Thomas F. Eagleton, U.S. Senator from the State of Missouri. Roderick M. Hills, Chairman, Securities and Exchange Commission.. Edwin H. Yeo, III, Under Secretary of the Treasury for Monetary Affairs; accompanied by Robert Gerard, Deputy Assistant Secretary for Finan- Harvey Kapnick, chairman and chief executive, Arthur Andersen & Co.; Brenton W. Harries, president, Standard & Poor's Corp.; and Jackson Phillips, executive vice president, Moody's Investor Services, Inc... Richard F. Kezer, president, Dealer Bank Association; accompanied by Wallace O. Sellers, Merrill, Lynch, Pierce, Fenner, & Smith, Inc., chair- man, Public Finance Council; David G. Taylor, Continental Illinois National Bank & Trust Co. of Chicago, vice chairman, Public Finance Council; Gedale B. Horowitz, Salomon Bros., co-chairman, Municipal Federal Legislation Committee, Public Finance Council; and Arthur Fleischer, Jr., Fried, Frank, Harris, Shriver, & Jacobson; for the Public Jim Flaherty, chairman, Allegheny County Board of Commissioners for the National Association of Counties, accompanied by Aliceann Fritschler, Gilman C. Gunn, III, senior municipal bond analyst for the Chubb Corp., S. Grady Fullerton, Harris County Auditor, Harris County, Tex.; member of executive board and former president, Municipal Finance Officers Asso- ciation, William J. Reynolds, director of finance, Greenwich, Conn.; vice chairman Government Debt Administration Committee, Municipal Finance Officers Association, accompanied by John Peterson_. Donald Robinson, Hawkins, Delafield & Wood, New York City. Richard B. Smith, Davis, Polk, & Wardwell, New York City. Donald R. Hodgman, O'Melveny and Meyers, Los Angeles, Calif. Ronald W. Forbes, associate professor of finance, State University of Observations concerning current U.S. Government accounting Questions related to governmental financial reporting- Illustrative consolidated financial statements-U.S. Government_ Consolidated statement of revenues and expenses. Consolidated statement of changes in cash and cash Notes to consolidated financial statements_ Certain economic questions related to consolidated financial 2. Government expenditures and gross national product.... 3. History of accounting in the U.S. Government. 4. Accounting and reporting questions raised by illustrative consolidated financial statements.... 5. Excerpts from section 3 of Securities Act of 1933.. Congressional Record, reprint of remarks of Senator Williams on intro- Article by Robert W. Doty titled "The Case for Self-Regulation in Grant, William R., vice chairman, Smith, Barney, Harris, Upman & Co., 336 Current reporting and disclosure staff work paper... Disclosure guidelines for offerings of securities by State and local Municipal Securities Rulemaking Board, statement received for the record. Pell, Haven N. B., letter enclosing no-action letter submitted to Securities Rathbun, Henry T., memorandum on constitutionality of a Federal statute providing for civil damage actions in Federal courts against Electorate of Allegheny County, Pa---- Municipal Finance Study Group, tables and charts accompanying prepared Average annual interest rates on long-term municipal and corporate 356 379 408 Number of institutions with full-time municipal credit analysts. Size distribution of general obligation bonds in survey of official Summary of reporting practices in survey of official statements.. New issue market yields on Aaa and Bbb rated general obligation bonds_- MUNICIPAL SECURITIES FULL DISCLOSURE ACT OF 1976 TUESDAY, FEBRUARY 24, 1976 U.S. SENATE, COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS, SUBCOMMITTEE ON SECURITIES, Washington, D.C. The subcommittee met at 10 a.m., pursuant to call, in room 5302, Dirksen Senate Office Building, Senator Harrison A. Williams, Jr. (chairman of the subcommittee) presiding. Present: Senators Williams and Tower. Senator WILLIAMS. These hearings of the Subcommittee on Securities will come to order. This morning the Subcommittee begins three days of hearings on legislation to upgrade the quality and uniformity of financial and other information concerning State and local issuers of municipal securities-S. 2574, introduced by Senator Eagleton, and S. 2969, introduced last week by Senator Tower and myself. A year ago there was little reason to reexamine the status of issuers of municipal bonds under the Federal securities laws or the application of its concepts to State and local borrowers. The antifraud provisions alone seemed adequate to achieve the necessary disciplines in the offering of municipal securities. The situation is far different today. The past year has seen turmoil and uncertainty in our municipal securities market. Mr. Lennox Moak, the Philadelphia Director of Finance, vice president of the Municipal Finance Officers Association, and a respected authority on municipal finance, accurately described these conditions in testifying on the plight of New York City: Increasingly, it seems that the confidence in municipal bonds has disappeared. My analysis of this indicates that this is due to several factors. The first is there is no universal accepted accounting procedure for State and local governments so that one does not know when he reads an accounting statement precisely what it really means. Second, there are no broadly accepted set of opinions for disclosure of information concerning financial conditions and in many cases, especially general obligations bond issues are sold with no disclosure whatever to potential purchasers. This is not true in the case of revenue bond issuers. Yet even there, it depends on the combined interests of the parties concerned in the transaction. On the second point, he elaborated by adding: There are no requirements for an effective flow of continuing information during the life of the bond issue. Nor is there any uniform system for its organization and circulation. Nor is there any central point from which existing information can be secured. I agree with this excellent analysis of the problem as well as the solutions proposed: The establishment of well-defined alternative systems of accounting which would be acceptable for application by State and local governments... and establishment of standards for disclosure incident to the creation and servicing of the debt of state and local governments. These recommendations are the very foundations of S. 2969. A congressional reexamination of the longstanding exemption of municipal issuers from the Federal securities laws is necessary to facilitate informed investment decisions, promote responsible municipal fiscal practices, and to maintain confidence in the efficiency and integrity of the marketplace. The objectives of our review are threefold: First, more information about issuers' financial condition and other essential information must be made available. Also, it must be timely, accurate, and compiled on a uniform basis. Unless this is done, there will be less investor participation, lower ratings, and underwriter antipathy—meaning less total borrowing and at higher interest rates. Second, the lack of uniform and nationwide municipal accounting standards and practices must be remedied and the current hodgepodge of current practices and customs must be replaced by more generally accepted procedures. The benefits derived from such procedures currently exist in some States. In these instances, credit ratings have improved and sound fiscal management and standardized municipal accounting and reporting have resulted in lower borrowing costs to the taxpayer. Third, municipal issuers must compete for the savers' dollars more effectively to meet projected future capital needs. To promote confidence and stimulate demand, individual investors will be called upon to participate to a greater extent in the primary market. The protections and safeguards of the securities laws must be available to them. This means that some of the disclosure standards investors are accustomed to in the corporate sector will have to be adapted to fit the unique nature of Government borrowers. There are several possible ways in which these goals can be achieved. State government could impose such requirements. This has been the pattern since municipalities were first exempt from the securities laws 43 years ago. Unfortunately, this approach has not proved successful. With few exceptions, progress toward improved disclosure and uniform accounting practices has been unsatisfactory, notwithstanding the efforts of the Municipal Finance Officers Association. [Copies of the bills being considered follow:] |