exhibits, and three extra copies of the letter for the convenience of the staff.

Representatives of MISC, the four members of the Association and this firm will be happy to provide any additional information you may desire or to meet with members of the staff if it is felt that a conference would be desirable. If you have any questions, please feel free to call the undersigned or Richard L. Weill of this office collect.

very truly yours

Gregory duBois Erwin

In accordance with your request during the hearings
on S. 2574 and S. 2969 on February 25, I am pleased to enclose
for your consideration a memorandum discussing the constitu-
tionality of legislation that would expressly provide for
civil damage actions in federal courts by investors against
state and local issuers, and their officials, who use the
facilities of interstate commerce in marketing their bonds.
we can be of any further assistance to the Subcommittee, I
hope you will call on me.

If

WILMER CUTLER & PICKERING

1664 × STREET, K. ME MASHINGTON, A. C. 20004

March 9, 1976

MEMC RANDOM

Subject: Constitutionality of a Federal Statute Providing for Civil Damage Actions in Federal Courts Against Issuers of Municipal Securities and Their Officials

This memorandum addresses the question whether Congress has the constitutional authority to provide for civil actions in federal courts by investors against issuers of municipal securities and issuer officials, for damages incurred on account of false or misleading disclosure in connection with the offer or sale of municipal securities in interstate commerce. The memorandum assumes that the statute providing for such actions would be similar to Section 11 of the Securities Act of 1933 (the "1933 Act"), which provides for civil damage actions against, among others, issuers of corporate securities and their officials. The memorandum concludes that Congress does have the constitutional authority to provide for such civil damage actions with respect to municipal securities.

This memorandum does not discuss the authority of Congress to regulate the interstate offer or sale of municipal securities

* The term "municipal securities is used in this memorandum in the same sense as the term is defined in Section 3(a) (29) of the Securities Exchange Act of 1934. The term "issuers of muncipal securities thus includes states, cities, counties, and the agencies of states and their political subdivisions, among others.

because it seems clear that Congress has this power under Article I, Section 8, Clause 3 (the "Commerce Clause") of the Constitution. E.g., Fry v. United States, 421 U.S. 542 (1975); Maryland v. Wirtz, 392 U.S. 183 (1968); National League of Cities v. Brennan, Civ. Action No. 74-1812 (D.D.C., Dec. 31, 1974), prob. juris noted, 420 U.S. 906 (1975), set for reargument, 421 U.S. 986 (1975). Instead, the memorandum focuses on the remedial question Congress can provide for civil damage actions in federal courts against states, units of local government, and their officials, in order to effectuate the purposes of the regulation it has the power to establish.

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whether

The memorandum first provides some background information about the municipal securities disclosure legislation now pending in Congress, and about the legal question whether Congress has the authority to include in such legislation provisions for civil damage actions in federal courts against issuers of municipal securities and their officials. memorandum then turns, in order, to a discussion of the liability of a state itself, of units of local government subordinate to the state, and of officials of issuers of municipal securities.

The

Background

The Senate Committee on Banking, Housing and Urban Affairs is presently considering S. 2969, "The Municipal Securities Full Disclosure Act of 1976," introduced by Senator Williams and Senator Tower. In general, that bill would require that certain large issuers of municipal securities disclose financial and other

11,*/

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information about themselves in annual reports and distribution
statements (collectively, the "disclosure documents"). S. 2969
does not, as drafted, specifically deal with the question of the
responsibility of the issuer or its officials for the accuracy
and completeness of the information contained in the disclosure
documents. It has been suggested that Congress impose upon
issuers of municipal securities and their officials the kind of
liability for damages that is imposed on issuers of corporate
securities and their officials under Section 11 of the 1933 Act.
Under Section 11,' an issuer is, in general, liable
for damages suffered on account of any untrue statement of a
material fact in a registration statement or on account of any
omission to state a material fact required to be stated or
necessary to make the statements in the registration statement
not misleading. Corporate officials are liable for damages as
well, but have defenses not available to the issuer, including
the defense that the corporate official "had, after reasonable
investigation, reasonable ground to believe and did believe"
that the registration statement was true and that there was no
omission to state a material fact.

In view of the fact that issuers of municipal securities are often states, state agencies, and units of local government, and that their officials are often elected executive officers,

the question has been raised whether there is any legal prohibition

A copy of Section 11 is attached as Appendix A to this memorandum.