not improve, and that we would be right back where we started from. A State agency can be of great help to local governments in assisting them in the disclosure process. However, we believe the authority for establishing rules and regulations should remain exclusively with the SEC. Another concern is that nothing in the act spells out what happens if an issuer fails to disclose information required by the SEC. What sanctions does the SEC have to insure that items of disclosure are in fact disclosed? It seems logical to us that if the SEC is to actually protect investors, it must have some way of insuring that their items of disclosure are complied with before an issue comes to market. We also feel that certain additional information would need to be included in annual reports and distribution statements. Both should include a good description of unfunded pension liabilities, accounting policies and changes in accounting, footnotes to the financial statements, status of cash flow and future borrowing plans and the relationship between the issuer and the trustee for bond holders. We would urge you to delete the words "similar and specific" when referring to other information the SEC may require. The sentences (to sec. 1(A)*4) and sec. 13 (A) (b) (2) (G)) would then read "Such other information as the Commission may by rules or regulations require as necessary or appropriate in the public interest or for the protection of investors." This change would give the SEC more flexibility and therefore help it to protect investors. We are in agreement with the need for a distribution statement and an independently audited annual report. Most States have the information needed for such documents. It's just a matter of putting the data in a form meaningful to municipal bond investors. In fact, I just received yesterday in my office a copy of the State of Wisconsin statement which starts out with a letter from the Governor of the State to prospective bidders on the bonds and one of the things he states in his letter, and I quote, is that "It has been prepared simply to consolidate what has in the past been available in several separate publications." So this means to me that many of the larger issuers which your bill focuses on do actually have the information. It's just not in a usable form for investors. The cost of summarizing such data should be nominal, and the act appropriately excludes public offerings of under $5 million. Now to see how important the $5 and $50 million figures are, we took a look yesterday at the Daily Bond Buyer calendar of sealed bid openings. This list is included in the Daily Bond Buyer which is a trade publication we receive each day and it shows what issues above $750,000 are coming to market over the weeks ahead. This calendar, which was included in the Bond Buyer yesterday, showed that 124 issues are going to be coming to market or at least have announced they are coming to market through May 11. Of these 124 issues, 78 of them were under $5 million in size. That's 63 percent. So most of these issues would be excluded. We 69-141 O 76 14 also wanted to check the $50 million figure by looking at the issues that are coming up for sale next week. We found that the Bond Buyer includes 42 issues that are coming to market for competitive sale next week and of those 42 issues only six have amounts outstanding now over $50 million. So we feel that based on the background that I have just described, that the $50 million amount and the $5 million amount both are adequate for protection of investors in the larger issues and also protection for smaller issuers who normally sell their bonds locally. Some people feel that underwriters should have the primary responsibility for writing a distribution statement. We feel that this responsibility logically belongs to the issuer. The issuer is closest to sources of information, and the 10-40 issues sold weekly on a competitive basis just do not lend themselves to having broker/dealers write detailed distribution statements. In conclusion, we think S. 2969 represents a sound approach for improving disclosure while at the same time being mindful of the needs of State and local governments. We are pleased to support the act, subject to our concerns noted previously. Thank you for allowing us to express our views today. We'd be happy to answer any questions you might have. Senator WILLIAMS. Thank you very much for an excellent statement. First, on our threshold, $5 million and $50 million, you think that the pattern of borrowing is such that those are practical limits and I gather that is true because you feel that those under $5 million-any issue under $5 million and total of under $50 -will be issues that will be sold quite close to home. Is that right? Mr. GUNN. That is right. Senator WILLIAMS. And is there the circumstantial probability that people that close to the issuer will have that feeling of knowledge that will give him assurance on some of the factors that are important in an investment decision? Mr. GUNN. That's right. In fact, many local investors know the situation very, very well. Often they know the mayor of the town, members of the council, and are intimately familiar with what's going on in the community. Senator WILLIAMS. There would be a warning 3,000 miles away, I would think, that on an issue under $5 million that maybe someone better be asked back there because it does not come through with the certification that might be required under this law. There would be a caveat the farther away you go. Mr. GUNN. That's right. Senator WILLIAMS. Now on the further authority of the SEC, this moves in the direction of preissue clearance of some kind. Isn't that what is sort of basic to what you're suggesting here? Mr. GUNN. Well, that's a question that we have been trying to wrestle with ourselves because, on the one hand, we realize the bill as it's written now is certainly not meant to do that. On the other hand, we do feel that investors, particularly individual investors, need protection before the fact rather than after the damage has been done. Therefore, we are raising the question of trying to insure that the issuer who is coming to market must actually disclose what the SEC has outlined that they should diclose. Unfortunately, I don't have an easy answer for how that process is to occur. Senator WILLIAMS. It is basic here that if the requirements are clear and the liability question is clear, then these two things together would enforce the provisions and the issuer would conform. If that liability question is to be made very clear, we still have discussion before us. In other words, this is market enforcement, marketplace enforcement, which comes down ultimately to the after-fact situation and liability and damages. Mr. GUNN. That's what we're concerned about, namely, the after the fact correction of any losses involved in the sense that a small investor-now we are a large investor, of course, speaking as a large investor, and we feel like we can take our lumps. That's really what we're paid to do. On the other hand, the small investor, it's of small solace to him in the intervening months between the time he sees his holdings deteriorate sharply in value and the time, for example, a lawsuit is actually decided in its final form-that can be an awful long time, and during that time an individual whose holdings has deteriorated sharply is severely limited in the options he has. Senator WILLIAMS. Well, we are very appreciative of the fact that you came here to testify on this legislation and with your eminence in the field it's significantly important to our record that you have made yourselves available to our deliberations. We appreciate it very much. Mr. GUNN. Thank you for inviting us. [It was requested that the following appear in the record:] 652 16 Calendar of MAJOR BOND ISSUES SCHEDULED ($ 750,000 up) These are the official dates as fixed for bond Listings today. (Note-The Moody's and Standard & Poor's ratings shown have been furnished by the rating agencies. Such ratings will be listed only when and if they are received from the agencies following the announcement of an intention to offer a specific issue.) 3/8 Peoria Unified Sch. Dist. No. 11, Ariz. 3/9 Colony Municipal Utility Dist. No. 1, Tex. (Waterworks & Sewer Rev.) Wednesday, February 25, 1976 3/10 Bernalillo Co., N.M. 3,000,000 § 2/18 2,000,000 § 2/10 5,050.000 § 6,100.000 16,000,000 1,376,000 t 2/17, 18 Bidding Details 3,500,000 § 2/18 2/26 St. John the Baptish Parish Sch. Dist., La.... 4,800,000 Baa "ૐ 2/11 3/23 Charlotte, N. C. 8,465,000 § 9 2/ 2, 24 1/26, 29; 2/11 2/26 Sevier Co., Tenn. 2,000,000 Baal 9 2/10, 11, 24 3/23 Dakota Co. Area Vocational-Technical Ind. Sch. Dist. No. 917, Minn. 5,355,000 2/25 Senator WILLIAMS. Mr. Grady Fullerton, Harris County Auditor, Harris County, Tex., member of the executive board and former president, Municipal Finance Officers Association; and Mr. William Reynolds, Director of Finance, Greenwich, Conn., vice chairman, Government Debt Administration Committee for the Municipal Finance Officers Association. We appreciate your being here and helping us in our deliberations on these municipal securities bills. Senator TOWER. Mr. Chairman, might I note that Harris County, Tex. contains a little country village called Houston, which is the fifth largest city in the United States. It's my pleasure to see Mr. Fullerton here today. STATEMENT OF S. GRADY FULLERTON, HARRIS COUNTY AUDITOR, HARRIS COUNTY, TEX., MEMBER OF EXECUTIVE BOARD AND FORMER PRESIDENT, MUNICIPAL FINANCE OFFICERS ASSOCIATION; AND WILLIAM J. REYNOLDS, DIRECTOR OF FINANCE, GREENWICH, CONN., VICE CHAIRMAN, GOVERNMENT DEBT ADMINISTRATION COMMITTEE, MUNICIPAL FINANCE OFFICERS ASSOCIATION; AND JOHN PETERSEN Mr. FULLERTON. Thank you, Senator. We thank you for the opportunity of being invited to participate. I would like to introduce Mr. William Reynolds who is director of finance in Greenwich, Conn., who will make a statement on behalf of MFOA, and then I will make some remarks. Mr. Petersen of our Washington staff is also present. Mr. REYNOLDS. Mr. Chairman, Senator Tower: I would also like to express our appreciation of having the opportunity of being here this morning and in addition to that, the appreciation of MFOA and myself as an individual issuer for your continued interest in this area of municipal finance. I would also comment that, somewhat late in the schedule of witnesses, we are appearing as probably the individuals who are going to be most affected by this legislation. The paperwork has to be gathered and the disclosure requirements met. It's the fellow in the municipal finance department who is going to have to do it. So that as I come here this morning, I do feel a bit like the condemned man being asked if he has any last words. My understanding of the proposed legislation is that it is to provide for direct regulation under the Federal securities law of the disclosure documents provided by State and local government borrowers. I do not get the impression that it is directed specifically to the question of liability. It appears that these proposals represent essentially a reaction to the turbulent events surrounding the fiscal crisis of New York City and State. They also stem from the recent realization on the part of many market participants today that over time they have become exposed to vague, but palpable legal liabilities under the antifraud provisions of the securities laws. I do not recognize that as a change, but a greater |