Senator WILLIAMS. What forum would receive that question of civil damages running against the issuer?

Mr. RATHBUN. Well, typically, it could be brought in a Federal district court, because undoubtedly you would have purchasers of one State suing issuers of another. If that wasn't available, I assume it could be brought in the local courts.

Senator WILLIAMS. Now isn't that an 11th amendment question? I'll tell you, this isn't really the forum to struggle through some of these very, very complex and profound legal questions. You have written opinion letters in some of these areas, haven't you?

Mr. RATHBUN. We have, sir.

Senator WILLIAMS. I wonder if you could focus on this additional authority in terms of the civil liability and whether there are constitutional questions of bringing that into Federal court.

Mr. RATHBUN. We would be glad to.

Senator WILLIAMS. I wonder if you could speculate on whether this bill with its disclosure requirements, if it were to become law, would be another reason to allow banks to underwrite revenue bonds. Mr. KEZER. Most assuredly.

Senator WILLIAMS. You struggled long and hard on this and I thought

Mr. KEZER. I wanted to phrase as positive an answer as I could. Senator WILLIAMS. This would be an additional reason, would it not?

Mr. KEZER. Yes. It seems to me that we have now got the business itself, the markets, being regulated through the Municipal Securities Rulemaking Board. If we have legislative mandate for disclosure, it seems to me there's no reason why banks should not be permitted to underwrite investment quality revenue bonds, even absent this bill.

Senator WILLIAMS. Until this bill comes along, there's some question, isn't there?

Mr. KEZER. Yes.

Senator WILLIAMS. Thank you very much.

Mr. KEZER. Thank you.

Senator WILLIAMS. Mr. Wallace Sellers from Merrill Lynch Pierce, Fenner, & Smith, David Taylor from Continental Illinois National Bank and Trust Co. of Chicago, Gedale Horowitz, from Salomon Brothers, and William Hough, Municipal Federal Legislation Committee, Public Finance Council for the Public Finance Council of the Securities Industry Association.

Gentlemen, you're all present and accounted for and, Mr. Sellers, you appear to be chairman of this group.

STATEMENT OF WALLACE 0. SELLERS, MERRILL, LYNCH, PIERCE, FENNER, & SMITH, INC.; DAVID G. TAYLOR, CONTINENTAL ILLINOIS NATIONAL BANK & TRUST CO. OF CHICAGO; GEDALE B. HOROWITZ, SALOMON BROTHERS, CO-CHAIRMAN, MUNICIPAL FEDERAL LEGISLATION COMMITTEE; AND ARTHUR FLEISCHER, JR., FRIED, FRANK, HARRIS, SHRIVER & JACOBSON; FOR THE PUBLIC FINANCE COUNCIL OF THE SECURITIES INDUSTRY ASSOCIATION

Wallace Sellers, chairman of the Public Finance Securities Industry Association, and vice president vach, Pierce, Fenner, & Smith. With me today are Mr. or, executive vice president of Continental Illinois NaA and vice chairman of the Public Finance Council; Mr. Ve Horowitz, cochairman of the Municipal Federal Legislation mittee of the Public Finance Council, and partner of Salomon Srothers in New York; and Arthur Fleischer, a partner of Fried, Frank, Harris, Shriver, and Jacobson.

We are pleased to have the opportunity to testify before you today on S. 2969, the Municipal Securities Full Disclosure Act of 1976. We have previously submitted for the record a more fully detailed statement on our views of the bill as well as the general need for legislation mandating disclosure with respect to the issuance of municipal securities.

The Public Finance Council supports the concept of a Federal statute that provides a vehicle for creating uniform disclosure standards for offerings of State and municipal securities, and endorses the bill's approach of not simply repealing the exemption of municipal securities from the Securities Act of 1933.

Municipal issuers need a regulatory pattern different from the one applicable to corporate issuers. However, we believe the bill presently before the committee does not reflect all of the basic features which are essential in legislation relating to municipal issuers. Therefore, we recommend the enactment of legislation in accordance with the following principles:

One: Federal legislation should provide a vehicle for the creation of uniform standards for offerings of State and municipal securities. These disclosure guidelines should be set by an organization of State and municipal issuers. Regulation by State and municipal issuers would have several advantages. In the first place, it would enable Federal legislation to take into account very difficult and important questions of Federal-State relations. Second, this structure would give responsibility for writing regulations to the group that is most familiar with the requirements of State and municipal financng. Third, it would help enlist the support of the issuers on behalf of a Federal regulatory scheme. The SEC would still participate in the regulatory process for State and municipal securities through its responsibilities for enforcing the anti-fraud provsions of the Securities Exchange Act. Finally, disclosure guidelines develoned by an organization of issuers would also be more flexible in adapting to different types of issues and issuers and to changing conditions than if disclosure requirements were written into the legislation as the bill attempts to do.

Two: Offering circulars used in connection with the issuance or distribution of municipal securities should contain audited financial statements prepared in accordance with generally accepted accounting standards and certified by either independent public accountant or a duly constituted independent state auditing firm.

Three: One of the most encouraging developments in the field of municipal finance has been a movement by States to assume responsibility for disclosure by their municipal issuers. For example, the

local government commission of the State of North Carolina has recently announced that it is considering a procedure by which officials of municipal issuers would be required to certify information in their disclosure documents and the commission would certify that this information has been confirmed through other data available to the commission. The bill recognizes the benefits of State regulation in providing an exemption from the Federal disclosure system for offerings complying with the State disclosure requirements.

The Public Finance Council recommends enactment of a provision that underwriters and dealers should not be liable for misstatements or omissions in offering materials from municipal securities if they rely in good faith on a State certification that these disclosure terms appear to comply with the requirements of applicable law.

Senator WILLIAMS. When you say "rely in good faith," either they rely or they don't. What is "relying in good faith?" That suggests to me that you are inviting more investigation than just reading the attested documents. "Rely in good faith," what does that mean to you?

Mr. SELLERS. No, sir. I think if a State agency had certified that the disclosure document of an issuer is adequate and fulfills the requirements of the law, then I think the underwriters should be able to rely on that, period, unless he has knowledge that it is

Senator WILLIAMS. How would he get it? Does he go out and do his own investigation or does it just, by chance, come to him?

Mr. SELLER. Just by chance. I think if there is State certification

Senator WILLIAMS. No other requirement upon him?

Mr. SELLER. If there is State certification; no.

Mr. TAYLOR. The State has done the certifications.

Mr. SELLERS. And North Carolina will be doing this. They will say that disclosure is adequate.

Underwriters and dealers would, of course, continue to be legally responsible if they are aware of the material misstatements or omissions in the offering materials. An authorization for underwriters to rely on State certification would give underwriters an incentive to press for State regulation and would recognize the ability of the States to assume responsibility for disclosure of municipal issuers. It would also give appropriate recognition to a basic distinction_between corporate and municipal underwriters. While corporate underwriters are generally done on a negotiated basis, most municipal offerings are competitively bid. This means that it is usually impracticable for underwriters of municipal securties to participate in the preparation of the offering circular or to make a type of investigation that is customary in negotiated corporate underwritings.

Another basic principle applicable to municipal offerings is that issuers who receive the proceeds of any offering and who control and should have knowledge of the material facts should be primarily responsible for the contents of disclosure documents. Hence, in addition to the authorization for underwriters to rely on State certification of offering materials, there should be an express recognition of contribution rights as well as acknowledgement of the ability of municipal issuers to indemnify underwriters and others.

Four: The bill contains a provision limiting the liability for damages of an underwriter of municipal securities to the total price at which it sold securities to the public. This measure, while a desirable clarification of the law, needs to be expanded and refined. The ceiling on liability should apply to actions for rescission as well as suits for damages. It should protect not only underwriters a Securities Act term which is not defined in the Securities Exchange Actbut any dealer who participates in the distribution process; and there should be a provision similar to the one in the Securities Act limiting the amount recoverable from such participants from the price at which the security was offered in public.

Five: Disclosure materials issued in connection with offerings of municipal securities should not be subject to prior review or approval by the SEC or any other Federal agency. The prior review concept was explicitly rejected by Congress when it enacted the 1975 amendments to the securities laws. We strenuously oppose the provisions of the bill that would appear to permit the SEC to institute such procedures.

Six: We are opposed to any exemption from the disclosure requirements for offerings of municipal securities based upon the size of the issuer. An exemption based on size tends to brand the exempt issue in the marketplace as an inferior class of security. The better way of handling this problem is to prescribe reduced disclosure requirements for these issuers. This committee stated that it was unaware of any abuses which would justify a radical incursion on the States' prerogative by overturning the exemption from the registration and disclosure processes of the Securities Act of 1933 and the Securities Exchange Act of 1934. It is our view that even in the absence of an express statutory disclosure system for municipal issuers, on balance, the financing of our municipalities has historically worked in an extraordinary fashion. Defaults on municipal bonds in the past have been so rare that since 1966 statistics on defaults have not been generally maintained. To be sure the Public Finance Council is concerned by the default of the Urban Development Corporation in New York, the moratorium for certain New York City obligations and evidence of financial instability in other municipal issuers. These factors appear to have affected investor confidence and have caused problems for certain issuers. We applaud the serious efforts which are being made to raise disclosure standards on a voluntary basis. We also clearly recognize that disclosure alone is not the answer to basic financial problems confronting certain municipalities. At the same time, the Public Finance Council would support a proposal for a mandatory disclosure system which does not unnecessarily increase the cost of municipal financing, which establishes reasonable standards of responsibility for the participants. and which produces a national system of minimum disclosure designed to enhance investor confidence in the municipal market.

In the context of the principles that we have outlined, we stand ready for further discussions to help achieve a satisfactory resolution and are willing to work with all interested parties toward this end.

Senator WILLIAMS. Thank you, Mr. Sellers. [Complete statement follows:]

STATEMENT OF THE SECURITIES INDUSTRY ASSOCIATION

The purpose of this statement is to set forth the views of the Public Finance Council of the Securities Industry Association (the "SIA") on Senate Bill, S.2969, the Municipal Securities Full Disclosure Act of 1976 (the "Bill"). The basic purpose of the Bill is to establish defined disclosure obligations for issuers of state and municipal securities, thereby changing the approach to disclosure that has existed in this area since the inception of the federal securities laws over 40 years ago.

The SIA supports the concept of a federal statute imposing disclosure obligations for state and municipal issuers. However, our support is in the context of certain principles set forth in this statement. The Bill does not reflect all the basic features which we believe essential in legislation relating to state and municipal issuers. Therefore, we oppose the Bill in its present form and recommend the enactment of legislation in accordance with the following principles:

(1) There should be uniform disclosure standards in offerings of state and municipal securities. These disclosure guidelines should be set by an organization of state and municipal issuers.

(2) Offering circulars for state and municipal securities should be required to include certified financial statements.

(3) Underwriters and dealers should not be liable for misstatements or omissions in offering materials for municipal securities if they rely in good faith on a state certification that these materials appear to comply with the requirements of applicable law.

(4) The limits on liability of underwriters and dealers in offerings of municipal securities and their rights of contribution and indemnification should be clarified.

(5) Disclosure materials issued in connection with offerings of municipal securities should not be subject to prior review or "approval" by the SEC or any other federal agency.

(6) There should be no exemption from disclosure requirements for offerings of municipal securities based on the size of the issue.

We offering our assistance to the Committee and to other interested persons, including the Securities and Exchange Commission, to the end of formulating legislation that will be in the public interest and will recognize the particular requirements, needs and characteristics of state and municipal issuers and the participants in the underwriting process.

Last year, the Congress adopted the Securities Acts Amendments of 1975 which created a comprehensive regulatory system for the professionals in municipal securities, both securities firms and banks, and created the Municipal Securities Rulemaking Board, composed of industry and public representatives, to adopt regulations for the municipal market place. The SIA supported this legislation, having actively worked on predecessor forms of regulation with Congressional staff and staff of pertinent agencies, including the Securities and Exchange Commission. The 1975 Amendments specifically recognized and emphasized (through the express prohibitions against the Rulemaking Board or the SEC requiring municipal issuers to make prior filings of offering materials or to furnish documents to dealers and others) the continuation of the exemption of municipal securities from the registration and disclosure process of the Securities Act of 1933 and the Securities Exchange Act of 1934. Indeed, this Committee in its Report, dated April 14, 1975 [Senate Report No. 94-75] on the Securities Acts Amendments of 1975 (the "Report"), stated that it was unaware of any abuses which would justify a radical incursion on the states prerogatives by overturning the exemption. It is our view that even in the absence of an express statutory disclosure system governing the issuance of state and municipal securities, on balance, the financing of our municipalities has historically worked in an extraordinary fashion. Municipal borrowings have proceeded along with a happy balance of reasonable cost to the municipalities and lack of large scale losses to investors. Defaults on municipal bonds in the past have been so rare that since 1966 statistics on defaults have not been generally maintained. To be sure the public Finance Council is concerned by the default of the Urban Development Corporation in New York, the moratorium for certain New York City obligations and evidence of financial