of the securities laws. Over time, the underwriter of municipal securities may get from the courts the kind of guidance we seek, but in the interim the uncertainties will continue, to the detriment of issuers, investors and underwriters. This is one of the reasons that we support prompt Federal legislation to deal with municipal securiies disclosure.

In the context of the new system of municipal securities disclosure, it is necessary to review and to define the role that underwriters should play. As I have said, competitive bidding, not negotiated transactions, is dominant in the municipal market. An underwriter will typically be part of a successful syndicate only a quarter of the time he bids. Accordingly, there are severe practical problems of time and access to information that keep an underwriter from performing the sort of independent investigation to determine whether the issuer has provided complete and accurate data that is performed in other markets. Since competitive bidding keeps costs to the issuer (and the issuer's taxpayers) low, it is highly desirable as a matter of public policy to preserve competitive bidding in the municipal market by carefully defining the underwriter's obligations and liabilities.

Moreover, we are dealing here with issuers that are governmental entities, raising funds for public purposes, not issuers that are private organizations raising funds in the hope of private profit. Thus, many of the reasons that justify compelling an underwriter to make an independent investigation about the accuracy and completeness of the information provided by an issuer of corporate securities are not applicable when one is dealing with municipal securities. Further, there are checks on a governmental issuer of securities that do not apply with equal force to a corporate issuer-Government in the sunshine laws, periodic elections and press scrutiny of local governments are examples.

Finally, the costs of an extensive underwriter investigation of the accuracy and completeness of the information provided by an issuer. even if it could practically be done, would have to be passed on to the issuers and would substantially raise the cost to the issuer of selling municipal securities. The issuer's cost would increase both because the underwriter's cost of doing business would escalate, and because there are many smaller underwriters who would stop bidding rather than arranging for and conducting extensive investigations into the accuracy and completeness of the information provided by an issuer. The issuers would have to bear the increased cost, and this would have the effect of increasing taxes or decreasing services in virtually every State, county, and city in the country. The increased cost might even discourage some local governments from raising the funds needed for essential public projects. And some issuers might find it impossible to raise funds at all.

In light of these factors, as well as the history of the market, we do not believe that the costs that would be imposed on issuers by requiring extensive underwriter investigation of the accuracy and completeness of the information provided by an issuer are worth the small benefits to be gained. Meeting disclosure requirements alone will impose new costs on issuers; and while the cost can be justified by the investor protection it provides, the additional costs

of a second level of investigation by an underwriter cannot be expected, when we are dealing with local government securities, to provide enough additional protection to make it worthwhile. This seems to us particularly true if the bill that is adopted by Congress provides, as S. 2969 does, for certified financial statements and issued responsibility for the accuracy and completeness of the disclosure. These provisions assure the investor the protection he needs in this market; there is no reason to impose on the taxpayers any additional expense.

Accordingly, we believe that the underwriters of municipal securities under any new disclosure system should not be called upon to perform an independent investigation concerning the accuracy and completeness of the information contained in a disclosure document prepared by an issuer. In our view, reliance on the statements of public officials is entirely reasonable unless an underwriter in fact. has different information. In the absence of knowledge of an omission or misstatement, an underwriter should have no liability for a misstatement or omission by an issuer of municipal securities. This is essentially the same public policy already reflected in section 11(b) (3) (D) of the Securities Act of 1933. Under that provision an underwriter may rely on good faith on statements made by an "official person" or copies or extracts from a "public official document" which are contained even in a corporate prospectus.

S. 2969 in its present form does not deal with these questions. Senator Williams' statement suggests, instead, that the general antifraud provisions of the securities laws should continue to apply. We do not believe that it is desirable from the point of view of issuers or investors, and we know it is not desirable or practical from the point of view of the efficient functioning of the municipal securities market, to continue the present uncertainty concerning the liability and obligation of underwriters. The market is presently not functioning in the way that it should, and we respectfully suggest that the Congress should not enact legislation which would perpetuate that state of affairs. We believe that there are sound and persuasive reasons of public policy for providing in S. 2969 that an underwriter of municipal securities will be liable only for an issuer's misstatements or omissions of which he had knowledge.

I appreciate the opportunity to appear before this committee on a matter of great importance to the DBA and to the municipal securities market as a whole. Prompt action by Congress is, in our view, necessary and appropriate so that the market can once again efficiently and effectively perform its historic function of providing to State and local governments the funds that they need to fulfill their responsibilities to the public.

Thank you.

Senator WILLIAMS. Mr. Kezer, how do you describe the present test in determining underwriter liability?

Mr. KEZER. I think that's

Mr. RATHBUN. Mr. Chairman, if I could address myself to that point, I think the situation is characterized today largely by a great deal of uncertainty. There is presently pending litigation concerning the New York City situation. There is also pending for possible review by the Supreme Court the Nuveen case in which underwriters

were held by the lower court to have an extremely high degree—I would say an unwarranted degree of responsibility to go behind such things as statements of auditors to look at their work papers. But the short answer to your question is that the law today in both the municipal and the corporate field is uncertain.

We think here that what has been suggested in Mr. Kezer's statement that imposing liability where we think it belongs on the State and local issuers to make complete disclosure is adequate protection for the investing public. I think in that connection we are supported by the following elements:

The first is that if you look at the history of this market, almost never have investors lost their money because of issuer fraud. Secondly, there are many safeguards in your bill, Mr. Chairman, particularly the requirement for audited financials. We think that those protections go about 98 percent of the way to solve investor protection problems.

Third, in these bond issues we are relying on statements of public officials. There is no private profit motive and as we pointed out in our statement, the Securities Act of 1933 recognizes that it is entirely appropriate to rely on those statements in a corporate prospectus. We have also pointed out the desirability from a cost point of view to the issuers of coming to market with their issues at competitive sale. We have adverted to the problems of an underwriter, whose bids may be successful only 25 percent of the time, going to those municipal bodies to undertake what might be described as the typical corporate due diligence investigation.

We think that the the added costs to the issuer provided in your bill of requiring certified financials are worth it. I think in the long run certified financials will provide a more efficiently functioning market which will probably return those costs to the issuers. But I submit that there is very little benefit that would justify the additional cost of requiring an additional level of investigation by the underwriters. I think the benefits to the investing public would be very minimal and that this would add a very substantial financial load on the issuers. When you refer to the issuers you're talking about the State and local taxpayers.

I would suggest this further, Mr. Chairman, and I will conclude, that if it should develop over the years that the protection of investors provided by S. 2969 and imposing express liability on the issuers for material misstatements or omissions fails to provide the investing public with the protection to which it is entitled, that at that point and at that point only should Congress decide to impose additional liabilities which we think are presently adversely affecting the market in terms of the uncertainty of underwriters' liability. Senator WILLIAMS. Would you repeat that last statement?

Mr. RATHBURN. Yes, Mr. Chairman. I'm suggesting that it would amount to overkill at this point, to go beyond the protections now set forth in your bill-such things as audited financials-and, as we would suggest, adding an express provision to your bill to require that issuers who use the facilities of interstate commerce to market their securities waive any jurisdictional defenses they may have. That would put the responsibility where it belongs, on the issuers, to make full and complete disclosure. We think it amounts to over

kill, which has no offsetting benefit to the cost involved by imposing on the underwriters a requirement that they conduct an additional investigation going into every fact and record of a municipal issuer before they are willing to assume the risk of taking an issue to the marketplace.

Senator WILLIAMS. It seems to me that you are first suggesting that the underwriter be in a position to be able to rely completely on the attested information that comes to him from the issuer. Is that right?

Mr. RATHBUN. With the addition of audited financials and the fact that this marketplace has functioned pretty effectively and honestly over the years, the fact that public officials are subject to the disciplines of reelection, State government in the sunshine laws, I think that this gives the investing public adequate protection; yes, sir. Mr. KEZER. With the exception that if there is knowledge of a misstatement, that that should

Senator WILLIAMS. My next point. It suggests to me that with that statement you are almost telling the underwriter that he had better not look any farther because he can just sit there on all the certifications that come from the issuer and be protected.

Mr. RATHBUN. He would still certainly be subject to liability for any information which he knew to be incorrect.

Senator WILLIAMS. It almost is an invitation to protect himself by putting blinders on and earmuffs, too.

Mr. RATHBUN. I don't think so, Mr. Chairman. I think that the provisions in your bill today, provided that you do impose direct liability on these issuers as to which there is at least uncertainty today will provide no such incentive. These are public officials who have to be reelected. I think the major safeguard that your legislation provides is the requirement for independently audited financials, If this bill had been in place a few years ago with the requirement that the financials of New York City be subject to independent audit, I don't think we'd be here this morning. That's a personal opinion.

Senator WILLIAMS. You have no suggestions for any other reasonable requirements on the underwriter for further investigation other than reading the material that comes attested and certified and with the independent audits that you just mentioned?

Mr. RATHBUN. Mr. Chairman, I will say again that if you impose a requirement of independent investigation upon the underwriters, you're going to add materially to the cost of the issuers. It was stated yesterday by public officials in testimony that the underwriters are not in a position to and will not absorb those costs. It seems to me that this, as in many legislative situations, calls for striking a reasonable balance and I think that the requirement in your legislation as it is presently drafted calling for this form of disclosure places a heavy burden on the officials of the issuer to comply. There is no reason to think that they are not going to do their level best to comply with those requirements. I don't want to sound like a broken record, but the requirement of independently certified financials is a major step in protecting the investing public and to add this an additional level requiring underwriters to make their independent

investigation would be unwarranted. Mr. Chairman, I suspect I'm speaking against my interests here-because I think if you provide by implication or directly an obligation on underwriters to conduct an independent investigation of the issuer, you could retitle the bill "The Lawyer Full Employment Act of 1976 Ad infinitem."

Senator WILLIAMS. This puts the responsibility and really the liability back on those who are certifying, doesn't it?

Mr. RATHBUN. Yes, sir.

Senator WILLIAMS. Now the independent auditor, he's the one that is going to have to shoulder the big burden. He will not be able to take figures that are given to him and consider that his only obligation.

Mr. RATHBUN. And he shouldn't.

Senator WILLIAMS. He is going to have to go back and look behind figures to see if there's any reason to doubt their authenticity. Mr. RATHBUN. You're right, Mr. Chairman, and an independent auditor should not accept the figures that are provided him. It's his obligation to

Senator WILLIAMS. Somewhere in the chain someone has to do more than accept as absolutely accurate figures that come to him. Mr. RATHBUN. And I think that's the proper function of the independent auditor.

Mr. KEZER. The presumption also is, if the underwriters had a responsibility to conduct a separate investigation, that they would then have to go back and revisit the numbers behind the numbers again.

Senator WILLIAMS. I gather ultimately the liability goes to the issuer and the individuals that are presenting the material that is to be disclosed. So the municipal official is really the one that faces ultimate liability. Are there constitutional questions here?

Mr. RATHBUN. Mr. Chairman, we have suggested that the public officials individually should not be subject to criminal liability in the absence of a knowing misstatement or omisson. This is essentially the same policy reflected in the securities laws today. But for willful violations, fraud, active fraud, if you will, we think it's appropriate for public officials to be subject to the criminal liabilities. We think that this is another mechanism which adds to investor protection.

As to the constitutionality point, Senator, my firm was recently asked for an opinion as to whether legislation placing these kinds of burdens on State and local officials would be constitutional, and our conclusion was, yes, that it would be.

Senator WILLIAMS. There would be no question where there was actionable fraud involved. What is the situation with respect to civil damages running against the individuals at the municipal level?

Mr. RATHBUN. Mr. Chairman, I have not really focused on that question. I would certainly think that for willful misstatements or omissions

Senator WILLIAMS. That is fraud.

Mr. RATHBUN. Right.

Senator WILLIAMS. But short of fraud, just plain negligence on the part of the individual?

Mr. RATHBUN. I think that liability would go to the issuer but would stop short of attaching to the issuing official.