Senator WILLIAMS. In other words, certification by local issuers and confirmation by the commission should put the burdens and responsibilities on them and remove the burdens and responsibilities as well as liabilities for underwriters.

Mr. SELLERS. That's right. Now, again, I would certainly agree that the audited financial statement is perhaps the single most important provision and that alone should solve a lot of problems. Now we would have one modification there. We suggest that they could either be done by an independent public accountant or an independent State auditing official to give somewhat more flexibility to the State and local governments.

Senator WILLIAMS. What do you think of the itemized requirements included in our bill, the bill that I have introduced with Senator Tower? Are all of those essentials?

Mr. SELLERS. I think a lot of them-certainly, they are all important. There might be a problem. I think one of the provisions is a list of the major taxpayers and, as we mentioned in our statement, this might turn out to be a very large document in the case of something like New York City or the State of California. I think there should be some flexibility in interpreting the requirements.

Senator WILLIAMS. This, of course, is not for distribution to the potential investor. This is the annual report.

Mr. SELLERS. Yes, I understand. This is not the distribution statement, but I think even this could be quite difficult for a large government body to comply with.

Senator WILLIAMS. I suppose that could be amplified if it were to be meaningful in the description of major taxpayers who are in arrears and a few other things. I was thinking of that which is the action document that is for distribution . . . the distribution statement. How about the elements there?

Mr. SELLERS. Yes, sir. I think that the bill certainly covers a lot of them. The disclosure for municipalities is a pretty complicated problem. Recently a number of us have listened to some of the public accounting firms discuss this and there is variation in the way that different municipalities present their financial statements, and I think that probably they need to have flexibility and help from the AICPA and other experts on government accounting in order to present fairly the statements of different types of municipalities.

Senator WILLIAMS. I think we better clarify your position on the most effective and the most desirable route from your standpoint of how we are going to have this beneficial effect on this particular marketplace, whether it is through national standards as we have done it here, or through a self-regulatory body.

Mr. SELLERS. No, sir. We think there should be a Federal statute creating uniform disclosure standards. We would like to see those standards drafted by State and local governments rather than either being embodied in the legislation or done by the SEC.

Senator WILLIAMS. I missed that.

Mr. SELLERS. We would like to see those disclosure standards drafted by State and local governments rather than by the SEC or in the legislation.

Senator WILLIAMS. Now I am confused. First of all, all of the ele

ments that you think are of critical importance are in the bill. Is that right?

Mr. SELLERS. Yes, sir.

Senator WILLIAMS. Now what are you talking about-somebody else drafting what?

Mr. SELLERS. I think the disclosure guidelines should be drawn up in some fashion by a group of State and local governments.

Senator WILLIAMS. You mean the guidelines that would further define the elements that we describe in the bill?

Mr. SELLERS. Yes, sir.

Senator WILLIAMS. I see, you mean instead of the more specificity that would follow these broad guidelines as required by SEC rules and interpretations. Is that what you are saying?

Mr. SELLERS. Well, no. I'm suggesting that the State and local governments in some fashion-and there are any number of ways this could be done but that they be the primary source for the disclosure guidelines.

Senator WILLIAMS. Well, what further do you need when you say a statement of counsel's opinion as to the legality of the issuance of the securities to be offered? Does that have to be refined in another way or supplemented by some other entity making a guideline in that area? That's one of the specifics. It is not clear to me why we have to create another entity to interpret a bill which really codifies what the municipal finance officers are circulating as a model. The Municipal Finance Officers' Association guidelines have been taken and incorporated into this legislation.

Mr. FLEISCHER. Mr. Chairman, may I respond to that?
Senator WILLIAMS. Yes.

Mr. FLEISCHER. I think the concept here is that there should be flexibility in rule making just as the Securities and Exchange Commission the forms for disclosure have developed over the years and the statute contained only minimum direction. We believe that the same concept should apply here so that a rulemaking board, if you will, of State and municipal issuers would have the authority to prescribe different disclosure standards. These standards might be tailored to the size of the issue, the nature of the issuers, and also as experience develops would change over the years. So essentially, what we are talking about here is to provide the needed flexibility as experience changes and depending on the nature of the issuers this rulemaking authority would be the basic authority to operate here. So that these various items that you have set forth in your legislation, a number of them will and some of them would not probably or possibly be in any disclosure form that was put out by the rulemaking authority.

Mr. TAYLOR. I think, as a member of the banking business right now, we are going through a situation with the SEC where the disclosure standards are changing day by day and disclosure can tend to be a very living, vibrant thing.

Senator WILLIAMS. Where would you strike, and how much would you strike, from this bill and what would you put in its place? Mr. SELLERS. I think it's hard to do that here.

Senator WILLIAMS. I would say that you would start on page 2, and strike from line 10 through the rest of the bill-the municipal securities disclosure provisions.

Mr. SELLERS. I don't understand that. As I said, we support the Federal statute creating uniform disclosure standards. We support the certified independent audit. We support annual audits of issuers over $50 million. We support a distribution statement. We even go further than the bill and suggest that an annual audit be available for all issuers

So I think that our feelings about disclosure in itself are strong and perhaps even stronger than the bill. The structure or the formulation of the disclosure guidelines is I think where we have some problems with it; and our other problem, as I said, we do not think the bill truly addresses the liability problem.

Senator WILLIAMS. That we put aside for a moment. Now we have to amend and add for that. You are accepting all that is here, you still are not satisfied with what follows evidently. I just don't see what you want added to this that you evidently agree with.

Mr. SELLERS. Well, to point out on page 2, after the first paragraph, the last sentence, "in accordance with such rules and regulations as the Commission may prescribe as being necessary or appropriate in the public interest or the protection of investors." We think State and local government issuers would be a better group to come up with the rules and regulations.

Senator WILLIAMS. What are you reading? Page 2 of which document?

Mr. FLEISCHER. This is page 2 of S. 2969, Senator.
Mr. SELLERS. It's section 13A.

Mr. FLEISCHER. It's somewhat difficult to draft here, but the basic concept, as Mr. Sellers said, we are simply talking about who the rulemaking authority is. This bill speaks in terms of such rules and regulations as the Commission may prescribe. The concept here is that the rulemaking authority would be a designed rule of State and municipal issuers.

Senator WILLIAMS. This is where you would change our structure and take this rule and regulation-writing authority from the Commission and give it to the states? Is that it?

Mr. SELLERS. Yes, sir, or to state and local government issuers. I think there are any number of ways it could be done and I think there are various ways that perhaps would be in between the position in the bill and our written statement.

Senator WILLIAMS. What confidence do you have that this would be done by the states? That authority is certainly there. They don't need us to tell them they have the authority. They have it.

Mr. SELLERS. Well, I would think there should be Federal legislation requiring the establishment of a uniform disclosure standard. We're not opposed to Federal legislation. We are simply saying that the disclosure standards would be more appropriate written by the State and local governments than by the SEC.

Senator WILLIAMS. And then come back here and we would put it into Federal statute?

Mr. SELLERS. Not necessarily. I think you could draft it so that it would apply the way they were drawn up. I see no reason to come back.

Senator WILLIAMS. Would you give them a date by which they must accomplish this?

Mr. SELLERS. Yes, sir. That would be one way of doing it. Setting up some type of advisory committee for the SEC would be another way of doing it. Expanding the Rulemaking Board is another way of doing it.

Senator WILLIAMS. We have a State exemption here. If the States have the substance of what is included in the requirements of this bill, they are out from under the operations of the proposed Federal law. Mr. SELLERS. Yes, sir. We think that is a very, very desirable and very innovative addition.

Senator WILLIAMS. Isn't that exactly what you are talking about? Mr. SELLERS. Yes, sir.

Senator WILLIAMS. Then wouldn't this bill accomplish the result, you are proposing with the State exemption?

Mr. SELLERS. Well, again, not quite, because I don't believe the State exemption applies to the annual report, does it?

Senator WILLIAMS. That's the one area, the first requirement of the annual report. But on the other-and again, the more pertinent and fixed responsibility of the distribution statement for any issue, it does apply.

Mr. SELLERS. Yes, sir. As I said, I think that is a tremendous addition.

Senator WILLIAMS. There's one thing that does disturb me personally and I have a feeling that we might have to review the threshold figures. You're concerned about that, aren't you?

Mr. SELLERS. Yes, sir. We believe that there may be some invidious distinctions between a $4.5 million issue and a $5 million issue. Mr. HOROWITZ. I think also, Senator, that the type of issue that is sold makes a difference, too. Some of them are revenue bonds, general obligation and tax bonds, and so on, and the protection granted, if the fellow sells $4.5 million of a way-out bond as opposed to $6 million of a normal, ordinary bond would not be very good because the $6 million was something which somebody could probably look at pretty easily and the $4.5 million, where the reporting requirements would not be the same, could be a most complicated issue.

Senator WILLIAMS. What is the nature of the issues that would be disturbing to you?

Mr. HOROWITZ. I don't want to say any issue would be disturbing. What I want to say is there are different types of issue in the municipal issues. We're not dealing with the corporate market where basically any issue is related to the corporate balance sheet and corporate figures. You have bonds which are payable from special assessment, from special revenues, as well as bonds that are payable from ad valorem taxes. So there could be various types of issue. You have pollution bonds and different types of bonds completely. So that the question could come up, not because of what I'm saying, not because of the size, but I'm saying a $10 million or a $6 million general obligation issue might be a lot easier to look at than a $4 million special assessment on properties in the District.

Mr. SELLERS. What we would like to see is some ability to classify different issues and different disclosure guidelines based on that rather than a fixed dollar amount.

Senator WILLIAMS. Who has the present competence to do that? Mr. SELLERS. At the moment, I'm not sure that anybody has. I suspect that some of the public accounting firms or the Municipal Finance Officers Association might come closer to that type of competence than anybody else. At the moment, I don't think anybody has thought about it.

Mr. HOROWITZ. I think there's some competence in the industry and some competence in the rating services, too.

Mr. SELLERS. Yes. The industry could certainly offer some suggestions. The Municipal Securities Rulemaking Board is another source of help on it.

Senator WILLIAMS. You overlooked any Federal area of responsibility.

Mr. SELLERS. Carefully.

Senator WILLIAMS. We granted authority and responsibility in the 1975 Act Amendments to the Commission and the Board of Governors of the Federal Reserve System to classify. Don't you think that they might have the competence over there to deal with this?

Mr. SELLERS. I think there are any number of bodies, if they don't have the competence now, could certainly develop it within a reasonable period of time. It's a problem no one has addressed.

Mr. HOROWITZ. I don't think we're excluding anybody, Senator. Senator WILLIAMS. Now you are broadly representative of the industry, speaking for the SIA and its specialized committee dealing in municipal finance; is that right? All of you come from the

Mr. SELLERS. I think it's certainly fair to say that there are some members of the Securities Industry Association that don't think any legislation is necessary, but I think we are certainly speaking for the majority of the members of the industry.

Senator WILLIAMS. When I said the industry, I didn't mean to include the banks.

Mr. SELLERS. Mr. Taylor is a bank representative and the Council is about one-third bank.

Senator WILLIAMS. There isn't a consensus in your group of bankers on this, I don't believe.

Mr. TAYLOR. I really don't find the DBA statement and our statement to be in conflict. I think ours goes somewhat further by actually suggesting a regulatory structure or a disclosure structure. But obviously, there will be disagreement in all circles at times, but I don't think you have identified a rift or anything.

Senator WILLIAMS. You don't deal with the other bill before us in any detail. We have two bills.

Mr. SELLERS. No, sir. We simply do not feel that that is at all

necessary.

Senator WILLIAMS. If you have any further ideas of who should be included and what amounts and how to classify, if it could be approached in broad terms in the legislation, I would really appreciate it. Otherwise, thank you very much.

[Whereupon, at 12:05 p.m., the hearing was recessed to convene the following day, Thursday, February 26 at 10 a.m.]