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in that regard. It is important that the provisions be both workable and appropriately protect public investors.

Finally, and underlying in part the previous item is the need for these hearings to consider the extent to which sovereign immunity is, under current law, and should be under the proposed legislation, available to issuers of municipal securities and their associated persons, and the effect of any such immunity on the duty of underwriters of any issue of municipal securities.

In conclusion, I would like to state it is the Commission's view that S.2969 represents a very effective and practicable solution to the serious information problems associated with contemporary municipal securities financing. Even though it is of course up to the Congress to determine whether or not legislation is needed, in our opinion s. 2969 will minimize regulatory costs and other burdens on both issuers and regulators while at the same time providing investors in municipal securities with consistent, comparable, reliable and sufficient information to make reasoned investment decisions.

Senator WILLIAMS. Our next witnesses are Edwin H. Yeo, III, Under Secretary for Monetary Affairs, and Robert Gerard, Deputy Assistant Secretary for Financial Resources Policy for the Department of the Treasury. Welcome, gentlemen. We look forward to your testimony.



Mr. Yeo. I have some short comments, Mr. Chairman.

Until last June, with one exception, no aspect of the municipal securities field was subject to Federal securities law. Apart from the reach of the antifraud provisions—section 17 of the 1933 act and section 10(b) of the 1934 act—there were no uniform national standards to govern and guide dealings in municipal securities.

I would like to say at the start that with that background the Treasury supports the concept, and with some qualifications which I will spell out, supports the Williams-Tower bill, S. 2969.

Under the leadership of the chairman, Congress moved last year to fill part of that void. The Securities Act Amendments of 1975 established a comprehensive mechanism to regulate transactions in municipal securities and the intermediaries which facilitate the process. Today we begin the infinitely more difficult and delicatebut equally important-I might even say personally perhaps of paramount importance—task of recognizing the critical need for current, accurate and comparable information about the fiscal and financial condition of State and local governments.

Forty-three years ago, when municipal securities were exempted from the securities laws, Congress could not have foreseen the importance of the municipal market of today. Approximately $30 billion of tax-exempt bonds were issued in 1975. Another $30 billion was borrowed short-term. Perhaps a more significant change than growth in the size of the market was the revelation that municipal securities were not riskless. Investors learned in 1975 that theoretical access to the ad valorem taxing power was not an absolute guarantee of timely repayment.

Clearly the times have changed for States and municipalties as well as for other economic sectors. States and municipalties now perform far more diverse services than four decades ago, or even 10 years ago. They employ a much more diverse set of taxes. Their financings are far more complicated. All of these changes accentuate the need of investors and underwriters and dealers-I might say taxpayers as well—for reliable, current and comparable information on the fiscal and financial condition of State and local governments.

A major defect in the flow of information now available is that the data are not easily, if at all, comparable. The growth of State and municipal activities, the diversity of taxes and the complexity of financing have spawned a variety of methods of reporting. Accounting procedures differ widely. As a result, verification and interpretation of State and local fiscal and financial data is extremely difficult.

The importance of providing reliable information is enhanced by the fact that the nature of investors in the municipal market has changed. Historically, investors have been sophisticated institutions -banks and fire and casualty companies—which had both the resources and the expertise to develop and evaluate information on their own. Today, however, individuals are playing an increasingly important role in the municipal market.

Under existing practices, there are in effect three mechanisms which tend to safeguard an investor's investment in municipal securities.

First, there is the fact that many States, either by statute or by constitutional provision, prohibit conduct which would undermine a political subdivision's ability to meet financial obligations. Such limitations generally include the requirement of a balanced budget and limitations on such items as outstanding long-term debt, shortterm debt outstanding at the end of the fiscal year, tax rates and expenditures, among others.

Legal limitations provide poor financial standards because they are arbitrarily applied to all municipalities in the jurisdiction and often do not allow for judgment in financial planning. Also, such limitations often are legally established in constitutions, charters and statute books. As time passes, they often become obsolete and are very hard to amend. Finally, as we learned in the case of New York City, legal prohibitions are not necessarily enforced strictly. I might add that it requires accurate information to enforce them.

A second source of potential protection is the antifraud provisions of the Federal securities laws. But these safeguards alone are deficient in two respects. First, they are retrospective only. They cannot help investors to prevent unwise investments, but can only provide a basis for recouping losses after (and if) fraud is proved. Moreover, they do not provide a basis for helping investors choose among competing investments; they only prohibit certain extreme unlawful conduct.

A third possibility is the rating process. But, since the rating services must rely on the insufficient and noncomparable data provided to them, they can at best only make general estimates of creditworthiness. There is a fundamental fallacy in trying to base ratings on less than full disclosure. There is no substitute for reliable, up-to-date, comparable information. To put it another way, reliable, up-to-date information would complement rather than conflict with the rating process.

In short, there is no mechanism to insure that investment decisions in municipal securities are made with clarity and confidence. Prudent decisions cannot be made when investors are forced to compare apples and oranges, and often old ones at that. An efficient market requires access to comparable, verified, and reasonably current information.

The fundamental goal of disclosure legislation must be to assure that the maximum amount of relevant information is readily available, with a minimum amount of Federal intervention and a minimum of cost. Disclosure rules and regulations should enhance the market, not interfere with the market mechanism for municipal issues. Most important, in order to insure that municipal investors are able to make a concise comparative analysis of the finances of different issuers, disclosure legislation must standardize the presentation of the information being disclosed.

It is the importance of standardization which requires that a disclosure program be administered at the Federal level. We have examined carefully the voluntary disclosure approach. As the committee knows, it has been argued that since investors and underwriters are demanding more information, if the free market were left to its own devices, the information would be provided by those issuers which needed market access. We concluded, however, that precisely to assure that the free markt mechanism will function smoothly with respect to municipal issues, it is necessary to insist upon mandatory disclosure of financial information by issuers entering the market. It is only by mandatory disclosure that adequate, uniform, usable information can be assured, and that its flow to the investing public can be guaranteed.

In designing a disclosure system, we must keep in mind that the policy tradeoffs here may differ from those employed under existing law and procedures. The governing principle in the corporate area is spare no expense to give the investor every last ounce of protection. In the municipal area, where such expenses must be directly paid by taxpayers, I do not think we can or should make a similar choice.

I'd like to talk a little bit about the scope. There are many municipalities which do not enter the capital markets frequently or to a heavy degree, and thus present lesser concerns to the investing public or to the proper functioning of our Nation's capital markets. There are many municipal issues which have a relatively limited market. So that mandatory disclosure does not result in overkill, we favor the setting of threshold limits below which disclosure would not be required.

Once the issuers which should disclose have been identified, the information required of them should be carefully specified and relatively comprehensive. Some flexibility, of course, is required, but State and local governments, we believe, are entitled to have Congress decide the kind of information it is required to disclose.

Based on the above principles, we oppose S. 2574 and H.R. 11044. By eliminating the 1933 and 1934 act exemptions for municipal securities, these bills would require that municipal securities undergo the same disclosure, filing and clearance and registration procedures as corporate securities. Such an approach would impose burdens and costs which outweigh the benefits derived.

We are in general agreement with S. 2969, cosponsored by the chairman and Senator Tower. S. 2969 is not a regulatory bill. It would not require filing, registration or presale clearance of issues. Instead, it is strictly designed to insure that information-reports and distribution statements—be prepared and made readily available to the public.

Let me stress this fundamental difference between the Solarz and Eagleton bills, and S. 2969, even at the risk of belaboring the point. The Solarz and Eagleton bills are regulatory measures. They would intimately involve the SEC in the issuance process, as it is in the corporate area. The Williams-Tower bill does not contemplate such involvement, providing only that informational reports and statements be prepared and made readily available.

Responsibility, in the final analysis, is more a matter of accountability than motive. And, in turn, accountability requires good information. If comparable, reliable, up-to-date information were made available through disclosure guidelines, in-depth scrutiny by investors and the electorate would be facilitated.

The mechanism for public scrutiny of municipal issues already exists. It lies in the marketplace and the election process. What is required is only to put it to work, and this, in turn, requires only assuring the flow of information. Reliable, comparable current data would preempt the need for presale registration and clearance.

I concur with the essential substance of S. 2969. The bill provides for the preparation of annual reports including audited financial statements by issuers of municipal securities with more than $50 million outstanding. It provides also that distribution statements be prepared prior to public offer or sale of $5 million or more of securities. And it requires that such reports and statements be reliable and comparable, as well as readily available to underwriters, dealers, and investors. Finally, it encourages State oversight by providing for exemptions from the distribution statement requirement where a State authority has approved the offer or sale of the issue.

The advantages of the Williams-Tower bill's approach are numerous. The 1934 act's reporting requirements are less burdensome than those under the 1933 act and will result in less burden to reporting entities. Ongoing information about the basic financial health of a city affords an excellent means of evaluating its creditworthiness and its potential for meeting debt service on bond issues into the future. To the extent new issue information is needed, the distribution statement which the Williams-Tower bill would require will provide all the relevant data. Thus, the Williams-Tower bill strikes an appropriate balance: requiring disclosure of as much information as is necessary to allow the market to function properly, without burdening our States and cities and their taxpayers with requirements that impose unnecessary costs.

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In my view, the bill as currently drafted requires improvement in two areas. First, I am concerned about the authority conferred upon the Commission by subsection (d) of section 13A. To the extent this provision reflects the authors' belief that, in light of inflation, it may be appropriate at some future date to allow the Commission to adjust upward the minimum filing requirements, such intent could be more clearly expressed by substituting the word “increase” for the word "change" on line 5.

If, on the other hand, the provision contemplates a possible downward adjustinent of the minimum limits, I believe the provision constitutes an inappropriate delegation of authority to the Commission. It is important to keep in mind that this legislation contemplates a degree of federal involvement in the affairs of sovereign political units. Accordingly, it is our strong belief that any change which materially increases the scope of the legislation, or the burden on entities initially subject to the legislation, must receive the review and approval of the Congress in the form of new legislation.

This leads directly to our second area of concern. While we recognize the necessity for a slight degree of rulemaking authority in the Commission to implement the statutory directives, we think the legislation, as currently drafted, goes much too far. As I indicated earlier, while the protection of investors is, and must be, a consideration, it is not in my view a consideration of such paramount importance as might be the case on the corporate side. The grant of discretion to the Commission to expand the type of information required should be carefully circumscribed and should recognize expressly the different competing considerations which exist in the municipal securities area.

After all of us have had the benefit of the hearing process, we expect to work closely with the Commission and the staff of this subcommittee to develop language to deal with the concerns set forth above. At the same time, we will also present additional minor technical amendments which we feel will improve the legislation.

All in all, S. 2969 presents a desirable framework for satisfying the important objectives of more and more useful information about municipal credits. We believe such legislation is urgently needed and we will cooperate with the Committee and the Congress in an attempt to achieve its expeditious passage.

Senator WILLIAMS. Thank you very much, Mr. Secretary.

You have analyzed the situation in the States as to State requirements in terms of financial statements and disclosure requirements. Are there any States that you would consider models that might be useful to other States where there is a lack of state demands upon municipal issuers?

Mr. Yeo. I think that there are several States. One would be North Carolina. I have the impression based on conversations with authorities in other States that the North Carolina experience has been watched carefully and is likely to be duplicated in other States.

Senator WILLIAMS. Certainly the legislation that Senator Tower and I have introduced is designed to bring forth that State effort.

Mr. Yeo. I certainly think that it would have that effect. I think it also would have another effect which is very important, and that is

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