WASHINGTON – Municipal securities regulators seem to have lost sight of their goals with some recent regulations, making them so complex and burdensome that market participants fear they will have difficulty complying and be left open to possible enforcement actions, said Bond Dealers of America’s new chair Tom Dannenberg.

Dannenberg, president and chief executive officer of Hutchinson, Shockey, Erley & Co. in Chicago, talked about the regulatory environment as well as the opportunity for change under the new administration during a recent sit-down interview with The Bond Buyer.

Dannenberg took over as BDA chair in March and will serve in the position for one year as BDA celebrates its ten-year anniversary.

BDA has grown to 69 member firms from 34 in 2012.

One recent regulatory action that illustrates BDA's concerns is the Securities and Exchange Commission’s proposal to add two material events to its Rule 15c2-12 on municipal disclosure, Dannenberg said.

BDA and other market participants all supported finding a way to obtain additional information about bank loans and private placements, which have increasingly become used by issuers as alternatives to publicly offered tax-exempt bonds and fall outside the SEC’s disclosure requirements for munis.

But the SEC’s proposed amendments to 15c2-12 cast too wide a net by requiring event notices to be filed for a broad range of “financial obligations,” if material, including, leases, guarantees and monetary obligations resulting from a judicial, administrative or arbitration proceeding. They also require notices to be filed for actions and events related to financial obligations that “reflect financial difficulties,” such as the modification of terms. In one example, the SEC suggested in its proposal that it might be material if an issuer failed to meet a construction deadline, resulting in the lender taking possession of a facility.

Market participants have until May 15 to comment on the proposal.
Dannenberg said he and BDA members are especially concerned about the subjectivity that will play into determining what is considered material and what qualifies as a financial difficulty under the proposal. The SEC has consistently declined to define materiality, contending it's based on facts and circumstances.

“I just think the language is so broad it could be all-encompassing,” Dannenberg said. “I think it serves to confuse the issue a lot more and will create more enforcement opportunities rather than great disclosure and better protected investors.”

Tom Dannenberg, BDA's chair, said he and the group intend to combat the complexity they see in recent rulemakings by taking advantage of a shift brought on by the Trump administration to deemphasize regulation and take a harder look at how rules are actually working.
Tom Dannenberg, BDA's chair, said he and the group intend to combat the complexity they see in recent rulemakings by taking advantage of a shift brought on by the Trump administration to deemphasize regulation and take a harder look at how rules are actually working.

He and other market participants are still shell-shocked from the SEC’s Municipalities Continuing Disclosure Cooperation initiative and see the same thing potentially happening again with these amendments. MCDC promised underwriters and issuers would receive lenient settlement terms if they self-reported instances over the last five years where issuers falsely said in offering documents that they were in compliance with their continuing disclosure agreements. The voluntary enforcement program led to SEC settlements with 72 underwriters, which represented 96% of the underwriting market by volume, and 72 issuers from 45 states.

Dannenberg said there are two “wildly divergent” views about the success of MCDC, that of the SEC, which sees it as very successful, and “virtually everyone else.”

“If 96% of market participants were found to be in violation of the rule, to me that means there’s a problem with the rule or its method of enforcement or the structure of the rule,” Dannenberg said about the initiative.

He and BDA’s other members are concerned that the broad 15c2-12 proposal could “wrap dealers up with future problems a la MCDC.”

“It’s kind of like the disclosure issue, ‘How can we get at it, let’s get creative.’ I think bank loans lend themselves to that,” Dannenberg said.

Some bank loans raise an added concern: whether they are simple loans, or securities that must be registered with the SEC. Issues like that as well as how much disclosure is required could “fall under the umbrella of some type of enforcement initiative surrounding bank loans,” Dannenberg said, adding, however, that he hopes that isn’t the case.

Dannenberg said BDA intends to combat the complexity by taking advantage of what he sees as a shift brought on by the Trump administration to de-emphasize regulation and take a harder look at how rules are actually working.

“What the administration has brought is a change in attitude that is kind of trickling down through the layers of regulators and even the houses of Congress,” Dannenberg said. “I think our argument that ‘Hey, let’s stop and reevaluate this.’ is going to gain more traction because of the mentality of the Trump administration.”

He added that there “might be a more receptive audience to the idea that more regulation is not necessarily better and some of the cost-benefit analyses on these issues are out of whack.”

“The pendulum has swung so far over the last ten years that I think there’s a greater recognition that it has swung too far and now it is time to back that off,” Dannenberg said. “This is the first time that we’ve really felt that and I think it’s incumbent upon us to take advantage of that and maybe ease some of the burdens that are unnecessary at this point.”

Another example of losing sight of the regulatory goal and getting into the weeds is the Municipal Securities Rulemaking Board’s proposed changes to its minimum denomination regulations, according to Dannenberg. The goal of the rule is to protect smaller investors, he said. The minimum denomination is the lowest amount of bonds that can be bought or sold, as determined by the issuer and set forth in the official statement for the bonds. Issuers often set higher minimum denominations when issues are not suitable for smaller or unsophisticated investors. The lowest minimum denomination is usually $5,000.

MSRB Rule G-15 currently prohibits dealers from trading below the minimum denomination but include several exceptions meant to ensure liquidity for investors that may be holding below-minimum amounts because of circumstances like a divorce or death.

The MSRB is proposing a standalone minimum denomination rule that would incorporate the existing provisions and make further changes to help investors with below-minimum denominations trade them in the market. The MSRB believes the changes will improve liquidity, but Dannenberg said they are so complex that they harm liquidity.

There are “these layers of complexity and this labored process that one needs to go through to be able to trade beneath the minimum denomination when in effect that doesn’t serve the investor, all it does is hamper liquidity,” Dannenberg said.

BDA has suggested in comment letters on the proposal that the new rule only focus on higher minimum denominations.

“There’s really no need for us to have a $5,000 bond minimum denomination embedded in virtually every official statement that is out there,” Dannenberg said, calling the requirement an “antiquated concept.”

“It’s a technical carryover from the way bonds used to be traded,” he said. “I think that’s a point that the MSRB was missing.”

Dannenberg said that the idea of minimum denomination should apply to investor protection.

“We would like to see changes to the rule with regard to how the rule actually functions,” he said.

Dealers’ fears about overly complex rules tripping them up also extends to the MSRB’s approved requirements to have dealers disclose their markups and markdowns in principal transactions. The requirements, which are “of great concern” to BDA’s members, said Dannenberg, have an effective date of May 14, 2018.

The changes to current MSRB rules will 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 in an amount that in aggregate equals or exceeds the size of the customer trade, to disclose its markups and markdowns in the confirmation it sends the customer.

The amendments also establish a waterfall of factors for determining prevailing market price, which dealers are to use to calculate their compensation. Dealers initially are to look at their contemporaneous trades of the same muni with other dealers or customers to establish a presumption of prevailing market price. If that data is unavailable, they must then make a series of other successive considerations. They can look at the contemporaneous trades of the muni in interdealer trades, then trades of the muni between other dealers and institutional investors, then trades on alternative trading systems or other electronic platforms.

Further down the waterfall, firms could look at contemporaneous trades of similar securities. The MSRB included a list of "non-exclusive factors" like credit quality, size of the issue, and comparable yield that can be used to determine if securities are similar.

The bottom of the waterfall allows dealers to use prices or yields derived from economic models.

BDA and the Securities Industry and Financial Markets Association have said the rule’s waterfall is complex and overly burdensome. They're concerned that it can’t be complied with through a firm’s automated system and will, instead, require subjective decisions to be made by traders. Automation is “just not feasible given the volume of trades some of our members execute,” Dannenberg said.

“As you get down the layers of the waterfall in terms of pricing, there’s really no way to automate that and the burden on a small broker-dealer to be able to show an economic model or a similar security pricing for purposes of complying with that rule is going to be a real challenge,” Dannenberg said. “Developing an economic model or even finding a similar security, that’s not something a machine can really do because there’s so much structural nuance, credit nuance, geographic nuance.”

“One of our goals this year is to express that very clearly to regulators and let them know that while there is a potential benefit to this rule, the cost outweighs that benefit and we need to come up with a different approach that is going to be sustainable for our members,” Dannenberg said.

BDA members are wondering if they can use a third-party, such as a pricing service, to provide pricing disclosure at the lowest level of the waterfall. That solution would keep markup disclosure. It would ensure dealers are meeting their best execution requirements and allow them to know where the market is and whether the markup is reasonable, according to the BDA.


Dannenberg was born and raised in Chicago. He admits that his path to the municipal market was “a bit of a circuitous one.” His first job out of college was in federal law enforcement. He worked for five years as a criminal investigator with the U.S. Office of Inspector General for the Department of Veterans Affairs and also spent some time with the U.S. Customs Service Office of Field Operations.

He eventually decided to go to graduate school at the University of Chicago, studying early modern British history. He landed at HSE after he decided to stop pursuing a PhD and met with the firm while it was recruiting at the university.

“I didn’t know a whole lot about municipal securities but it sounded interesting,” Dannenberg said. “I liked the structure and makeup of the firm. I liked the folks I met with so I decided to give it a try.”

He started on the firm’s institutional sales desk in 2004 and became a partner at the firm in 2007 and a director in 2009. He took over as the firm’s president and CEO in 2012.

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