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 News and Commentary

Switching Roles from FA to Underwriter Prohibited 

Weekly Market Brief

For the seven day period ended November 16, the Bond Buyer's 20-Bond Index increased by 3 basis points to 3.52%.  For the same period, the yield on 10-year Treasury Bonds decreased by 3 basis points to 2.37%. This week's economic releases for October included retail sales which increased by 0.2%; the Consumer Price Index which rose 0.1%;and the Producer Price Index which rose 0.4%.  Also released was the new Residential Construction Report which indicated that housing starts increased by 13.7% in October and permits increased by 5.9% in October. Also see Economic Indicators and Rate Graphs
[11/18/2017]

                                                *****
Although the outline of Trump's tax plan did not include Municipal Bonds, the House Ways and Means Committee's Tax "Reform" Bill slashes the use of
tax-exempt municipal bonds.  The bill includes the elimination of tax-credit bonds and tax-exempt bonds for sports stadiums.  Of greater impact is the proposed elimination of all private activity bonds including 501(c)(3) (bonds of non-profit corporations) and the elimination of the issuance of tax-exempt advance refunding bonds (both with 12/31/2017 effective dates). The Senate Bill, as presently drafted, preserves private activity bonds but does not preserve tax-exempt bonds for advance refundings.
  Issuers are urged to act now for the preservation of the tax-exemption of municipal bonds. Visit
Municipal Bonds for America
 

MSRB Releases Results of MA Testing (Series 50)

To help insure that Municipal Advisors are qualified to provide services, the Municipal Securities Rulemaking Board implemented rule that all Municipal Advisor must pass the Series 50 Test on and after October 13, 2017.  As of October 13, 505 firms were registered as municipal advisor with one or more individuals that has passed that test.  184 firms are sole practitioners. 50 firms had no qualified Series 50 representatives. 40 firms have elected not to continue engaging in Municipal Advisor Activities.   [9/24/2017] 

 

BAB Subsidy Cut for 2017-2018

For the United State's fiscal year ending September 30, 2018, the subsidy payments to issuers of Build America Bonds will be cut by 6.6%  The cut is under the federal government's sequestration cuts that began in March 2013. The BAB subsidy in the 2017 fiscal year was reduced by 6.9%, for the 2016 fiscal year was reduced by 6.8%, for the 2015 fiscal year was reduced by 7.3% and for the 2014 fiscal year was reduced by 7.2%.  [8/05/2017] 

 

Moody's Is Now On EMMA

As of June 1, 2015 Moody's Investors Service began making its municipal ratings available on the Municipal Securities Rulemaking Board's Electronic Municipal Market Access (EMMA) website.  Prior to June 1, Standard & Poor's, Fitch and Kroll already made their municipal ratings available to EMMA.  With this change, it is now easier for issuers as well as investors to monitor rating changes.  [6/6/2015]  return

Bond Insurers Receive Rating Upgrades

On March 18, 2014 Standard & Poor's raised the ratings of certain bond insurers as follows: MBIA's rating to A- from BBB, National Public Finance Guarantee Corp. to AA- from A (MBIA's main unit for insuring municipal bonds), Assured Guaranty to AA from AA- and Municipal Assurance Corp. (a unit of Assured Guaranty) to AA from AA-. As a result of the change Assured will now have the same rating as Build American Mutual, the highest rated insurer. According to "The Bond Buyer" in 2013 only 3.6% of all new municipal bonds were insured.  [3/22/2014] return

On May 21, 2014 Moody's raised the rating of National Public Finance Guarantee Corp. to A3 from Baa (MBIA's main unit for insuring municipal bonds).  [5/23/2014]  return

Missouri State Auditor Finds Negotiated Sales Costly

The Missouri State Auditor, Thomas A. Schweich, released a study titled "General Obligation Bond Sales Practices."  The study was an analysis of 538 general obligation bonds issued by Missouri local governments during a 4 year period ending December 31. 2011.  The study found that competitive sales result in 23.5 to 24.2 lower basis points than negotiated sales.  The issuers included in the study will pay approximately $43 million in added interest as a result of selling their bonds with a negotiated rather than competitive sale. The Auditor's office also found that "based on interviews with local government finance officials, there is a clear lack of understanding of the bond issuance process."  In addition to recommending the use of competitive bidding for most General Obligation bonds, the Auditor also recommended that local governments "obtain the services of a financial advisor who is independent from the underwriting function, regardless of the method of sale used." See the Full Report.  [11/17/2013] return

Municipal Advisor Rule

SEC Adopts Municipal Advisor Rule

In July 2010, Congress passed the Dodd-Frank Act, which requires the Securities and Exchange Commission (the "SEC") to adopt a rule requiring municipal advisors to register with the SEC.  A temporary rule was adopted pending the SEC's establishment of the registration process and defining who is a "municipal advisor."  On September 18, 2013, the SEC adopted the final rule which will become effective on July 1, 2014. The complete text of the rule is 777 pages and is available at http://www.sec.gov/rules/final/2013/34-70462.pdf. Alternatively a three page summary is available. The Government Finance Officers Association has prepared a very good summary titled "GFOA Issue Brief: SEC Municipal Advisor Rule return

Howard to Speak at Missouri GFOA's Spring Conference

On May 1, 2014, Joy A. Howard will be speaking and moderating a session on the new Municipal Advisor Rule and how it affects municipal entities at the Government Finance Officers Association of Missouri's Spring Conference.  The conference will be held in Lake Ozark and additional details regarding the conference are available at  "MOGFOA Spring Conference [4/04/2014] return

SEC Charges School District and Underwriter with Disclosure Related Fraud

On July 29, 2013, the Securities and Exchange Commission charged a school district in Indiana and its municipal bond underwriter with falsely stating to bond investors that the school district had been properly providing annual financial information and notices required as part of its prior bond offerings. An SEC investigation revealed that in an official statement prepared in 2007, the school district stated that it was in compliance with its disclosure obligations related to prior bond offerings.  However, the district had not submitted any of the required annual reports or notices for a 2005 bond offering, and the underwriter did not conduct adequate due diligence to detect the false statement in the course of the 2007 offering. In its Press release the SEC noted that "this is the first time the SEC has charged a municipal issuer with falsely claiming in a bond offering’s official statement that it was fully compliant with the annual disclosure obligations it agreed to in prior offerings, and an underwriter and its principal for not doing the necessary research to attest to the truthfulness of that claim."  See the entire Press Release. [8/02/2013] return

Underwriters' Role to Be Disclosed to Issuers
Under MSRB Rule G-17

Effective August 2, 2012 underwriters must make significant disclosures regarding their role and certain other matters.  Among the disclosures, that must be made in writing, are the following: 

bulletpoint  the underwriter must deal fairly at all times with both municipal issuers and
    investors,

bulletpoint  the underwriter’s primary role is to purchase securities with a view to
    distribution in an arm’s-length commercial transaction with the issuer and
    it has financial and other interests that differ from those of the issuer;

bulletpoint  unlike a municipal advisor, the underwriter does not have a fiduciary
    duty to the issuer under the federal securities laws and is not required
    by federal law to act in the best interest of the issuer
without regard to
    the underwriter’s own financial or other interests; and
,

bulletpoint  the underwriter has a duty to purchase securities from the issuer at a fair and
    reasonable price, but must balance that duty with its duty to sell municipal
    securities to investors at prices that are fair and reasonable.

In addition, the amendment states that an underwriter must not recommend that the issuer not retain a municipal advisor.

The amendments include numerous other disclosures relating to (i) conflicts of interest, (ii)  compensation arrangements, and (iii) material aspects of a transaction including known risks to the issuer.    [8/04/2012] return
 

GAO's Study on Municipal Bond Disclosure Released

On July 19, 2012, the United States Government Accountability Office released its study "Options for Improving Continuing Disclosure." The study was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The report addresses (1) the extent to which information currently provided on municipal securities is useful for investors and the extent to which existing regulations reflect principles for effective disclosure, and (2) options for improving the information issuers disclose to investors of municipal securities. To conduct this work, GAO reviewed disclosure rules and compared them with principles for effective disclosure cited by SEC and the International Organization of Securities Commissions, surveyed selected experts and market participants, and interviewed issuers. The study is available at http://gao.gov/products/GAO-12-698.   [8/04/2012] return

SEC's Study on Municipal Bonds Released

On July 31, 2012 the Securities and Exchange Commission (SEC's) released its study on the municipal securities market. The report includes the SEC's analysis of disclosure and price transparency and discusses possible legislative changes to improve disclosure.  The report recommends that Congress consider authorizing the SEC to set baseline disclosure standards and require municipal issuers to have audited financial statements.

The report also outlined other potential legislative changes that the SEC may recommend to Congress to help improve disclosures and practices in the municipal securities market including:

  • Eliminating the availability of Securities Act and Exchange Act exemptions for conduit borrowers who are not municipal entities.
     
  • Authorizing the Commission to establish the form and content of financial statements for municipal issuers who issue municipal securities, and to recognize a designated private-sector body as the standard setter for generally accepted for federal securities law purposes.
     
  • Providing a safe harbor from private liability for forward-looking statements of repeat municipal issuers that satisfy certain conditions.
     
  • Permitting the Internal Revenue Service to share information with the SEC that it obtains from returns, audits, and examinations related to municipal securities offerings, particularly in instances of suspected securities fraud.
     
  • Providing a mechanism, through trustees or other entities, to enforce compliance with continuing disclosure agreements and other obligations of municipal issuers to protect municipal securities bondholders.

The study is available at http://www.sec.gov/news/press/2012/2012-147.htm  [8/04/2012] return

Bond Insurance

BAM - New Municipal Bond Insurer Formed

Build America Mutual Assurance Company ("BAM") was launched on July 23, 2012.  The company was assigned a AA/Stable rating by Standard& Poor's Rating Services.  BAM will insure only essential public purpose issues and will be the industry's first mutual bond insurer. To obtain insurance, BAM will allocate an amount equal to 1% of the par amount insured as a Member Surplus Contribution, giving the issuer the right to vote as a member of BAM and to receive dividends. An additional 10-year upfront risk premium will be changed and annual installment premiums if the bonds extend beyond 10 years.  

AGC Downgraded

On January 17, 2013, Moody's downgraded Assured Guaranty Municipal Corp. to A2 from Aa3 and Assured Guaranty Corp. to A3 from Aa3. Following the downgrade, Assured Guaranty announced that is will establish a new insurer this year that will not be rated by Moody's. [1/18/2013]

MAC - New Municipal Bond Insurer Formed

As promised in January, and as noted above, Assured Guaranty established a new municipal bond insurer. The launch of the new company known as Municipal Assurance Corp. (MAC), was announced today.  MAC will insure only select categories of U.S. municipal bonds and opens for business with $1.5 billion of claims-paying resources, financial strength ratings of AA+ (stable outlook) from Kroll Bond Rating Agency and AA- (stable outlook) from Standard & Poor’s Rating Services, and insurance licenses in 37 states and the District of
Columbia. MAC has been capitalized to approximately $800 million through cash and securities contributed by Assured Guaranty Municipal Corp. (AGM) and Assured Guaranty Corp. (AGC), which own MAC jointly via a holding company. Additional information is available and www.macmunibonds.com. [7/22/2013]
return
 

Auditor Reprimands School District for Failure to Engage Independent Financial Advisor and for Absence of Competitive Bidding

On March 2, the Missouri State Auditor released its finding of an audit of the School District of Springfield, R-XII.  The Auditor's report notes that the District sold bonds and certificates through a negotiated sale, rather than a competitive sale and has used the same underwriter since 1991.  In addition, the District's bond underwriter acts in the dual capacity of financial advisor and underwriter which creates a conflict of interest.  "Additionally, the lack of independent financial advice could result in the School Board not always being adequately informed of bond issuance options or being able to adequately evaluate bond proposals."  The audit also indicated that while Missouri law does not require competitive sales, competitive sales may result in lower interest costs.

The audit was undertaken by the Missouri State Auditor in response to a petition signed by more than 5,000 residents of the District.   [3/10/2012] return

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.

Additional information regarding the current Rule G-23 and its background is available on this site at www.Munibondadvisor.com/RuleG23.htm.  
[12/02/2011] return

Municipal Advisors Serve in the Issuers' Best Interest; Underwriters 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]  return

 

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Phone (314) 423-2122
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JHoward@munibondadvisor.com