[House Report 110-835]
[From the U.S. Government Publishing Office]



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 bonds (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
           Mr. Erik R. Sirri, Director, Division of 
        Trading and Markets, U.S. Securities and Exchange 
        Commission
           The Honorable Eric R. Dinallo, 
        Superintendent of Insurance, Department of Insurance, 
        State of New York
           The Honorable Richard Blumenthal, Attorney 
        General of Connecticut
        Panel Two
           The Honorable Bill Lockyer, Treasurer, State 
        of California
           The Honorable Robin L. Wiessmann, Treasurer, 
        State of Pennsylvania
           The Honorable Tate Reeves, Treasurer, State 
        of Mississippi
           Mr. Mark Newton, President and Chief 
        Executive Officer, Swedish Covenant Hospital
           Mr. Terry Dillon, Chief Executive Officer, 
        Atlas Excavating on behalf of the National Utility 
        Contractors Association
        Panel Three
           Mr. Ajit Jain, Chairman, Berkshire Hathaway 
        Assurance Corporation
           Mr. Sean W. McCarthy, President and Chief 
        Operating Officer, Financial Security Assurance on 
        behalf of the Association of Financial Guaranty 
        Insurers
           Ms. Laura Levenstein, Senior Managing 
        Director, Global Public, Project & Infrastructure 
        Finance Group, Moody's Investors Service
           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) * * *

           *       *       *       *       *       *       *


                                  
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