The article "SEC Officials Say Rule 2a-7 Changes Possible," published on May 2, quotes from a National Federation of Municipal Analysts commentary on the bond rating reform debate. The NFMA leveled criticism, however thinly veiled, at my office and others calling for a fair rating system that does not treat taxpayers like second-class market participants. The article did not include a response from reform proponents. Allow me.

The NFMA tries to denigrate the reform effort by calling it the work of a small band of rowdy malcontents. Wrong. The list of reform supporters includes organizations representing 17,500 government finance officials throughout the country, more than 650 securities and financial market firms, and 478 cities in California. Proponents also include 20 state and local municipal bond issuers, the nation's two largest public pension funds, and the world's largest bank.

Contrary to the NFMA's complaint, we have not engaged in "inaccurate" or "misleading" rhetoric or tactics. We have sought to engage the municipal bond industry in a serious discussion of important issues. When we ask why municipal bonds, which almost never default, have lower ratings than corporate bonds with much higher default rates, that isn't rhetoric. When we question the efficiency and transparency of a market where taxpayer-supported bonds rated on one scale compete with corporate-backed bonds rated on a much easier scale, that's not misleading. These are real issues, and they need to be resolved to restore stability to the market. We're disappointed the NFMA does not acknowledge that reality.

For years, taxpayers have suffered financial harm caused by the flaws in the current rating system - flaws other market participants accepted and exploited. Taxpayers have endured the unfair treatment in silence. Now that their representatives are speaking up, the NFMA decries them as "the loudest voices" threatening to stifle debate. We welcome other voices. But taxpayers have a multibillion dollar stake in the debate, and we expect their views to be treated with respect. Or does the NFMA propose that those speaking for taxpayers defer to the "experts" who drove the capital markets into the ground?

The NFMA expresses concern about appropriate disclosure. As with ratings, however, they seem to favor a double standard. They urge better disclosure from issuers, but fail to disclose that the major rating agencies are the three biggest financial supporters of the NFMA. That certainly seems to be a material fact readers might want to know in evaluating the group's defense of current bond rating practices. It's this kind of clubby environment and lack of transparency that helped create the conditions that ignited our campaign. Taxpayers aren't members of the club. We're speaking and acting for them, and will continue to do so.

Contrary to the NFMA's assertion, we don't have a "short-sighted agenda." We have a short agenda. Don't hold municipal bonds to a higher standard than corporate bonds. Tell investors the truth about the risk of default. We're fully prepared to have a reasoned debate about the issue. Is the NFMA?


Bill Lockyer

California State Treasurer