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your colleagues on the committee for acting so promptly to call hearings after the initial discussion on my bill, S. 2574, late last year.

At the time I introduced my bill last fall, we were in the throes of the New York City crisis. I sat in this very hearing room as the full committee listened to witness after witness describe the city's condition and the impending day of reckoning. One fact, brought out time and again, was that lack of sound financial reporting was a major cause of the crisis.

The circumstances which led to the passage of the emergency aid bill did not come about overnight. Problems had begun germinating as long as 10 or 15 years ago. Public officials, the banks, the bond rating services, the union leaders—many had some knowledge long ago that all was not well with New York City. But they all went along, perpetuating the public story of fiscal soundness, until the house of cards collapsed.

Mr. Chairman, I know that I need not belabor the point before this subcommittee. The conclusion, I believe is unmistakable: There is an urgent need for legislation to open up and clean up the books of our cities and States. Only then can we assess the magnitude of the problems and develop measures to resolve them in an orderly and deliberate manner, well in advance of a major crisis. I see such legislation as a protection not only for investors, but also for public officials, State and local government workers, city residents for all of us.

As you know, I introduced my bill on October 28, 1975, and offered it as an amendment to the New York City aid bill on December 5. This amendment, by the way, was withdrawn because of the urgency of the bill. This legislation would require the registration of taxexempt bonds with the Securities and Exchange Commission, and subject these issuers to substantially the same accounting and disclosure requirements now required only of corporations.

This is something we can do now to curtail the artful accounting and management practices which have either destroyed, or soon will destroy, the creditworthiness of some of our large cities and even some of our states. A corporation seeking to issue new stock or bonds must meet a rigid set of requirements for accuracy and consistency in its reporting of financial data. The security itself, the terms of repayment, the use of the proceeds, and the company's operations must be described in the offering statement. Certified financial statements, earnings statements, and balance sheets for the previous 5 years must be submitted, after approval by an independent public accountant.

State and local governments are subject to much less stringent requirements when they seek to place a bond offering. There are no reporting or certification requirements at all. A municipality may tell a prospective buyer as much or as little as it chooses.

Mr. Chairman, I believe that requiring SEC registration would bring about the necessary changes. The many well-run States and communities could more easily demonstrate their soundness and the deservedness of their high credit ratings and low interest rates. At the same time, any bond issuer which was manipulating figures to show a balanced budget would be exposed. Good issues could be more easily differentiated from bad issues, and fiscally responsible units of government might then see their prudence rewarded by lower interest rates and more competitive bidding.

A few other points regarding my bill are worthy of mention. Registration with the SEC could impose a burden on small units of local government issuing small amounts of bonds. These issues are typically placed privately, often entirely within the state. My bill follows existing procedure in permitting the SEC to exempt these types of issuers.

Further, I think it is recognized that most units of government do not keep their books according to generally accepted accounting principles. From what I know about audits currently underway in New York City, Washington, and elsewhere, it could be years before many cities are able to meet these standards. My bill, as offered in December, recognizes this fact, and also the fact that the SEC staff would have to be augmented, by delaying the implementation date.

Mr. Chairman, I think my bill is fair to all concerned and represents good public policy. It would not prevent future defaults, just as the acts of 1933 and 1934 have not prevented corporate bankruptcies. But at least investors and bankers and bond rating services and taxpayers and the U.S. Congress would know what sort of financial situation a State or municipality was in before default became even a remote possibility.

I would also like to take advantage of your offer to comment on the disclosure bill introduced by you and the ranking minority member of the committee, Senator Tower, last week.

Mr. Chairman, we are clearly seeking the same goals in our two bills. The difference, as I see it, is largely one of approach: I sought a simple, clearcut piece of legislation that I thought could easily find support in Congress, leaving the detailed rulemaking authority to the SEC; you and Senator Tower have opted for codifying the various requirements.

Many of the points in your bill-annual financial statements, auditing by independent public accountants, descriptive offering statements, exemptions for small issuers—I have suggested myself and would, of course, support. Your bill does not require prefiling with the SEC. I do think a strong role for the SEC is required, and I would encourage the Subcommittee not to weaken the controls too much if you think full registration in advance may be too stringent.

In short, I am encouraged by the bill you have introduced and the hearings that are now taking place. I am prepared to help the subcommittee in any way I can to see that these important first steps are carried through to their conclusion.

Finally, Mr. Chairman, let me say with my usual refreshing modesty, your bill is very good. It's almost as good as mine.

Senator WILLIAMS. We appreciate your statement and not only your interest but your leadership in filling this gap in the framework of securities legislation within which the SEC operates. I look back to the end of last year when we had the New York City crisis question before us. I know that you attended those hearings when the witnesses came in and described with some drama the needs of New York City. You and I responded and supported the measure that offered relief to the city at that time.

Looking ahead to testimony the Subcommittee will receive during these three days of hearings, I see that some of the witnesses that were here pleading the cause for New York and for our support, federal support, will be here in opposition to our legislation, yours and Senator Tower's and mine.

You probably haven't seen the statements that we do have filed that will be following your testimony, but do you have any comments on that general description-witnesses who want Federal support for cities in times of crisis but who are now opposed to bringing municipal issuers under fair standards of disclosure and financial statements, certified financial statements ?

Senator EAGLETON. If municipal officials do testify here and say they are opposed to the concept—they can quibble about the contents of our bills—I think they are very shortsighted and unenlightened indeed. Let me put it another way. In my state, Mr. Chairman, Kansas City has, as a matter of charter, routine annual statements by a CPA. It's been in the charter of Kansas City for many years. Jackson County, which is the county that surrounds Kansas City, where President Truman was the presiding judge of the Jackson County court, dating back to his day, there was an annual audit by the CPA for Jackson County. In St. Louis County, Mo., the largest county in our State with 1,100,000 people, it's a matter of their charter: an annual certified audit. Sadly, the city that needs it most in my State, St. Louis, Mo., the oldest city, the city beset with the greatest problems, does not have it and is going through the pains now of an audit, and they know not where that will lead.

So for the well-run cities, the modern cities, the progressive cities, this is a matter of standard routine with them. If you went to the mayor of Kansas City he would fight you very bitterly if you tried to change the annual audit. Yet the old cities, especially in the Northeast and in the North Central region, the New York cities, the Detroits, the Clevelands—those are the cities that need it the most and I guess will come before this committee and fight it the hardest.

Maybe that's human nature. Maybe no one wants somebody looking over their shoulder. But when you come to the federal government for billions of dollars and pledge to the federal government that within 3 years you're going to have it all straightened out in New York City—that's poppycock. They won't have this thing straightened out in 3 years. You could have all the eight largest CPA firmsArthur Andersen has been the leader in this field and we have retained them for the District of Columbia-they could be up there two years and make only a slight dent in the books and records crisis. We will never get a handle on these municipal problems unless we have accurate records and unless we can accurately predict what income is going to be, what expenses are going to be. You can't run a business without doing it on that basis. You can't run New York City or Washington, D.C. that way.

Senator WILLIAMS. If you had known that the Municipal Finance Officers Association and the brokerage house inderwriters, or at least some of them, wowd oppose these requirements that we're putting in our bills, would that have affected your judgment on the New York City decision ?

Senator EAGLETON. Again, I'd be surprised. I should think the stock brokers of America, in trying to sell worthwhile securities, securities that have a sound basis, would like to have the backing of some CPA figures—some statements that said, look, this bond that I'm recommending that you buy for your accounts or for these widows and orphans, we're going to put all the trust funds of the New York City school teachers in these issues. I think they ought to be the first to say we want these to be gilt-edged securities; we want to show our clients that these are worthy investments. They should not be the

fighting the bill. They should have been here two years ago leading the charge, but you know, wisdom comes late to many.

Senator WILLIAMS. Thank you very much, Senator.
Senator EAGLETON. Thank you, Mr. Chairman.

Senator WILLIAMS. Chairman Roderick Hills, Chairman of the Securities and Exchange Cummission, is our next witness. We appreciate all you have meant to the development of this legislation, and we welcome you here this morning.

STATEMENT OF RODERICK M. HILLS, CHAIRMAN, SECURITIES AND

EXCHANGE COMMISSION

Mr. Hills. I might say that the Commission regards S. 2969 as an appropriate framework in which the Commission can be most effective in dealing with the problem that the subcommittee is dealing with. I have filed with the subcommittee a copy of my statement and with your permission I will excerpt from the statement some comments that we think are important.

Senator Eagleton and others have commented upon the need to protect investors. That obviously is a primary requisite and a primary objective of all of the laws administered by the SEC. If I may concentrate a bit on what seems to us to be a second objective, namely, to assist the issuers and underwriters of municipal securities in meeting their legal responsibilities under the federal securities laws. It seems to us that the second point may not have had sufficient attention in the recent discussion about the needs for disclosure requirements for municipal issuers.

As the Senator knows, the Securities and Exchange Commission now has the responsibility to enforce the antifraud provisions of the 1933 and 1934 acts. That means that if negligent or deliberate misrepresentations of fact are used in marketing municipal securities, we have the obligation to seek enforcement of these provisions of the 1933 and 1934 acts. It means, as the Senator knows, that on occasion we have to launch a major investigation of such alleged activities. It seems to us that not only our own litigation at the SEC, but the private litigation that will necessarily be engendered of the type we now see in the State of New York, can only add to the problems that we have seen growing presently in the industry. There has been to date little litigation but there seems now to be the prospect of considerable litigation which will further define the obligations of the parties, the issuers and the underwriters in this area.

The point which I make is that the bill in its present form does not expand the enforcement responsibility of the Commission and indeed it does not expand the ultimate liability of either the issuers or the underwriters. It attempts merely to provide a standard to clarify that responsibility and a standard by which the SEC can better deal with the issue.

The proposed legislation of Senator Eagleton has to be viewed in light of the longstanding exemptions that have existed for municipal securities. Those exemptions, whatever their justification was in the past, come into a new view today, where the circumstances convince us that the use of municipal securities, the trading of municipal securities, and the reliance upon municipal securities is far more widespread in our society than it was 10, 20 or 30 years ago.

As a result, there is not only the greater likelihood of lawsuits, but there is a greater likelihood of inappropriate reliance upon the veracity of the information that people have with respect to those securities.

Because of municipal trading market problems that have occurred in recent years, the Securities Act Amendments of 1975 were passed in order to provide the Commission and the Municipal Securities Rulemaking Board with expanded authority to develop rules that would govern that market and govern the role of underwriters therein. But improvement of municipal issuer information was not one of the main objectives of the 1975 Amendments. In recent months and certainly in 1975, serious questions have arisen concerning the accuracy of the financial information that is being provided. It is in response to that problem that this proposed legislation is most fitted.

The failure of issuers to provide data of a consistent and understandable nature to underwriters and investors is necessarily going to cause a kind of confusion that is undesirable in a field of this size. There have been already, and no doubt there will be more, attempts by underwriters and by issuers to secure more information for people that wish to trade and wish to buy these securities. The fact is that we can, I think, properly guess that there will be a certain competition for disclosure, that around the country various underwriters, various rating services will seek to promote more and more kinds of disclosure, a kind of competition that will not necessarily aid the issuers, a kind of competition that is not necessary for protection of investors. Giving us authority to create standards that will make for a more uniform financial presentation, we think, will eliminate this potential competition; it will eliminate the confusion that exists to a degree already, and the confusion that can only be compounded as judicial decisions evolve.

It's important to note that S. 2969 does not embody any amendment to the Securities Act of 1933. As a consequence, municipal securities under S. 2969 would continue to be exempt from the registration requirements of the Securities Act. S. 2969 would amend only the Securities Exchange Act of 1934 by adding a new section 13A, which would provide disclosure requirements for municipal securities as defined in section 3(a) (29) of the Exchange Act.

The disclosure requirements of 13A, as proposed, are considerably more limited in scope than the analogous requirements in the Securities Act.

It's also important to point out that the information required by this legislation would not be filed with or automatically reviewed by

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