CMTA Legislative Update - June 2019
Thursday, June 6, 2019
Posted by: CMTA
CMTA is sponsoring an amendment to the Securities Act of 1933 (“1933 Act”). State and local agencies are currently allowed to buy corporate debt (i.e., commercial paper and medium-term notes) that is issued under Section 3(a)3 of the 1933 Act. Corporate debt is typically the most profitable component of a public investment portfolio since it offers a higher relative yield due to the risk of issuer default. State and local agencies, however, cannot buy 80% of outstanding high-quality 3(a)3 commercial paper because corporations have shifted to issuing it under Section 4(a)(2) of the 1933 Act which is reserved for “accredited investors”.
State and local agencies were omitted from the definition of accredited investors in the 1933 Act because the Act was intended to address securities fraud in the private sector that led to the 1929 stock market collapse. Since state and local agencies are not classified as accredited investors, they also cannot be classified as “qualified institutional buyers” for purposes of buying SEC Rule 144A corporate debt (“private placement”).
CMTA’s amendment would classify state and local agencies that meet certain criteria as both accredited investors and qualified institutional buyers, thereby giving them to access to the Section 4(a)(2) and Rule 144A corporate debt markets. This access is critical if state and local agencies are to continue to participate in the corporate debt market; the California State Treasurer’s Office believes that medium-term notes will be the next to experience a mass conversion of corporate issuance programs to Section 4(a)(2).
The Government Investment Officers Association (“GIOA”) has endorsed CMTA’s proposed amendment.
Assemblyman Kevin McCarty (D-Sacramento) has introduced Assembly Bill (“AB”) 945 during the 2019-20 Regular Session. The California Bankers Association is the bill sponsor, and the California Credit Union League is a co-sponsor. AB 945 passed, by unanimous vote, through two Assembly committees and the Assembly Floor in two weeks. It has now been referred to two Senate committees. The California Association of County Treasurers and Tax Collectors (“CACTTC”) opposes AB 945, unless amended.
AB 945 would amend California Government Code sections 53601.8 (cities and special districts) and 53635.8 (counties and city/county) by deleting the January 1, 2021 sunset provision for existing law that allows local agencies to invest up to 30% of their surplus funds in financial institutions that use certificate of deposit (“CD”) placement services (e.g., CDARS). It would also raise the 30% portfolio concentration limit to 50%. Industry sources indicate that community banks plan eventually plan to raise the portfolio concentration limit to 75%, and then to 100%. CACTTC opposes any change to the existing 30% portfolio concentration limit.
AB 945 presents several issues for local agencies. First, is it good public policy and a desirable precedent for for-profit financial institutions to set the risk parameters for public investments when their sole motive is to maximize profit? Second, is it good public policy to circumvent collateralization through CD placement services when those services will not guarantee that a local agency’s CD deposits might not accidentally be placed with the same financial institution, thereby exposing the local agency to loss in the event of bank failure if the combined deposits exceed FDIC coverage? Third, is it desirable for public treasurers to lose the discretion that they have had since 1913 over the investment of public funds under their control? Although the deposit of local agency surplus funds into community banks is depicted as “voluntary”, how voluntary will it be when elected officials are pressured by community banks and by community activists at public hearings to invest their agency’s surplus funds in “the community”? Some elected officials might regard this as an excellent way to win votes. Fourth, as noted in the Assembly Committee on Banking and Finance analysis, the intent of AB 945 is to inject public funds into community banks, as opposed to investing them in government or corporate securities outside the community banking system. How is this consistent with the principle of diversification that is embedded in local agency investment policies? Fifth, local agencies that participate in county investment pools will receive less interest income since the counties will have to shorten the weighted-average maturity of their pools in order to accommodate redemptions related to this bill, if enacted.
The CMTA Board of Directors has voted not to take a position on AB 945.