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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.

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WILMER, CUTLER & PICKERING

1666 K STREET, N. W. WASHINGTON, D. C. 20006

CALLC ADDRESS: WICRING WASM., D. C.
INTERNATIONAL TELEX: 440-230

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TELEPHONE 201 372-6000

RICHARD W. WILMER

TIMOTHY . OYA LLOVO N CUTIER

DAVOR ANDERSON JOHN W PICENO

J RODERICK KELLERE MANUEL CONEN

ARTHUA. MATME HUGH AN SMITH

JAMES S. CAMPOCLL LOUIS! OOCROORICA

DENSIS LARNCRY J. ROGER WOLLENDERG

DANIEL MARCUS CHARLES COLOVE,

JANOB ROBERTSON MARSHALL MORNBLOWER BAYMONO C. CLEVENOER, HENRY T. RATMOUN

LOUIS. CONEN Ptt cán

WICHAEL LCD GANUEL J. LANANAN

STEPHEN AWCISSASSCA WILLIAN A PERUK

TIMOTHY N. OLACA SAMVCL A. STEAN

SALLY MATIC ARNOLD MLERMAN

DAVID LANG, JR ROBERT STRANAMAN, JA PAUL MODE DA MAI OTRUTT JA

STEEN OLACA OCL ROSCNOLOON

C. OVOCN GAAT WOWARDR WILLENS

RONALD GRCENE ANDACLAMAC DONALD

JAT LAPIN Phi Hoo E

DEANNE C. SIEMER
DANIEL A MAYERS

GARY D. WILSON
CZEKIEL G STODOARD
SCRARO C. SUITM

COUNCE

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RICHARD A. ALLEN
PETERD OCWLEY
STEWART A BLOCA
LACALAND NOLOOM, JR.
MICHAEL LOUBACH

CHARO CASS
LARRY O CHASE
WILWELMIRA ACUDEN COOKE
MCHCLC . CORASH
PATRICIA O DOVOLASS
S. ALLEN CARLY DE
JANCS A FARRAND
NANCY C. GARRISON
NCAL M.OOLDOCRO
CORNELIUS J. GOLDEN, JA
FRANCES N ORLEN
MOOCRT C. MACHER
ALLEN M. MARRISONJA,
JOHN M. MARWOOD
MICHAEL S NELER
A. STEPHEN MUT JA
C. LORING JOTTON, JR

CUROPEAN OFFICE

DAVID R. JONNSON
NEIL KING
WILLIAM J NOLASAY, JR
JOMNM NORNS
NOEL ANRETELL KRAMCR
WILLIAN LLAC
CARTOLERMAN
Loit 1 HCM
MARY A MERCYNOLDS
A. DOUGLAS NELANED
ROOKRT MORRIS
RICHARO O. PAISNER
PHILLIP L. RADOF.
RENT TOWNSENO ROBINSON
JONN

HN ROUNSAVILLE, JA
MICHAEL 3 SCHOOLER
KAREN HOSEA SCHWARTZ
THEODORCS SINS
MARIANNE & SMYTME
DOUGLAS G. THOMPSON,
ALAN CITY
ALTCR 7 MINSLOW, R.
ROG CR N SITTEN

S, CMCAPSIDE
LONDON, ECEV GAA, ENGLAND
TELEPHONE 01-230-2401

TCLCX: «SI 38 32 42
CAILE ADDRESS: WICRING, LONDON

March 9, 1976

Dear Mr. Chairman:

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 constitutionality 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. If we can be of any further assistance to the Subcommittee, I hope you will call on me.

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Nenny Tubun

,

Henry

Rathbun

f Senator Harrison A. Williams, Jr. Chairman, Subcommittee on Securities Senate Committee on Banking, Housing and Urban Affairs

352 Russell Senate Office Building

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WILMER. CUTLER & PICKERING

1660 K STREET, N. W

WASHINGTON, D. C. 20006
March 9, 1976

MEMORANDUM

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 securi

ties.

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 Ehe 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.

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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

whether

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.

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.

The

memorandum then turns, in order, to a discussion of the lia

bility of a state itself, of units of local government subordi

nate to the state, and of officials of issuers of municipal

securities.

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

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 ll 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.

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