in the case of New York City, legal prohibitions are not necessarily enforced strictly.

A second source of potential protection is the anti-fraud 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 non-comparable 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.

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, vertified, and reasonably current information.

THE DESIRED NATURE AND SCOPE OF DISCLOSURE LEGISLATION

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 ensure 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 market 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, uinform, 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 trade offs here may differ from those employed in the corporate area. It is not an overstatement to say that, 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 exepnses must be directly paid by taxpayers, I do not think we can or should make a similar choice.

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 disclosure.

COMMENTS OF PENDING DISCLOSURE BILLS

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 WilliamsTower 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 li lies in the market place 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 pre-empt 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 '34 Act's reporting requirements are less burdensome than those under the '33 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 with requirements that impose unnecessary costs.

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 adjustment 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 rule-making 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 must be carefully circumscribed and should recognize expressly the different competing consideration 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, gentlemen, and we look forward to further discussions and communications on some of the particulars that were raised that were very helpful.

Mr. Harvey Kapnick, chairman Arthur Andersen & Co. We are very pleased to welcome you before our committee, Mr. Kapnick, together with and flanked by eminent counsel.

STATEMENT OF HARVEY KAPNICK, CHAIRMAN AND CHIEF EXECUTIVE, ARTHUR ANDERSEN & CO., ACCOMPANIED BY MARIO V. MIRABELLI AND CHARLES BOWSHER

Mr. KAPNICK. Thank you, Mr. Chairman.

My name is Harvey Kapnick. As you have indicated, I am chairman of Arthur Anderson & Co., an international firm of public accountants with offices in 35 different countries and approximately 14,000 personnel. I have with me Mr. Mario Mirabelli of the law firm of Mirabelli and Gould, our counsel in this regard; and Mr. Charles Bowsher, a partner of our firm.

Many of our clients file financial statements with the Securities and Exchange Commission under the Securities Acts, and we report on such financial statements in accordance with the acts and the applicable rules and regulations. Therefore, we have considerable experience and knowledge about the financial accounting and reporting of corporations and the financial data in prospectuses that go to investors in connection with the issuance of corporate securities. Our firm has performed professional work for various departments of the Federal Government. As a public service, and at our own expense, we prepared in 1975 a booklet, "Sound Financial Reporting in the Public Sector-A Prerequisite to Fiscal Responsibility," which has created considerable interest and has been entered in the Congressional Record. Secretary of the Treasury Simon has announced that the Treasury plans to publish consolidated financial

statements on the accrual basis for the Federal Government as a whole for the fiscal year ending September 30, 1977.

During our fiscal year ended August 31, 1975, our firm performed professional work for: (1) 54 departments, agencies, authorities, and other entities of State governments in 25 States, and (2) 124 cities, districts, authorities, and other local governmental units in 25 States and the District of Columbia.

At the request of the Secretary of the Treasury, we prepared a special report in December 1975, regarding information relating to financial requirements under the New York City Seasonal Financing Act of 1975. We have also been recently engaged to survey the accounting and financial management practices of the District of Columbia. The purpose of this survey is to define and analyze existing problems and to develop a plan that would lead to the implementation of generally accepted accounting principles and an eventual auditors' opinion. The results of the survey are to be reported to the Senate Committee on The District of Columbia.

My purpose in testifying today is to present my views on the accounting and financial reporting of state and local government entities and their systems and controls, particularly as these matters relate to the issuance of securities by those entities. My comments are made for use by your committee and the Congress in considering the proposed legislation in the area of municipal securities. In my opinion, this issue is of utmost importance to all citizens of the United States. I am pleased that the Senate of the United States is considering legislation to protect citizens from abuses that have or could have occurred in this area.

I fully support the Municipal Securities Full Disclosure Act of 1976 (S. 2969) as it has been introduced in the Senate of the United States. There is an urgent need for legislation to give investors more adequate information, to place greater responsibility on the issuers for the information disseminated, to achieve more uniformity, and to establish better standards for information to be presented, all of which I believe will add more credibility to the market for municipal securities. This act's concept of requiring an annual report and a distribution statement for issuance of new securities under the prescribed conditions is, in my view, the minimum required at this time.

In addition, there is a need for uniform standards applicable to these documents from the standpoint of everyone concerned. The securities acts have been designed to protect investors. Investors in municipal securities need the same quality of information as investors in corporate securities. The concern of Congress and the public interest should be the same for both types of securities. Until recently, a clear case may not have existed for specific requirements covering municipal securities. However, with recent events casting serious doubts on whether certain governmental units can obtain the funds required for needed programs or for refinancing existing obligations, immediate action is required to assist such governmental units and to protect potential investors.

In my view, the program contemplated by the proposed bill would be greatly strengthened and enhanced in the view of investors, if the annual reports and distribution statements were to be filed with the Securities and Exchange Commission subsequent to their issuance. The SEC could then perform a monitoring function with respect to such documents, perhaps on a test basis. Such a function would enable the SEC to review compliance with the provisions of the bill, and the rules and regulations to be prescribed thereunder, in order to determine the general level of compliance and any changes in regulations or legislation that should be considered. To file the annual reports and distribution statements in a central repository only, with no review by the SEC, would seem to be missing an opportunity for monitoring by the SEC. Such a review would result in benefits far in excess of the costs. Also, an annual report by the SEC to the Congress concerning the results of this subsequent review would be beneficial in evaluating the success of this program.

I realize that the Securities Reform Act of 1975 contains a specific provision prohibiting any requirements for the issuer of municipal securities to file any documents with the SEC or the Municipal Securities Rulemaking Board prior to the offering of the securities. Nevertheless, a question continues to exist about whether registration of certain municipal securities under the Securities Act of 1933 would be in the public interest. The question of whether prior filing of documents is required will not be answered until experience is gained with the proposed program. This step could be omitted now, but this is one of the reasons that I suggest a monitoring function for the SEC to observe what is being done by the issuers of municipal securities and to make an annual report to the Congress reporting the results of that review. This subject is so important in my view that developments in this area should be considered by the Congress in a periodic and orderly manner for the next several years.

The cost of regulation to the issuers of municipal securities is undoubtedly of concern to many governmental entities and will represent an additional cost in many cases to be borne by taxpayers. However, the question is whether this cost is necessary to provide an orderly market for such securities and to protect the purchasers of municipal securities. This, of course, is a judgmental matter, but I believe that the public interest now must of necessity lean toward the investors. Also, the effects of the uncertainty that presently exists in the minds of investors with respect to municipal securities is difficult to judge, but it is certain to be of some significance to the ability of the market to absorb the securities as well as to the interest rates that must be paid. Any additional costs incurred as a result of the registration process and the greater disclosure requirements may be more than offset in the long run by lower interest costs resulting from greater investor confidence. In addition, another concern might be considered. In recent years, the interest rates of municipal securities have tended to increase faster than interest rates on longterm corporate bonds. Since our Federal tax system