WASHINGTON - House Financial Services Committee chairman Barney Frank is exploring the idea of including a provision in the expansive muni bill his staff is drafting that would require the federal regulation of financial or investment advisers in the municipal market that are not currently regulated, a senior committee staff member said yesterday.

Speaking at a National League of Cities' conference, James Segel, special counsel to the Massachusetts Democrat, said the staff is considering incorporating a measure in the bill that would place financial advisers under "some sort of regulatory framework."

The bill, which may be introduced by May, is being drafted to provide short-term assistance to the muni market in the form of three programs: a federal guarantee for general obligation bonds, some form of federal "reinsurance" of revenue bonds, as well as a backstop for the $500 billion variable rate demand obligation market.

On the regulation of unregulated advisers, Segel said: "We don't know where that would be at this point, but there have been instances of advice given to municipalities which has not really been in the interest of the municipalities, certainly in hindsight."

Currently, swap advisers, guaranteed investment contract brokers, and independent financial advisers are unregulated, while dealer-affiliated FAs are subject to numerous regulations that have prompted the dealer community to argue for a more level playing field.

Last month, the Municipal Securities Rulemaking Board wrote to key lawmakers urging that specific consideration be given to placing unregulated market participants under its authority.

In its letter, the board said that it was taking the action because multiple ongoing federal investigations of investment advisers and other muni market participants - as well as "the ensuing media coverage and the resulting negative impact on investor confidence and market integrity" - have highlighted the need for broader regulation of muni market participants.

But Segel did not say yesterday if the staff would entrust the regulation of non-dealer advisers to the MSRB. Congressional sources said the matter will be up for debate as lawmakers consider broad financial regulatory reform.

Some market participants, including Municipal Market Advisors, have said that self regulation in the municipal and other securities markets should end and that the MSRB, which oversees the securities firms and banks that are its members, should be folded into the Securities and Exchange Commission or another regulator. In response, the board essentially argues that it has the ability to provide more proscriptive rulemaking than another regulator with broader responsibilities.

Segel also said that the muni bill may include provisions from last year's "Municipal Bond Fairness Act," which would direct the SEC to require registered credit rating agencies to rate municipal bonds on the same scale as corporate and other debt, based on the likelihood of repayment. That bill cleared the Financial Services Committee but was not voted on in the full House.

The inclusion of the provision would come after Moody's Investors Service and Fitch Ratings both suspended the review or recalibration of their muni rating scales in light of the turmoil in the financial markets. Standard & Poor's has maintained that it has always had a single scale, but it has upgraded thousands of credits in the past few years.

Asked about the timing of the muni bill, a congressional source said that helping the muni market is important to Frank, but is "not on the front burner," because he is focused on a series of more pressing financial issues.

"It's not on the back burner, though," the source added. "It's sort of on the middle burner."

Meanwhile, Catherine Spain, director of the NLC's center for member programs who also spoke on the panel, said that the group continues to move forward with its proposal for the creation of a nonprofit, national mutual credit-enhancement company.

NLC representatives met last week with Treasury Department officials who were receptive to the idea and are interested in helping the muni market, she said.

The group may need a total of about $1 billion to $1.5 billion, a significant portion of which would have to come from the federal government, NLC officials have said.

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