With the passage of the Securities Acts Amendments of 1975 (Tower Amendment), Congress limited the regulatory scheme for municipal securities (including conduit borrowers such as 501(c)(3)s borrowing through state or local bond issuing authorities). The Securities and Exchange Commission (SEC) staff is considering whether to recommend that the SEC propose legislation to repeal the Tower Amendment, which generally prevents the SEC from regulating the municipal bond market, and seek an explicit grant of authority to regulate the municipal bond market directly. SEC staff believes that additional control over municipal bond disclosure and accounting standards is necessary.

The apparent goal is to make exempt bond disclosure more like corporate disclosure with respect to timeliness and quality. Arthur Levitt, former SEC chairman, in recent testimony before the Senate Committee on Banking, Housing, and Urban Affairs has endorsed this reform effort based on his belief that (1) many participants in the municipal debt market" -- insurers, rating agencies, financial advisors to issuers, underwriters, hedge funds, money managers and even some issuers -- have abused the protection granted by Congress from SEC regulation," and (2) the tax-exempt debt and derivative products sold today are substantially the same as those sold in the corporate markets.

Historically, efforts to reform the Tower Amendment have been unsuccessful given the low level of municipal bond defaults and fraud claims. However, the increasing size and complexity of the municipal bond market, coupled with recent rating agency failures and the financial crisis, has provided new impetus for regulation and review. Additionally, current investigations into derivatives, bid rigging, pay-to-play and other scandals, such as the New York Attorney General's pension fund investigation, may impact efforts to alter the regulatory playing field. Municipal bond borrowers should keep a vigilant eye on this issue.

If the disclosure changes weren't enough of a concern, Sen. Chuck Grassley (R-Iowa) suggested in a May 12 roundtable discussion on healthcare reform hosted by the Senate Finance Committee that exempt hospitals should become taxable and receive tax deductions or credits for their charitable activities. Sen. Grassley's comments were framed against the prospect that universal coverage would result in a substantial decline in uncompensated care. In the roundtable, Leonard Burman, Director of the Tax Policy Center, went further and argued that hospitals' exempt debt should be limited -- as the subsidy is inefficient and largely inures to the benefit of the bondholders rather than the tax-exempt entities.