WASHINGTON - The House Banking Committee plans to consider reform of the municipal securities market next year because of bank involvement in pay-to-play practices and recent market losses by state and local government investment funds, according to incoming chairman Rep. Jim Leach, R-Iowa.
Regulation of derivatives, housing reform, and changes to the Glass-Steagall Act also loom large on the panel's horizon, Leach told Republican committee members in a Wednesday memo that sets a preliminary agenda for the panel.
A major factor in any review of municipal securities will be the outcome of ongoing investigations by the Securities and Exchange Commission into pay-to-play practices, "whereby investment and commercial banks provide campaign contributions to municipal officials in order to garner the municipalities' securities business," Leach said.
"Most of the municipalities issue their securities under negotiated terms, as opposed to a competitive bidding process," he said.
"Furthermore, many investors have lost money in the municipal market because of the declining interest rate environment," Leach said. "Given these developments, the committee may consider reform of the municipal securities market."
Leach noted that he had introduced legislation in the previous Congress to require that underwriters, dealers, and other parties connected with municipal bond issues disclose the political contributions they make to municipal officials.
The legislation also sought to repeal the so-called Tower Amendment, which was added in 1975 to the Securities Exchange Act of 1934 to exempt municipal securities from SEC filing requirements imposed on corporate issuers of securities, he said.
A spokesman for Leach said he could not comment on this or any other aspect of the memo.
Investor losses also will drive another major issue, regulation of derivatives, Leach said. "Given the much publicized losses from the derivatives activities of municipalities, financial institutions, and corporations, legislation introduced last year to provide a regulatory framework for derivatives will again be introduced and considered by this committee." he said.
In the housing area, Leach indicated that many federal housing programs would have to be cut back, with the committee planning "to thoroughly review the programs under its jurisdiction."
Those programs include many important to the municipal market, including the HOME and Community Development Block Grant programs, the Section 8 rent subsidy program, and mortgage insurance programs run by the Federal Housing Administration.
"In view of the November 1994 election, the committee's legislative agenda will be budget-driven, with programs under its jurisdiction reduced through direction of the budget and appropriations committees," Leach said in his memo.
Among hearings Leach is scheduling for next year, one will examine the Community Development Block Grants program and consider whether the $4.6 billion it received in fiscal 1995 should be cut in future years.
"The committee will consider whether funding can be responsibly reduced and whether allocation factors need to be changed so that funds reach the most needy of the country," Leach said.
"The committee will also consider the possibility of combining CDBG with other economic development programs and consider whether receipt of federal assistance should be conditioned upon a community's willingness to promote policies that remove barriers to affordable housing (such as rent controls)," Leach said.
"The committee also, as expected, will consider reform of the Glass-Steagall Act, which was passed during the Great Depression to separate commercial from investment banking.
The act allows banks to underwrite general obligation bonds but not municipal revenue bonds and other securities. "Legislation is needed in order to respond to the rapidly changing financial services market," Leach said.
The panel also plans to consider "modest" changes to the Federal Reserve Board, including the way reserve bank presidents are selected and more timely release of monetary policy decisions, Leach said.
Consolidation of bank regulatory agencies is expected to return to the committee's agenda, as well as escheatment, which refers to the method by which abandoned or unclaimed intangible assets are returned to states.
All states except New York, Massachusetts, and Delaware are seeking legislation to overturn a Supreme Court ruling that unclaimed dividends and interest payments escheat to the state in which the financial intermediary is incorporated - usually New York, Massachusetts, and Delaware, Leach said.
The only investigation listed in the memo addresses Whitewater, on which Leach plans hearings in late spring or early summer.
