02/2007]

The jury trial over DAC's patent infringement claim has been tentatively set for September 2, 2008. A hearing has been scheduled in Florida for next month to hear arguments on DAC's request for a preliminary injunction to stop operations of DisclosureUSA. [5/11/2007]

The Municipal Advisory Council of Texas and DAC have reached an agreement that will eliminate the hearing that was scheduled for June 5 to stop operations of DisclosureUSA. Under the agreement, DisclosureUSA will no longer provide receipts indicating that the documents have been received by the national and state information repositories nor alerts when documents are not received by the repositories. As a separate action, the Securities and Exchange Commission agreed to remove references to DisclosureUSA from its website. [5/25/2007]

The Municipal Advisory Council of Texas and DAC have reached an agreement that eliminates the patent infringement suit. Under the terms of the settlement DisclosureUSA will no longer provide receipts indicating that the documents have been received by the national and state information repositories, DisclosureUSA will no longer enable users to create cover sheets for filings, issuers will not be able to download their documents for 30 days after they are filed and issuers will not receive email alerts regarding their filing deadlines. [6/13/2007]

DisclosureUSA

Act to Regulate Rating Agencies

Missouri Debt Limit Change Considered

Tax Increment Finance

Refunding Transactions

Tax Reform

Rule G-23

Wildwood Receives First Bond Rating

Missouri Regional Library Selects WM Financial Strategies

Pay-to-Play Loophole to Be Closed

Contributions for Bond Elections Equate to Pay-to-Play

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]

Missouri Constitutional Debt Limit Change Considered

Senate Joint Resolution 31 is a proposed amendment to the Missouri Constitution that would, subject to statewide voter approval, change the bonding limit for Missouri school districts from 15% to 20% of assessed valuation. The Resolution was approved by the Missouri Senate last week. If approved by the House, the election will be held on the November 7, 2006 [4/17/2006]

The General Assembly adjourned for the year last week without a vote by the House on SJR 31. [5/20/2006]

Tax Increment Finance

Legislation to Change Missouri TIF Law

Robert Johnson of Lee's Summit is sponsoring a bill to make major changes to Missouri's tax increment financing (TIF) law. The bill includes, among others, the following provisions: (i) permits a backdoor referendum (referendum following submission of a petition for a referendum), (ii) for retail developments, not more than 22% of the total project costs can be funded with TIF, (iii) prohibits the use of TIF where 25% or more of the area is vacant, (iv) increases from 50% to 90% the amount of incremental economic activity taxes (sales taxes) that are deposited in the special allocation fund for payment of redevelopment projects, and (iv) requires the distribution of 25% of the "payments in lieu of taxes" (incremental property taxes) to the taxing districts within the boundaries of the TIF area and 100% or the incremental property taxes attributable to residential property must be passed through to affected school districts. In addition, the bill creates and defines twelve conditions of "blight." The full text of the bill, HB1070, and its status is available on the Missouri House of Representatives website. Also see the commentary "Too Many Economic Development Incentives?" on this website. [1/21/2006]

Several bills have also been introduced in the Missouri House and Senate to modify the TIF law. The bill that appears to be most restrictive is SB 651 that would require the distribution of 10% of the incremental tax revenues from new tax increment financing projects to be distributed to school districts. SB 672 would impose many new restrictions on TIF including limiting tax increment financing for retail projects, new reporting requirements and the distribution of 25% of incremental property taxes to the taxing districts within the TIF boundaries. SB 832 prohibits the use of TIF in most flood plains and for greenfield development and requires voter approval under certain circumstances.
[1/28/2006]

SB 832, which is considered a "moderate" bill for TIF reform, was passed by the Senate this week. The bill is now being considered by the House.
[4/22/2006]

This week the bill was reported do pass by the House. [4/29/2006]

The Missouri General Assembly ended its 2006 session last Friday. In spite of the large number of Tax Increment Financing bills that were introduced this session none were approved. SB 832 which was the most likely to obtain passage died when House and Senate negotiators were unable to agree on the definition of "blighted areas." [5/16/2006]

Wentzville and Bonne Terre Save from Refunding

Wentzville, Missouri to Save $361,000

WM Financial Strategies is serving as financial advisor to the City of Wentzville, Missouri for the sale of bonds that will refund $1,585,000 of Neighborhood Improvement District Bonds (NID Bonds). The refunding will result in approximately $361,000 of savings representing over 22% of the principal amount of the bonds refunded. On a present value basis, the savings equal approximately $175,833 or 11% of the principal refunded. NID Bonds are paid by special assessments from the property owners of the City's Bear Creek Neighborhood Improvement District. The property owners will be the beneficiaries of the savings. UMB Bank was selected as the underwriter of the bonds through a competitive proposal process.

Bonne Terre, Missouri to Save $328,000

WM Financial Strategies is serving as financial advisor to the City of Bonne Terre for the sale of Certificates of Participation (COPs) that will refund $2,945,000 of certificates of participation issued in 1999. The refunding will result in approximately $328,000 of savings representing over 11% of the principal amount of the certificates refunded. On a present value basis, the savings equal approximately $255,000 or 8.6% of the principal refunded. Commerce Bank was selected as the underwriter of the COPs through a competitive proposal process. [See article in the Daily Journal] [3/31/2006]

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. For further information see the Advisory Panel's full report. [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]

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.
[2/25/2006]

Wildwood, Missouri Receives First Bond Rating

The City of Wildwood has received a "Aa2" rating from Moody's Investors Service. The City, established in 1995, will go to market with its first bond issue in August 2005. The estimated $3,850,000, Neighborhood Improvement, Limited General Obligation Bonds will be used to finance the construction of a sewer system in portion of Wildwood. WM Financial Strategies is serving as the City's financial advisor. [7/24/2005]

Missouri Regional River Library Selects WM Financial Strategies

The Missouri Regional River Library has selected WM Financial Strategies as its financial advisor in connection with the construction of a new library in the City of Jefferson, Missouri. The District's selection came after receiving 9 proposals and interviewing 3 finalists. (See the Press Release) [7/24/2005]

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.
[3/14/2005]

Contributions for Bond Elections Equate to Pay-to-Play

Rule G-37 of the Municipal Securities Rule Making 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]