DENVER — A dealer group said the issuer community must mobilize to defend the federal tax exemption for municipal securities, which has been called into question by recent Obama administration proposals.
The remarks came at the Bond Dealers of America’s National Fixed Income Conference here, on a panel about federal tax reform and the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Two recent proposals by the administration — the American Jobs Act of 2011 and a draft Plan for Economic Growth and Deficit Reduction — have raised concerns about whether the value of tax-exempt interest could be reduced to 28% or varying annual levels, some of which could be even lower, even if those two initiatives do not appear to have much support.
“Neither of those proposals, I think, in the short-term is going to go anywhere,” said Bill Daly, BDA’s senior vice president of government relations. “But they do indicate a very serious threat to the muni exemption. It is clearly on the table.”
In the long term, Daly said, the White House’s proposals may have done market participants a favor, motivating them to educate members of Congress about the exemption.
BDA is preparing model letters and talking points for its members if they wish to contact their congressional representatives, Daly said. Still, he placed the lobbying onus on state and local governments.
“We’re going to do what we can,” Daly said. “But this is something where the issuers have to have a very substantial role in this effort.”
In particular, Daly said, governors, mayors and county executives can play a role by phoning members of Congress. That personal appeal can make a difference, he noted, driving home the role of tax-exempt bonds as a means for state and local governments to access to the capital markets.
Separately, former Securities and Exchange Commission member Richard Roberts, a principal at Roberts, Raheb & Gradler LLC in Washington, said Dodd-Frank faces possible rollbacks as well.
“If there’s a huge shift in the political landscape in the coming election, obviously some pieces will be repealed,” Roberts said. It’s too soon to know which provisions, he added.
He also said a recent letter sent by Sen. Tim Johnson, D-S.D. and Rep. Barney Frank, D-Mass., to SEC chairman Mary Schapiro and Commodity Futures Trading Commission chairman Gary Gensler “walks” the regulators back “from some of the strict language of Dodd-Frank.”
In that letter, dated Oct. 4, Johnson, chairman of the Senate Banking Committee, and Frank, the top Democrat on the House Financial Services Committee, urged the regulators to protect the ability of state and local governments and pension plans to use swaps cost-effectively.
As for legislative efforts to boost the SEC’s muni market authority, Roberts said in an interview that the commission’s pending staff report on the municipal market would be key.
Roberts, who has been retained by BDA as a Dodd-Frank lobbyist, noted that Rep. Spencer Bachus, R.-Ala., chairman of the Financial Services Committee, represents a district that includes Jefferson County, where the SEC held a field hearing in late July. Roberts, who testified at that hearing, is a former chief of staff to another prominent Alabama Republican, Sen. Richard Shelby, the top Republican on the Banking Committee.
“Once that report comes out, I’m confident [Bachus] will hold some hearings on the issue,” Roberts said. “I’m anxiously awaiting that report.”
As for a draft bill, being circulated by Reps. Mike Quigley, D-Ill., and Patrick McHenry, R.-N.C., that would give the SEC authority to dictate the timing and content of issuers’ disclosure, including interim financial statements, Roberts was circumspect.
“Any legislation is tough,” he said.
Elsewhere at the conference, regulators warned they are scrutinizing secondary market pricing.
In particular, they said they are concerned about the role played by brokers’ brokers, who have attracted regulatory attention in the past. Recent efforts, including the Municipal Securities Rulemaking Board’s draft Rule G-43, reflect renewed concerns about their role in secondary market liquidity.
“The brokers’ brokers market has a lot of barnacles on it,” said Mac Northam, director of fixed income at the Financial Industry Regulatory Authority. “The question I think really is not so much brokers’ brokers, but the quality of the bidding process which is taking place.”
Dealers should have a basis for relying on a broker broker’s price, and should check other available information, such as Bloomberg, according to Northam. “You have an obligation to sell the security at the price which is fair,” he said.
Specifically, he said, dealers need to be able to account for any research they undertook related to a retail sale.
“Absent you being able to demonstrate what you’ve done, I’m stuck with the order ticket,” Northam said.
Separately, new MSRB chairman Alan Polsky, senior vice president at Dougherty & Co. in Minneapolis, said the board is studying transaction costs and price discovery, and will continue to do so in the coming year.
“We want to continue those discussions,” Polsky said in a speech Thursday evening, his first since starting as MSRB chairman on Oct. 1. He also said the board would like its online EMMA system to be “a lot more robust with respect to secondary market disclosure.”
In addition, Polsky noted that the board will take up its proposed interpretive guidance for Rule G-17 for underwriters at its October board meeting. The SEC comment period on that proposed guidance ended last month.