THE STATE OF TEXAS I

COUNTY OF HARRIS I

On this the 23rd day of February, 1976, the Commissioners' Court

of Harris County, Texas, sitting as the governing body of Harris County, upon motion of Commissioner Eckels, seconded by Commissioner Lyons,

duly put and unanimously carried,

IT IS ORDERED that the Harris County Government does not desire any unnecessary Federal control over the Bonded indebtedness of Harris County and Harris County Flood Control District, and that this Resolution be forwarded to the U. S. Senate Committee on Banking, Housing and Urban Affairs.

I, R. E. Turrentine, Jr., County Clerk and Ex-Officio Clerk of Commissioners' Court of Harris County, Texas, do hereby certify that the above and foregoing is a true and correct copy of Order made

and entered on the 23 AN day ofel ebruary- 1976. as sane appears of record in Volume 97

Commissioners' Court.

of the Minutes of the

GIVEN UNDER MY HAND AND SEAL OF OFFICE this theo

February

day of

R. E. TURRENTINE, JR., County Clerk and Ex-Officio Clerk of Commissioners' Court of Harris County, Texas.

27 Melany Bordelon

By

Deputy..

Senator WILLIAMS. Donald Robinson, Donald Hodgman and Richard B. Smith. The lawyers now should be heard.

STATEMENT OF DONALD ROBINSON, HAWKINS, DELAFIELD, & WOOD

Mr. ROBINSON. Mr. Chairman, I want to thank you for the opportunity to testify on the two bills that are before you.

My name is Donald Robinson. I'm a partner in Hawkins, Delafield and Wood, New York City, a nationally recognized bond counsel. I am also and have been for the last three years chairman of the municipal bond workshops for the Practicing Law Institute. Prior to that, since 1969, I lectured in that program. I was also a participant in the Municipal Finance Officers Association program relating to the preparation of the guidelines. I would like to state that I am appearing today in my individual capacity.

I believe the solution to the problem which you're seeking to address should involve a proper accommodation between the protection of the investors in municipal securities and the continued ability of the municipal issuers to market obligations without any undue impediments. If registration requirements are imposed upon issuers of municipal securities, any benefits which may be derived from substantially greater disclosure for potential investors will undoubtedly be overcome by the detrimental burden of added costs to the general public in the form of increased taxes or increased user charges.

It is my belief that there is adequate statutory authority at the present time for the protection of investors and that additional regulation in the form of either S. 2574 or S. 2969 will not add any further protection to investors but will, in fact, constitute an inappropriate impediment to issuance of municipal securities and add unnecessary costs to such issuance. Therefore, I am of the view that neither bill before you should be enacted into law. There is no need for additional legislation because Section 10(b) of the Securities Exchange Act of 1934 and Rule 10(b) (5) promulgated thereunder by the Securities and Exchange Commission provide adequate protection at the present time for members of the investing public who purchase municipal obligations. That section and the rules promulgated thereunder, together with the Securities Acts Amendments of 1975, also give the Securities and Exchange Commission adequate power to police alleged violations of fraud incurred in connection with the offer and sale of municipal securities. As you know, although municipal securities have been exempt from the registration requirements of the Securities Act of 1933 and the regulatory requirements of the Securities Exchange Act of 1934, the antifraud provisions contained in Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 do not provide any exemption with respect to municipal obligations for fraudulent practices. The Federal securities laws, as interpreted by the courts, also provide for implied rights of action for defrauded purchasers of securities. One of the first cases involv

ing alleged securities fraud dealing with a purchaser who sought to recover on the basis of an implied right of action, involved the alleged fraud in the sale of municipal securities. That case was Thiele v. Shields and was decided in 1955. Clearly, the courts have recognized such an implied right of action in connection with alleged fraud in the sale of municipal securities from that date.

The Commission has and continues to recognize its enforcement obligations with respect to the sale of municipal securities. In the 1960s the Commission instituted a proceeding in the matter of Walston & Co., Inc. and issued an order in that proceeding on September 22, 1967, and that involved the sale of municipal securities. Since that date the Commission has taken additional steps and applied additional concern to this field. The Commission has proceeded with at least five civil injunctive actions since that time all of which occurred in the last three years. At no time has the Commission indicated that there was any additional need for legislation. This committee, in its report dated April 14, 1975 with respect to such legislation stated at page 43: "The Committee believes the municipal securities markets have, in the main, performed their debt financing functions for state and local governments with commendable efficiency and integrity." The Securities Acts Amendments of 1975 were enacted to provide additional enforcement tools to the Commission to help combat those few abuses which did. exist. In fact, the committee stated in the report at page 44:

The Committee is mindful of the historical relationship between the federal securities laws and issuers of municipal securities. Apart from the general antifraud provisions, municipal securities are exempt from all substantive requirements. Most significantly, this means that state and local governments do not have to comply with the registration and disclosure requirements of the Securities Act of 1933. The bill does not in any way change this pattern, for the Committee is not aware of any abuses which would justify such a radical incursion on states' prerogatives.

The antifraud provisions require adequate and full disclosure of all material facts necessary for an investor to make an investment decision with respect to the proposed purchase of municipal securities. Neither of the two bills before you changes that requirement nor does either add to the protection afforded proposed investors from that presently prevailing as aforementioned. Full disclosure is full disclosure without more. The proposed legislation before you accomplishes nothing more than to provide further Federal involvement and governmental decisions with respect to what it considers to be material or adequate disclosure. Also involved in the process is the possibility of substantial redtape and additional costs involved in the registration of or reporting requirements related to municipal securities. The concept of full disclosure which had its foundations in the above-mentioned antifraud provisions is a fair and flexible standard and is now fully adequate for the protection of investors. Therefore, in my opinion there is no need for the enactment of the legislation before you.

There will also be some very practical problems if either piece of legislation is enacted. These problems arise because of the diversity of types of municipal securities and governmental units. The

U.S. Bureau of Census reported in 1972 that there were 78,267 State and local governmental units classified. When working on the Municipal Finance Officers Association guidelines, one of the major problems that was dealt with and why it took so long to at least come out with an exposure draft for something that people could comment on was the diversity of local laws, State and local laws. I understand fully the desire of the chairman in his bill to put together a set of guidelines and he's looked at the exposure draft of the MFOA and there's nothing in there that is dead wrong, but there is nothing in there that we know without comment, without review of all the comments from the 50 States, that is absolutely

correct.

The process of evaluation, determining what is material, takes time. It's best done on an ad hoc basis. It's not done by legislation. It's not done by setting one set of standards for all the issuers throughout the country.

As you know, attempts are being made to improve disclosure guidelines. The MFOA project is an outstanding bit of selfregulatory development by the municipal issuers themselves to try to improve with additional minimal cost to taxpayers and the users of public facilities, to reach an accommodation between adequate and full disclosure and keeping the cost of government at the lowest possible rate.

Also, the market has adapted very well to the problems. In any case, municipal issuers are preparing full-disclosure documents which surpass the level of disclosure suggested in S. 2969. In short, the problem this subcommittee is focusing upon is being fully solved by municipal issuers and the securities industry without any Federal supervision.

I would also like to point out to the subcommittee that the Sovereign States have constitutionally protected powers and that the Federal Government should be cautious in any approach to limiting these powers.

In conclusion, I recommend that Congress not enact either of the two bills before you. Full disclosure, which we all favor, is presently being provided for by the issuers themselves, as well as by the underwriters of their securities. To require the Commission to set the standards for disclosure in this very complex and sensitive area would be to complicate rather than simplify the problem. Thank you very much.

Senator WILLIAMS. Thank you very much, Mr. Robinson. It's very appropriate for you to include a statement from our report of last April of the legislation where we did say the bill does not in any way change this pattern of nonapplication, for the committee is not aware of any abuses which would justify such a radical incursion on States' prerogative.

First, I would say I don't consider this bill a radical incursion. With what we knew then that was an accurate statement. One of the reasons we didn't know some of the problems which hit us with such force in November was that the guidelines and the uniform standards and reporting and disclosure weren't in place and with

the information we had all was well on the Hudson, but we found out later, of course, that it wasn't.

So it's fair for you to report what we said then, and I think it's fair for me to comment that one of the reasons we were not aware was that the basic data was not there for us to be made aware. That's a fine statement. We appreciate your appearance and it will be helpful. I will make no further comment at this point. [Complete statement follows:]

STATEMENT OF DONALD J. ROBINSON

Mr. Chairman and members of the Subcommittee, I thank you for the opportunity to testify with respect to S. 2574 and S. 2969, both of which deal with the treatment of municipal securities under the Federal securities laws. My name is Donald J. Robinson and I am a partner in the law firm of Hawkins, Delafield & Wood, New York City, a nationally recognized bond counsel which renders legal opinions with respect to the valid issuance of municipal obligations throughout the country. In addition, since 1969, I have been a lecturer for the Practising Law Institute programs on Municipal Bonds Workshop and have been Chairman of the Workshop program since 1973. However, today I appear in my individual capacity.

The solution to the problem which Congress is seeking to address should involve a proper accommodation between the protection of investors in municipal securities and the continued ability of municipal issuers to market obligations without any undue impediments to the continued proper operation of state and local governments. If registration requirements are imposed upon issuers of municipal securities, any benefits which may be derived from substantially greater disclosure for potential investors will undoubtedly be overcome by the detrimental burden of added costs to the general public in the form of increased taxes or increased user charges.

It is my belief that there is adequate statutory authority at the present time for the protection of investors and that additional regulation in the form of either S. 2574 or S. 2969 will not add any further protection to investors but will, in fact, constitute an inappropriate impediment to issuance of municipal securities and add unnecessary costs to such issuance. Therefore, I am of the view that neither bill before you should be enacted into law. There is no need for additional legislation because Section 10 (b) of the Securities Exchange Act of 1934 and Rule 10(b) (5) promulgated thereunder by the Securities and Exchange Commission provide adequate protection at the present time for members of the investing public who purchase municipal obligations. That section and the rules promulgated thereunder, together with the Securities Acts Amendments of 1975, also give the Securities and Exchange Commission adequate power to police alleged violations of fraud incurred in connection with the offer and sale of muncipal securities.

As you know, although municipal securities have been exempt from the registration requirements of the Securities Act of 1933 and the regulatory requirements of the Securities Exchange Act of 1934, the antifraud provisions contained in Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 do not provide any exemption with respect to municipal obligations for fraudulent practices. The Federal securities laws, as interpreted by the courts, also provide for implied rights of action for defrauded purchasers of securities. One of the first cases involving alleged securities fraud dealing with a purchaser who sought to recover on the basis of an implied right of action, involved the alleged fraud in the sale of municipal securities. That case was Thiele v. Shields and was decided in 1955. Clearly the courts have recognized such an implied right of action in connection with alleged fraud in the sale of municipal securities from that date.

The Commission has and continues to recognize its enforcement obligations with respect to the sale of municipal securities. In the 1960s the Commission instituted a proceeding in the matter of Walston & Co., Inc. and issued an order in that proceeding on September 22, 1967. Since that date, the Commission has also proceeded with civil injunctive actions in connection with fraud in the sale of municipal securities and in the past three years, the