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MSRB Filed Proposed Municipal Advisor Core Conduct Rule with SEC

GFOA Newsletter: April 30, 2015

The Municipal Securities Rulemaking Board filed a proposed rule with the SEC that would “govern the core conduct of municipal advisors, including their fiduciary duty to put the interests of state and local government clients ahead of their own,” the Bond Buyer reports. Rule G-42 on the conduct of non-solicitor municipal advisors was filed last week and is, subject to SEC approval, “a key piece of the MSRB’s efforts to regulate MAs under the Dodd-Frank Act’s requirement that MAs act as fiduciaries to their issuer clients.” The rule, which is expected to affect roughly 740 firms and 3,800 individuals, states that MAs owe a fiduciary duty of loyalty to their municipal issuer clients, requiring “without limitation … to deal honestly and with the utmost good faith with a municipal entity client and act in the client’s best interests without regard to the financial or other interests of the municipal advisor.” It also spells out a less stringent “duty of care” owed to all clients, including obligated persons such as conduit borrowers.

GFOA has been actively engaged providing recommendations to the MSRB as they developed this proposed rule, issuing comments several comment letters in March and September 2014. GFOA’s Committee on Governmental Debt Management is currently reviewing the MSRB’s latest proposed version of the rule, and expects to issue comments to the SEC over the next several weeks.

 

Inadequate Rainy Day Funds Leave States Vulnerable to Next Fiscal Shock

GFOA Newsletter: April 16, 2015

State governments haven’t yet rebuilt their rainy day funds following the Great Recession; on average, they have a little more than half the reserves they had in 2007. That’s according to a report from the Pew Charitable Trusts. This vulnerability has implications for the national economy because states facing deteriorating economic conditions would have to cut spending or raise revenue by a combined $21 billion, exacerbating economic weakness, according to Moody’s Analytics’ stress test of state finances (cited by Bloomberg). “Investors are monitoring states’ fiscal balances after seeing how reserves helped some governments weather the recession,” Bloomberg reported. For example, California’s credit was upgraded and its borrowing costs shrank after voters agreed to bolster rainy day funds. “We’re looking for stability and credit quality,” a municipal research group said in the article. “A rainy day fund is a symbol of conservative financial management.” States weren’t sufficiently prepared for the last recession; 2009 budget gaps totaled $117 billion, about twice the level of reserves, and more of a cushion might have allowed them to cut fewer jobs.

 

SEC Still Greatly Underestimating Burden of Complying with Rule 15c2-12, SIFMA Says

GFOA Newsletter: April 9, 2015

The SEC’s revised estimates of the compliance burden imposed by its main disclosure rule still contain “gross inaccuracies,” according to a March 27 letter the Securities Industry and Financial Markets Association sent to the SEC. The letter was a response to updated SEC estimates about the amount of time required for market participants to comply with Rule 15c2-12.The rule requires dealers to review issuers’ official statements before underwriting municipal bonds, and to reasonably determine that the issuer has contracted to disclose annual financial and operating information, as well as material event notices, on the Municipal Securities Rulemaking Board’s EMMA website.

“We continue to be seriously concerned about the gross inaccuracies in the current notice and the original notice of the SEC’s time estimates for compliance with the rule and the failure of the SEC to estimate the rule’s primary disclosure compliance burdens, as separate and distinct from its secondary market compliance burdens,” the letter stated. “These estimates continue to seriously and materially underestimate the time burden of the rule on broker dealers,” SIFMA said of the commission’s latest numbers, “which peg the dealer compliance burden as 10 hours per year per firm to determine that an issuer has entered into a continuing disclosure agreement. In a competitive offering,” a Bond Buyer article reported. “SIFMA estimates firms spend on average six man-hours on each offering they bid.”

State and Local Tax Revenue Up 4.2% for 4th Quarter, Census Data Show

GFOA Newsletter: April 2, 2015

State and local tax revenue rose 4.2%, to $369 billion, in the fourth quarter of 2014, compared with the same period a year earlier, according to U.S. Census data released last week. Despite growth in state and local income tax, corporate tax, and property tax, sales tax was flat. Total state tax revenue rose 5.2%, to $212.8 billion.

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