AI, ESG and data regulations that will impact munis in 2024

February 23, 2024 10:00 AM

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A new law focused on limiting transportation carbon emissions, FINRA fines and the utilization of artificial intelligence for IRS enforcement are some of the latest regulatory developments to follow.

Here are five developments to track throughout 2024.

Senate Environment And Public Works Committee Hearing On Modernizing Infrastructure

Andrew Harrer/Bloomberg

Will a controversial Biden regulation limit transportation emissions?

The Biden administration's new regulation attempting to limit carbon emissions within transportation could impact infrastructure spending and faces backlash from some states and Congressional Republicans.

The rule, which was finalized in November, requires state DOTs and MPOs to gather emissions data from vehicles into a single standard, and establish carbon emission targets that will be reviewed every two years. The rule requires the targets to decline over time but leaves it to states and MPOs to set the actual targets and strategies for meeting them. The first targets were due Feb. 1, though there are no penalties for missing the targets.

"There are a lot of ways to go about reducing emissions and frankly state DOTs can directly impact some, but certainly not all, of the actions as infrastructure owners and operators," said Joung Lee, director of policy and government relations at the American Association of Highway Transportation Officials.

Read more:

States, Republicans skeptical of Biden rule to cut transportation emissions

Lawmakers Trying To Avert Fiscal Cliff To Prevent Short-Term Shock To The Economy

Andrew Harrer/Bloomberg

Delayed tax on Arkansas-issued bonds impacts $5.43 million

A tranche of economic development revenue refinancing bonds issued by the Arkansas Development Finance Authority has been found to be taxable by the Internal Revenue Service.

The ruling affects $5.43 million of paper issued by the ADFA in 2016. The issuer is disputing the findings.

"We are represented by counsel, are in ongoing discussions with the IRS on this issue and look forward to reaching an appropriate resolution," Jake Bleed, general counsel with the ADFA, recently told Bond Buyer's Scott Sowers. "Given that those discussions are actively under way and no final resolution has been reached, we will not have any further comment at this time."

The IRS can review bonds at any time and begins the audit process for these bonds by sending a request for documents, then potentially a follow-up phone call or through a 5701-B form.

Read more:

IRS finds $5.4 million Arkansas issuance taxable

Sign outside offic eof Financial Industry Regulatory Authority

Adobe Stock

Home Financial Services fined $50,000 by FINRA

The Financial Industry Regulatory Authority (FINRA) fined Home Financial Services $50,000 for failing to reveal execution times, mark-ups and mark-downs and supervisory failures after a 2021 examination of the firm.

In their review, FINRA found that between 2018 and 2021 the firm reported its mark-up or mark-down only as a percentage of the prevailing market price on 108 customer confirmations, did not disclose mark-downs at all on 372 customer confirmations and did not disclose the execution time on 2,183 retail customer confirmations.

Without admitting or denying the findings, Home Financial has consented to the fine and a censure.

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FINRA fines firm $50,000 for disclosure failures

SEC working to alleviate FDTA implementation concerns

The Securities and Exchange Commission (SEC) is partnering with other federal regulators to lessen fears regarding the implementation of the Financial Data Transparency Act.

The goal of this new law, which was passed in 2022, is to provide more transparency to the financial markets by introducing machine-readable formats into the Municipal Securities Rulemaking Board's EMMA system, which tracks the muni market.

"There's no new disclosure requirements, standards or timelines, it's just about structured data," Dave Sanchez (pictured), director of the SEC's Office of Municipal Securities, said during a panel discussion produced by XBRL US in November.

The SEC is in charge of developing the standards for how the data will be submitted to the MSRB. The upcoming deadlines include publishing proposed rules by June 2024, which will kick off the public comment period. Determining the standards is set for December 2024, with specific rulemaking to be in place by 2026.

Read more:

SEC attempts to calm muni market over FDTA implementation

IRS leveraging AI for tax enforcement

The Internal Revenue Service (IRS) is leveraging artificial intelligence and tax enforcement to identify compliance issues with a focus on high-income earners, partnerships, large corporations and scams that abuse tax laws.

"This new compliance push makes good on the promise of the Inflation Reduction Act to ensure the IRS holds our wealthiest filers accountable to pay the full amount of what they owe," said Danny Werfel, IRS Commissioner.

The agency will examine 75 of the largest partnerships in the U.S. through various industries that have more than $10 billion in assets. Some municipal bond market leaders believe that a combination of boosted IRS enforcement combined with raising the tax rate on carried interest could drive more investment into tax-exempt securities. Others believe the added enforcement will play no role.

Read more:

Artificial intelligence among tools IRS will use for enforcement push