- Figures as reported through the fourth quarter 1975 (final) except for profits.

Figures as reported through the fourth quarter 1975 final) except for profits.

Thomas F. Mitchell

100 Bush Street, Penthouse

San Francisco, California 94104

February 18, 1976

Mr. Howard Menell

Senate Banking Committee

New Senate Office Building, Rm. 5300
Washington, D.C. 20510

Dear Howard:

Thank you for your recent invitation to offer comments for possible consideration by the Senate Banking Committee in its deliberations on the Eagleton bill. I have taken the liberty of inviting members of my firm who have far more experience and knowledge of industry practice than I to submit comments of their own, particularly where their views differ from mine. I hope that my having done so will prove helpful to you and to members of the Committee.

Let me begin with a full disclosure statement of my own. I am an inactive member of the District of Columbia Bar. I was introduced to municipal finance through a 15-month association with the Center for Capital Market Research at the University of Oregon. Since July, 1975 I have been employed by an independent municipal financing consulting firm. My remarks represent my personal views, not necessarily those of the firm. I trust that my mentioning these facts will assist you in evaluating these remarks.

POSSIBLE SOURCES OF DISCLOSURE STANDARDS

Federal The Eagleton bill, S. 2574, would remove state and local government obligations from the list of securities exempted from the registration requirements of the Securities Act of 1933. It is but one of a number of proposals regarding standards of disclosure in the offer and sale of municipal securities. The Municipal Securities Rulemaking Board, established pursuant to the 1975 amendments to the Securities Exchange Act, will soon promulgate standards of disclosure for underwriters and others involved in the offer, sale, and distribution of municipal securities. However, the Board is prohibited by law from requiring disclosure by municipal issuers themselves. The U.S. Treasury has recently proposed that a system of mandatory uniform accounting standards be developed and applied to municipal issuers. The Kennedy-Reuss bill creating a taxable bond option includes an advisory agency which, presumably, could develop suggested disclosure guidelines.

State - At the state level, standards of disclosure might be developed by municipal debt advisory commissions or possibly through legislation requiring certification by a competent state agency. In most states, however, new legislation would be required to create such agencies and to confer the requisite authority. With a very few exceptions, supervision of state and local issues by official state agencies does not now exist.

Other Finally, there are privately-developed standards of disclosure for municipal issuers. These may be developed by industry organizations such as the Municipal Finance Officers Association, or they may be developed by individual banks, underwriters and dealers, bond rating agencies, bond counsel, and financial advisors.

THE DISCLOSURE PROBLEM

Because the concept of "materiality" is so imprecise, and because there does not yet exist an authoritative system of disclosure standards, there presently exists in the municipal bond market confusion amounting almost to chaos. The exchange of ideas and information within the financial community is just beginning. In the absence of a consensus or of authoritative criteria regarding disclosure, each party seeks to learn for itself what it deems necessary to avoid potential liability for failure to disclose or to state correctly all material facts. The tendency is to demand a very great quantity of information, often with little thought given to the materiality of what has been demanded. Although such information may not be readily available and may be generated only at substantial cost to the issuer, the issuer is often forced to comply as a practical matter to insure receiving a bid for its securities. And, recent experience shows that even a massive prospectus or official statement does not guarantee a bid. The present uncertainty regarding disclosure is clearly unsatisfactory both for issuers and for the prospective purchasers of their obligations.

THE NEED FOR FULL DISCLOSURE

This is not to suggest that greater disclosure by municipal issuers is undesirable. On the contrary, I believe that more, rather than less, disclosure will aid issuers as well as prospective investors. I favor greater disclosure for two reasons: first, to prevent abuses, and second, to enhance the economic efficiency of the market for municipal securities. On the whole, there has not occurred in the municipal bond market anything like the abuses which prompted passage of the federal securities laws in the 1930's. Nevertheless, it is possible that the

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