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Lawsuit Challenges Interpretation on 144A Bond Disclosures

September 18, 2023

On September 12, the National Association of Manufacturers (NAM) filed a federal lawsuit against the SEC for its new interpretation that would require 15c2-11 public disclosures to private-issue 144A bonds. At issue is the SEC’s application of the rule to fixed income bonds without a new rulemaking.

“The SEC’s attempt to force private companies to disclose confidential financial information publicly is a clear violation of the Administrative Procedure Act,” said NAM Chief Legal Officer Linda Kelly.

Why it matters: Starting in January 2025, broker-dealers would be required to verify that certain issuer (or asset-backed) information is publicly available on 144A securities to freely quote the bonds. For CREFC members, this change would impact Single Asset Single Borrower CMBS and CRE CLOs, among others.

The interpretation was originally supposed to go into effect in January 2023, but CREFC and other organizations worked with Congress and the SEC to get an extension. While CREFC continues to work on a legislative fix, the interpretation would go into effect in 2025 absent action from Congress, the courts or the SEC.

What they’re saying: NAM’s suit alleges procedural deficiencies in the SEC’s rulemaking process.

• Since Rule 15c2-11 was introduced in 1971, it has always been treated as applying exclusively to the equity markets. NAM says that expanding the rule would have to follow the Administrative Procedures Act.
• But the SEC now claims the rule has always applied to fixed income and the rulemaking is unnecessary.

What’s next: The lawsuit was filed in the Eastern District of Kentucky, which is in the Sixth Circuit Court of Appeals.

• While finally resolving the litigation could take years, observers expect the district court could issue a “nationwide injunction” to temporarily pause application of the rule during the challenge.
• The injunction could quickly be appealed up through the levels, including to the Supreme Court, before the case is even heard on the merits. Thus, the change could be paused while the litigation proceeds.

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SEC Gensler at Senate Hearing

September 18, 2023

SEC Chair Gary Gensler testified before the Senate Banking Committee, where he fielded questions on a variety of issues, including private equity and hedge funds, climate disclosures, crypto, and artificial intelligence. Gensler will appear next on the House side on September 27.

Why it matters: Gensler’s aggressive and expansive agenda continues to draw bipartisan criticism, but he also has his defenders. Banking Committee Chairman Sherrod Brown (D-OH) praised Gensler’s actions, including the SEC moving to implement the Conflicts of Interest in Securitization rule.

What they’re saying: The SEC’s broad jurisdiction over the economy leaves room for many topics, the recently final Private Funds Rule, the soon-expected Climate Disclosures, cryptocurrency, and AI were repeated topics.

Private funds rule

• Republicans heavily criticized the agency’s private funds rule, which Ranking Member Scott (R-SC) characterized as a “tax” on private markets that will hurt small businesses and push small and diverse fund managers out of the market. Sen. Hagerty (R-TN) insinuated that the actual purpose of the proposal is to change the negotiated dynamics between two sophisticated players in favor one over the other.
• In contrast, Sen. Brown welcomed efforts to fix this power imbalance, highlighting that private equity firms managed trillions in assets for pension funds and endowments last year, controlled between 15% and 20% of the whole economy, and they were able to do so without offering much information on how they’re using people’s money, including around fees, comparable performance data, independent audits, and conflicts of interest disclosures.
• Brown asked how providing this information will help protect pension funds, charitable endowments, and other investors. Gensler responded that the rules bring greater transparency about fees, performance, and side letters, which will help promote competition and efficiency in the market. “If the cost comes down, that means the returns for retirees goes up,” he added.

Climate disclosures

• Gensler stated that the SEC isn’t a “climate regulator” three separate times, while also noting that 80% of the top 1,000 companies by market cap already make climate risk disclosures: “We’re just trying to bring some comparability to that,” he said.
• Sen. Brown agreed that the majority of the largest companies already disclose GHG emissions on a voluntary basis because investors demand it; however, without a clear standard, the information is not easily digestible nor comparable across companies, he said. Gensler reiterated that the proposal is about bringing comparability and consistency to climate disclosures, adding that they “try not to do things against the clock.” It depends when the staff and Commission are ready, he concluded.
• Across the aisle, Ranking Member Scott emphasized that the compliance burdens associated with the new rules will quadruple the cost of running a public company. On a related note, Sen. Tester (D-MT) sought assurances that the climate rule won’t lead to additional “pain in the neck” for agricultural producers, saying that the “bleed down of regulation” happens often and he wants the agency to make crystal clear that farmers and ranchers won’t have to report on goods they sold at public companies.
• In response to Sen. Tester’s question on what SEC envisions Scope 3 reporting to look like, Gensler admitted that Scope 3 requirements are not as well developed as Scope 1 and 2, given that public companies currently report some GHG emissions, though the SEC is assessing an appropriate path forward.

Artificial Intelligence

• Democrats focused on specific AI applications and emerging risks, with Chair Brown previewing a hearing in the coming weeks on the impact of AI on financial markets and consumers.
• Chair Gensler answered that predictive data analytics and AI are used today in robo advising, in brokerage apps, for market sentiment analysis, on account opening documentation, to submit insurance claims, to assist with AML compliance, etc.
• Sen. Warner (D-VA) expressed that AI could undermine public trust in our capital markets and in our free and fair elections, mentioning deepfakes and how AI tools can generate false complaints about products or false regulatory filings.
• Ranking Member Scott slammed the SEC’s new rules around conflicts of interests associated with the use of AI by broker-dealers—despite being labeled as an “AI” rule, this “power grab” will stifle innovation, he said.
• Sen. Cortez Masto (D-NV) asked if trading firms and money managers, in addition to broker-dealers and investment advisers, should be required to disclose their use of the technology. Chair Gensler responded that, given the new challenges posed by AI, the lack of explainability, and the chance for biases in AI models, Congress may want to take up such disclosures.

The bottom line: The SEC will continue to be in the spotlight with several hearings over in the House next week. Contact David McCarthy (dmccarthy@crefc.org) with questions about Congress’s oversight of the SEC.

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SEC Chairman Gary Gensler appeared before the Senate Banking Committee last week.

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Partisan Stopgap Bill Emerges as Shutdown Looms

September 18, 2023

House GOP leadership had hope to use their first week back to advance several appropriation bills, but pushback from the House Freedom Caucus once again held up action on the floor. But late Sunday night, House Republicans among themselves on a 30 day continuing resolution to fund the government.

Why it matters: The stopgap bill will kick off negotiations, but McCarthy will likely have to buck hardliners to fund the government.

• The CR includes spending cuts, hardline immigration restrictions, no disaster relief funding, and no Ukraine funding. Those provisions won’t fly with Democrats in the House, Senate, or White House.
• While McCarthy has been able to power through tough fights before (e.g., debt ceiling), it took Democratic votes and remains a sore spot for the Freedom Caucus.
• McCarthy’s announcement of an impeachment inquiry sought to placate some of his conference, but it does not appear to have been enough to cool tempers on spending. The inquiry also strains McCarthy’s relationship with Democratic leadership.

What they’re saying: Puchbowl News broke the news on the CR and included bill summaries from the various House GOP factions. Here’s a summary of the proposal from the Main Street Caucus, and here’s one from the House Freedom Caucus. Announcing an agreement among the fractious conference is an achievement.

Yes, but: It is unclear if the CR will even pass the House.

• Last week, House Republicans were unable to advance a party-line defense appropriations bill after a conservative wing delayed the bill to try to push more government spending cuts.
• McCarthy could not count on Democratic support for the defense bill since it included many partisan provisions targeting diversity, equity, and inclusion initiatives at DOD. The same is true for this CR.

The Senate, however, made progress by advancing one of three spending “minibus” packages for a final vote expected this week.

• Senate Appropriations Chair Patty Murry (D-WA) and Ranking Member Susan Collins (R-ME) have taken a diligent approach to clearing bills out of committee in a bipartisan fashion in order to clear the 60 vote hurdle over a filibuster.
• To avert a shutdown, the Senate can modify the one House-passed appropriations bill to fashion an omnibus or continuing resolution. That would require the House to vote on the bill again, however.

What’s next: No one knows.

• Absent some negotiating breakthrough, McCarthy’s options have been to put a bill on the House floor that either 1) cannot pass the Senate or 2) attract Democratic votes and anger critics in his own party.
• The CR is Option 1. If the House passes the CR, McCarthy can claim an initial victory.
• Some are looking to the Senate progress as the way forward.

Contact David McCarthy (dmccarthy@crefc.org) with questions. 

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Without Congressional action federal government funding authority expires after September 30.

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House Subcommittee Examines Bank Capital Proposal 

September 18, 2023

On September 14, the House Financial Services Subcommittee on Financial Institutions and Monetary Policy held a hearing entitled “Implementing Basel III: What’s the Fed’s Endgame?”

Witnesses included:

• Greg Baer, Bank Policy Institute
• Andrew Olmem, Mayer Brown
• Robert Broeksmit, Mortgage Bankers Association
• Alexa Philo, Americans for Financial Reform

Policymakers and industry witnesses shared their differing perspectives on the banking agencies’ proposed revised bank capital standards. The proposed standards, which target large banks with over $100 billion in assets, will implement the final international Basel III rules and respond to some of the early -2023 regional bank turmoil.

Why it matters: Implementation of the current version of the proposed rule would significantly increase capital requirements for the larger U.S. banks, with negative implications for the cost and availability of credit to U.S. businesses and consumers.

Key themes from the hearing included:

• The proposal does not share the underlying data that served as the basis for the proposed risk weights. (In a letter submitted to regulators on September 12, banking trades argued that the proposal violates the Administrative Procedure Act (APA) because it lacks sufficient public data and analysis. )
• U.S. banks would be at a competitive disadvantage versus European banks given the proposed elimination of internal models in most instances, among other changes.
• Regional banks would be subject to a new set of regulations that are not suited for banks their size.
• The proposed changes could impact the ability of the U.S. to meet requirements of the Inflation Reduction Act (IRA) and climate change treaties.

What they’re saying: Unlike the implementation of Basel reforms over a decade ago, market participants believe there is bipartisan interest in ensuring that this proposal does not restrict capital availability to the U.S. economy.

Additionally, regulators also appear relatively open to feedback. In a statement accompanying the proposal’s release, Fed Chair Jerome Powell noted:

“While there could be benefits of still higher capital, as always we must also consider the potential costs. This is a difficult balance to strike, and striking it will require public input and thoughtful deliberation.”

CREFC is closely monitoring these policy developments and has convened a working group to respond to the proposal. Please contact Sairah Burki at sburki@crefc.org if you would like to join this effort.

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Capital Markets Update Week of 9/18

September 18, 2023

Private-Label CMBS and CRE CLOs

• Only one transaction priced last week, a $679 million conduit backed primarily by 10-year loans (BBCMS 2023-C21).
• Year-to-date, the private-label CMBS and CRE CLO issuance stood at $28.6 billion, 69% behind last year’s tally at this time of $92.5 billion.

Active Pipeline Over Next Two Months

• Two transactions are currently in the market, including one conduit and one CRE CLO.
• In addition, Commercial Mortgage Alert reports that the issuance pipeline will be flush over the next couple of months with multiple conduit and SASB offerings.

CMBS Spreads Steady

• Benchmark CMBS spreads in the secondary market were unchanged across the capital stack last week. LCF AAA, AA, and A spreads remained at 138, 250, and 410, respectively, while BBB- spreads stayed at 915.
• AAA SASB spreads were tighter by 2 bps, in a range of 145 – 217.

Benchmark Rates Remain Elevated

• The 10-year Treasury yield was up 7 bps last week to 4.33%. The 10-year yield hit a YTD high of 4.34% on August 21, the highest since 2007.
• CME 1M Term SOFR was unchanged last week at 5.33%, its highest level of 2023, and up 97 bps since the beginning of the year.
• Inflation data released last week raised fears of a reacceleration in prices. Annual inflation accelerated to 3.7% in August, following a jump in energy prices. While core inflation registered its lowest annualized level in almost two years, it still recorded a larger-than-expected monthly gain of 0.3%. “We expect the committee to continue shifting to a message of ‘higher for longer,’” said Oscar Munoz, Chief US Macro Strategist at TD Securities. “… Fed officials aren’t likely to fully close the door to additional rate increases.”
• Traders are pricing in a 98% chance that the Federal Reserve will keep its benchmark interest rate steady in September and an approximately 30% chance that it will raise the interest rate one more time by the end of the year, according to CME’s FedWatch Tool. In addition, they are pricing in a 36% likelihood that the central bank will keep the policy rate at its current range of 5.25% to 5.5% until June next year.

Agency CMBS

• Agency issuance totaled $1.8 billion last week, consisting of $1.2 billion in various Freddie transactions and $600 million in Fannie DUS. For the year, agency issuance stands at $79.4 billion, 28% lower than the $110.3 billion for the same period last year.

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Join CREFC Executive Director, Lisa Pendergast, at CREFC's Capital Markets Conference on 9/28

We are excited to host CREFC’s Capital Markets Conference in New York again this fall. This timely event offers a robust program and brings together leading industry professionals to share insights into how the Federal Reserve’s hawkish monetary policy has impacted benchmark, mortgage, and capitalization rates. In a series of panel discussions, seasoned market professionals will decipher what it all means for commercial real estate generally and the prospects for those billions of dollars of maturing CRE loans successfully securing refinance capital.

Taking place on September 28th, the conference offers attendees the opportunity to exchange market outlooks and strategize on ways to operate amidst a novel mix of challenges.

I am delighted to highlight this year’s exciting program:

• Welcome Remarks
  • Lisa Pendergast, Executive Director, CRE Finance Council
  • Partner Sponsor: Stewart McQueen, Partner, Dechert LLP
• Shifting Gears: When Will the Capital Markets Thaw?
• Regional Bank CRE Pullback: Fact vs. Fiction
• Networking Lunch
• Remarks from CREFC Chair
  • Harris Trifon, Managing Director and Portfolio Manager, Lord, Abbett and Co.
• Keynote Session: CRE…Where is the Money?
  • [Moderator] Elaine McKay,Partner, Co-Head of US Investment Operations, Real Estate, Ares Management LLC
  • Margaret McKnight, Partner & Head of Portfolio Solutions, SRE, StepStone Group Real Estate
  • Miriam Wheeler, Partner and Managing Director, Head of the Global Real Estate Financing Group, Goldman Sachs & Co.
• Maturities Rising: Servicing in Today’s Market
• CRE CLOs: One Step Back, Two Steps Forward
• The Launching of the NCREIF/CREFC Open-End Debt Fund Aggregate
• Networking Reception

You can view the full program with speakers and discussion topics here.

Please join us this year for this timely conference and remember to register at our discounted rate by Wednesday, September 20th.

Sincerely,
Lisa Pendergast
Executive Director
CRE Finance Council

News

ICYMI: Banking Agencies Release Capital Proposal 

September 11, 2023

On July 27, the Federal Reserve, FDIC, and the Office of the Comptroller of the Currency (OCC) jointly proposed revised bank capital standards (Proposal). Click here for our full alert.

• Comments are due November 30, 2023.
• Join CREFC’s webinar on September 12 at 3:00 PM featuring bank capital experts from Mayer Brown to cover the proposal’s key details, including implications for CRE lending.

Why it matters: Capital requirements impact banks’ ability to lend and the cost of doing business. The Proposal, which targets large banks with over $100 billion in assets, will carry out the final international Basel III standards and respond to some of the early-2023 regional bank turmoil.

What’s next: CREFC convened a working group to discuss the impact of the proposal and to assist in CREFC’s industry response. Contact Sairah Burki (sburki@crefc.org) to join. 

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Congressional Outlook: Shutdown Showdown 

September 11, 2023

This week, the House and Senate are back from August recess and have under three weeks to avert a government shutdown after September 30.

Why it matters: While disruptive and costly, government shutdowns have become a more common occurrence in recent divided government.

What they’re saying: Leadership has not outlined a clear action plan, but a solution could play out in several ways.

Regular Order Unlikely: Rather than a continuing resolution, the debt ceiling deal directed both chambers to pass the 12 appropriations bills that fund the government.

• The Senate Appropriations Committee passed all 12 bills.
• House Appropriations passed 10 bills, and the full House has only passed one bill.
• The Senate may act on several of its own appropriations this month, but sharp disagreements in the House make regular order unlikely.

Continuing Resolution Likely: A short-term continuing resolution (CR) keeping levels the same could delay the shutdown date and give leadership more time to negotiate.

• The White House, Majority Leader Schumer, and Speaker McCarthy have all expressed support for this path, though dates and details remain elusive.
• The House Freedom Caucus opposes a clean CR.

Omnibus, Minibus, and Cromnibus: We expect these terms to come into play as negotiations progress.

• An omnibus bill combines all of the 12 spending bills into one legislative vehicle. This could be a continuing resolution that tweaks spending levels as a percentage of a previous budget.
• Minibus bills could combine several funding bills to partially fund certain government functions that are less politically controversial.
• A Cromnibus bill is a combination of a continuing resolution and an omnibus bill that funds most of the government functions. This allows Congress to keep the government open, pass certain funding proposals, and extend the clock on more controversial proposals.

What’s next: The outlook is murky and Speaker McCarthy will be in the spotlight as he once again must wrangle his narrow majority to advance legislation. Expect some House floor drama and threats to McCarthy’s leadership with a “motion to vacate”.

Contact David McCarthy (dmccarthy@crefc.org) with questions.

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Without Congressional action federal government funding authority expires after September 30.

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Senate Banking Insurance Hearing

September 11, 2023

On September 7, the Senate Banking Committee held a hearing entitled “Perspectives on Challenges in the Property Insurance Market and the Impact on Consumers.”

Why it matters: Given the increasing frequency and severity of extreme weather and natural disasters, property insurance has become significantly more expensive and sometimes unavailable.

Who testified:

• Douglas Heller, Consumer Federation of America
• Michelle Norris, National Church Residences
• Jerry Theodorou, the R Street Institute

Key topics included:

• Consumer impact — lower income Americans subject to price spikes of up to 80% due to low credit.
• Cost drivers — inflation, building costs, and rising re-insurance costs all contribute to increases in the price of insurance.
• Flood insurance — including potential improvements to the National Flood Insurance Program and the role of private flood insurance.

Potential solutions:

• Jerry Theodorou from the R Street Institute said that California should repeal Proposition 103 because it prevents carriers from utilizing recent catastrophes or reinsurance costs to adjust insurance rates. He also urged continued regulatory support for Florida’s tort reforms and public education on the insurance markets.
• The Consumer Federation of America’s Douglas Heller said that states should continue to invest in infrastructure resilience and home protection as an alternative to emergency spending. He also argued that the government should establish a federal reinsurance program and encourage states to collect industry data.
• Michelle Norris from National Church Residences stated that the government should invest in building resiliency and a federal reinsurance program.

CREFC, via its Sustainability Initiative, has launched an Insurance Working Group to identify key issues in the commercial property insurance markets and offer potential solutions. Please contact Sairah Burki at sburki@crefc.org with any questions or to join our Working Group.

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