Weekly Market Brief

For the seven day period ended February 2, the Bond Buyer's 20-Bond Index decreased by 7 basis points to 3.60%.  This matches the yield from two weeks ago and reflects a record low for municipal bonds.  The yield on 10-year Treasury bonds decreased by 10 basis points to 1.86% during the same period.  This week's economic releases included the ISM Manufacturing Index which rose to 54.1 in January from 53.9 in December (a reading above 50 signals expansion) and the ISM Non-Manufacturing Index which rose to 56.8 in January from 52.6 in December. Also released was the Employment Situation Report which indicated that 243,000 jobs were created and the unemployment rate declined to 8.3%.  Also see Economic Indicators and Rate Graphs.  [2/03/2012]
 

Switching Roles from Financial Advisor to Underwriter  Prohibited

Effective November 27, 2011 broker-dealers (underwriters) are prohibited from serving as a financial advisor and then switching to an underwriter. In addition, underwriters are required to disclose in writing that they serve solely in an arms length commercial transaction rather than in a fiduciary capacity (a requirement for financial advisors under the Act). 

Rule G-23 of the Municipal Securities Rulemaking Board ("MSRB") was adopted in 1977 and prohibited broker-dealers (underwriters) from serving as both underwriter and financial advisor for the same transaction. However, Rule G-23 permitted a broker-dealer serving as a financial advisor to subsequently serve as underwriter with issuer's consent.

Municipal Advisor's Serve in the Issuer's Best Interest; Underwriter's Don't

In its newly released report for issuers "Six Things to Know When Issuing Municipal Bonds," the Municipal Securities Rulemaking Board ("MSRB") states that "municipal advisors are required by federal law to act in the best interests of their state and local government clients without regard to their own financial or other interests. This is called a “fiduciary duty.” Municipal advisors must not let any financial relationships or interests they have prevent them from acting in the best interests of state or local government issuers that want to raise money at the lowest possible cost. Underwriters do not have a fiduciary duty to their state or local government issuer clients, but they must act fairly and not deceive state or local government issuers." The report is one of several reports released by the MSRB as part of it new State and Local Government Toolkit.     [11/13/2011]

Tax Exemption of Municipal Bonds at Risk

Much to the surprise of market participants and municipal issuers, Obama's jobs proposal would limit the tax-exemption of municipal bonds to 28% for all individuals with $200,000 or more of taxable income and married couples with $250,000 or more.  The tax-exemption is now worth up to 35% for individuals in the highest tax bracket. The provision is intended to be a revenue offset to the cost of the jobs bill. The impact of the provision, if it adopted, would reduce the demand for tax-exempt bonds and significantly increase the cost of municipal borrowing. Consequently, state and local governments would likely need to scale back capital spending.  It is ironic that Obama would include a deterrent to capital spending in a bill designed to stimulate spending and job creation.   [9/16/2011]

SEC Approves Disclosure Rule Changes for Municipal Bonds

On May 26, 2010 the Securities and Exchange Commission (SEC) voted unanimously to change Rule 15c2-12 to expand disclosure requirements. The new rules will become effective on December 1, 2010. In general, the changes include (i) expanding the rule to include Variable Rate Demand Obligations, (ii) filing of event notices within ten business days after the occurrence of the event, (iii) expanding the types of events that must be disclosed by an event notice, and (iv) requiring disclosure of events that may adversely affect a bond's tax exemption, including IRS proposed and final determinations of taxability. The rule presently provides that notice must be made only if the event is "material." The proposal would eliminate the need for a materiality determination and require that the following events be disclosed in a notice: 1) principal and interest payment delinquencies with respect to the securities being offered; (2) unscheduled draws on debt service reserves reflecting financial difficulties; (3) unscheduled draws on credit enhancements reflecting financial difficulties; (4) substitution of credit or liquidity providers, or their failure to perform; (5) defeasances; and (6) rating changes. A materiality determination would be retained for some events, including, (1) non-payment related defaults; (2) modifications to rights of security holders; (3) bond calls; and (4) the release, substitution, or sale of property securing repayment of the securities. The amended rule specifically requires disclosure of events that may adversely affect a bond’s tax exemption, including issuance by the IRS of proposed and final decisions about whether the bond can be taxed.

The proposed amendment also would increase the number of events to include: (1) tender offers; (2) bankruptcy, insolvency, receivership or similar proceeding; (3) mergers, consolidations, acquisitions, the sale of all or substantially all of the assets of the obligated person or their termination; and (4) appointment of a successor or additional trustee or the change of the name of a trustee, if material.

In its adopting release, the Securities and Exchange Commission noted that the SEC has set forth interpretations under the antifraud provisions of the federal securities laws to require municipal securities underwriters to have a reasonable basis for recommending any municipal securities. In its release the SEC reaffirmed that, "to have a reasonable basis to recommend a security, a municipal underwriter must carefully evaluate the likelihood that a municipality will make the ongoing disclosure called for by the amended rule. The adopting release further states that it is doubtful that an underwriter could form a reasonable basis to recommend a security if the municipality had a history of persistent and material non-disclosure." 

Additional information regarding continuing disclosure is available at "Municipal Bond Disclosure - History, Requirements and Services Provided by WMFS." For assistance with your continuing disclosure reports or filings contact Joy A. Howard at 314-423-2122. [5/28/2010] 
 

Ratings to Be Recalibrated

Moody's

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] 

Fitch

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 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. [10/31/2009] 
 

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] 
 

Pay-to-Play: Contributions for Bond Referenda

Rule G-37 of the Municipal Securities Rulemaking Board ("MSRB") may be changed to prohibit contributions for bond elections. Rule G-37 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.  In 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 Haines 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.

On January 7, 2009, The Bond Buyer reported that the MSRB is now reviewing rule G-37. The Bond Buyer's article followed the submission of a letter by executives from Citi, JP Morgan and Morgan Stanley suggesting that bond election contributions could cause an underwriter to be selected and that a level playing field is needed for all underwriters.   [1/10/2009]

At its April 2009 meeting the MSRB choose not to place a ban on contributions for bond referenda.  The MSRB press release indicated "The Board determined that, based on the information it has been able to gather, there is not adequate evidence to suggest that bond ballot campaign contributions have a negative effect on the integrity of the municipal marketplace."  In addition, the MSRB indicated that it would continue to research any link between "contributions and questionable practices." In view of the MSRB's current push for additional regulatory powers, its reactive, rather than proactive, position on this matter surprised and disappointed market participants interviewed by The Bond Buyer.   [4/12/2009]   

In June the MSRB released a draft of changes to Rule G-37 that would require dealers to disclose contributions they make to bond ballot campaigns. The proposed changes are in response to concerns raised by industry participants that contributions to bond campaigns could assist dealers obtain municipal securities business and may raise the perception of pay-to-play practices. The proposed rule change, as noted above, requires disclosure of contributions but does not ban contributions to bond ballot measures. The MSRB is seeking comment on the proposed rule until August 7.  In its release, the MSRB noted that "the information gathered through the public disclosures contemplated in the draft amendments could serve as a basis for understanding whether the MSRB should consider further action with regard to bond ballot initiatives in the future."  [7/03/2009]  

The MSRB plans to propose revisions to Rule G-37 within the next few months that would be filed with the Securities and Exchange Commission for approval. The rule is intended to prevent dealers from using contributions to obtain municipal bond business. The proposed rule does not prohibit contributions, but would require disclosure of election contributions except for up to $250 for elections in which the dealer could vote for the bond issue. The MSRB indicated that it would study the contribution disclosures and later determine whether restrictions will be placed on election contributions.   [10/31/2009]   
 

Municipal Bond Insurance

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] 
 

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] 
 

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.
[12/09/2007] 
 

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 - update]

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]

On Sunday, the Treasury announced that tax-exempt money market funds can participate in the guarantee program.  The Treasury Department indicated that "Participation in the temporary guaranty program will not be treated as a federal guaranty that jeopardizes the tax-exempt treatment of payments by tax-exempt money market funds." The temporary guaranty program will provide coverage for amounts held by investors in such funds as of the close of business on September 19, 2008.  See Notice 2008-81.   [9/22/2008]
 

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 (see the tax table at www.investinginbonds.com), 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.   
[11/04/2007]

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]

NFMA Issues White Paper on Municipal Securities Laws

Premium Callable Bonds

A popular trend in the bond market is structuring callable bonds with premium pricing.  As reported in The Bond Buyer, on June 6, 2007, bond purchasers like this structure because it offers an additional yield or "kick." (See the article "A Little 'Kick' in Yields.") As reported on this website on March 23, 2007 in the article "The Problem With Premium Pricing" that "Kick" is costly to issuers.
[6/08/2007] 

Missouri Supreme Court Grants Collective Bargaining

Overturning a 1947 ruling, on May 29 the Missouri Supreme Court determined that teachers and other public employees have the right to engage in collective bargaining.  Prior to Tuesday's ruling the courts had determined that employees had only the right to "meet and confer."  The ruling also overturned a 1982 decision by making work agreements binding. See the ruling. [5/30/2007] 

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]

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]

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."  For further information, see the MSRB's January 29, 2007 Notice and the NASD's Guidance On Gifts and Gratuities. [1/31/2007]

Electronic Municipal Market Access System - EMMA

The MSRB is seeking comments on a proposed new rule that would establish a disclosure system for new issues of municipal securities and allow the dissemination of official statements electronically.  The system would be modeled in part after the Securities and Exchange Commission's "access equals delivery" model for prospectus dissemination.  Under the proposal, a centralized web site would be created where municipal securities dealers could post official statements and that investors could access for free.  Paper copies would continue to be made available to investors requesting one.  Once the rule is approved, the system could be operating as early as the end of 2008. [1/26/2006] 

On Wednesday the Securities and Exchange Commission will vote on changes to be made to rule 15c2-12.  The change would require municipal issuers to file secondary market disclosure documents with the Municipal Securities Rulemaking Board's new Electronic Municipal Market Access system (EMMA) and would eliminate the Nationally Recognized Municipal Securities Information Repositories (NRMSIRs).  Following the vote, the change is subject to a 30 day comment period after publication in the Federal Register. [7/28/2008] 

The MSRB's Electronic Municipal Market Access system (EMMA) is nearing completion.  This week, the MSRB issued preliminary specifications for submitting electronic municipal bond offering documents to the system. When completed, issuers will be able to electronically submit their disclosure documents to the system and other repositories will be eliminated. [9/28/2008] 

The MSRB's Electronic Municipal Market Access system (EMMA) is nearing completion.  This week, the MSRB issued preliminary specifications for submitting electronic municipal bond offering documents to the system. When completed, issuers will be able to electronically submit their disclosure documents to the system and other repositories will be eliminated. [9/28/2008] 

This week the MSRB filed a request with Securities and Exchange Commission to delay the continuing disclosure component of EMMA so that issuers will have more time to become familiar with the system. The MSRB requested an operation date of July 1, 2009. MSRB indicated that it "expects to propose in the near future the implementation of a pilot continuing disclosure component of EMMA that would permit voluntary or test submissions of continuing disclosure documents prior to the effectiveness of the SEC’s proposed changes to Rule 15c2-12.  The MSRB is committed to working with issuers, other industry participants and the SEC to help ensure a rational and efficient transition to the new rule requirements and related EMMA system enhancements."   [11/08/2008] 

On December 8, 2008 the Securities and Exchange Commission finalized changes to Rule 15c2-12. Beginning on July 1, 2009 issuers will be required to file all continuing disclosure documents electronically through the MSRB's Electronic Municipal Market Access (EMMA) system.  The rule will also require all issuers that sell bonds in excess of $1,000,000 on and after July 1, 2009 to file annual financial information through EMMA.  [12/20/2008] 

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 Bloomberg.com.  [11/18/2006]

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 Bloomberg.com  [12/08/2006]

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

Voters Approve Bond Issues

In spite of economic concerns, voters approved bonds this week. According to the Bond Buyer, there were 696 propositions totaling $67 billion of bonds of which approximately 82% were approved.  Of the 39 Illinois propositions reported by the Bond Buyer, 15 propositions were approved or approximately 38%.  Of the 19 Missouri propositions reported by the Bond Buyer, 17 were approved or approximately 89%.   [11/08/2008]   
 

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]   
 

Taxpayers Pay More for Negotiated Bond Sales

Study by Missouri State Auditor

On January 3, 2006, Missouri State Auditor Claire McCaskill released a study comparing the cost of bonds sold through negotiation to bonds sold through competitive bidding. The study confirmed the findings of a 2001 study by Ms. McCaskill's office that negotiated bond sales cost more.  The study demonstrated that during the one-year period ending May 31, 2005, the additional cost was $11.2 million for the 144 Missouri bonds sold by negotiated sale.

Among the other findings and recommendations in the study were the following:

  87% of Missouri general obligation issues were sold through negotiation compared to a national average of 46%.

  Without an independent financial advisor, issuers are not always well informed about bond issue options. 

  Taxpayers could avoid paying unnecessary interest costs if issuers sell general obligation bonds competitively and use independent financial advisors.

The study included a numerical analysis of 161 Missouri bond issues totaling $1.2 billion prepared by the University of Connecticut's Mark Robbins and William Simonsen. In an interview with Bloomberg, a leading global provider of data, news and analytics, Mr. Simonsen indicated that the failure to take bids cost Missouri issuers at least 19 basis points (0.19%) more a year.

(See the 2001 Study, the 2005 Follow-Up Study and services offered by WM Financial Strategies, independent financial advisor, for competitive general obligation bond sales).  [1/04/2006]

Bloomberg Columnist States "Municipal Bond Issuers Are Lazy"

The 2005 bond follow-up study indicated that some issuers use negotiated sales because they believe it is easier and more convenient. In the January 4, 2006 Bloomberg article "Missouri Lawmakers May Seek Bids on Bonds After Audit", it was reported that Roger Kurtz, associate director of the Missouri Association of School Administrators in Jefferson City, stated that schools favor negotiated sales because they believe they require less time and work of superintendents and other administrators.  On January 6, 2006 Bloomberg's municipal bond columnist, Joe Mysak begins his column regarding the 2005 bond study with "Municipal bond issuers are lazy, when they aren't entirely clueless." (See "Missouri Bond Study Shows Dim Issuers, Mad Bankers") [1/06/2006]


"Auditor spots a red herring in her bowl of vanilla ice cream"

On January 15, 2006 the St. Louis Post-Dispatch published a column, with the title above, relating to the recently released Missouri auditor's report on bond sale practices. Columnist David Nicklaus pointed out the irony of Missouri bond sales in that a school superintendent must seek competitive bids to buy new school buses but may "call a single investment banker and negotiate a price" for the sale of a multimillion-dollar bond issue.  With respect to issuers' argument that negotiated sales are "easier and more convenient," Nicklaus points out that financial market expertise can be obtained by hiring an independent financial advisor as an alternative to negotiated bond sales. [1/15/2006]

Also see the commentary "Competitive Bond Sales - Is Saving Taxpayers' Money Too Much Work?" on this site.
 

Competitive vs. Negotiated Bond Sales

Bloomberg Writes Series of Articles on Sale Methods

Bloomberg L.P., an industry leader in financial news, market data, and analysis, is running a series of articles on competitive versus negotiated sales of municipal bonds.  The first article "States, Cities Shun Finance Competition, Victimizing Taxpayers", originally published on January 3, 2005, includes quotes from Missouri State Auditor Claire McCaskill's 2001 report "General Obligation Bond Sale Practices" and commentary relating to Missouri bond sales from A.G. Edwards, L.J. Hart, McLiney & Co., George K Baum and Piper Jaffray.  The second article,
"Citigroup 'Double-Dipped' Louisiana Taxpayers With No-Bid Bond" was originally published on February 24, 2005.  Both articles are published on this site with the permission of Bloomberg. [5/28/2005]

States, Cities Shun Finance Competition, Victimizing Taxpayers
Citigroup 'Double-Dipped' Louisiana Taxpayers With No-Bid Bond  


Philadelphia Sells Bonds Competitively

Last week Philadelphia sold $218 million in general obligation bonds by competitive bidding.  The sale was the first competitive bond sale by the City in three decades. The sale follows the conviction of former City treasurer, Corey Kemp, in a pay-for-play case last year. (Underwriters were selected for negotiated sales based on political contributions.) For additional information regarding the case and commentary relating negotiated sales from Joe Mysak, columnist for Bloomberg, see Its Time for Philly to Try a Bond Sale Auction. [7/21/2005]  


State and Local Governments Continue to Sell Bonds Through Negotiation

As noted in the WM Financial Strategies' article Bonds Gone Wild, the economic crisis has reduced the number of institutional investors.  In spite of this change, local governments continue to typically receive 3 or more bids and are successful in selling bonds competitively. Regardless of the potential financial benefits or greater transparency associated with competitive bidding, State and local governments continue to sell bonds through negotiation.  See Corzine’s Competition Push Stops at ‘Volatile’ Munis. [2/14/2009]