mean they can't go to market?

Mr. CARVER. Well, it goes well beyond that, Mr. Chairman. In the particular instance we're talking about, uniform accounting procedures for all activities of municipal governments and local government, and there will be actual audit procedures and the comptroller will be charged with coming in and making an audit of the internal procedures and activities financially of the local government. So the net result would be that when you go to market the information would be available primarily because of a much greater responsibility that's been placed upon the units of local government by the State.

Senator WILLIAMS. Is there any certification from the State that a municipality has conformed?

Mr. CARVER. Yes, sir. They will, by making an internal audit, either approve or disapprove the financial condition of that particular unit of local government. If they disapprove, obviously they will make requirements that will necessarily have to be met in order for them to get a clean audit, the very same sort of thing that occurs in the private sector when you have a certified public accountant firm come in and actually give you an unqualified audit.

Senator WILLIAMS. Well, it seems to me if this bill were in place in Illinois and the State had to certify the municipality had conformed, why that is the sort of State law that would exempt that State from the coverage of this bill. So therefore, I conclude that we are not in disagreement that underwriters and investors ought to have that certainty that there are clear accounting procedures and that there should be disclosure of the basis for the issuance of the bond; in other words, the financial condition of the municipality.

Mr. CARVER. Well, Mr. Chairman, I think we are in very strong disagreement as to whether the Federal Government ought to prescribe the rules.

Senator WILLIAMS. No; I didn't say the Federal Government. I'm saying the underwriter and the investor ought to know just what he's asked to consider in bidding or buying.

Mr. CARVER. Well, I think investors have been able to make those type of decisions in the past. I would agree with you that an investor ought to know those things that he feels are his need to know and I would further suggest that that kind of a situation, given the performance of the market in the last 43 years has existed and I would suggest that where it has not existed that that's been almost a unique occurrence. I myself have invested in a great variety

Senator WILLIAMS. Well, these are unique times. I have been here for 20 years or so and this is the first time I have seen-this year, within the last 6 months-mayors-this morning paper carries an article about the Mayor of Detroit-talking bankruptcy peril in our great cities. He lists the other cities. So these are unique times. Mr. CARVER. Mr. Chairman, I'm not even sure if the mayors of the other cities that my friend Coleman Young has suggested would necessarily agree that they are in as bad a shape as he's suggested they are, but I think that what we're talking about gets right back

to the very point that I made earlier. There are 39,000 units of local government and these, with rare exceptions, have had absolutely no problem, and the number might even be greater. Some people tell me they don't know how many numbers there are. But the need might be quite great for a city like New York, but those of us in the rest of the Nation feel that to bring all of us in the $5 million limit, believe me, Mr. Chairman, brings a great number of local government units under the control of the SEC if in fact this legislation would be passed.

Senator WILLIAMS. What is the big new burden? I don't understand resistance to something that seems so fundamental to an intel ligent investment community and the protection of investors, just a fair disclosure of what you're asking the people to invest in.

Mr. CARVER. Well, if you take a look at your legislation, first it's suggested that the commission will have the right to pass whatI'm going to have to find-in accordance with such rules and regulations as the commission finds are necessary or appropriate in the public interest, and it goes on to expand that they can go well beyond the items that are just simply listed out. These are costly, preparing the reports. For instance, in Illinois, if we had to prepare a report on a municipal security on the basis of a Federal guideline at the same time maintain all of your accounts on the basis of a State guideline, and if those didn't happen to come together simply because the SEC decided that the rules in Illinois did not adequately meet what they felt were necessary, we could have a double burden. There are many units of Government who have absolutely no problem in selling securities who have no problems in staying behind those securities, and yet they would be caused to bear the cost of uniform accounting according to a Federal guideline and making reports available and all the other attendant administrative requirements, and each and every time adding to the cost of preparing those bonds for the market. The suggestion that I think we're trying to make in the statement that has been prepared, you will note that there is an impact on the cost. We don't know exactly what it is. We suspect no one else does either. We do, however, feel that that's a very important thing to be developed because I personally believe and I think the League of Cities and the U.S. Conference of Mayors believe that as it is developed it will be found that this is going to be a very important cost and it's going to be quite a substantial cost being asked to be borne by cities who have had absolutely no problem, not only in the sales of their securities but the redemption of the same securities as well. Senator WILLIAMS. Now, has the conference of Mayors met within this year? Have they considered this bill?

Mr. CARVER. No, sir.

Senator WILLIAMS. How do you define your present liability? You mentioned that the fraud provisions of the securities acts do apply, and now we come to this question of the municipalities' liabilities. Where you are operating under procedures and you have not followed procedures and you are developing them in Illinois, what is the situation on liability, civil liability, on the issuer?

Mr. CARVER. It's my understanding, Mr. Chairman, that if in fact knowing misrepresentation takes place, that under the 1933-34 acts there is, if you do in fact have a case of fraud, that the SEC has the authority to prosecute under those conditions and it's my understanding that as a result in those types of misrepresentations the financial information has been provided, there are penalties involved.

Senator WILLIAMS. How about in cases where there isn't fraud but there is a failure short of fraud at the municipal level? Do you believe that suits could or should be possible against the municipality?

Mr. CARVER. Mr. Chairman, that's I think speculation. Let's take a look at the record. The record is that the occurrence of that kind of an instance or condition has almost been nonexistent and the underwriters

Senator WILLIAMS. But the question is, whether as a matter of law, this remedy should be available?

Mr. CARVER. I would have to suggest that taking into account first that a bond opinion must be gotten before the bonds can be sold, taking into account that the underwriters do very carefully review every bond issue before it's sold, and taking into account that if fraud actually takes place, there are penalties, now the question then becomes, as I think you're suggesting, what happens when fraud doesn't occur but unknowingly a misrepresentation takes place, and what type of penalty or not necessarily a penalty, but shouldn't the investor who's lost their money under those kind of conditions have an opportunity to receive that money back.

Senator WILLIAMS. Recover in a damage suit, yes.

Mr. CARVER. And I would suggest that on the surface it would have to appear that the logic would be in favor of the investor having the opportunity because a misrepresentaion, even though it's unknowing and not fraud. has taken place, that an investor ought to have the right to get that money back.

But I think the point I'm trying to make this morning, Mr. Chairman, is that if we take that to the extent that's suggested in the bill and if we cause all of the units of local government to have to conform to the standards that are set up and conform to them on a uniform basis nationally, and if we take into account all the costs that are attendant to that-and I happen to personally believe that those could be quite high-that our efforts to save those very, very few investors who might potentially lose money is taking a great deal more of the taxpayer's and the other investors' money in accomplishing that goal.

Senator WILLIAMS. You are really reducing your arguments to the additional cost burden. That's basically what you're talking about.

Mr. CARVER. I'm bringing it basically down to the additional cost burden to a question about the need, and finally I think for a request to allow the cities of this country to have an opportunity to develop, if necessary, more uniform standards in this area, and I think this morning there will be testimony from municipal finance

officers suggesting that such is possible, and I would further suggest that the very same process that took place that has now evolved into the practice of obtaining a bond opinion from counsel concerning the sale of municipal bonds which has not been by the way mandated by law, can just as easily occur in the accounting and reporting area as well.

Senator WILLIAMS. Thank you very much. [Complete statement follows:]

STATEMENT OF RICHARD CARVER, MAYOR OF PEORIA, ILL., ON BEHALF OF THE NATIONAL LEAGUE OF CITIES AND THE UNITED STATES CONFERENCE OF MAYORS

I am Richard Carver, Mayor of Peoria, Illinois, and I am testifying this morning on behalf of the National League of Cities and the United States Conference of Mayors. Together these two organizations represent nearly 15,000 municipal governments in all fifty states. Recently, I have been appointed Chairman of the National League of Cities' Effective Government Committee, which is the League's policy committee which has jurisdictions over municipal bond financing issues. I can assure this Committee that the legislative proposals being considered during these hearings will receive careful scrutiny by my committee.

Mr. Chairman, in your remarks which accompanied the introduction of S. 2969, the Municipal Securities Full Disclosure Act of 1976, you spoke of the serious disruptions and uncertainties that have arisen in the municipal bond market as a result of the New York City fiscal crisis-uncertainties that have led to record high interest rates and cancellations, postponements, and rejections of municipal bond issues. During the past six months, many Members of Congress have become extremely concerned, not only about New York City securities, but about the functioning of the bond market in general. For perhaps the first time, the operations of this multi-billion dollar market are being closely scrutinized by several Congressional Committees. Important questions are being asked about the adequacy of the taxexempt market-about its efficiency and equity and its ability to provide adequate safeguards to investors and taxpayers.

All of these questions must be addressed, and the National League of Cities and U.S. Conference of Mayors are prepared to work with the Congress in developing appropriate remedies where necessary. For example, earlier this year we testified before the House Ways and Means Committee and endorsed legislation which would allow cities to issue taxable bonds, the interest on which would be partially paid for by the federal government. This proposal, which is commonly referred to as the taxable bond option, is designed to insure an adequate supply of capital to the nation's cities and at the same time improve the efficiency and equity of the bond financing mechanism.

However, our support for improvements in the capital financing system for state and local governments must not be interpreted as an abandonment or weakening of our continued commitment to the existing tax-exempt bond market. During the past 40 years, this market has proven its ability to generate the capital needed by state and local governments. And most importantly, that capital has been provided in a manner which promotes fiscal independence and rewards fiscal responsibility.

When examining the strengths and weaknesses of today's tax exempt bond market, it is imperative that the conclusions that are drawn be based upon the broadest possible study of the market and not simply upon the specific difficulties associated with the New York crisis. While many of the fiscal and economic difficulties which exist in New York City are also prevalent in other cities, the financial emergency which engulfed New York was indeed unique. During the height of the New York City crisis, many observers failed to make a distinction between New York's specific difficulties and the financial plight of other American cities. Those that failed to differentiate came forward with proposed solutions to the New York crisis which would have been automatically applicable to other governments. As Members of this Committee are well aware, both the National League of Cities and U.S. Conference of Mayors vigorously supported federal financial assistance for New York City. However,

in so doing, we made some very careful and important distinctions. The NLC Board of Directors' policy statement regarding the New York City crisis illustrates this point. I quote:

"Congress and the Administration should be prepared to assist a municipality to obtain needed credit during a financial emergency only if it is apparent that the municipality and its state government have exhausted all constitutional, legal and fiscal remedies available under their respective authorities. Assistance measures which may be appropriate in a financial emergency, should not be made a permanent feature of federal policy with regard to municipal bond financing.

"In addition, municipal governments oppose a continuing system of federal government guarantees or insurance of tax-exempt or taxable municipal bonds."

Many critics of federal involvement in the New York crisis have claimed that a precedent would be established and that city officials would line up at the federal treasury demanding similar relief. The NLC Board, however, made it abundantly clear that the nation's cities have no interest, and are in fact opposed, to any across-the-board federal involvement in the tax-exempt municipal bond market.

I bring this policy position to your attention because it underscores a very real concern that we have-namely, that the New York City crisis may lead to inappropriate federal involvement in the fiscal affairs of all state and local governments. The issue before us today, the establishment of federal reporting and disclosure guidelines for the issuers of municipal bonds, is directly related to the events surrounding the New York crisis. If that crisis had not occurred, I believe the disclosure issue would never have been elevated to the federal level. I point this out, not because I believe that accurate and complete financial disclosure is simply a New York City problem, but because I fear that the New York crisis may so dominate the discussion that erroneous and unfair conclusions may be drawn-conclusions that could adversely affect the other 39,000 local governments in the country. As you, Mr. Chairman, stated in your remarks which accompanied the introduction of S. 2969, "Forty-three years of municipal finance coorroborates the continuing validity of the finding that 'recurrent abuses' have not occurred-New York City being atypical and unusual."

I hope these introductory remarks will serve as an appropriate framework for our discussion of the legislative issues before us today. Members of this Committee are well aware of our strong support for the Tower Amendment which exempted states and local governments from reporting requirements under the 1975 Securities Act Amendments. In a letter to this Committee, we stated that without the Tower Amendment, "extensive and expensive reporting requirements would be imposed upon state and local issuers." We concluded by saying: "Such reporting requirements would seriously hamper the ability of local government to freely market their debt. We remain unpersuaded that additional issuer information requirements would serve any useful purpose to a federally-mandated Municipal Rule-making Board."

In addition to our position on the Tower Amendment the National League of Cities is strongly opposed to regulation of state and local government issuers by the Security Exchange Commission. Our policy states, "The federal government should not submit the local government authority and its bond issuance procedures to the jurisdiction of the private security regulatory bodies." We are in full agreement with those who argue that SEC coverage, as envisioned in the Eagleton bill, S. 2574, should not be extended to municipal bond issuers. The three reasons set forth in the introductory remarks accompanying S. 2969 are precisely the same points we wish to make: First, municipal bonds as a class are extremely safe investments. Penn Central and WT Grant bankruptcies seldom occur in the public sector; Secondly, state and local governments provide an ultimate safety for their securities through the exercise of their general taxing authorities; and Third, the normal political processes associated with the issuance of state and local government debt ensure close public scrutiny through hearings, elections and referendums.

The position of the National League of Cities and the U.S. Conference of Mayors, however, goes beyond opposition to outright coverage by the Securities Acts of 1933 and 1934. We will vigorously oppose any attempt to regulate,