The House Financial Services Committee held a hearing on May 21, 2009, on four bills to address problems in the tax-exempt debt market:
- The Municipal Market Liquidity Enhancement Act of 2009 (H.R. 2551), would permit the Federal Reserve to lend money to a special purpose entity to finance liquidity facilities for auction-rate bonds and variable-rate demand obligations.
- The Municipal Advisors Regulation Act (H.R. 2550), would allow the SEC to regulate municipal financial advisors and establishes specific prohibited transactions for municipal financial advisors, such as engaging in fraudulent or deceptive practices and establishes the fiduciary duties municipal financial advisors owe their clients.
Independent municipal financial advisors historically have not been subject to a comprehensive regulatory scheme and largely have operated unregulated in the markets.
- The Municipal Bond Fairness Act (H.R. 2549), requires rating agencies to rate exempt debt securities based on the risk of default to address the lower ratings historically assigned to tax-exempt bonds as compared to corporate bonds with similar risks of default.
Factors that have been offered to explain the more stringent municipal ratings include the lesser liquidity of municipal bonds, differences in the investor base between municipal bonds and the short-comings in municipal disclosure. The factors causing the lower ratings, according to some witnesses at the hearing, were not appropriate considerations in a credit rating.
- The Municipal Bond Insurance Enhancement Act of 2009 (H.R. 2589) would aid certain exempt bond issuers by providing federal reinsurance for their primary bond insurance.
The American Hospital Association generally supported the liquidity aspects of the legislation and urged Committee Chairman Barney Frank (D-Mass.) to "include tax-exempt hospital bonds in any legislation you propose to provide temporary federal government help for the municipal securities market." The Healthcare Financial Management Association (HFMA), on the other hand, expressed reservations with the bills.
With respect to the proposed Municipal Market Liquidity Enhancement Act, the HFMA suggested that additional liquidity capacity would be helpful, but that the scope of the liquidity facility program should be narrow, perhaps limited only to existing issues, and designed not to crowd relatively strong, long-term providers of liquidity facilities out of the market.
On the proposed Municipal Advisors Regulation Act, the HFMA indicated that its members would not recommend additional federal regulation of financial advisors, despite its recognition that advisors were somewhat dismissive of the risks inherent in possible worst-case scenarios. HFMA suggested that a private-sector solution would make a better alternative and suggested that it include (1) well-defined standards of conduct; (2) specific education/certification for bond enhancements and complex derivative products like interest rate swaps; and (3) a complaint mechanism monitored by the trade groups for use in identifying "bad actors."
Finally, the HFMA opposed the proposed Municipal Bond Fairness Act, arguing that the bill would force rating agencies toward an artificial consistency between healthcare and other industry credits. Moody's Investors Service's representative at the hearing, however, stated that the bill was consistent with Moody's intention to recalibrate its exempt bond ratings to enhance comparability with other ratings, once the debt markets restabilized.
While the legislation before the House Financial Services Committee is unlikely to be enacted in the near future, aspects of it may be included in health reform legislation addressing healthcare facility tax-exempt debt.