WASHINGTON – Former state and local officials on a House Financial Services Committee panel raised concerns Thursday about the lack of transparency of fees in municipal bond deals and the tendency by dealers to push for more negotiated than competitive bond transactions.
Another panel member raised concerns about the use of municipal bonds to finance the development of sports stadiums and facilities.
The hearing by the committee's capital markets subcommittee was kind of a mish-mash of topics, combining standards-setters for the corporate bond market and municipal securities regulators. It was called "Examining the Agenda of Regulators, Self-Regulatory Organizations and Standards-Setters for Accounting, Auditing and Municipal Securities.
The panel's chairman, Rep. Scott Garrett, R-N.J., mostly focused on the Public Company Accounting Oversight Board and its failure to hold enforcement proceedings in private without notifying firms they are being examined.
During the hearing, Rep. David Schweikert, R-Ariz., a panel member and former treasurer of Maricopa County, Ariz., recalled signing documents for a refunding of municipal bonds and discovering that there were "extraordinary legal fees," that were almost as high as the savings that were to be obtained from the refunding. He asked if there are any standards for fees in the municipal market.
Municipal Securities Rulemaking Board executive director Lynnette Kelly told Schweikert that California has recently adopted a law requiring issuers in the state to disclose bond payments and use of proceeds.
Schweikert asked how elected officials can get a better understanding of fees and costs. Kelly said there is no national database of this information, but added, "I get your point."
Rep. Bruce Poliquin, also a panel member, said that when he became treasurer of Maine the state had done a lot of negotiated bond deals, which were costly. He said he pushed for more competitive deals that "would drive down interest rates in a very transparent way."
Poliquin asked if muni issuers are required to hire financial advisors that would steer them to more competitive deals.
Jessica Kane, director of the Securities and Exchange Commission's Office of Municipal Securities, said it is up to state and local governments to decide whether they want to do negotiated or competitive deals and whether they want to hire advisors.
Poliquin talked about finding "a lot of hidden fees" in negotiated deals and asked Kane if the SEC has found this to be the case. She said she would check with the SEC's Office of Compliance Inspections and Examinations on this question.
Rep. Randy Hultgren, R-Ill., a panel member and chairman of the Municipal Finance Caucus, said he has introduced a bill to make clear that municipal issuers are not required to hire municipal advisors because some issuers have been confused about that.
Hultgren asked Kane about the drop in money market fund holdings of tax-exempt securities and whether this has been due to SEC rules. Kane said rules the commission adopted in 2014 have not taken effect yet and that low interest rates might have a bearing on fund holdings.
Rep. David Scott, D-Ga., asked Kane if there are any "emerging threats" in the municipal market because tax-exempt bonds are being used to help finance the Major League Baseball's Atlanta Braves move to SunTrust Park from Turner Field, and the development of the Mercedes-Benz Stadium for the National Football League's Atlanta Falcons, both of which are in Georgia.
Scott noted there have been concerns that "municipal bonds have become the favorite way in financing these mega stadiums."
Kane responded to the question about emerging threats by pointing to the success of both the SEC and MSRB efforts to oversee municipal advisors under a Dodd-Frank Act mandate and the SEC's efforts to improve muni continuing disclosure through a voluntary enforcement program.
Rep. Randy Neugebauer, R-Texas, asked Kelly if the MSRB's proposed markup disclosure rules will hurt liquidity in the municipal market by discouraging broker-dealers from holding munis in their inventories. The MSRB filed rule changes with the Securities and Exchange Commission earlier this month that would require a dealer, which buys or sells munis for or from its own account to a retail customer and engages in one or more offsetting transactions on the same trading day in the same security, to disclose its markup or markdown in the confirmation they send the customer. The rule filing contains guidance for dealers on a "waterfall" of factors to examine to establish the prevailing market price of a municipal security in order to calculate their compensation – the markup or markdown.
Kelly said the MSRB has made a major effort to take costs and burdens of its rules into account and that the board welcomes the opportunity to engage in a dialogue with the industry about the costs and benefits of the proposed rules.
Neugebauer also asked Kelly if technology is lagging behind in the municipal bond market, compared to other markets.
Kelly said that while the municipal market is very much a "buy and hold" market with many older investors, the MSRB has put some important features on its EMMA system to allow retail investors and other market participants to get a lot of information about muni bonds.
