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Resolution of executive board.
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CHARTS AND TABLES
MUNICIPAL SECURITIES FULL DISCLOSURE ACT
TUESDAY, FEBRUARY 24, 1976
SUBCOMMITTEE ON SECURITIES,
Washington, D.C. The subcommittee met at 10 a.m., pursuant to call, in room 5302, Dirksen Senate Office Building, Senator Harrison A. Williams, Jr. (chairman of the subcommittee) presiding.
Present: Senators Williams and Tower.
Senator WILLIAMS. These hearings of the Subcommittee on Securities will come to order.
This morning the Subcommittee begins three days of hearings on legislation to upgrade the quality and uniformity of financial and other information concerning State and local issuers of municipal securities—S. 2574, introduced by Senator Eagleton, and S. 2969, introduced last week by Senator Tower and myself.
A year ago there was little reason to reexamine the status of issuers of municipal bonds under the Federal securities laws or the application of its concepts to State and local borrowers. The antifraud provisions alone seemed adequate to achieve the necessary disciplines in the offering of municipal securities.
The situation is far different today. The past year has seen turmoil and uncertainty in our municipal securities market. Mr. Lennox Moak, the Philadelphia Director of Finance, vice president of the Municipal Finance Officers Association, and a respected authority on municipal finance, accurately described these conditions in testifying on the plight of New York City:
Increasingly, it seems that the confidence in municipal bonds has disappeared. My analysis of this indicates that this is due to several factors. The first is there is no universal accepted accounting procedure for State and local governments so that one does not know when he reads an accounting statement precisely what it really means.
Second, there are no broadly accepted set of opinions for disclosure of information concerning financial conditions and in many cases, especially general obligations bond issues are sold with no disclosure whatever to potential purchasers. This is not true in the case of revenue bond issuers. Yet even there, it depends on the combined interests of the es concerned in the transaction.
On the second point, he elaborated by adding: There are no requirements for an effective flow of continuing information during the life of the bond issue. Nor is there any uniform system for its organization and circulation. Nor is there any central point from which existing information can be secured.
I agree with this excellent analysis of the problem as well as the solutions proposed :
The establishment of well-defined alternative systems of accounting which would be acceptable for application by State and local governments ... and establishment of standards for disclosure incident to the creation and servicing of the debt of state and local governments.
These recommendations are the very foundations of S. 2969.
A congressional reexamination of the longstanding exemption of municipal issuers from the Federal securities laws is necessary to facilitate informed investment decisions, promote responsible municipal fiscal practices, and to maintain confidence in the efficiency and integrity of the marketplace.
The objectives of our review are threefold:
First, more information about issuers' financial condition and other essential information must be made available. Also, it must be timely, accurate, and compiled on a uniform basis. Unless this is done, there will be less investor participation, lower ratings, and underwriter antipathy-meaning less total borrowing and at higher interest rates.
Second, the lack of uniform and nationwide municipal accounting standards and practices must be remedied and the current hodgepodge of current practices and customs must be replaced by more generally accepted procedures. The benefits derived from such procedures currently exist in some States. In these instances, credit ratings have improved and sound fiscal management and standardized municipal accounting and reporting have resulted in lower borrowing costs to the taxpayer.
Third, municipal issuers must compete for the savers' dollars more effectively to meet projected future capital needs. To promote confidence and stimulate demand, individual investors will be called upon to participate to a greater extent in the primary market. The protections and safeguards of the securities laws must be available to them. This means that some of the disclosure standards investors are accustomed to in the corporate sector will have to be adapted to fit the unique nature of Government borrowers.
There are several possible ways in which these goals can be achieved.
State government could impose such requirements. This has been the pattern since municipalities were first exempt from the securities laws 43 years ago. Unfortunately, this approach has not proved successful. With few exceptions, progress toward improved disclosure and uniform accounting practices has been unsatisfactory, notwithstanding the efforts of the Municipal Finance Officers Association.
[Copies of the bills being considered follow:]
IN THE SENATE OF THE UNITED STATES
OCTOBER 28, 1975 Mr. EAGLETON introduced the following bill; which was read twice and referred
to the Committee on Banking, Housing and Urban Affairs
А A BILL
To amend the Securities Act of 1933 to provide for the registra
tion of securities issued by State and local governments.
Be it enacted by the Senate and Ilouse of Representa
2 tives of the United States of America in Congress assembled,
3 That (a) section 3 (a) (2) of the Securities Act of 1933
4 is amended
(1) by striking out “or any territory thereof, or
by the District of Columbia, or by any State of the
United States, or by any political subdivision of a State or territory or by any public instrumentality of one or
more States or territories,”; and
(2) by striking out "or any security which is an
industrial development bond" and all that follows
through the semicolon following “does not apply to such security”.
(b) Section 3 of such Act is amended by adding at
• 4 the end thereof the following new subsection:
“ (d) The Commission may from time to time by its rules 6 and regulations and subject to such terms and conditions as ī may be prescribed therein add to the securities exempted
as provided in this section any class of securities issued by
a State of the United States or by any political subdivision 10 of a State or by any territory of the United States or
political subdivision of a territory or by any public instru12 mentality of one or more States or territories if it finds, 13 having regard to the purposes of this title, that the enforce14 ment of this title with respect to such securities is not necessary
in the public interest and for the protection of
(c) Section 15B (d) (1) of the Securities Exchange Act 18 of 1934 is amended by striking out "Neither the Commission
nor the Board is” and inserting in lieu thereof “The Board
20 is not".