WASHINGTON - House Financial Services Committee chairman Barney Frank is poised to introduce his municipal market legislation as four separate bills to improve the chances of at least some of the measures passing the House, congressional sources said yesterday.
One of the bills is expected to authorize the Federal Reserve to establish a temporary liquidity facility for variable-rate demand obligations. A second is expected to authorize the Treasury Department to run a temporary reinsurance program that would cover all insured municipal credits.
A third bill, which would seek to place all financial advisers on a level regulatory playing field, may require that FAs register with the Securities and Exchange Commission and would impose a "fiduciary" standard on them.
It's unclear if the fiduciary standard would apply to all FAs or just currently unregulated ones. It also is unclear what precise definition of "fiduciary" the committee plans to use, but it is expected to be modeled on a relationship between a lawyer and a client.
A fourth bill will require that municipal and corporate debt be rated on a "global" scale based on the likelihood of timely repayment to the creditor.
The bills are each expected to be introduced before a hearing that is planned for May 21. As previously reported, Frank decided not to include a separate provision that would have provided federal guarantees for general obligation debt sold by states and localities.
Such legislation would have been politically difficult to achieve and was opposed by some industry groups who believed it would have harmed bond insurers by removing the safest muni credits as potential clients.
Dealer groups said yesterday that they are looking forward to seeing the details of each of the proposals, and that they fully support what Frank is expected to introduce.
"Each of these bills will be important to helping local governments get over the remaining friction from the credit crisis," said Michael Decker, co-chief executive officer of the Regional Bond Dealers Association.
Scott DeFife, senior managing director for government affairs at the Securities Industry and Financial Markets Association, noted that muni dealer-FAs are already regulated by the Municipal Securities Rulemaking Board.
"We hope that the committee recognizes the framework that our members are already working within under the MSRB and hope that that's recognized in the proposal," he said.
Sources familiar with the legislation who asked not to be named said that they expect the VRDO liquidity facility and reinsurance bills are likely to contain few details and that those would have to come as the Fed and the Treasury develops the programs.
One source who did not want to be identified estimated that the Fed would likely need to provide liquidity for $150 billion to $200 billion of VRDOs. That would cover municipal issuers still seeking to convert consistently failing auction-rate securities into variable-rate mode as well as provide sufficient liquidity to issuers with existing VRDO liquidity facilities from troubled banks. The precise size of the VRDO market is not known, but it is thought to be about 18% or 20% of the overall $2.7 trillion muni market, sources have said.
The source also expects Treasury would need to create a $200 billion to $300 billion reinsurance program, though the cost of such a program would be substantially less because participants would pay to use it and the expenses generally would be tied to bond defaults.
The source also said that Treasury would likely open the reinsurance facility to both new and existing credit-enhanced debt because "the whole goal is to expand capacity at the bond insurers, so if that comes from laying off new risk or old risk, I don't think Treasury cares."