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Frank Committee Releases Draft Muni Bills

WASHINGTON — The House Financial Services Committee Thursday evening released four draft bills that members are poised to introduce authorizing the federal government to include the municipal market in its economic recovery programs. The bills are to be considered during a committee hearing scheduled to be held on May 21 and led by chairman Barney Frank, D-Mass.

One of the bills authorizes the Treasury Department to reinsure up to $50 billion of credit-enhanced municipal securities in each of fiscal years 2011 through 2015. The program would be run by a new Office of Public Finance led by an official appointed by the Treasury secretary. Fiscal year 2011 begins Oct. 1, 2010.

Another bill authorizes the Federal Reserve to establish a special-purpose entity that would in turn provide liquidity facilities for variable-rate demand obligations. Liquidity could only be provided to VRDOs issued prior to the date of enactment or to refinance auction-rate securities or for cash-flow notes.

Those two bills would amend the federal tax law to clarify that this federal assistance does not constitute a federal guarantee or otherwise jeopardize the tax-exempt status of the debt.

A third bill makes it unlawful for a municipal financial adviser to use the mail or other means of interstate commerce unless they are registered with the Securities and Exchange Commission. They would have to file an application to the SEC, which would then have 45 days to either grant the registration or institute proceedings to decide if it should be denied.

Registered municipal FAs would have to establish, maintain and enforce written policies and procedures that are “reasonably designed” to prevent violations of the law.

Registered advisers or anyone associated with them would be deemed to have a fiduciary duty to any municipal issuer for whom they act as a muni FA.

The term municipal financial adviser is defined as anyone providing advice to an issuer regarding the issuance or proposed issuance of securities, the investment of proceeds, the hedging of any risks — including advice tied to securities-based swap agreements — as well as the preparation of disclosure documents and the selecting and negotiating of guaranteed investment contracts or other investment products.

However, the definition does not include bond attorneys, rating agencies or registered broker-dealers acting as underwriters.

A fourth bill requiring credit rating agencies to rate municipal and other securities only on the likelihood of timely repayment to creditors appears to be the same as legislation introduced last year. It gives the SEC 270 days after the date of enactment to “prescribe rules” to implement the new law.

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