WASHINGTON – The municipal market faces a year of adjustment as regulators slow the pace of new rulemaking and focus on enforcement, with an emphasis on continuing disclosure.
Regulators, municipal market groups, and other stakeholders told The Bond Buyer that 2019 will be marked by such developments as a new advertising rule for muni advisors that's set to take effect, as well as two new event notices that issuers will need to start disclosing under the Securities and Exchange Commission’s Rule 15c2-12 in February.
Rebecca Olsen, director of the SEC’s Office of Municipal Securities, said disclosure would be a major theme of OMS’s work in the coming year, and that the SEC wants to explore what it can do to improve the timeliness of issuer disclosures. SEC Chair Jay Clayton has also recently signaled that he wants the SEC staff to work with the Municipal Securities Rulemaking Board to see if the MSRB’s EMMA system can create incentives for more timely disclosure from issuers. The SEC has limited authority to regulate issuers under the federal securities laws.
The MSRB’s priorities for its fiscal year that ends Sept. 30, 2019, include making EMMA more user-friendly for issuers, as well as continuing an initiative to revisit many of its rules to explore how they could be changed to bring them up to date.
It’s the effectiveness in 2019 of an advertising rule for muni advisors and a muni advisor principal exam that is perhaps most on the minds of members of that community. The MSRB’s new Rule G-40 on advertising by municipal advisors was originally slated to be effective in February, but the MSRB on Dec. 21 announced it planned to file for an extension. The rule formally establishes advertising standards for municipal advisors, requiring that they not be misleading and prohibiting such ads from containing client testimonials, among other requirements.
The rule, as well as associated tweaks to existing dealer advertising requirements, was controversial as market groups complained in comment letters about a lack of clarity. The MSRB said it plans to complete guidance and related rule amendments on the use of social media under the advertising rules in the next few weeks.
Advertising regulation will be a “behavioral shift,” thoughnot as big as the one the profession experienced with the advent of the core MA conduct rule, said Leo Karwejna, managing director and chief compliance officer at PFM.
“There will be some new and additional requirements,” Karwejna said. “Much more akin to what the broker-dealers have been dealing with for some time.”
Susan Gaffney, executive director of the National Association of Municipal Advisors, said she expects G-40 will require a lot of work of MA firms. Gaffney stressed the need for the MSRB to provide helpful guidance on how firms can show compliance with the rule, and said NAMA will be placing an emphasis on supporting members as they work to adjust to it.
“We have to make sure they have the resources,” Gaffney said.
MAs are also looking toward the February availability of a pilot version of a new Series 54 exam for muni advisor principals. Under the MSRB’s rules, each firm must designate at least one principal and that person will have to take and pass the new test.
The MSRB recently released an outline for the test, which will be 100 multiple-choice questions. The pilot will run from February through June of 2019, and will be the basis for the MSRB’s establishment of a qualifying score for the final exam.
“I think it will be a different experience than the Series 50 was,” said Karwejna, referring to the existing test all muni advisors have to pass.
Whereas the Series 50 is more of a test of the knowledge an MA needs to properly advise clients, the Series 54 is focused on an understanding of the regulatory framework.
“I’m estimating that you’re going to less able to rely on your experience,” Karwejna said.
The MSRB, SEC, and Financial Industry Regulatory Authority are holding a joint one-day compliance outreach event for muni advisors in San Francisco Feb. 7, where G-40 and the professional qualifications requirements will both be on the agenda.
Another major theme going into the new year is the looming effectiveness of the two new event notices under Rule 15c2-12. The rule requires underwriters to “reasonably determine” that an issuer has undertaken to provide certain types of disclosures on an ongoing basis. Beginning Feb. 27, 2019, new continuing disclosure agreements will have to include commitments to disclose the incurrence of bank loans as well as other types of debt that could potentially impair bondholders. It also will require issuers to disclose negative developments associated with that debt.
“All eyes are going to be on that going into 2019,” said Brett Bolton, vice president of federal legislative and regulatory policy at the Bond Dealers of America.
Securities Industry and Financial Markets Association President and CEO Ken Bentsen said SIFMA is closely watching disclosure regulation, including the 15c2-12 developments. Bentsen said his group is looking particularly to see whether regulators make any moves aimed at increasing pre-trade transparency. Economists have said that retail muni market investors receive muni prices that are worse than the best available quotes from dealers and that retail investors would benefit the most if pre-trade prices were transparent and publicly available.
Dealers have argued that there would be little if any utility in pushing for such transparency, pointing out that recent rule changes such as the best execution rule have changed the calculus. The best execution rule requires dealers who buy or sell munis for or from their own accounts, and engage in one or more offsetting transactions on the same day in the same security, to disclose their markups or markdowns in the confirmations they send retail customers.
Bentsen said pre-trade transparency efforts have not proven beneficial in other markets.
“We’re highly skeptical of the benefits of such an effort,” he told The Bond Buyer.
BDA CEO Mike Nicholas said his group is looking at market structure challenges independently so they can develop “market-driven solutions” that BDA can bring to the regulators.
“Municipal disclosure fits right into that area,” Nicholas said.
Bondwave CEO Michael Ruvo said 2019 will likely see a “recalibration” of the best execution processes. The industry is becoming increasingly science and data-driven, he said, a trend he sees continuing in 2019. In a published Bondwave piece, Ruvo said 2019 could be a key year as industry professionals assess the data generated by the markup disclosure process.
“Navigating 2019, fixed income traders will continue to hang up their legacy tool-sets as they harness emerging quantitative and algorithmic tools to drive deeper market insights and more efficient trading,” Ruvo wrote.
“Relying more on data science and analytics than ever before, fixed income traders will have deeper transparency into the fixed income market and the ability to better assess real value.”
There’s no clear securities law agenda on Capitol Hill heading into the new year, when Democrats will assume control of the House of Representatives. But lawmakers could take action if some kind of problematic situation were to arise in the market.
“If there are situations in the marketplace, I think you’re going to have congressional oversight,” said Micah Green, a partner at the law firm of Steptoe & Johnson in Washington.
“I don’t think the municipal bond issues are necessarily at all partisan,” Green said. “I think you’re going to have continued bipartisan attention.”
