this bill, could then address yourselves to whether or not there's added requirements in the future. I'm afraid that my experience in this area indicates to me that this may not be the last hearing that you will have on this subject. We must all look at whether or not we are getting responsible fiscal management over the funds in our society in municipalities. The services that are needed in these municipalities are essential because that's our way of life.

Now if what your bill is doing as a minimum standard does not provide that over the long period, then I know that the Congress is going to address themselves again to it. At that proper point they can require pre-compliance on registration, I would recommend between the two bills, Mr. Chairman, that only the minimum requirements be adopted at this point.

Senator WILLIAMS. Perhaps I'm not complete in my understanding of your position in disagreement with the bill. The one area that concerns you most, as I heard your statement and I will study it further, is the lack of built-in required monitoring by the SEC. Is that central to your concern?

Mr. KAPNICK. Yes. That's central to my concern and if we're going to have a central repository for these documents then I believe that the SEC should be the place where that repository is. Then they can monitor and come back to you as the Congress and say here are the things we found and they can prepare an annual report. I believe that, without some form of a monitoring function, Mr. Chairman, it is going to create difficulty for you because the compliance is the area, either on a test basis, or some other basis will indicate it and see whether or not people are complying. Then you can take the legislative action that's necessary, or you finally get into enforcement where something happens. I prefer a monitoring before the problem.

Senator WILLIAMS. How would you change the provision that creates a central repository under contract with the SEC? Could you adapt this requirement of SEC monitoring to this contracting out of the repository? That's really a receipt and orderly filing I would think.

Mr. KAPNICK. That's right.

Senator WILLIAMS. Would your idea adapt to that?

Mr. KAPNICK. No. I would make the SEC that repository rather than a placing out under contract, the same as they have their corporate securities that are all in one place where you can do testing.

The other thing that is very important is if you're testing in an audit type of operation is that the person being tested should not know whether he's been selected or not. If we're going to have a prefiling where a regulatory agency says, "OK, everything now looks all right." That's one thing, that type of compliance. But if you're going to have a testing type of compliance which I visualize as being a part of this system, then it should be with the regulatory body. It's going to cost us money as a nation to have it either in a private repository or in a public repository. I prefer to have it, because of the convenience and the control that is established not only for the SEC but for the Congress of the United States, in a public repository. I would change your bill to provide that the repository be, not under contract, but a part of the SEC function.

Senator WILLIAMS. We didn't deal in the hearing this morning in any detail at all on this requirement and provision with the Chairman of the SEC. I do know, though, that on using a preissue registration statement, that the SEC feels as though this is an unnecessarily heavy burden that they don't want to shoulder with this new development in municipal finance. The preissue registration statement which is the idea that's in Senator Eagleton's bill, how many issuers are there of municipals?

Mr. KAPNICK. I think according to the chairman, there were or one of the documents I saw-78,000, but don't misunderstand my position, Mr. Chairman. The prefiling that you discussed with Chairman Hills, I would not support at this point because I believe that your bill provides a minimum standard and therefore we should go forward with a minimum standard, not with a prefiling under the Securities Act of 1933, and get our experience and then decide what else needs to be done, if anything.

The only question I would suggest you consider is where the documents are filed. The SEC has the most experience in handling this type of large operation and they should be the ones, in my opinion, that would do it.

Senator WILLIAMS. Bureaucracy and paperwork and Federal Government demands are not held in the highest appreciation these days. Those that are caught in the snows of New Hampshire compare the avalanche of snow up there to the avalanche of paper filings here in Washington. It's a massive new paperwork burden we're talking about here, and the national mood seems to be to try to get the job done effectively without the burdens of unnecessary filings and reviews. You get the feeling that comes out, well, all you have to do is listen to any political speech these days everybody who's campaigning seems to be against this big, massive burdensome government. Mr. KAPNICK. And I am, too.

Senator WILLIAMS. But you're adding a new significant dimension in your suggestion I believe.

Mr. KAPNICK. Yes, but not really.

Senator WILLIAMS. By the way, I am not out making these speeches, but I'm listening carefully.

Mr. KAPNICK. Let me point a couple things out to you, Mr. Chairman, that I'm sure you're aware of. No. 1, under your bill, it's my recollection that the estimates are less than maybe 10 percent of those who are municipalities may be required to file. In other words, when you get down to school districts and some of those governmental units, when we talk about 78,000, there's not that many that will be required to file.

Senator WILLIAMS. I'm glad you clarified that because we have a threshold that reaches only about 6 percent of the issuers.

Mr. KAPNICK. That's right. Now, Mr. Chairman, that is the important area of regulation. To me that takes care of that mass that we need to have taken care of so that we all reestablish our confidence in our governmental process. Now you're not going to get away from the mass of paperwork by deciding whether it's deposited in the private sector or in the SEC. The paperwork you have created

by this bill and we have endorsed the bill, is needed at this point in time.

I think the point, however, that you get into when you consider the priorities and I would say to you that I congratulate you on this bill because I know of no higher priority today in saving our way of life than this legislation. I say that for several reasons.

One of the most important reasons that I would say is if you stop to think about some of the indiscretions in the private sector where we have had bankruptcies, who loses? The investor loses. But if we have failures and financial difficulties in the public sector, who loses? Obviously, the investor; but more importantly, the citizen loses because if those hidden costs which are going to create the writeoffs, just like many of the corporate writeoffs, those writeoffs are not going to go away. Those writeoffs are going to have to be taken care of in some fashion. For example, the hidden pension costs, the hidden services that are not being put on the financial statement, many of those are going to have to be borne by us as citizens in some fashion. I'm sure that with all of your experience in the labor and legislation area, Mr. Chairman, that you can fully realize that if the pension trusts which are underfunded in many cases were not handled, that those people must be protected, and I'm sure that you and others would be the first to handle it as a national problem.

So we're looking here at a priority that goes much more basic to our society than probably any that I have seen in recent years.

Senator WILLIAMS. That's a very fine statement of need and I appreciate it.

Just one final question. I had a lot of questions in mind, but your comprehensive statement has been helpful in all of the areas of concern. There is one thing that I do want to ask, though, and that is the role of the financial reporting services. Their analysis, of course, has been the one area that people have relied on and their rating systems. I wonder what elements are there in the financial rating by the services and what is lacking and what is needed, because obviously notwithstanding ratings, we have had our critical problems.

Mr. KAPNICK. Well, let me address myself to that issue. I'm sure you're going to have testimony from those involved in the rating services. On the other hand, I think the most important thing to me is the need for the uniformity of data. The rating services can only do the job if they've got adequate information. Now let me tell you that I believe that in what we're seeing today as we have encountered the problems in the last few months, is a build-up of analysis capability within the private sector and in various banks, in various other institutions, who are going to try to pull together all the data. If you get into the question even in the trust companies as the prudent man rule with which I'm sure you're familiar, they've got to start getting more complete data.

In my opinion, we can have one of two approaches. We can have a uniform approach to the reporting of data which is what your legislation is providing. Or we can have everybody going out trying to find it themselves and getting more information here and less information there. The banks and the rating services which are providing

ratings can only do the job based upon the information that's available to them.

Sometimes I realize the rating services have been criticized the same as the accountants, but you can only do the job if you've got the data that is there with which to do it.

Senator WILLIAMS. There is within the accounting profession a consensus of the minimum standards that can be made uniform for the underpinning of this kind of financial reporting.

Mr. KAPNICK. Absolutely.

Senator WILLIAMS. I'm sure in certain areas within the accounting profession there are controversies and conflicts, but the foundation of reliability has a common consensus. Is that a fair statement?

Mr. KAPNICK. That is a fair statement, Mr. Chairman.

There's one area that probably you might be interested in as you look at some of the problems that's been surfaced in recent years. This is an issue which I address myself in my written statement, namely the consolidation of municipalities into a unit.

Our view, and this is something that the SEC in their determination of regulations would prescribe the same as they prescribe the consolidations for industrial companies, is in many cases you need to know the whole picture in order to avoid getting into trouble. You get into trouble when the combined needs of the taxes and services become so great that the citizens say, "Wait a minute. We can't afford it any longer." Now if you take it fund by fund, not only the investor can get misled because he doesn't see the total package, but also the individual citizen can get misled. I think the consolidation statement for a municipality is essential, which incidentally is essentially a modification of the consolidation technique that was used by New York City the minute they had to put together a financial plan for the Congress and for others. So the need is to put it all together so that you don't have to look at a hundred funds as a citizen of your community, so you know what the total package is. I would encourage the SECand we will file our documents with them when they consider this. Because there again it goes not only to the investor but to our way of life, the need for the community to have adequate funding for the services that they are looking forward to.

Senator WILLIAMS. I won't deal with the complexity or the imponderables in that. It comes to me with the greatest common sense and logic and I know your counsel will be appreciated by those who now have it. I know we will find it very useful as we go forward with our legislation. Thank you very much.

[Whereupon, at 12:25 p.m., the hearing was recessed to reconvene Wednesday morning, February 25.]

MUNICIPAL SECURITIES FULL DISCLOSURE ACT OF

1976

WEDNESDAY, FEBRUARY 25, 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.

Senator WILLIAMS. We will continue our hearings on S. 2574 and S. 2969, the second day of hearings.

The first witnesses this morning are Mr. Brenton W. Harries, president, Standard and Poor's Corp.; and Mr. Jackson Phillips, Executive Vice President, Moody's Investor Services, Inc.

STATEMENT OF BRENTON W. HARRIES, PRESIDENT, STANDARD & POOR'S CORP. AND JACKSON PHILLIPS, EXECUTIVE VICE PRESIDENT, MOODY'S INVESTOR SERVICES, INC.

Mr. HARRIES. Senator Williams, in my oral remarks here today I will be quite brief in light of the lengthy witness list scheduled.

Since receiving a copy of this bill last Thursday and in preparing my written testimony, I have had an opportunity to reflect more deliberately on the provisions of S. 2969 and particularly I took the opportunity yesterday to listen to the remarks of Senator Eagleton and then what I would regard as the more reasoned approach of Chairman Hills.

My conclusion is that I continue to believe that this bill is not the ultimate answer to the problem but that indeed it appears to present a reasonable framework for further dialog and possible solution.

I have been impressed by what I would regard on the part of the committee staff and the committee itself as a reasonable, constructive approach. If this bill, S. 2969, can be a way to proceed to what I regard as the real solution to the problem of disclosure, assuring proper disclosure not just to investors but to underwriters as well, then I would commend your effort and hope that there would be time in the process of the congressional activity in this area for further study as to just what is a distribution statement and what is needed in it.

If I may, Senator, I would like to present for just a couple of minutes for the record the present state of the market as reflects how a bond comes to market today, and if I may, I would use the ex(109)

69-141 O-76-8