ample of your State and mine, New Jersey, and show you the kind of documents that New Jersey used to prepare and today what is being prepared. It will only take a moment.

In 1973 when New Jersey sold $75 million of general obligation bonds, they prepared a four-page piece with a cover page which I am holding in my hand, and for the record I will describe thiswith a cover page giving the name, when the bonds were due and when the sale date was. The inside left-hand page carried the actual bid form. The right-hand page was one page of statistical data, this particular one carrying a statement of total debt authorized and outstanding and all future debt service. That was it. Page 4 was blank. Last month New Jersey prepared an enlarged proposal to bid consisting also of four pages, but in this case the fourth page had more financial data on it. Therefore, there were, in effect, two pages of financial material relative to the State that was provided to potential bidders. Under the light of disclosure rules today, hardly enough. Senator WILLIAMS. This was prepared for potential underwriters? Mr. HARRIES. Yes, sir. The sale date was January 7, 1976. Several underwriters did not bid on the basis of the information presented but there was, however, a bid conditioned upon a fuller disclosure statement. The State then prepared this document I am holding. It consists of 32 pages. It has a good deal of financial, demographic, and economic data relative to the State.

The question I pose to you-and ask that we focus on as you go through these hearings is does your bill provide that this document contains all material information and that no material information has been omitted? I submit, sir, that I don't think it does yet. At great effort I brought this pile of material from New York. This 5 inches of documents was supplied to Standard and Poor's Corp. by the State of New Jersey in just the last 4 months. Now in this material that the State has disclosed to us and makes available to major underwriters and to major investors-but obviously because of its very volume they don't attempt wide distribution of it-I submit to you that New Jersey has disclosed, that it has put in this material all the information necessary for an investor to make a reasoned investment decision.

And the question I think that has to be answered is, how do we get from this voluminous pile to this 32-page disclosure piece that can be given to investors so that they can rely upon it with proper certifications from the State? I submit, Senator Williams, that although your bill may be an effort in this regard, to me the ultimate solution lies in a State agency certifying that this document has sufficient information in it, and I'm pointing to the document of 32

pages.

Senator, what I'm suggesting for State endorsement of municipal bond issues is not new ground. I would urge that the committee might consider examining what has been done in North Carolina. They have a State agency. In the testimony yesterday I don't think enough differentiation was made between what a State agency is and what a quasi-agency is. In Texas we have the Municipal Bond Advisory Council of Texas. This is an industry-supported function. I repeat, in North Carolina it is a State agency consisting of 12 people. It is

not a bureaucracy. It's within the Department of the Treasury of the State. This is where the information is correlated, checked, verified, and then released.

In New Jersey we have a Commission on Local Government which uses more moral suasion in assisting borrowers rather than having the teeth of what I'm really talking about for a State agency. I think we have done well in New Jersey because we don't have the short-term borrowings in Newark and Trenton that affected New York City and it's precisely that type of State overview which has prevented it.

I will pause now because I know you have many questions. Thank

you.

[Complete statement follows:]

STATEMENT OF BRENTON W. HARRIES, PRESIDENT, STANDARD & POOR'S CORP.

I am pleased to present this statement in response to the Chairman's letter of February 16 and address myself to points raised in this and other communications.

It seems to me that the problem the municipal market finds itself in today is not so much that full disclosure to ultimate investors is lacking, but rather that the Securities Law Amendments Act of 1975 has put potential muncipal bond underwriters in an untenable position. On the one hand they are prevented from requiring what the potential issuer must disclose, while on the other they are required to exercise due diligence in their distribution efforts. The need is to establish what is material, accurate information, and then insure that it is disclosed and certified as being complete. Then the underwriter can be assured as to disclosure and bid accordingly.

Would S.2969 accomplish this? I think not, except through the indirect route embodied in section (c), which provides an exemption from the act if the issue is processed through a state agency set up for the purpose of approving bond issues:

"(c) The provisions of subsection (b) shall not apply to an issuer solely by reason of an offer or sale of municipal securities

"(1) the disclosure with respect to which has been approved, after hearing, as adequate for the protection of investors by a State governmental authority (other than the issuer) expressely authorized by law to grant such approval." I have stated repeatedly in other forums and before the Joint Economic Committee last month that I believe disclosure is a state problem, and can and should be handled at the state level. Disclosure must be a living thing and not an annual report that sits in some repository such as a town hall. The disclosure information must flow smoothly into the marketplace where it can be synthesized and distilled in a variety of ways that will make it palatable for a potential investor to digest. The needs of full disclosure will not be satisfied by producing bigger and bigger official statements and annual reports. The challenge is to develop a procedure through which full disclosure may be accommodated and at the same time sustain and improve market performance.

In every state the principal public mechanism for municipal debt issuance already resides in some type of system. It should be acknowledged that a great deal has already been done in this complicated effort and that we should attempt to capitalize on existing strengths rather than create an entirely new and foreign mechanism. Therefore, if by exempting from the requirements of S.2969 those states which have mechanisms set up that meet the requirements of section (c), all other states will be motivated to set up their own mechanisms, then the positive affects are apparent. Many states now have agencies or commissions which assist local governments in debt planning, cash management and budgeting. These state units already are producing full disclosure documents. An outstanding agency in this regard is cited in Senator Williams' introductory remarks. The North Carolina Local Government Commission is perhaps the most outstanding example of a state agency, structured

within the Treasury Department of the state, which has regulatory power over every public bond sold by an issuer in North Carolina including the state itself. They are familiar with the handle local problems with expertise which simply cannot be matched by a federal bureaucracy. Other states should emulate this example.

A state-related structure, though superficially more complex than a single national organization, might in fact prove far more efficient in the functions for which it is designed and would have the additional advantage of avoiding the creation of a Federal bureaucracy. Many reasonable people fear that a Federal body would inevitably intervene in the financial and even the administrative functions of municipalities everywhere. It was surely the fear of just such a bureaucracy that inspired the Tower Amendment to the 1975 Securities Act Amendments. The state approach would allay the probably wellplaced fears of the Tower Amendment advocates while still providing a vehicle for effective disclosure for the benefit of bond investors.

It may be said that this proposal is too cumbersome to be implemented and it is superficially true that there is more work involved in creating 50 or so bodies than in creating one. However, wouldn't the obvious attractions of this approach generate enthusiasm which would more than compensate the extra initial effort? And wouldn't the continuing operations of the state organizations likely be so much more efficient and responsive to the legitimate needs of issuers, underwriters and investors than a national bureaucracy that the extra start-up effort would be repaid many times?

Turning to some specific questions pertaining to S.2969 which have been raised by the staff: At Standard & Poor's we obviously receive a great deal of information which is not normally disseminated to the general public because of the volume and complexity of the data. Annual reports, budget statements, viability and engineering reports in their entirety are supplied to us when rating reviews are in order. Obviously we feel we receive full disclosure or we would not assign a rating. There have been instances when we felt disclosure was inadequate and we refused to rate. In 90 percent of all the rating reviews we do, we receive independently audited financial statements. We are not auditors and do not attempt to perform that function; therefore, we rely upon such audits in our examination.

It is difficult to answer whether more complete disclosure would result in lower borrowing costs. If greater disclosure could increase investor acceptance, obviously demand for the issue will be greater and this might affect the price. But if greater disclosure means that a potential investor is loaded down with far more information than he would ever use, then the additional cost of preparing extraneous matter is unnecessarily burdensome to the issuer.

Adequate disclosure on issues below the $5 million par value mentioned in the bill is a recurring problem. These are the smaller issuers who sell infrequently and often have little idea what is required. This group of issuers would be greatly aided by a state agency designed to provide the mechanisms of market access.

The provision in the bill setting up a central repository for current information is particularly appealing. A logical by-product of this base could be electronic tiering of information, depending on the sophistication of the user who would determine how much disclosure he wishes.

I believe it important to stress that the goal of better disclosure should be more efficient marketing. The target of an efficient market should not be hampered by efforts to stop incomplete or fraudulent disclosure. We have other laws to handle the latter and the goal of 2969 should be to improve marketability. I do not believe that SEC imposed accounting standards, for example, would accomplish that goal, or even is a realistic idea.

Guidelines for adequate disclosure are currently being worked on by the Municipal Finance Officers Association. Much in their guidelines is the same material required by us in a credit rating application. Certainly this is the best source from which to begin to formulate appropriate guidelines.

To sum up, I believe the problem can best be handled by agencies within the respective state governments. Their costs of operation could be paid by fees on local bond sales. I fear greatly-and share Senator Tower's concerns about-what role the Federal government could come to play over state and local units of government if S.2969 were enacted in its present form.

As to S.2574, much of my foregoing comments apply. Furthermore, I think the proposal of 2574 to subject municipal issues to corporate registration requirements is unworkable and unnecessary.

Senator WILLIAMS. Shall we take both statements? You came up together and you are listed together. Why not proceed with Mr. Phillips and then we will ask questions.

Mr. PHILLIPS. Senator, thank you for the opportunity of appearing before you.

My name is Jackson Phillips. I am an executive vice president and the director of Municipal Bond Research for Moody's Investors Service, Inc. with headquarters in New York City. We have been invited to testify in connection with S. 2574 and the bill introduced by Senator Williams relating to municipal securities full disclosure.

We provide several services to and for the municipal bond market. We gather and publish factual information on some 13,500 State and local governments annually in our Municipal and Government Manual, which also includes data on Canadian and other international governmental issues. We gather more detailed information for analyses of municipal bonds and publish our analyses in individual credit reports. We reach conclusions as to the relative credit worthiness of issuers and publish these as our ratings in the credit reports, our bond record, our bond survey, as well as carrying them in the manual. All data are from official sources, that is from officials who by law are charged with recording and reporting information.

The municipal market in the United States is a unique one. (1) It is big, with some $250 billion outstanding obligations of State and local governments, each secured by sources of revenue of those governments. (2) It is diverse. Out of the roundly 78,000 governments in the United States, about one-third have outstanding bonds and notes. While a few large issuers account for the largest part of the dollar volume, many small issuers account for the large number of market participants. The diversity is maintained, as each year some 8,000 new issues come into the market, slightly over half for bonds, the remainder for short-term financing. (3) Interest on the securities in this market is exempt from Federal income taxes, permitting the issuers to obtain a lower rate of interest. (4) The market is unregulated. Except for fraud provisions of the Securities and Exchange Act and for the creation of the Rulemaking Board under the auspices of the SEC last year, issuers, dealers, and others in the market operate without many of the Federal regulatory controls imposed on other security markets.

There are, of course, good reasons for the lack of regulation and /for the tax exemption, and some are rooted in the Federal system of government as embodied in the constitution. The reasons are such an integral part of our system of government that they cannot be ignored. Nor can it be argued that the municipal market is inefficient. This is the market which serves a great number of small participants, maximizing their freedom of choice by utilizing the free market. process. This is the market in which freedom of entry permits every small unit of government in the United States with the authorization of their State governments to obtain the capital they need for the purposes they feel they need it, subject to the requirements of the

marketplace. This is the market that permits State and local governments to satisfy what they perceive to be their needs without resort to a centralized bureaucracy. The record is impressive in many ways, because it is through this market that our local capital plant is in place: the schools, the street systems, State highway networks, and other local improvements. A central government could better have located the schools perhaps but only at the cost of local self-determination. And it should be born in mind that State governments have often shown the Federal Government the way: after all, several States built turnpikes, the forerunners of our Interstate System, with some operations beginning as much as 18 years before the Federal Interstate System legislation was worked out.

Into this workable market have come some problems, and the current one is called investor confidence. It should be noted that a major cause of investor shakiness has been inflation, which does not arise. from activities of State and local governments. Because of inflation, interest rates on all fixed income obligations have risen, as investors seek an offset to an expected deterioration in their principal. Much of the market's queasiness is traceable back to 1974 when for the year inflation averaged 11 percent. Another impairment to investor confidence has come through scattered cases of alleged misrepresentation. This uncertain feeling of deception has certainly been compounded by the New York City debacle. Still another assault on investor confidence lies purely within the area of credit. Local borrowers must have both the means to repay and the willingness to repay in order to maintain a credit standing. And under the impact of major social and economic changes, credit bases have changed and some have deteriorated sharply in recent years. One body of thought holds that the large cities have lesser means of debt repayment than formerly, and it is certainly true that there has been a fundamental shift in the public finance system in the United States. The property tax, the life support of U.S. local government, has continued to decline in relative yield, coincidentally with the ascendancy of the Federal income tax. But this has been going on for the last 50 years and is nothing new.

The attempt of the bills under consideration, as I understand them, is to restore investor confidence by providing uniformity in some degree to reporting and disclosure of information by borrowers in the municipal security market. It is ironic that informational short-comings are felt to exist in the tax-supported, general obligation bond area, rather than in the revenue bond area. Revenue bonds are patterned after corporates generally, and information requirements are usually specified in the bond contract. By contrast, the tax-supported obligation has always been deemed to be covered adequately by laws which seek primarily to inform the taxpayer what is happening to his money. The current problem arises apparently out of the immeasureable magnitude of the responsibility that has been thrown on underwriters. Underwriters now feel the liability has been thrown on them in the event something later goes wrong with an issue, and they have not been able to secure all of the information necessary to protect themselves in the first place. Therefore,