H.R. 2209 Passed by House of Representatives Today Classifies Investment Grade Municipal Securities as HQLAs
WASHINGTON, D.C. – The National Association of State Treasurers (NAST) commended the House of Representatives today after it passed legislation to protect the access of states and municipalities to low-cost financing for infrastructure projects across the country. H.R. 2209, introduced by Reps. Luke Messer (R-IN) and Carolyn Maloney (D-NY), will provide much-needed support for the municipal bond market by classifying investment grade municipal securities as High Quality Liquid Assets (HQLA).
“For nearly 200 years, state and local governments have relied on municipal bonds as an affordable, efficient source of funding for schools, highways and other critical infrastructure projects. With every corner of the nation in need of infrastructure investment, there couldn’t be a better time for the U.S. House of Representatives to have passed this legislation,” said NAST President and Washington State Treasurer James McIntire.
H.R. 2209 would amend the 2014 Liquidity Coverage Ratio: Liquidity Risk Measurement Standards, which set minimum liquidity requirements for large banking organizations, to include highly rated municipal securities that are both liquid and readily marketable as HQLAs. Including municipal securities in this classification will lower borrowing costs for state and local governments and further lower the cost of public infrastructure projects.
“NAST would like to thank the House leadership for supporting this measure, which will balance financial stability concerns while preserving state and local government’s ability to make crucial infrastructure investments across the country using low-cost municipal bonds,” added Treasurer McIntire. “We look forward to working with the U.S. Senate to pass a similar bill, and to build on this legislation to support a robust municipal bond market for years to come.”
Actions conclude charges against underwriters under the Municipalities Continuing Disclosure Cooperation Initiative
SEC headquarters in Washington. (Photo: AP)
The Securities and Exchange Commission said Tuesday that it levied enforcement actions against 14 municipal underwriting firms for violations in municipal bond offerings.
The actions conclude charges against underwriters under the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative.
The SEC orders and penalty amounts taken Tuesday include:
- Barclays Capital Inc. – $500,000
- Boenning & Scattergood Inc. – $250,000
- D.A. Davidson & Co. – $500,000
- First Midstate Inc. – $100,000
- Hilltop Securities Inc. – $360,000
- Janney Montgomery Scott LLC – $500,000
- Jefferies LLC – $500,000
- KeyBanc Capital Markets Inc. – $440,000
- Mitsubishi UFJ Securities (USA) Inc. – $20,000
- Municipal Capital Markets Group Inc. – $60,000
- Roosevelt & Cross Inc. – $250,000
- TD Securities (USA) LLC – $500,000
- United Bankers’ Bank – $160,000
- Wells Fargo Bank N.A. Municipal Products Group – $440,000
In all, 72 underwriters have been charged under the voluntary self-reporting program targeting material misstatements and omissions in municipal bond offering documents.
In Tuesday’s actions, the SEC stated that between 2011 and 2014, the 14 underwriting firms sold municipal bonds using offering documents that contained materially false statements or omissions about the bond issuers’ compliance with continuing disclosure obligations.
The SEC also found that the underwriting firms “failed to conduct adequate due diligence to identify the misstatements and omissions before offering and selling the bonds to their customers.”
While not admitting or denying the findings, the 14 firms agreed to cease and desist from such violations in the future. Under the terms of the MCDC Initiative, they will pay civil penalties based on the number and size of the fraudulent offerings identified, up to a cap based on the size of the firm. Each firm also agreed to retain an independent consultant to review its policies and procedures on due diligence for municipal securities underwriting, the SEC said.
“The settlements obtained under the MCDC initiative have brought much-needed attention to disclosure obligations in municipal bond offerings,” said Andrew Ceresney, director of the SEC’s Enforcement Division, in a statement. “As part of the settlements, 72 underwriting firms – comprising approximately 96% of the market share for municipal underwritings – have agreed to improve their due diligence procedures and we expect that investors will benefit from those improvements.”
The MCDC Initiative, being coordinated by Kevin Guerrero of the Enforcement Division’s Municipal Securities and Public Pensions Unit, was announced in March 2014 and offered favorable settlement terms to municipal bond underwriters and issuers that self-reported violations.
The first enforcement actions against underwriters under the initiative were brought in June against 36 municipal underwriting firms. An additional 22 underwriting firms were charged in September. All of the firms settled the actions and paid civil penalties up to a maximum of $500,000.
The SEC said Tuesday that its initiative is continuing with respect to issuers who may have provided investors with inaccurate information about their compliance with continuing disclosure obligations.
The SEC’s 2012 Municipal Market Report identified issuers’ failure to comply with their continuing disclosure obligations as a major challenge for investors seeking important information about their municipal bond holdings.
U.S. state treasurers will ask banks and private equity firms to help lobby federal policymakers in their push to categorize municipal bonds as high quality liquid assets under new banking rules, Washington State Treasurer James McIntire said on Thursday.
Federal rules approved in September 2014 aim to ensure that big banks will be able to access enough cash during a financial crisis. But the rules excluded muni bonds from the types of securities that count as high quality liquid assets, or HQLAs.
States, cities and investors fear that the exclusion would deter banks from buying muni debt, hurting municipalities’ ability to fund everything from schools and bridges to water treatment plants and hospitals.
The National Association of State Treasurers (NAST) and several other organizations have been pushing for inclusion of munis. The rule, due to take effect in January 2017, requires that large banks hold high-quality assets that can be quickly and easily converted into cash within 30 days of a financial stress period.
NAST plans to ask for help from its corporate partners, including financial institutions, in its ongoing effort to secure muni bonds a place at the table, said McIntire, the group’s incoming president.
“They might bring a little bit more firepower to the table,” McIntire said of the banks in an interview.
The decision by the regulators has been “very challenging,” McIntire said. “It’s been hard to get their attention.”
Congressional action has begun to help, McIntire said. Last month the House Committee on Financial Services passed a bill that would qualify muni bonds as HQLA.
Some studies have shown munis, especially general obligation bonds issued by states, to be at least as liquid as their corporate counterparts.
Cumberland Advisors wrote in a commentary last month that yields on muni bonds rose 20 percent in the second half of 2008, while investment-grade corporate yields shot up by 50 percent.
A study last year by Washington State compared its own general obligation bonds to senior unsecured bonds from Microsoft Corp, one of the state’s most well known companies.
During the bond market selloff in mid-2013, more than $3.2 billion of Washington State’s bonds traded, compared to about $2.14 billion of Microsoft’s bonds, the study said. (Reporting by Hilary Russ)