instability in other municipal issuers. These factors apepar to have affected investor confidence and have created 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, if a mandatory disclosure system can be devised which does not unnecessarily increase the cost of municipal financing, which will establish reasonable standards of responsibility for the participants and which will produce a national system of minimum disclosure designed to enhance investor confidence in the municipal market, the Public Finance Council would support such proposal. We believe that any regulatory proposal must take into account the very difficult and important questions of federal state relationships. We also respectfully suggest that legislation must respect and acknowledge the unique characteristics of municipal issuers and the manner in which their securities are distributed.

I. THE PRESENT DISCLOSURE SYSTEM

At present there is no established disclosure system governing the issuance of State and municipal securities. Several states have adopted programs requiring various disclosures by municipalities issuing debt. However, there is no uniformity among these state programs and there is no federal program for state and municipal issuers. Rule 10b-5, the basic antifraud provisions of the Securities Exchange Act of 1934, does apply to municipal securities, however; and a series of recent lawsuits, court decisions and Commission proceedings have made issuers, public officials and underwriters sensitive to disclosure questions.

The legal proceedings, in conjunction with the difficult financial problems confronting certain municipalities, have created increasing pressures for improved disclosure in the distribution of municipal securities. Thus, there have been several recent instances where municipal offerings have been postponed or delayed at least in part because the official statements or offerings documents have not, in the judgment of the prospective bidding groups or others, disclosed information regarded as material. Furthermore, the practice has increasingly developed for underwriters to request state or municipal officials to certify as to the accuracy and completeness of statements made in offering materials. Another indication of the concern for improved disclosure is contained in the draft of "Disclosure Guidelines for Offerings of Securities" published in November 1975 by the Municipal Finance Officers Association (MFOA). The purpose of the exposure draft is to establish disclosure guidelines for security offerings by state and local governments. These guidelines are presently being commented on and revisions may be anticipated.

We subscribe to the concept that improved disclosure practices will enable the marketplace to assess in a more meaningful fashion the value and creditworthiness of different issuers and their outstanding obligations. The marketplace has become more sensitive to the differences in creditworthiness of various municipal issuers and is beginning to express this by increasing the divergence in yields, as shown in Exhibit 1, between AAA and BAA rated general obligation bonds of municipalities. The Exhibit also shows the rise in the ratio of yields of tax exempt to taxable securities in 1975. Some have questions whether these differences in interest rates paid by variously rated issuers and the rise in the ratio of tax exempt yields to taxable yields accurately reflect the ability of municipalities to service their debt and have suggested that interest rates might be more in line with the financial capabilities of issuers if there were uniform disclosure standards, leading to better informed judgments in the marketplace.

The various responses to date to the pressures for improved disclosures in municipal securities offerings highlight a number of facts which, we believe, must be considered in any legislation. The first is the great diversity of state and municipal issuers, their variance in size and function, the many types of obligations that may be issued and the enormous number of issuers. Exhibit 2

shows the distribution according to size of the approximately 6,500 general obligation and revenue bonds issued during the 18 month period January 1974 through June 1975. During this period, approximately 84 percent of the general obligation bonds and 65 percent of the revenue bond issues were under $5 million. In the United States at the end of 1974 there were 78,268 state and local government bodies which had an outstanding publicly held indebtedness aggregating $207 billion. In this regard, Congress should consider whether industrial revenue bonds and pollution control bonds issued by governmental entities for the benefit of private enterprises organized for profit should continue to qualify for the municipal securities exemption from the registration requirements of the Securities Act of 1933. According to the "Bond Buyer", industrial revenue and pollution control bonds accounted for approximately $3 billion of the total $29.2 billion of state and local government bonds issued in 1975.

Secondly, there do not currently exist any generally accepted or uniform standards or practices for the disclosure of material information about the issuer of a municipal security. A widely accepted practice in an "Official Statement" for general obligation bonds is to identify the issuer or obligator, the terms and conditions of the bonds, the legal opinion of issuer's counsel, and, possibly, some general information about the issuer. When issuers have responded to recent concerns for more detailed disclosure, the nature and type of data disclosed have varied as has the character of the disclosure. The Municipal Finance Officers Association's guidelines, when issued in definitive form, should be a stimulus to a more uniform approach to disclosure.

Thirdly, uniform accounting practices do not exist. Two accounting auditing standards have been published: one by the National Committee on Governmental Accounting and the other by the American Institute of Certified Public Accountants. While these two standards appear to be quite similar, very few municipalities have had their financial statements audited pursuant to these standards. The difficulty in establishing uniform accounting practices on a voluntary basis for the municipal industry is illustrated by a 1972 study by Robert Merriam, reported in "The Rating Game," which indicated that only 233 out of 1,822 cities belonging to the MFOA had agreed to comply with the set of uniform accounting standards promulgated by the MFOA in 1946. Many States do mandate the accounting or auditing practices to be employed by the various state and municipal agencies within the State. However, there is no assurance of comparability among these various legislatively mandated ac counting systems and practices. Furthermore, the principle of independently audited financial statements has not been widely accepted in the municipal

area.

Another problem in developing a disclosure program is in the inexperience and lack of expertise of certain municipalities in the disclosure process. The concept of disclosure so widely accepted in the corporate securities market is alien to segments of the municipal market. This condition is a product of different regulatory and economic environments.

II. THE REGULATORY APPROACH OF THE BILL

We endorse the Bill's approach in treating disclosure questions affecting state and municipal issuers separately from those affecting corporate issuers. We are opposed to legislation which would simply repeal the exemption of municipal securities from the Securities Act of 1933 and subject municipal issuers to the same disclosure requirements and legislative pattern applicable to corporate issuers. We believe that the relative safty of municipal issues, the many material distinctions between municipal and corporate issuers, and the significant differences between the problems that led the Congress to adopt the Securities Act of 1933 for corporate issuers and the problems that currently exist in the municipal securities market do not prompt the same response for municipal securities as that which is appropriate for corporate securities. Any legislation, and any rules issued under the legislation, should recognize the substantial differences between municipal issuers and corporate issuers. Certain of the major differences include the following:

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1. State and municipal issuers are governments or agencies of governments and function on a not-for-profit basis. Corporate issuers operate for profit.

2. State and municipal issues finance essential government services. Statutory prohibitions often bar state and local governments from using other sources of funds such as bank loans to finance these services.

3. The state and municipal securities market is enormous in scale and range in comparison to the corporate market. According to the "Bond Buyer," in 1975 state and local governments had 8,107 public offerings of short and long term debt aggregating $58.3 billion. According to our records, in 1975 corporations marketed 844 public offerings of stocks and bonds in an aggregate amount of $46.7 billion.

4. The underwriters of state and municipal securities are to a significant extent a different group of dealers from those engaged in corporate underwriting, and within those firms actively engaged in both corporate and municipal underwritings there is generally little overlap or interchange between the corporate underwriting department and the municipal underwriting department. This is, in part, because of the enormous size of the state and municipal market, the participation of banks in state and municipal underwritings and the substantial number of dealers that specialize in trading municipal bonds. Furthermore, there are many more state and municipal underwritings than corporate underwritings in process at any single time. This limits the resources that underwriters can devote to disclosure in connection with any particular state or municipal offering.

5. Most state and municipal issues are competitively bid. Many states have statutes that require competitive bidding. In corporate finance, negotiated offerings are predominant. This difference is germane to the degree of disclosure that can be elicited because there is far less opportunity in a competitively bid underwriting than in one that is negotiated for underwriters to participate in the preparation of disclosure materials.

6. The state and municipal market encompasses many different types of securities. Some of these securities, such as tax anticipation notes and state agency bonds, are quite dissimilar to corporate debt securities and may require a very different disclosure pattern from the one that has developed under the securities laws for corporate securities.

While we endorse the approach of the Bill in not simply transfering the regulatory scheme of the Securities Act to state and municpal securities, we believe that the new regulatory structure that the Bill would create for state and municipal issuers needs substantial revision. The Bill would create a new Section 13A of the Securities Exchange Act of 1934 ("Exchange Act") which would include the following provisions :

1. Section (a) (1) would require state and municipal issuers with more than $50 million in outstanding securities to prepare annual reports and reports of events of default. The SIA endorses this concept. The annual report is the best means of keeping the market place informed regarding issuers of large amounts of outstanding municipal securities which have stopped issuing securities and therefore no longer publish official statements. Another virtue of the annual report is that it can serve as the basis for disclosure materials issued in connection with offering of securities by the issuer. Although a $50 million minimum sum is an arbitrary figure, it would exclude relatively small issuers which are unlikely to have a substantial secondary market in their securities and which would find the annual report requirement to be a costly burden.

Section (d) would authorize the SEC to change the minimum amount of outstanding securities that would trigger the reporting requirements. The SIA opposes this provision. We believe that a decrease in the minimum amount is too important a decision to be delegated to an administrative agency, in view of the burden that an annual report requirement might impose on small issuers.

2. Under Section (b) a distribution statement would have to be prepared in connection with each issue of state or municipal securities in excess of $5 million, subject to the SEC's power to change this minimum amount pursuant

to Section (d). While the SIA approves of requiring issuers to prepare official statements, we believe it is a mistake to exempt issues of less than a specific amount. This tends to brand exempt issues in the marketplace as an inferior class of securities. The better way to handle the problem of the small issue is to permit the classification of issues by size for purposes of establishing disclosure requirements.

Under Section (b)(1), only issuers that offer or sell securities through a "municipal securities broker, municipal securities dealer or bank acting as agent **" would be required to prepare a distribution statement. This would exclude from the distribution statement requirement offerings that were self-underwritten or used some other unorthodox distribution method in which brokers, dealers and banks acting as agent were not involved. The SIA believes it would be a mistake to include such an exemption in the legislation. Investors would have a greater, not a lesser, need for disclosure material prepared in accordance with official guidelines if brokers, dealers and banks acting as agents did not participate in the distribution process. This exemption might encourage the creation of unorthodox distribution techniques in order to avoid the disclosure requirements of the Bill, a development which would not be in the public interest.

3. The Bill requires specific disclosures to be made in both annual reports and distribution statements, pursuant to Sections (a) (2) and (b) (2). We believe it is a mistake under current conditions, when disclosure standards for municipal issuers are in a state of flux, to seek to prescribe legislatively the content of disclosure materials. Rulemaking is a better means than legislation for setting disclosure standards because it allows more room for developing separate forms for different types of issues and issuers and provides greater flexibility to adapt disclosure requirements to changing conditions. The specific disclosures mandated by the Bill illustrate the disadvantages of prescribing disclosure standards legislatively. For example, the Bill would require the annual report to include descriptions of the issuer's major taxpayers and the nature and extent of the federal or other assistance programs available to the issuers. These requirements, while reasonable in the context of a water district or other specific purpose issuer, would be completely unmanagable for a state like California or a city like New York.

In any case, if legislation is adopted that prescribes the content of annual reports or distribution statements, only items material to the issuer should have to be included.

One item of disclosure that should be specifically required in the legislation is the inclusion of independently audited financial statements. The SIA endorses Section (a) (2) (J) which would require such financial statements in annual reports for fiscal years commencing on or after December 31, 1978. We believe, however, that as an alternative to certification by an independent public accountant a municipal issuer should have the option of complying with a state certification procedure for financial statements. With this modification, we believe that the financial statement requirement should apply to distribution statements as well as annual reports.

3. The SEC would be empowered to require certain information to be included in annual and event of default reports and distribution statements, in addition to the items specifically required by the Bill. The SIA believes that the SEC is not the appropriate body to have this power and opposes this grant of authority. Because state and municipal securities are different in numerous respects from the corporate securities the SEC has experience in regulating, we believe it would be preferable for the disclosure guidelines for state and municipal securities to be set by an organization of issuers which would be more familiar with these securities.

The legislation should instruct the body that sets the disclosure guidelines to prescribe different forms for different types of issues and issuers.

4. Section 2(d) of the Bill would repeal the provision in the Securities Acts Amendments of 1975 that the Commission is not authorized to require an issuer of municipal securities, prior to selling the securities, to file any application, report or document with the Commission. A similar restriction ap

plicable to the Municipal Securities Rulemaking Board would be left intact. The Report indicated that the filing prohibition had been inserted in the 1975 Amendments in response to "the fear that requirements could be imposed which would have the effect of subjecting the information disclosed by issuers in connection with an offering to prior review or approval, thus resulting in a de facto registration requirement for municipal bonds." The repeal of this prohibition would in effect authorize the SEC to institute such a "de facto registration requirement."

The Report stated that "no case has been made for the pre-filing review, either directly or indirectly, of such sales documents ***" The SIA believes that this statement remains true today. Based on our experience as underwriters of corporate and municipal securities, we believe that pre-filing and staff review would add material costs and delays to the process of state and municipal financing, while not offering comparably significant benefits in terms of improved disclosure. It would also raise delicate questions of federalstate relations and might overburden the staff of the SEC, thereby increasing the time required to obtain staff review of offering materials of both corporate and state and municipal issuers. The number of state and municipal issues in 1975, it should be remembered, was 8,107 compared to 844 corporate issues.

We are concerned that additional authority to institute a pre-filing requirement would be given to the SEC by the provision in Section (b)(1) of the new Section 13A of the Exchange Act that distribution statements shall be prepared “in accordance with such rules and regulations as the Commission the protection of investors." As we have stated before, we oppose giving the Commission powers to regulate the form and content of distribution statemay prescribe as being necessary or appropriate in the public interest or for ments and the process for making such statements available to prospective purchasers.

5. Section 2(c) includes several exemptions from the distribution statement requirements, which in concept are desirable. A distribution statement would not have to be prepared for an issue "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) expressly authorized by law to grant such approval ** *." While the SIA endorses the idea of allowing disclosure to be regulated at the state rather than the federal level, we think that this goal can best be accomplished by having the states administer uniform guidelines set by an organization of issuers and permitting underwriter and dealer reliance on this system, as provided in item 6 below. Furthermore, the reference in the Bill to a "hearing" on the adequacy of the protection for investors implies a proceeding too elaborate to be a workable alternative to compliance with the federal regulations. The exemption should be available if the issuer complies with a state procedure for staff review of disclosure materials.

There are also exemptions based on Sections 3(a) (9) (securities exchanged with existing securities holders), 3(a) (10) (securities issued in reorganizations approved by court or governmental authority) and 4(2) (private placements) of the Securities Act of 1933-all of which are desirable. In addition. any legislation should include an exemption for intra-state offerings, comparable to the exemption contained in Section 3(a) (11) of the Securities Act. 6. The Bill would limit the liability for damages of any underwriter of municipal securities to the total price at which it sold securities to the public. Section 2(g). The SIA believes this is a desirable clarification of the law, but that further limitations are needed: the Bill should limit an underwriter's liability to that amount it directly sells to the public; the ceiling 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 Exchange Act) but any broker, dealer or bank that 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 to the price at which the security was offered to the public. Furthermore, the SIA recommends enactment of a provision that underwriters and dealers shall not be liable for misstatements or omissions in offering materials for municipal se