awareness of this exposure. The range of applicability of these laws is uncertain, primarily because of the lack of precedent of Commission or private actions against governmental issuers. Although the Commission has announced undertaking an investigation of New York City under its existing antifraud powers and although there are approximately 40,000 potential governmental issuers, the SEC has not undertaken enforcement action against any of them.

To address the disclosure question: Rightly or wrongly, in the search for possible dimensions of disclosure liability, some have sought to find guidance in that securities market where fraud actions both by the Commission and private parties have been prevalent: the market for registered corporate securities. Most agree that there are many differences between these two markets, the issuers and their securities. However, until such differences are clarified, it has been necessary to study that area where fraudulent activity has occurred in order to protect against its occurrence in the municipal securities area. Again, this has been necessary because of the absence of any such precedence in the provision of information by municipal issuers.

At the same time, governmental issuers and their advisors, in an effort to meet these newly perceived information needs and increasingly conscious of their own liabilities, have been rapidly developing, with broad industry participation, a comprehensive model for disclosing the information needed by investors and underwriters. Such a model should reflect the differences in the markets and their methods of sale and distribution. The suggested set of guidelines for official statements, that developed by the MFOA in concert with other interested groups, was given wide dissemination starting in late November of last year. This took place only after 6 months of drafting and review and fulfilled a commitment made initially a year ago to this committee, the SEC, and others that rapid progress was being made in this new area of concern. Approximately 3,000 copies of the guidelines have been distributed in a little over 2 months. The guidelines, even though in draft form, have already gained wide acceptance and we have developed a work plan for their continued perfection as we will discuss a little later.

Through a combination of market forces and rapid-but responsible-governmental action, the framework for improved disclosure in this complex market is being put in place. Issuers that do not disclose will not get bids. The discipline will continue whether or not the provision of such information is subject to direct regulation. Incidentally, there's been an extremely valuable ancillary development from all of this communication among the various disciplines in the municipal bond market. We are finally getting to know each other and I think this is important.

I have served on both sides of the table, having worked for a number of years with a dealer bank as a financial advisor to local governments, as mayor of a community, and now as chief fiscal officer in a Connecticut community. Over the years, the issuers

have not really known the problems of the underwriters and the underwriters have not known the problems nor the financial methods, or the bookkeeping procedures of local governments. We have lived, if you will, in somewhat of a dream world. They didn't ask questions and we weren't providing answers. It's a new ball game. There's no question about that. We have come to recognize the fact that, in essence, we are borrowers and they are lenders and if we are going to ask them to lend money to us we're going, just as any other borrower, to have to put our house in order. They are not going to lend us the money if we don't put our house in order. It gets down to that simple basic fact.

I think we have earned the right to an opportunity to put our own house in order and we have demonstrated that we are working in that direction. I think that the underwriters are willing to give us that opportunity and to work together to develop the disclosure guidelines, the things that they need to know in order to make a valid decision both as direct lenders and as sellers of our securities to the ultimate investor.

We do not assert that disclosure documents or procedures in the municipal market met a corporate standard prior to the turmoil of this past fall. Nor is it asserted that in the past 3 months all problems have been resolved. However, it is believed that in a very short period of time, by combining many diverse interests, the municipal market has shown itself capable of developing a workable framework for disclosure. Our policy has been and continues to be to work for improved disclosure, because it makes economic and ethical sense to better inform investors and taxpayers. Doing so in the most efficient manner is also in their interest, and I think it's important for all of us to recognize at the State and local level particularly, that we are responsible to both investors and taxpayers. In many instances this is the same person. That investor is one of our taxpayers and we are aware of that and it is good business for us to protect his interest in the most efficient manner possible.

We do not now favor Federal legislation of the type proposed under S. 2574 and S. 2969. S. 2574 calls for full registration under the 1933 Securities Act of all municipal bonds. This approach would be unwieldy and cause an unnecessary level of involvement by the SEC in the issuing process.

S. 2969 calls for federally imposed standards for annual and new issuance reports under flexible parameters to be set by the SEC. This approach, while less onerous, does share certain other difficulties with the full registration proposal. A question which will be raised and will have to be answered is to the lack of the clear boundaries to the domain of the SEC's rulemaking powers. For example, as already noted, the bill does not address the most pressing problem in disclosure, which is not that of the information items of disclosure, but rather the liability structure among the various market participants involved in the process. It's not the material but the materiality that's disclosed. Now is the time to straighten out these problems of liability. Here, existing practice

in the regulated corporate market provides particularly poor guidance, and I would quote very briefly from a Commission release that recently announced the beginning of a study by the SEC of its disclosure requirements in the corporate market.

Substantial questions concerning substance and effectiveness of the corporate disclosure system-[this refers to the private corporate system]-as enforced by the SEC, continue to be raised. In some measure these questions reflect the intensification of courses identified by Commissioner Wheat such as the increasing institutionalization of the markets. Moreover, since the time of that report, an increased body of scholarly work examining the economics and structure of information systems has evolved. Increasing consideration has been given to the random work theory and the efficient market hypothesis. New techniques of portfolio management are being utilized and penetrating questions are being asked concerning the cost and benefits of the current system.

In addition, the President and Congressional leaders have urged all units of government to examine their practices and procedures to determine whether they are cost effective, whether they impose inordinate burdens on business and the public, and whether competitive forces, among others, might be substituted for governmental regulation.

If there's one distinct clear difference between the private and the public securities markets it is in this area of competition. Ours is a competitive market with bids being involved in 90 percent, probably, of the issues sold.

Rapid Federal legislation, even though imperfect, perhaps could be justified if the municipal bond market were in a chaotic condition over disclosure. That, however, is not the case. The municipal bond market has many concurrent concerns about credit quality and, in some cases, the implication of the recently reported Federal bankruptcy legislation.

There have been a few instances of postponements attributable to disclosure or of some reduction in the number of bids for the same reason. For the most part, outside of New York City, these were caused by confusion on all sides over what were incorrectly thought to be changed disclosure responsibilities under the 1975 Securities Act Amendments and the need to develop quickly disclosure procedures under the severe emotional and economic pressures of late 1975. As these clear up, there is an emerging consensus that, whatever their method of implementation, disclosure standards will be applied widely throughout the market. The question is really what method of adoption is most efficient and in keeping with our economic and political traditions. We have not waited for additional Federal legislation, regulatory agency_or court action to move for designing a workable standard. The records show MFOA anticipated its need, and is moving most rapidly to a solution.

As noted, the major disclosure problem is rapidly becoming less one of getting issuers to "tell all," but rather one of affixing levels of responsibilities in the collection and investigation of information and in its certification. We believe that this problem can be solved by the promulgation of procedural policies by an authoritative body. Some States are already moving in this direction and we are actively working for agreement among all authoritative groups on this question at a national level.

Some Federal legislation may be needed or it may be possible to do this without such legislation. We would stress, though, that this would not be disclosure legislation. This would be liability legislation. We submit, also, that the many alternatives have not been adequately explored. These hearings are most helpful in focusing attention on the fact that such exploration should be diligently and rapidly pursued and we acknowledge and appreciate that.

To be specific as to what we have done, to the end of rapidly designing and disseminating standards of disclosure in this area, we have undertaken many steps. MFOA, along with many private and industry groups, is sponsoring educational seminars on the subject throughout the Nation. We are continuing our commitment to study in depth and dispassionately the provision and use of credit information and its ability to reflect accurately credit quality. We have shared and will continue to share the fruits of this research work with the Congress, the SEC and others. We wish to assist them in their information needs and we need and continue to solicit their assistance. In fact, just last Thursday, I opened my mail before going out to speak before a group on disclosure in Westchester County. There were four notices of seminars or other meetings being held in various parts of our area and nationally on this very topic with multidiscipline groups interested in arriving at a solution.

To this end, MFOA at its executive board meeting in Chicago on February 13 adopted a resolution which has spelled out the process which we intend to adopt at our national meeting in May of this year, a definitive policy for municipal debt guidelines disclosure. I ask that this resolution be introduced in the record. Senator WILLIAMS. It will be.

[Resolution follows:]

RESOLUTION

The Executive Board of the Municipal Finance Officers Association of the United States and Canada adopted the following resolution at its meeting in Chicago on February 13, 1976:

It is hereby resolved, That the Executive Board of the Municipal Finance Officers Association requests the Governmental Debt Administration Committee of the Association to proceed on a time schedule which would look forward to the adoption at the May, 1976, Annual Conference of the Association of a definitive policy for municipal debt disclosure guidelines. To this end, the Committee is to continue to enlist the comments and suggestions of the Securities Industry Association, the Dealer Bank Association, public interest groups, municipal bond lawyers, the accounting profession, the Municipal Securities Rulemaking Board, the technical staff of the Securities and Exchange Commission, and all other interested parties concerning the draft municipal disclosure guidelines that have been prepared jointly by MFOA staff, consultants, and other groups and have been circulated for comment in accordance with the action of the Board on November 21, 1975. Adopted February 13, 1976.

Mr. REYNOLDS. Finally, we would not deny that the need to increase the quality and uniformity of government financial reporting and accounting practices is clear. We believe that progress in these practices will be rapid because brand new and extremely effective incentives are now at hand and are pointing the way

bond market discipline, the requirements for disclosure already on the books, the very occurrence of these hearings. To the extent that States, localities and other market participants are permitted an opportunity to do this for themselves, they will continue to be on the spot to prove their effectiveness as partners in a Federal system. State and local officials are not out to defraud a public they are sworn to serve and if they do they go to jail. By the some token, they have both responsibilities and rights to do their jobs themselves without a Federal checkrein until such time as they have defaulted on their obligations to investors and the public at large.

I would respectfully submit that one New York City does not equal the 40,000 national issuers. Thank you for the opportunity to participate and we would welcome the opportunity to answer any questions.

Senator WILLIAMS. Thank you very much.

Now Mr. Fullerton.

Mr. FULLERTON. Senator, I'd like to affirm everything Mr. Reynolds has said and call to your attention again that a great number of cities and counties throughout the United States have been making fine financial disclosure. Financial disclosure promulgated by MFOA since the 1940's, actually since the 1930's, far exceeds the SEC's requirements in many areas. I would suggest, Senator, in all seriousness, that if this is good for units of city government and county government, that perhaps this same disclosure requirement would be good for the Federal Government. We need Federal disclosure of this type of information and I should suggest that maybe if it's good for one it would be good for the others.

Senator WILLIAMS. An excellent idea.

Senator TOWER. I might point out that we have one advantage over municipalities, and that is we own a printing press.

Mr. FULLERTON. Yes, sir. That's the problem.

Senator WILLIAMS. That came from Senator Tower. That didn't come from me. I agree with you.

Senator TOWER. By the way, I agree with you, too.

Mr. FULLERTON. The golden rule has long prevailed in the investment market and that is "those that have the gold, rule." When underwriters do not get disclosure, they just don't have to bid on the bonds and some of us have found that out. The fact has been elementary in the field of investments for many, many years that an investor should investigate before he invests and if he has nothing to investigate he takes his other options and goes somewhere else. That forces us to give what you wish and I'd like to show you that we have been producing-and in Texas the attorney general of Texas must approve every county bond issue before we can issue it. If we have too much debt outstanding, we can't issue. The differences between the many States causes this problem to be far different from a corporate procedure. Texas has one set of rules. Alabama, another; New York, another; Ohio, Connecticut-trying to work out a procedure within Federal stand