Weekly Market Brief
The Bond Buyer's 20-Bond Index decreased by 6 basis points to 3.61% for
the seven day period ended May 16. During the same period, the yield on 10-year
Treasury bonds increased by 6 basis points to 1.87%. This week's
economic releases included Retail Sales which increased by .1% in April;
the Producer Price Index which declined by .7% in April; the Consumer
Price Index which declined by .4% in April; and the University of
Michigan's Consumer Sentiment which increased to 83.7 in May from 76.4
in April. Also released was the New Residential Construction Report
which indicated that new building permits increased by 14.3% while
housing starts fell by 16.5%,
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:
the underwriter must deal fairly at all times with both municipal issuers
the underwriter’s primary
role is to purchase securities with a view to
unlike a municipal
advisor, the underwriter does not have a fiduciary
the underwriter has a duty
to purchase securities from the issuer at a fair and
In addition, the amendment states that an underwriter must not recommend that the issuer not retain a municipal advisor.
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.
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]
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:
The study is available at http://www.sec.gov/news/press/2012/2012-147.htm. [8/04/2012]
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.
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.
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
Advisors Serve in the Issuers' Best Interest; Underwriters Don't
Tax Exemption of
Municipal Bonds at Risk
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.
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.
Pay More for Negotiated Bond Sales
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.
Bloomberg Columnist States "Municipal
Bond Issuers Are Lazy"
Competitive vs. Negotiated Bond
States, Cities Shun Finance
Competition, Victimizing Taxpayers