News and Commentary

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%,

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Congress may consider the tax-exemption of municipal bonds this year as part of spending cut negotiations and/or income tax reform.  To learn more and support the preservation of the tax-exemption of municipal bonds visit Municipal Bonds for America.  Also see Economic Indicators and Rate Graphs.  [5/17/2013]
 

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: 

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

  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;

  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,

  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]
 

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]

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.

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]
 

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]

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 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] 

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] 
 

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]   
 

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]  

WM Financial Strategies
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Phone (314) 423-2122
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