By Mr. WILLIAMS (for himself and Mr. TowER):

S. 2969. A bill to amend the Securities Exchange Act of 1934 to require the preparation of annual reports and distribution statements by issuers of municipal securities, and for other purposes. Referred to the Committee on Banking, Housing and Urban Affairs.

THE MUNICIPAL SECURITIES FULL DISCLOSURE ACT OF 1976

Mr. WILLIAMS. Mr. President, I am today introducing, on behalf of Senator TOWER and myself, a bill to amend the Securities Exchange Act of 1934 to upgrade the quality and uniformity of financial and other information concerning State and local issuers of municipal securities.

Until enactment of the 1975 Securities Acts Amendments, municipal securities the debt obligations of State and local governments-were exempted from all but the antifraud provisions of the Federal securities laws. However, the increasing incidence of sharp and illegal practices led Congress in 1975, to subject the municipal securities industrybank and nonbank dealers and underwriters-to SEC jurisdiction. This action was taken in order to protect unwary investors, and ended 40 years of nonregulation.

Now, in view of the widespread concern over the financial condition of many of our largest cities, and the obvious lack of adequate disclosure and standardized municipal accounting practices, it is clear that the time has come for the Congress to reexamine the validity of the "hands-off" treatment of municipal securities issuers in the primary market.

Since 1933, municipal securities have been expressly exempted from the full disclosure requirements of our securities laws. As a result, municipal securities have been distributed under practices involving far less disclosure and recognition of fundamental investor protections than is the case for corporate issuers.

The reasons for the original exemptions are not well documented in legislative history, but several factors seem to have influenced the 73d Congress when it considered the Securities Act of 1933. First, there were only rare instances of misrepresentation by municipalities. As evidence of this, the House committee report on the Securities Act of 1933 stated that municipal securities were beyond the need of public protection because of the lack of "recurrent demonstrated abuses." The principal reason for the exemption, however, was the concern that the costs of SEC regulation would be passed on to State and local issuers and the belief that investors in

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municipal securities were sophisticated institutions able to look after their own interests.

Forty-three years of municipal finance corroborates the continuing validity of the finding that "recurrent abuses" have not occurred-New York City being atypical and unusual. This is not so however, with respect to the remaining arguments that were so persuasive in 1933.

For example, for many years, it was true that sophisticated investors-those generally considered to be able to protect themselves and therefore not in need of the statutory protections of the securities laws were the principal purchasers of municipal securities. Until very recently, municipal financing demands were satisfied by commercial banks, high income individuals, and fire and casualty insurance companies.

However, according to Federal Reserve estimates, the commercial banks' share of the new issue market has steadily declined during this decade-from 95 percent in 1970 to 32 percent in 1974. Moreover, insurance companies and other financial intermediaries are not likely to increase their holdings substantially to offset the commercial banks' declining market participation.

A corollary of this is that these tax exempt securities are no longer the province of wealthy and institutional investors. An increasingly large proportion of municipal debt has been sold to individuals of small and moderate means. Rising personal incomes and significant increases in municipal bond interest rates and yields have caused a major upsurge in private investor interest the very category of investors intended to receive the protections mandated by our securities laws.

Also, the historical concern that application of the securities laws to State and local issuers would increase costs and otherwise interfere with essential capital raising efforts has been superseded by a potentially far more serious concernthe erosion of investor confidence. Attractive municipal securities may have once been relatively risk free and safe of municipal credit and the financial condition of governmental borrowers, as well as the accuracy with which information is described and disseminated.

New York City has left in its wake serious disruptions and uncertainties. Some State and local governments have not been able to get to the market at all; others have only been able to sell new issues at extraordinarily high interest rates. In some cases, underwriters have declined to bid on issues where they have been unable to satisfy their legal duties to prospective investors. And banks and other institutional investors have greatly reduced their participation in both the

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primary and secondary markets. The heretofore highly efficient operations of the primary municipal bond markets have been strained as a result.

Finally, Mr. President, the dimensions of this component of our capital markets is vastly different in terms of size than anyone could have predicted in 1933. Between 1950 and 1974 municipal bond volume grew at about a 10 percent annual rate. In recent years, this growth rate has accelerated. During 1972 alone, longterm municipal bond sales-$23 billion were 31⁄2 times greater than in 1960. In 1975, total issuers of both long- and short-term debt securities were approximately $60 billion-16 percent higher than the previous year.

The almost $22.8 billion of total longterm municipal securities issued in 1974 as compared to the approximately $26.4 billion of new corporate securities-including common, preferred stock, and debt issues-which were registered with the SEC during that year, alone justifies a reexamination of the status of State and local issuers under the securities

laws.

In 1928, one commentator described municipal reporting in the United States

as:

A jungle through which run only little

trails and some of those are little used... Everyone concedes that some reports are indispensible, but a few consider what the reports should contain, for whom they should be prepared, in what form they should be presented, how they might most advantageously be circulated, how their content and form might be improved.

The general absence of uniform and standardized municipal reporting is of no less concern today. According to a 1974 Report of the Twentieth Century Fund Task Force of Municipal Bond Credit Ratings:

A major problem, admitted by both the rating agencies and others interested in fiscal affairs, is the lack of uniformity in ac

counting practices and timeliness in the reporting of state and local government statistics. Furthermore, not only do the reports differ in definitions, detail and quality, but their veracity and accuracy are often neither examined nor guaranteed by an independent audit.

The accounting and reporting problem is a deepseated one because the states either passively or actively have created a hodge-podge of practices and requirements.

Sound financial management and fiscal responsibility by State and local officials will not, in my opinion, occur without definite accounting and reporting

standards.

Last year, Arthur Andersen & Co., a well-known international accounting firm, published a report entitled "Sound Financial Reporting in the Public Sector: A Prerequisite to Fiscal Responsibility" to encourage public discussion on the need for sound accounting controls and financial reporting in all units within the public sector. Arthur Andersen concluded:

Cities, states and other political subdivisions should be required to publish [... nancial] statements annually and in connection with the sales of securities to the public.

It is somewhat anomalous that major private corporations have audits performed by independent certified public accountants, but municipalities do not. The need for this basic information by bondholders, prospective investors, the electorate, and by all branches of government is obvious.

Mr. President, each level of government-city, State, and Federal-is confronted with an array of problems that cannot go unanswered. These problems are particularly acute for our urban centers; outdated capital facilities, demands for increased services for the poor and the elderly, and obsolete equipment are. just a few. Clouds of doubt over the willingness of investors to purchase municipal securities can only interfere with our progress toward long-term solutions of these problems.

It is therefore imperative that all State and local governments, regardless of size and geographic location, join with the executive branch and the Congress to improve and fine-tune the operations of our markets for municipal securities. An essential and significant first step must be confidence in the integrity and efficiency improved disclosure to promote investor of the capital raising system-a system which governmental entities will have to rely upon more heavily in the years

ahead.

Mr. President, the public policy underpinning of 43 years of Federal securities regulation has been full and complete disclosure. Full disclosure has worked well both to facilitate investment decisions and to allow for the optimal use of capital among competing sources. Notwithstanding the relative agreement that the "truth in securities" and "investor protection" framework of the Securities Act of 1933 and the Securities Exchange Act of 1934 are conceptually adaptable to public issuers, it must not be overlooked that the reasons for and the provisions of these laws are in large measure

unrelated to the characteristics or needs of governmental issuers or the underwriting and offering process for their securities.

First, municipal securities as a class continue to be relatively safe investments there have been no Penn Centrals or W. T. Grants, and municipal defaults are almost nonexistent.

Second, municipal issuers provide the ultimate safety for their securities through the exercise of the general taxing power.

Third, the political process prior to which an offering is conducted insures "sunshine" via public meetings, periodic elections and other publicity.

Finally, there are important legal distinctions between government and corporate borrowers.

All of these points render the full range of regulation, registration, and reporting under the 1933 and 1934 acts inappropriate. Nor would their application be practicable from an administrative standpoint. Although there are no accurate figures on the number of public instrumentalities issuing securities, estimates range from 20,000 to 100,000. At either extreme, the practical limitations

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on the SEC if the procedures and requirements of full registration and presale review under the 1933 act were to be applied to municipal issuers are clear when viewed in light of the cumulative total of corporate registration statements processed by the SEC from 1935 to 1974 which add up to a mere 47,223.

It may be argued that the requirements of the anti-fraud provisions, which are applicable even to "exempt" securities, are sufficient to require disclosure of all material facts and to permit informed investment decisions. However, investors. in many instances are not receiving substantial disclosures and when they do, they are not standardized. And as I mentioned earlier, the veracity of such financial information is often open to doubt.

I stronlgy believe that what is needed in this area, is an approach that allows for limited SEC authority to develop improved and standardized disclosure but which avoids the formalities, administrative delays and costs of full registration which are inappropriate for municipal bonds. Such an approach must recognize and respect the prerogatives of State and active role by them in assuring investor local governments and encourage a more protection. In a nutshell, these are the views embodied in the bill which I am introducing today. I have discussed these

views with the Chairman of the Securities and Exchange Commission, and I am pleased that he is in general agreement.

The Municipal Securities Full Disclosure Act of 1976 is the product of extensive consultations between Chairman Hills and myself and our staffs. Both Senator TOWER and I, appreciate the Chairman's willingness to lend the Commission's considerable expertise and experience in navigating through previously unchartered areas of Federal securities regulation and the legal and economic concepts on which those laws and regulations are based.

quently from longstanding practices and The bill relies heavily and borrows freprocedures employed by issuers, underwriters and their counsel in marketing municipal securities. Major changes would not be required by this bill. For example, the methods of syndication and distribution would continue to be governed by State law.

However, the bill would require the preparation of annual reports and distribution statements and specify their contents. In this way bondholders and prospective investors would be fully informed of the precise nature and terms of the bonds being offered, as well as various other relevant matters concerning the issuer. But, the bill does not contemplate direct regulation of the issuer through registration, waiting periods of through prefiling of sale documents with the SEC. Even the content of the required disclosures are taken from the "Disclosure Guidelines for Offerings of Securities by State and Local Governments," prepared by the Municipal Finance Officers Association. The streamlined approach of this bill would rely solely upon the antifraud provisions of the Exchange Act in lieu of registration with the SEC.