110th Congress Report
HOUSE OF REPRESENTATIVES
2d Session 110-835
==========================================================================
MUNICIPAL BOND FAIRNESS ACT
_______
September 9, 2008.--Committed to the Committee of the Whole House on
the State of the Union and ordered to be printed
_______
Mr. Frank of Massachusetts, from the Committee on Financial Services,
submitted the following
R E P O R T
[To accompany H.R. 6308]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred the
bill (H.R. 6308) to ensure uniform and accurate credit rating
of municipal bonds and provide for a review of the municipal
bond insurance industry, having considered the same, report
favorably thereon with an amendment and recommend that the bill
as amended do pass.
CONTENTS
Page
Amendment........................................................ 1
Purpose and Summary.............................................. 4
Background and Need for Legislation.............................. 5
Hearings......................................................... 6
Committee Consideration.......................................... 7
Committee Votes.................................................. 7
Committee Oversight Findings..................................... 7
Performance Goals and Objectives................................. 7
New Budget Authority, Entitlement Authority, and Tax Expenditures 8
Committee Cost Estimate.......................................... 8
Congressional Budget Office Estimate............................. 8
Federal Mandates Statement....................................... 9
Advisory Committee Statement..................................... 9
Constitutional Authority Statement............................... 9
Applicability to Legislative Branch.............................. 10
Earmark Identification........................................... 10
Section-by-Section Analysis of the Legislation................... 10
Changes in Existing Law Made by the Bill, as Reported............ 12
Amendment
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the Municipal Bond Fairness Act''.
TITLE I--DISCRIMINATORY RATINGS TREATMENT OF STATE AND MUNICIPAL
SECURITIES
SEC. 101. PRESERVATION OF AUTHORITY TO PREVENT DISCRIMINATION.
Section 15E of the Securities Exchange Act of 1934 (15 U.S.C. 78o-7)
is amended--
(1) by redesignating subsection (p) as subsection (q); and
(2) by inserting after subsection (o) the following new
subsection:
``(p) Ratings Clarity and Consistency.--
``(1) Commission obligation.--Subject to paragraphs (2) and
(3), the Commission shall require each nationally recognized
statistical rating organization that is registered under this
section to establish, maintain, and enforce written policies
and procedures reasonably designed--
``(A) to establish and maintain credit ratings with
respect to securities and money market instruments
designed to assess the risk that investors in
securities and money market instruments may not receive
payment in accordance with the terms of issuance of
such securities and instruments;
``(B) to define clearly any rating symbol used by
that organization; and
``(C) to apply such rating symbol in a consistent
manner for all types of securities and money market
instruments.
``(2) Additional credit factors.--Nothing in paragraph
(1)(A), (B), or (C)--
``(A) prohibits a nationally recognized statistical
rating organization from using additional credit
factors that are documented and disclosed by the
organization and that have a demonstrated impact on the
risk an investor in a security or money market
instrument will not receive repayment in accordance
with the terms of issuance; or
``(B) prohibits a nationally recognized statistical
rating organization from considering credit factors
that are unique to municipal securities that are not
backed by the issuer's full faith and credit in its
assessment of the risk an investor in a security or
money market instrument will not receive repayment in
accordance with the terms of issuance.
``(3) Complementary ratings.--The Commission shall not impose
any requirement under paragraph (1) that prevents nationally
recognized statistical rating organizations from establishing
ratings that are complementary to the ratings described in
paragraph (1)(A) and that are created to measure a discrete
aspect of the security's or instrument's risk.
``(4) Review.--
``(A) Performance measures.--The Commission shall, by
rule, establish performance measures that the
Commission shall consider when deciding whether to
initiate a review concerning whether a nationally
recognized statistical rating organization has failed
to adhere to such organization's stated procedures and
methodologies for issuing ratings on securities or
money market instruments.
``(B) Consideration of evidence.--Performance
measures the Commission may consider in initiating a
review of an organization's ratings in each of the
categories described in clauses (i) through (v) of
section 3(a)(62)(B) during an appropriate interval (as
determined by the Commission) include the transition
and default rates of its in discrete asset classes.''.
SEC. 102. GENERAL ACCOUNTABILITY OFFICE STUDY OF CREDIT RATINGS.
(a) Study Required.--The Comptroller General shall conduct a study of
the treatment of different classes of (municipal versus corporate) by the nationally recognized statistical rating organizations. Such study shall examine--
(1) whether there are fundamental differences in the
treatment of different classes of bonds by such rating
organizations that cause some classes of bonds to suffer from
undue discrimination;
(2) if there are such differences, what are the causes of
such differences and how can they be alleviated;
(3) whether there are factors other than risk of loss that
are appropriate for the credit ratings agencies to consider
when rating bonds, and do those factors vary across different
sectors;
(4) the types of financing arrangement used by municipal
issuers;
(5) the differing legal and regulatory regimes governing
disclosures for corporate bonds and municipal bonds;
(6) the extent to which retail investors could be
disadvantaged by a single ratings scale; and
(7) practices, policies, and methodologies by the nationally
recognized statistical rating organizations with respect to
rating municipal bonds.
(b) Report Required.--Within 6 months after the date of enactment of
this Act, the Comptroller General shall submit a report on the results
of the study required by subsection (a) to the Committee on Financial
Services of the House of Representatives and the Committee on Banking,
Housing, and Urban Development of the Senate. Such report shall include
an assessment of each of the issues and subjects described in
paragraphs (1) through (7) of subsection (a).
SEC. 103. IMPLEMENTATION.
The Securities and Exchange Commission shall prescribe rules to
implement the amendments made by section 101 within 270 days after the
date of enactment of this Act.
TITLE II--REVIEW OF MUNICIPAL BOND INSURANCE INDUSTRY
SEC. 201. AUTHORITY OF SECRETARY.
(a) Authority to Receive and Collect Information.--Subject to
subsection (b), the Secretary of the Treasury shall have the authority
to receive and collect (directly from the States and other sources),
and to analyze and disseminate, data and information, and to issue
reports, regarding entities that insure or guarantee the payment of any
portion of the principal and interest of any municipal obligation,
including information, data and material regarding--
(1) financial safety and soundness of such entities;
(2) concentration of insurance liabilities of such entities;
(3) performance of such entities under various scenarios of
macro- and micro-economic stress;
(4) underwriting standards for such entities; and
(5) risk management of such entities.
(b) Limitations.--With respect to the authority under subsection
(a)--
(1) the submission of any non-publicly available data and
information to the Secretary shall be voluntary and such
submission shall not constitute a waiver of, or otherwise
affect, any privilege or confidentiality protection to which
the data or information is otherwise subject;
(2) to the extent that any such data and information has
already been received or collected by, or can efficiently be
received or collected by, the States (including the insurance
commissioners of the States), the National Association of
Insurance Commissioners, or any other appropriate source, the
Secretary may enter into an information-sharing agreement with
such source to provide for the receipt of such data by the
Secretary;
(3) any requirement under Federal or State law to the extent
otherwise applicable, or any requirement pursuant to a written
agreement in effect between the original source of any non-
publicly available data or information and the source of such
data or information to the Secretary, regarding the privacy or
confidentiality of any data or information in the possession of
the source to the Secretary, and any privilege arising under
Federal or State law (including the rules of any Federal or
State court) with respect to such data or information, shall
continue to apply to such data or information after the data or
information has been provided pursuant to this subsection to
the Secretary;
(4) the Secretary shall treat as confidential and privileged
any data or information obtained from any source that is
entitled to confidential treatment under applicable State or
Federal law or regulations, or under any agreement to which the
source is a party and shall take all reasonable steps to oppose
any effort to secure disclosure of the data or information by
the Secretary;
(5) the Secretary may not in any case disclose to any party
any personally identifiable information received or collected
by the Secretary pursuant to this subsection; and
(6) any non-publicly available data and information received
or collected by the Secretary pursuant to this subsection shall
be considered trade secrets and commercial or financial
information that is privileged and confidential pursuant to
section 552(b)(4) of title 5, United States Code.
SEC. 202. REPORTS TO CONGRESS.
The Secretary shall submit a report annually to the Committee on
Financial Services of the House of Representatives and the Committee on
Banking, Housing, and Urban Affairs of the Senate on the financial
state of the industry for insurance and guarantee of municipal bonds,
meaningful trends in such industry, and the potential impacts on the
overall financial system in the United States that entities providing
such insurance and guarantees could have under various scenarios of
macro- and micro-economic stress.
SEC. 203. RETENTION OF EXISTING REGULATORY AUTHORITY.
This title may not be construed to establish any supervisory or
regulatory authority of the Secretary over any entity that insures or
guarantees the payment of any portion of the principal and interest of
any municipal obligation.
SEC. 204. DEFINITIONS.
For purposes of this title, the following definitions shall apply:
(1) Municipal obligation.--The term ``municipal obligation''
means any bond, note, security, or other debt obligation issued
by any State, any political subdivision of a State, one or more
political subdivisions of a State, or a State and one or more
of its political subdivisions, by any agency, department,
office, authority, or other instrumentality of a State, any
political subdivision of a State, one or more political
subdivisions of a State, or a State and one or more of its
political subdivisions, or by any other entity eligible to
issue bonds the interest on which is excludable from gross
income under section 103 of the Internal Revenue Code of 1986.
(2) Political subdivision.--The term ``political
subdivision'' includes any city, county, town, township,
parish, village, or other general purpose political subdivision
of a State and any school, utility, fire, or tax district, or
other special purpose political subdivision of a State.
(3) Secretary.--The term ``Secretary'' means the Secretary of
the Treasury.
(4) State.--The term ``State'' means the States of the United
States, the District of Columbia, the Commonwealth of Puerto
Rico, the Commonwealth of the Northern Mariana Islands, Guam,
the Virgin Islands, American Samoa, and any other territory or
possession of the United States.
SEC. 205. AUTHORIZATION OF APPROPRIATIONS.
There are authorized to be appropriated to the Secretary for carrying
out this title such sums as may be necessary for each fiscal year.
Purpose and Summary
H.R. 6308, the Municipal Bond Fairness Act, is intended to
address issues that prevent the efficient functioning of the
municipal securities market. The bill would do this by
improving the consistency and comparability of credit ratings
for all securities and money market instruments and by
directing the Treasury Department to collect information on the
municipal bond insurance industry and report its findings to
Congress.
Title I requires that ratings issued by agencies designated
as Nationally Recognized Statistical Rating Organization
(NRSRO) by the Securities and Exchange Commission (SEC) reflect
the risk an investor will not receive repayment according to
the terms of a security. The bill also requires that NRSROs use
rating symbols consistently for every security. NRSROs are
permitted to use additional credit factors in their analysis,
including factors such as the priority of a security's
repayment and the recovery rate in the event of default. The
Title also clarifies that NRSROs may provide complementary
ratings intended to measure a discreet aspect of risk such as a
security's expected price volatility.
Title II of the bill addresses municipal bond insurers by
directing the Secretary of the Treasury to collect information
on the financial stability of that industry and provide a
regular report to Congress on its findings.
Background and Need for Legislation
There are about 55,000 issuers of tax-exempt municipal
bonds including state and local governments as well as various
non-profit organizations such as hospitals and universities.
These issuers range from the large and well known such as the
state of California to the small and obscure school districts
in rural areas. A 2004 study by the SEC found that about 74
percent of municipal bond issues are for $1 million or less.
Municipal bonds can generally be categorized as either
general obligation (GO) or revenue bonds. GO bonds are backed
by the taxing power of the issuing government and generally
viewed as the safest of municipal bonds along with those
revenue bonds backed by the ratepayers of public water and
sewer utilities. A 2007 study by Moody's Investor Services
found that only one Moody's-rated investment-grade bond in this
category defaulted between 1970 and 2006.
The chart below describes the low default history of
municipal bonds rated by Moody's and Standard & Poor's as
compared to corporate bonds.
CUMULATIVE HISTORIC DEFAULT RATES
[In percent]
------------------------------------------------------------------------
Moody's S&P
Rating categories ---------------------------------------
Muni Corp Muni Corp
------------------------------------------------------------------------
Aaa/AAA......................... 0.00 0.52 0.00 0.60
Aa/AA........................... 0.06 0.52 0.00 1.50
A/A............................. 0.03 1.29 0.23 2.91
Baa/BBB......................... 0.13 4.64 0.32 10.29
Ba/BB........................... 2.65 19.12 1.74 29.93
B/B............................. 11.86 43.34 8.48 53.72
Caa-C/CCC-C..................... 16.58 69.18 44.81 69.19
Investment Grade................ 0.07 2.09 0.20 4.14
Non-Invest Grade................ 4.29 31.37 7.37 42.35
All............................. 0.10 9.70 0.29 12.98
------------------------------------------------------------------------
Source. Moody's, S&P.
Despite the lack of defaults of municipal bonds, issuers of
these securities have historically earned a lower rating than
comparable corporate bonds when viewed in terms of likelihood
of default. Moody's Investor Services, for example, has
employed a distinctly separate method of evaluating municipal
bonds for 70 years. In general, Moody's bases its municipal
bond ratings on the fiscal strength of the municipality that
issues the bonds. For corporate bonds and structured, or asset-
backed bonds, on the other hand, Moody's bases its rating on
risk of loss. The effect on ratings is illustrated by the table
below which shows how the rating on a municipal bond would
translate if the issuer was judged on a scale used to evaluate
corporate bonds (what Moody's calls the global scale). Most
single A-rated municipal bonds would merit AA or higher if they
were rated as corporate bonds.
MAPPING MUNI TO GLOBAL SCALE RATINGS
--------------------------------------------------------------------------------------------------------------------------------------------------------
Corporate scale equivalents, by sector
--------------------------------------------------------------------------------------------------------------------
Muni scale ratings Start-up TIFs and
State GO Local GO, State, COPs; sp tax; pub. Hospitals and toll roads, CCRC,
lease, wtr/swr higher ed; airports universities multifam
--------------------------------------------------------------------------------------------------------------------------------------------------------
Aaa................................ Aaa................... Aaa................... Aaa.................. Aaa.................. Aaa
Aa................................. Aaa................... Aaa................... Aa-Aaa............... Aa-Aaa............... Aa
A.................................. Aa-Aaa................ Aa.................... A.................... A-Aa................. A-Aa
Baa................................ As.................... A-Aa.................. A.................... A.................... Baa-A
Ba................................. A-Aa.................. A..................... Baa-A................ Baa.................. Ba-Baa
B.................................. Baa-A................. Baa................... Ba-Baa............... B-Ba................. B-Ba
Caa................................ Baa................... Ba-Baa................ B-Ba................. Caa-B................ Caa-B
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source Moody's.
This ratings disparity can also have the effect of driving
demand for bond insurance. Bond insurers, or monolines,
guarantee repayment of securities for a fee. Many issuers will
choose to insure A-rated bonds to the AAA level in order to pay
lower interest rates over the life of the security.
Monolines can only insure to the AAA level if they, in
turn, are rated as AAA insurance companies. In the fall of
2007, monoline exposure to structured mortgage securities began
to cause some of the firms to lose their AAA ratings. The
ratings on the bonds they insured consequently dropped at the
same time. This created uncertainty in the municipal bond
market for which investors demanded a higher risk premium--
which raised borrowing costs for states, cities and other
municipal bond issuers.
Hearings
The Committee on Financial Services held a hearing on March
12, 2008, entitled ``Municipal Bond Turmoil: Impact on Cities,
Towns and States.'' The following witnesses testified:
Panel One
<bullet> Mr. Erik R. Sirri, Director, Division of
Trading and Markets, U.S. Securities and Exchange
Commission
<bullet> The Honorable Eric R. Dinallo,
Superintendent of Insurance, Department of Insurance,
State of New York
<bullet> The Honorable Richard Blumenthal, Attorney
General of Connecticut
Panel Two
<bullet> The Honorable Bill Lockyer, Treasurer, State
of California
<bullet> The Honorable Robin L. Wiessmann, Treasurer,
State of Pennsylvania
<bullet> The Honorable Tate Reeves, Treasurer, State
of Mississippi
<bullet> Mr. Mark Newton, President and Chief
Executive Officer, Swedish Covenant Hospital
<bullet> Mr. Terry Dillon, Chief Executive Officer,
Atlas Excavating on behalf of the National Utility
Contractors Association
Panel Three
<bullet> Mr. Ajit Jain, Chairman, Berkshire Hathaway
Assurance Corporation
<bullet> Mr. Sean W. McCarthy, President and Chief
Operating Officer, Financial Security Assurance on
behalf of the Association of Financial Guaranty
Insurers
<bullet> Ms. Laura Levenstein, Senior Managing
Director, Global Public, Project & Infrastructure
Finance Group, Moody's Investors Service
<bullet> Mr. Martin Vogtsberger, Managing Director
and Head of Institutional Brokerage, Fifth Third
Securities, Inc. on behalf of the Regional Bond Dealers
Association
Committee Consideration
The Committee on Financial Services met in open session on
July 30, 2008, and ordered H.R. 6308, the ``Municipal Bond
Fairness Act'', as amended, favorably reported by a voice vote.
Committee Votes
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. No
record votes were taken with in conjunction with the
consideration of this legislation. A motion by Mr. Frank to
report the bill, as amended, to the House with a favorable
recommendation was agreed to by a voice vote. During the
consideration of the bill, the following amendments were
considered:
An amendment in the nature of a substitute by Mr. Frank,
No. 1, was agreed to, as amended, by voice vote.
An amendment by Mr. Roskam, No. 1a, requiring a GAO study
of credit ratings, was agreed to by voice vote.
An amendment by Mr. Capuano, No. 1b, requiring
documentation and disclosure, was agreed to by voice vote.
An amendment by Mr. Capuano, No. 1c, preventing conflicts
of interest, was offered and withdrawn.
An amendment by Mr. Campbell, No. 1d, dealing with
municipal securities disclosures, was offered and withdrawn.
An amendment by Mr. McHenry, No. 1e, regarding structured
securities, was offered and withdrawn.
An amendment by Mr. Capuano, No. 1f, on separate reserves,
was offered and withdrawn.
Committee Oversight Findings
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the Committee held a hearing and made
findings that are reflected in this report.
Performance Goals and Objectives
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee establishes the
following performance related goals and objectives for this
legislation:
H.R. 6308 is intended to address issues that prevent the
efficient functioning of the municipal securities market. The
bill would do this by improving the consistency and
comparability of credit ratings for all securities and money
market instruments and by directing the Treasury Department to
collect information on the municipal bond insurance industry
and report its findings to Congress.
New Budget Authority, Entitlement Authority, and Tax Expenditures
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
Committee Cost Estimate
The Committee adopts as its own the cost estimate prepared
by the Director of the Congressional Budget Office pursuant to
section 402 of the Congressional Budget Act of 1974.
Congressional Budget Office Estimate
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
August 29, 2008.
Hon. Barney Frank,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 6308, the
Municipal Bond Fairness Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Matthew
Pickford.
Sincerely,
Peter R. Orszag.
Enclosure.
H.R. 6308--Municipal Bond Fairness Act
H.R. 6308 would amend the Securities Exchange Act of 1934
to direct the Securities and Exchange Commission (SEC) to
require bond rating agencies to rate municipal bonds using the
same rating scale as corporate bonds. The legislation also
would authorize the Department of the Treasury to collect and
analyze information on municipal bond insurers. In addition,
the legislation would require a study by the Government
Accountability Office (GAO) regarding the rating of municipal
and corporate bonds.
CBO estimates that implementing H.R. 6308 would cost about
$1 million in 2009 and less than $1 million annually in
subsequent years, assuming the availability of appropriated
funds. Enacting the legislation would not affect direct
spending or revenues.
Bond rating agencies have maintained different rating
systems for municipal and corporate bonds. Under those rating
scales, many of the characteristics of municipal bonds and
corporate bonds with the same ratings are not comparable. (Some
rating agencies are moving to using the same rating systems for
both types of securities, and other agencies are expected to
follow.)
The legislation also would authorize the Treasury to
collect data on municipal bond insurers from insurance firms,
the National Association of Insurance Commissioners (NAIC), and
state insurance regulators. According to the Association of
Financial Guaranty Insurers, there are about 12 firms that
offer such insurance. The Treasury would analyze the data on
the insurers and report annually on the financial state of that
industry.
CBO expects that implementing H.R. 6308 would increase the
administrative costs of the SEC and the Treasury. Based on
information provided by the Treasury and the SEC about the
costs of similar programs and reports, we estimate that
implementing those provisions would cost less than $1 million
annually, assuming appropriation of the necessary amounts.
The legislation also would require GAO to prepare a study
within six months of its enactment explaining how the bond
rating agencies rate municipal and corporate bonds. Based on
the costs of similar reports, CBO estimates that preparing the
report would cost less than $500,000 in fiscal year 2009,
assuming the availability of appropriated funds.
H.R. 6308 would impose a private-sector mandate, as defined
in the Unfunded Mandates Reform Act (UMRA), by requiring bond
rating agencies to establish and maintain a standardized rating
scale. According to industry experts, the costs of complying
would likely be small because those agencies already have the
ability to rate all securities by the same scale and some are
already moving in this direction. Therefore, CBO estimates that
the cost for the mandate would fall below the annual threshold
established in UMRA for private-sector mandates ($136 million
in 2008, adjusted annually for inflation). H.R. 6308 contains
no intergovernmental mandates as defined in UMRA and would
impose no costs on state, local, or tribal governments.
The CBO staff contacts for this estimate are Matthew
Pickford (for federal costs) and Jacob Kuipers (for the
private-sector impact). The estimate was approved by Theresa
Gullo, Deputy Assistant Director for Budget Analysis.
Federal Mandates Statement
The Committee adopts as its own the estimate of Federal
mandates prepared by the Director of the Congressional Budget
Office pursuant to section 423 of the Unfunded Mandates Reform
Act.
Advisory Committee Statement
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
Constitutional Authority Statement
Pursuant to clause 3(d)(1) of rule XIII of the Rules of the
House of Representatives, the Committee finds that the
Constitutional Authority of Congress to enact this legislation
is provided by Article 1, section 8, clause 1 (relating to the
general welfare of the United States) and clause 3 (relating to
the power to regulate interstate commerce).
Applicability to Legislative Branch
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of section
102(b)(3) of the Congressional Accountability Act.
Earmark Identification
H.R. 6308 does not contain any congressional earmarks,
limited tax benefits, or limited tariff benefits as defined in
clause 9 of rule XXI.
Section-by-Section Analysis of the Legislation
Section 1. Short title
This section designates the short title of the bill as the
Municipal Bond Fairness Act.
TITLE I--DISCRIMINATORY RATINGS TREATMENT OF STATE AND MUNICIPAL
SECURITIES
Sec. 101. Preservation of Authority to Prevent Discrimination
This section amends Section 15E(c) of the Securities
Exchange Act of 1934 (the Ratings Agency Reform Act of 2006)
adding a new paragraph (p) that creates an SEC obligation to
require NRSROs to create new policies and procedures with
respect to credit ratings for securities and money market
instruments. The policies and procedures would guide the
process of producing credit ratings that reflect the risk that
an investor will not receive payment according to the terms of
the securities. The policies and procedures must also provide a
clear definition of any rating symbol the organization uses and
set out a way to apply the rating symbol consistently for all
types of securities.
This section also clarifies that in developing credit
ratings that reflect the risk of non-repayment on a security or
money-market instrument, the NRSROs can consider factors other
than the risk of default, such as but not limited to, priority
of repayment, preferences and expected loss in the event of a
default. During the markup, Ranking Member Bachus asked
Chairman Frank for clarification that these factors could be
used by NRSROs in developing a credit rating that reflects the
risk of non-repayment on a security or money-market instrument.
Chairman Frank agreed with the Ranking Member that priority of
repayment and losses realized in the event of a default are the
type of factors that NRSROs should consider in the development
of a credit rating. These additional credit factors must be
documented and disclosed and have a demonstrated effect on the
risk of non-payment.
This section also clarifies that NRSROs may consider unique
factors when assessing the risk of non-repayment of municipal
revenue bonds. Unlike the issuers of municipal general
obligation bonds who typically can levy new taxes as a source
of repayment on their securities, the source or repayment for a
revenue bond is typically limited to a single revenue stream.
Given these different circumstances, NRSROs may consider credit
factors in the analysis of the likelihood investors will not
receive repayment on a revenue bond that may not be considered
in the analysis of whether an investor may not receive
repayment on a general obligation bond.
The section also clarifies that rating organizations may
establish ratings to measure a separate aspect of risk that is
complementary to the credit rating that reflects the risk an
investor will not be repaid.
The SEC must establish performance measures it must
consider when deciding whether to initiate a review of a rating
organization for compliance with the Credit Rating Agency
Reform Act. The performance measures are intended to be a
factor in the SEC's decision whether to conduct a review of an
NRSRO. The performance measures are not intended to serve as a
quantitatively driven trigger that indicates when a review of
an NRSRO must take place by the SEC. The evidence of
performance the SEC is to consider must include, but is not
limited to aggregate ratings transitions in discrete asset
classes.
Sec. 102. General Accountability Office Study of Credit Ratings
This section requires the Comptroller General to study the
treatment of municipal and corporate bonds by NRSROs to
determine (1) whether the NRSROs treat the bonds differently;
(2) what the differences are; (3) whether factors other that
risk of loss are appropriate for credit ratings; (4) what types
of financing municipalities use; (5) what legal and regulatory
regimes govern municipal bond disclosures; (6) the effect on
retail investors of a single credit rating scale; and (7) what
practices, policies and procedures NRSROs use with respect to
rating municipal bonds. The Comptroller must submit the report
to Congress within six months of the date of enactment.
Sec. 103. Implementation
This section requires the SEC to prescribe rules to
implement the amendments made by Section 101 within 270 days of
the date of enactment.
TITLE II--REVIEW OF MUNICIPAL BOND INSURANCE INDUSTRY
Sec. 201. Authority of Secretary
This section authorizes the Secretary of the Treasury to
receive and collect information (both public and private) on
entities that guarantee municipal obligations. The information
will be analyzed and used to issue reports concerning the
entities safety and soundness, concentration of liabilities,
performance under scenarios of financial stress, underwriting
standards and risk management practices.
Clauses (A) through (F) provide strong confidentiality and
privacy protections to data in the Secretary's hands as
follows: data submission is voluntary and submission will not
be viewed as a waiver of any privilege with regard to the data;
the Secretary can receive data from the States, the NAIC and
other sources, and to the extent that the data has already
been, or can efficiently, be collected by a source, the
Secretary can enter into an information-sharing agreement with
that source to prevent incurring new costs for previously
collected data; any privilege or written agreement between the
owner of the data and the source to the Secretary, including
any applicable State or Federal law will continue to apply to
the data after it is provided to the Secretary; the Secretary
will treat as privileged and confidential any data it receives;
the Secretary will not disclose personally identifiable
information; and information in the Secretary's hands will be
protected by the Freedom of Information Act exemption regarding
trade secrets, proprietary information and financial data.
Sec. 202. Reports to Congress
The Secretary will report each Congress to the House
Committee on Financial Services and the Senate Committee on
Banking, Housing and Urban Affairs.
Sec. 203. Retention of Existing Regulatory Authority
This section affirmatively states that the legislation does
not establish general supervisory or regulatory authority in
the Department of the Treasury over any insurer.
Sec. 204. Definitions
Definitions for certain terms used in the legislation are
provided.
Sec. 205. Authorization of Appropriations
The section authorizes the appropriation of such sums as
may be necessary for each fiscal year for the Secretary to
perform the functions described.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, existing law in which no change is
proposed is shown in roman):
SECURITIES EXCHANGE ACT OF 1934
TITLE I--REGULATION OF SECURITIES EXCHANGES
* * * * * * *
SEC. 15E. REGISTRATION OF NATIONALLY RECOGNIZED STATISTICAL RATING
ORGANIZATIONS.
(a) * * *
* * * * * * *
(p) Ratings Clarity and Consistency.--
(1) Commission obligation.--Subject to paragraphs (2)
and (3), the Commission shall require each nationally
recognized statistical rating organization that is
registered under this section to establish, maintain,
and enforce written policies and procedures reasonably
designed--
(A) to establish and maintain credit ratings
with respect to securities and money market
instruments designed to assess the risk that
investors in securities and money market
instruments may not receive payment in
accordance with the terms of issuance of such
securities and instruments;
(B) to define clearly any rating symbol used
by that organization; and
(C) to apply such rating symbol in a
consistent manner for all types of securities
and money market instruments.
(2) Additional credit factors.--Nothing in paragraph
(1)(A), (B), or (C)--
(A) prohibits a nationally recognized
statistical rating organization from using
additional credit factors that are documented
and disclosed by the organization and that have
a demonstrated impact on the risk an investor
in a security or money market instrument will
not receive repayment in accordance with the
terms of issuance; or
(B) prohibits a nationally recognized
statistical rating organization from
considering credit factors that are unique to
municipal securities that are not backed by the
issuer's full faith and credit in its
assessment of the risk an investor in a
security or money market instrument will not
receive repayment in accordance with the terms
of issuance.
(3) Complementary ratings.--The Commission shall not
impose any requirement under paragraph (1) that
prevents nationally recognized statistical rating
organizations from establishing ratings that are
complementary to the ratings described in paragraph
(1)(A) and that are created to measure a discrete
aspect of the security's or instrument's risk.
(4) Review.--
(A) Performance measures.--The Commission
shall, by rule, establish performance measures
that the Commission shall consider when
deciding whether to initiate a review
concerning whether a nationally recognized
statistical rating organization has failed to
adhere to such organization's stated procedures
and methodologies for issuing ratings on
securities or money market instruments.
(B) Consideration of evidence.--Performance
measures the Commission may consider in
initiating a review of an organization's
ratings in each of the categories described in
clauses (i) through (v) of section 3(a)(62)(B)
during an appropriate interval (as determined
by the Commission) include the transition and
default rates of its in discrete asset classes.
[(p)] (q) Applicability.--This section, other than subsection
(n), which shall apply on the date of enactment of this
section, shall apply on the earlier of--
(1) * * *
* * * * * * *
