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the Commission. We would have the authority to assist in the creation of a repository to insure that the information would be available for the Congress and the SEC to determine whether or not other methods were necessary to deal with the problem and would be available to underwriters and other people dealing in this industry so that they would have a better understanding of what is happening.

We note that the bill would require an issuer with more than $50 million in municipal securities outstanding to file certain reports and in any case in which an issuance of more than $5 million of municipal securities is contemplated there would be a distribution statement required.

We have analyzed the exemption from the distribution statement requirement which defers to State regulators and we think it is a useful one. We should point out to the subcommittee that the exemption, in its present form, relies very heavily upon the good faith which we expect on the part of States to determine that the purposes of the disclosure provisions of the proposed legislation have been met. Whether or not some additional requirement should be included to the effect that the disclosure approved by a State must be similar to that which this bill would require, is a matter for the Congress to decide. From our standpoint, we do wish to encourage the excellent type of State regulation that we see developing in many States, the kind of local regulation that Senator Eagleton referred to. It's important, I think, particularly to focus on the differences between the authority of the SEC to require additional disclosure under the 1933 act and under proposed 13 of the 1934 act. In sections 7 and 10 of the 1933 act, the Securities and Exchange Commission has a broad authority to require such additional disclosure as it may deem necessary or appropriate of issuers which are subject to the registration requirements of that act. The proposed bill, on the other hand, would give us limited authority to require additional similar and specific information of municipal issuers. The bill would essentially require the type of general information that is required by Schedule B of the 1933 act. The type of information which would be required derives from the different nature of a municipality. The bill would require disclosure of those things that relate more to revenue and expense and cash flow than those things that would deal with detailed operations.

It is important to emphasize the point again that this legislation does not expand the existing liability of municipal issuers. It merely assists in clarifying the extent of their obligation to disclose information.

There are some matters which we should point out which these hearings should direct themselves to from time to time—whether or not the initial threshold amounts of $50 million and $5 million are appropriate are matters on which we presently have no opinion. Our empirical data in this area is scanty. These strike us as reasonable initial limits but it may very well be that these hearings will develop data that suggests some other threshold limitations are appropriate.

Second, the committee may wish to consider issues relating to the scope of underwriter liability. This bill contains a limitation in section 13A (g) which is borrowed from a similar provision in section 11 of the Securities Act. Municipal securities underwriters and their


counsel may wish to comment upon that limitation and they may wish to make additional suggestions, but the point, of course, is that this limitation should be helpful in bringing underwriters back into the field in this period of uncertainty.

Finally, and underlining in part the previous point, is the need for these hearings to explore the extent to which sovereign immunity is, under current law and should be under the proposed legislation, available to issuers of municipal securities. This bill does not treat that.

Mr. Chairman, as I said at the outset, the proposed legislation seems to us to be a responsible framework under which the Securities and Exchange Commission can best act. Its purposes are, of course, to protect investors, but equally the purposes of the proposed bill in our judgment would provide necessary and helpful information to underwriters and issuers, and would help eliminate confusion that we see developing in the field.

Senator WILLIAMS. Do you deal with analysis of the other approach, the filing and registration with the SEC by the issuer, Senator Eagleton's approach?

Mr. Hills. Yes, I think it's fair to say that the load on the Securities and Exchange Commission in reviewing registration statements will change even in the corporate field in the future. I'm not prepared today to say exactly how it will change, but it will change. The requirement that a registration statement for municipal securities be received and commented upon by the SEC would create two problems. First, the massive obligation is one we simply could not meet. Even if the Congress were to greatly expand our budget, it would be years before we had a staff trained in those matters. The types of problems that have arisen in the past with respect to municipal securities do not suggest to us that that type of approach is appropriate.

Second, creation of standards for disclosure, given the longstanding capacity of the Enforcement Division of the SEC, seems to us to give us the necessary handle to protect the public interest. But to require us to comment on statement after statement involving so very many different kinds of municipalities, so many different kinds of political and economic problems, would impose a burden of great dimensions not only on the SEC but upon the industry generally. We at this time see no reason to put that burden either on the Commission or on the industry.

Senator Williams. A lot of discussion and thought still has to go into the enforcement of the standards here. This is rather a thicket of law. Earlier in your statement you mentioned the greater likelihood of lawsuits in the present atmosphere. We might be able to start there to just run through effective enforcement of new standards that would be imposed without the SEC being the recipient or depository of registration statements.

Mr. Hills. Well, the SEC, of course, would have under the proposed bill initial capacity to determine whether or not the disclosure requirements were complied with. If the requirements were complied with honestly and the facts were displayed fully and fairly, the Commission could more quickly devote its energies to other matters. Thus, the proposed bill would give us an easier threshold of decision. Second, it obviously brings home to issuers and people dealing with issuers their responsibility under the existing law. It would provide,

it seems to us, a better road map for enforcement activities. It would not change the enforcement responsibilities of the Commission in the sense that our ultimate responsibility is to enforce the provisions of the existing acts, but it would provide a road map to tell issuers what is the type of thing they should be doing. Therefore, it seems to us to greatly aid in the resolution of the thicket that we're talking about.

There's been very little litigation, as the Senator knows, in this field. The SEC has had only a handful of cases dealing with these matters. Today there are in New York alone a number of cases involving municipalities, city officials, municipal officials, underwriters, issuers of all kinds. The uncertainty concerning the information which is required is, in the absence of legislation, necessarily going to evolve through litigation rather than through SEC rulemaking, which as a matter of good administrative law seems to us always to be the better approach.

Senator WILLIAMS. Are issuers right now liable for civil damages if there is inaccurate information disseminated in connection with an issue of bonds?

Mr. Hills. Well, there is controversy, as the Senator knows, as to what sovereign immunity means in this field. It is the judgment of the Commission that there is liability by municipalities in the context of an SEC enforcement action. The issue is not, of course, just inaccurate information. It has to do with whether or not the people should have known or did know; the degree of culpability, the degree of inaccuracy, must always be measured. Those are all matters about which there is uncertainty. Obviously, if some city official has every good reason in the world to believe that he did what he was supposed to do, it makes the question of liability more difficult; but as a matter of ultimate legal principle, it is the position of the Commission that sovereign immunity does not protect municipal issuers or their officials from liability in an SEC enforcement action.

Senator Williams. Counsel shows me a case that suggests that they are. The test here is whether the officials conduct was so aggravated as to place him beyond the scope of his official capacity. In other words, this recognizes evidently sovereign immunity except in an extreme situation. It recognizes the principle of sovereign immunity, not necessarily whether it's a constitutional standard or not, but it l'ecognizes a different standard.

Now as to the underwriter, what is his liability now and is the underwriter able to escape liability if he can prove due diligence in attempting to arrive at all the relevant facts? That's the test on the corporate side, isn't it?

Mr. Hills. That is the test on the corporate side. This bill certainly does not expand the liability of the underwriter. If anything, it limits it in amount to his involvement in the underwriting. The test is comparable to the corporate side. There's no reason why it shouldn't be, and there is a responsibility, in our judgment, for the underwriter to use due diligence now in this area. The question of what due diligence should produce, however, is the area of confusion.

Senator WILLIAMS. Well, due diligence is exculpatory for the underwriter. That puts an additional burden, I would think, back at the issuer.

Mr. Hills. This bill would require the issuer to provide a certain financial presentation. The underwriter still has an obligation, as any underwriter does in connection with selling in any kind of security, an obligation to do what he should do to make certain the information is accurate. If he secures the information from an issuer and knows or should know that the information is inaccurate, he's still responsible.

Senator WILLIAMS. In this legislation we do not clarify or in any way further define present liability that resides with the issuer and I'm wondering whether some clarification might not be a good idea here,

Mr. Hills. The Commission's view on that point is it's a matter for the Congress rather than the Commission to decide to what extent sovereign immunity should protect municipalities and people dealing in this type of exempt securities, and it is quite true that the proposed bill does not clarify the issue of sovereign immunity. As we say, it is the opinion of the Commission's general counsel, and I think of many respected outside counsel, that sovereign immunity does not protect the issuer from liability in an SEC enforcement action; but the question of whether there is further civil liability is a matter this subcommittee may very well wish to examine.

Senator WILLIAMS. Senator Tower, do you have anything?

Senator Tower. I'm sorry, Mr. Hills, that I got here late. I didn't get to hear your testimony. It's my understanding, however, that your point of view of S. 2574 is it would be an enormous administrative burden that you're not prepared to carry at the moment. Is that correct?

Mr. Hills. Senator, it would indeed be an enormous administrative burden. Obviously, if we thought that that burden was necessary to protect the public interest or investors, we would come before the Congress and seek an appropriation to enable us to bear the burden.

It's our present judgment that the problem created in the municipal securities area does not justify accepting such responsibility at this time. We can properly protect the public and provide standards which will eliminate a great deal of the confusion in the industry by the approach set forth in S. 2574.

Senator TOWER. What is your view of how the adoption of the bill that Senator Williams and I have introduced, S. 2969, would atfect the sovereignty of State and local governments?

Mr. Hills. It does not, in our judgment, affect it at all. It helps clarify the responsibility of local and State government. In our judgment, the proposed legislation does not expand or contract the ultimate responsibility of State and local government under the 1933 and 1934 Acts. It provides a framework for the performance of their responsibilities, for the exercise of their duties in this area.

Senator TOWER. If S. 2969 had been in effect earlier, how, in your view, would this have affected New York City's financial situation?

Mr. Hills. Assuming that it was in effect and assuming, as we, of course, would, that the parties in the various types of New York securities transactions that are now a problem had fully complied, I suppose two observations could be made depending upon what time in history the bill was in effect. If it had been in effect in the recent

history, it probably would not have been possible for the municipalities to secure assistance in their underwritings or find investors to purchase them. Had the bill been in effect a number of years ago, it would have imposed a form of fiscal management that hopefully would have maintained the city and the other entities involved now in a sounder financial structure.

Senator TOWER. Perhaps fewer investors would be stuffing their portfolios with that inflated New York City paper.

Mr. Hills. I think that's a fair guess.

Senator TOWER. Not quite so many of them would be left holding the bag. S. 2969 provides for an exemption for securities issued by any municipality where the State has approved such issuance. Should we do more to encourage States to regulate issuers within their jurisdiction?

Mr. Hills. Well, I believe this bill certainly does encourage them. There may be other measures than can be taken to encourage them. This bill provides in its present form a rather broad grant of authority to the States. If a State, after hearing, decides that the disclosure is adequate to protect its investors then the State retains the jurisdiction as to the offering of municipal securities. I pointed out in my testimony that the present bill does not require that the States find affirmatively that the type of disclosure being used by a municipality within their jurisdiction is of the kind that the proposed S. 2969 requires. That may be something that the subcommittee may wish to consider, but in the bill's present form, there is a broad deferral to any State that takes on itself the obligation after hearing to decide that disclosure is adequate to protect the interest of investors. I'm not sure how a broader deferral could be better.

Senator TOWER. On page 4 of your testimony you said : Investors and underwriters are now alert to the inadequacies of the past disclosure practices and appear to be more demanding of adequate information.

Now if this is true, why do we need this bill? Wouldn't the marketplace demand it?

Mr. Hills. Well, as the Senator knows, I personally am a great supporter of competition and there's no doubt that competition in disclosure policies will cause more disclosure, but I'm afraid that it's very likely that the competition for disclosure will cause greater confusion as to what is adequate disclosure and no entity is better qualified than the SEC to speak to all municipalities at once and prescribe the form of financial presentation that should be a reasonable approach for these entities. In other words, I don't see what is to be gained by promoting competition for this kind of disclosure for people, investors particularly, who have no real idea as to what kind of information they should be seeing. So for purposes of developing comparable information from municipalities, there seems to us to be a good and sufficient reason to provide a standard.

Senator TOWER. I still find it amusing that every time you and I get together we talk about disclosures of some sort. Mr. Hills. Or the lack of them.

Senator TOWER. Or the lack of. I assume your views on disclosure at this time are somewhat different than that.

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