Texas is taking a hardline approach to enforcing a new law requiring banks underwriting the state’s hot municipal bond market to certify by Wednesday that they don’t exclude the firearms industry.
Some of the country’s largest banks, including Bank of America, Citibank, and JPMorgan Chase underwrite municipal and state debt in Texas, but also have tailored restrictions that appear to bar financing to certain parts of the gun industry, such as companies that make or sell bump stocks or sell to customers under 21.
Republican Attorney General Ken Paxton’s office isn’t having it.
Leslie Brock, the state’s assistant attorney general and chief of the Public Finance Division, notified bond underwriters that compliance with the new Texas law isn’t open to “qualifications,” according to an Aug. 23 letter obtained by Bloomberg Law.
The new law, signed by Republican Gov. Greg Abbott in June, requires banks and other businesses seeking municipal or state contracts worth $100,000 or more to certify that they don’t exclude firearm or ammunition industries and retailers. Companies that do business with the state, including bond underwriters, face a Sept. 1 deadline to certify compliance with the law.
Banks that reject clients “based on the types of weapons sold or customers served” wouldn’t be in compliance, according to Brock’s letter. Such restrictions amount to “a refusal to do business against an entire class of firearm entities,” she wrote.
The attorney general’s office didn’t respond to multiple request for comment.
Brock’s letter makes it “extremely clear” that Texas is taking a strict approach to compliance, said Tom Sage, a partner in Hunton Andrews Kurth’s Houston office. The Houston attorney represents bond issuers and underwriters and is part of an informal task force of lawyers trying to figure out compliance with the new law.
Banks “will have to make that decision whether or not they feel that they can comply with this law or not,” he said.
Texas issuers sold more than $58 billion of bonds in 2020, and is currently the second largest market after California, according to Bloomberg data. Bank of America, Citibank, and JPMorgan Chase are among the top bond underwriters in the state, though other major U.S. and international investment banks also participate in the market.
“While we believe our business practices should permit us to certify, we continue to assess our next steps as we try to understand how Texas will interpret the law,” JPMorgan spokesperson Patricia Wexler told Bloomberg Law Aug. 24.
JPMorgan Chase CEO Jamie Dimon told the House Financial Services Committee May 27 that the bank doesn’t serve manufacturers of assault-style weapons for civilian use, but does serve manufacturers for military and law enforcement.
Bank of America declined to comment. However, the bank
Citibank also declined to comment, but referred Bloomberg Law to a June 23 blog post that said the bank will keep doing business in Texas. Citibank said the law doesn’t conflict with a policyadopted in 2018 requiring retail firearms industry clients to use “best practices” like requiring background checks, prohibiting sales to people under 21, and barring sales of bump stocks or high-capacity magazines.
The law applies to governmental entities, such as state agencies, as well as counties, municipalities and school districts.
Another lawyer in contact with the AG’s office said banks have been seeking to certify compliance by Sept. 1 while still rejecting gun industry clients for “traditional business reasons,” such as credit, litigation or reputational risks. A firearms or ammunition maker wouldn’t be turned away “solely” because of their industry status, said the lawyer, who spoke on background.
The state plans to query some of the banks named by Rep. Giovanni Capriglione (R) before deciding whether to approve bond deals, the lawyer said.
It’s unclear how deeply the Texas AG’s office will scrutinize bank certifications by looking at their public statements, congressional testimony—or even bank policies and practices in other states with gun restrictions.
Connecticut, for example, requires financial services companies that want to do business with the state to provide a “responsible gun policy” which the state’s Treasurer factors into contract awards.
Sage isn’t sure whether all banks that have traditionally served Texas’ muni bond market will be able to continue doing business there.
“If it’s one investment bank that can’t do work here, that’s probably not a big issue. If 50% can’t, I definitely think you see a change in yields because you have that much of an impact on the distribution of local debt in Texas,” he said.
The Texas law impacts more than the municipal bond market. Banks that distribute benefits, hold state or municipal bank accounts or even take advantage of state tax credits in underwriting economic development activity also must certify their compliance with the law, said Peter Dugas, executive director of risk, regulatory and compliance services at CAPCO, a consulting firm to banks.
“There are a lot of activities that financial institutions engage in,” that will be subject to the new law, Dugas said. He said bank have been scouring their contracts with state entities to see if they need to add certifications for the new gun law.
The law’s long-term impact could make financial services in Texas more expensive, said Steven Craig, professor of economics at the University of Houston, who specializes in municipal finance.
Banks are unlikely to drop business with the state over one issue, but compliance costs could become prohibitive if lawmakers keeping adding certifications, he said.
“The tendency is bad and you’re adding on costs without really affecting the world in a way that you might want to,” Craig said.