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Bernard Beal, CEO of M.R. Beal & Company and vice chair of the Securities Industry and Financial Markets Association (SIFMA) testified today on behalf of SIFMA before the House Financial Services Committee at a hearing titled “Legislative Proposals to Improve the Efficiency and Oversight of Municipal Finance”.
Commenting on the overall state of the municipal markets, Mr. Beal said “while much of the dust from [the auction rate securities] breakdown has settled and many sectors of the market are regaining health, some parts of the municipal bond market have been unable to regain their footing and seek access to the capital markets. Many lower-rated state and local government issuers are facing a critical need for reliable liquidity facilities and long-term credit enhancement and the lack thereof is making it difficult for them to bring some transactions to market, which delays important infrastructure projects, such as schools, healthcare facilities, bridges and roads that create jobs and revitalize communities.“
His testimony covered the four legislative proposal introduced by HFSC Committee Chairman Frank last week.
Municipal Bond Insurance Enhancement Act of 2009: SIFMA supports the proposal to establish a temporary federal government reinsurance program for transactions covered by a primary credit enhancement policy from a private market participant. SIFMA strongly endorses creating the Office of Public Finance within the Department of Treasury as proposed under this legislation. This office will provide a point of contact for the municipal securities industry for non-regulatory matters, and help foster communication among state, local and federal government levels and serve as a point of information for municipal securities market stakeholders.
Noting that municipal bond insurance is a product that serves a valuable function in the municipal securities marketplace, Mr. Beal said “the lack of AAA and AA rated companies has negatively impacted the market access of smaller issuers and those lesser rated issuers for whom the addition of insurance to their debt helps lower the cost of borrowing and makes their debt eligible for purchase by municipal market funds.”
Municipal Market Liquidity Enhancement Act of 2009: “While, in general, our markets are functioning properly, there are important sectors of our markets that are in need of affordable liquidity facilities,” said Mr. Beal. “Injecting liquidity into the municipal securities market is a complex undertaking; doing so will affect the sector in need and each of the market participants in that sector differently. Because it is directed to serve the needs of those market sectors in the greatest need, the proposed federal liquidity facility can play a critical role in reinvigorating those sectors.”
SIFMA believes that there are many ways for the federal government to inject liquidity into the municipal securities market, each of which has distinct policy ramifications. In his testimony, Mr. Beal offered alternative approaches and discussed the potential market effects of each. These include authorization of the Federal Reserve Bank to lend money to a special purpose vehicle that will be used to purchase three classes of variable rate demand obligations (VRDOs)—previously issued VRDOs, those issued to refund auction rate securities and short-term notes issued to assist a government with its short term borrowing needs. While creating a liquidity facility of last resort is one way to address the need to provide liquidity facilities to the market, other structures exist, including a federal backstop or a federal participating liquidity facility. Consideration of pricing, size and term of any liquidity facility would also be necessary.
“It is our intention to work constructively with Congress and the Administration to assure that whatever federal liquidity facility is implemented is an efficient vehicle for troubled sectors while being the least disruptive to the markets that are functioning well,” he said.
Municipal Advisors Regulation Act: SIFMA supports the proposed legislation to regulate independent municipal financial advisors, who have not been subject to any regulatory scheme and have always operated unfettered in the markets. SIFMA has held this view for many years, as the unregulated financial advisors have taken advantage of gaps in the industry’s regulatory structure. This legislation will fill in that regulatory gap, protect issuers and investors alike and help to restore confidence in the municipal securities markets. The legislation will also help level the playing field for market participants who offer financial advisory services to state and local governments, by holding currently unregulated financial advisors to the same high standards for registration, examinations and fair dealing as well as limiting potential conflicts of interest caused by unregulated provision of political contributions, gifts and entertainment.
Mr. Beal noted: “While a fiduciary standard of care is defined under various state laws, the municipal finance market is a national one in which lawyers, bankers, advisors and trustees from all 50 states can work on transactions in all 50 states. Thus, a single standard of care under federal law will regulate municipal financial advisors and, at the same time, establish a uniform standard that will apply throughout the country regardless of the jurisdiction or the home state of the advisor. This clarity will simplify compliance and enforcement. Correctly, the new regulations would not cover bond attorneys serving in an accepted legal capacity or registered broker-dealers (acting in the capacity of underwriters), who are already well regulated under the MSRB.”
Municipal Bond Fairness Act: SIFMA believes it can play a constructive role in the important decision on whether to move to global scale ratings, either by unilateral action on the part of the rating agencies or as a result of federal law. In his testimony, Mr. Beal presented the advantages and disadvantages of such a move which would represent a sea change to the municipal bond industry.
