lation, regulatory agency, or court action to move for designing a workable standard. The record shows MFOA anticipated its need and the guidelines are fulfilling that need. Mr. Chairman, attached to our testimony is a copy of a policy statement adopted by MFOA membership at its annual meeting in May which reiterates our stand on such Federal regulation.

At this point, Mr. Chairman, I would also like to add that I have been asked by the National League of Cities and the National Association of Counties to say that they, too, favor voluntary disclosure in lieu of Federal regulation.

As noted, the major disclosure problem is rapidly becoming less one of getting issuers to tell all, but rather one of affixing levels of responsibility in the collection and investigation of information and in its certification. We believe that this problem can be solved by the promulgation of procedural policies by an authoritative body. Some States are already moving in this direction, and we are actively working for agreement among all authoritative groups on this question at a national level. Some Federal legislation may be needed, or it may be possible to do this without such legislation. We submit that the many alternatives have not been adequately explored. These hearings are most helpful in focusing attention on the fact that such exploration should be diligently and rapidly pursued.

To the end of rapidly designing and disseminating standards of disclosure in this area, we have undertaken many steps. MFOA, along with many private and industry groups, has sponsored educational seminars on the subject throughout the Nation. We are continuing our commitment to study in depth and dispassionately the provisions and use of credit information and its ability to reflect accurately credit quality. We have shared, and will continue to share, the fruits of this research work with the Congress, the SEC and others. We wish to assist them in their information needs, and we continue to need their assistance.

The need to increase the quality and uniformity of governmental financial reporting and accounting practices is clear. We believe that progress in these practices will be rapid because new and extremely effective incentives are now at hand pointing the way, bond market discipline, the requirements for disclosure already on the books, the very occurrence of these hearings. To the extent that States and localities and other market participants are permitted an opportunity to do this for themselves, they will continue to be on the spot to prove their effectiveness as partners in a Federal system. State and local officials are not out to defraud the public they are sworn to serve. If they do, they will go to jail. By the same token, they have both responsibilities and rights to do their jobs without a Federal checkrein until such time as they have defaulted on their obligations to investors and the public at large.

Mr. Chairman, Mr. Boyles.

STATEMENT OF HARLAN E. BOYLES

Mr. BOYLES. Mr. Chairman and members of the committee, I don't have a prepared statement as such, but I would like to make a few points, in that the State of North Carolina is often cited as being one

of the States that we might look to as an example for giving leadership to the units of local government in the issuance of their securities.

Of course, we are proud that North Carolina has had a very favorable experience in this area, and, of course, the favorable experience has been in the form of lower interest costs to the taxpayers of the municipal borrowers.

But I would note that the urgency of the situation that we are now dealing with, to me, seemingly, has passed. The market, of course, is responding to the difficult situation that we were faced with some 9 months ago; so as a consequence, certainly representing an issue of some $50 million to $300 million in securities per year, we do not see the difficult situation that existed some months ago as continuing today.

The other thing, and the real point that I would make here is notwithstanding that the State of North Carolina would be exempt under the terms of this proposal, there seems to us to be many alternatives much superior to the one being proposed here today, and those alternatives, of course, include such things as voluntary compliance or maybe the identification of underwriter's liability, or even maybe we should look to other regulatory agencies to prescribe standards of accounting and reporting practices.

I think that, in essence, what I am saying is that we should look to the other alternatives before we seriously consider enacting this legislation.

Thank you, and I would be glad to respond to any specific questions. But I think Mr. Petersen has some prepared remarks.

STATEMENT OF JOHN E. PETERSEN

Mr. PETERSEN. Thank you.

Mr. Blum referred to a series of studies that the Municipal Finance Officers Association has been conducting under a grant provided by the National Science Foundation. These studies deal with the general problem area of reporting, evaluating and improving municipal credit conditions.

There are five tasks involved in the research project which commerced nearly 18 months ago, but the one which has probably gotten the most attention is that having to do with analysis of investor needs for municipal credit information and investor perceptions of credit. quality. The purpose here is to really go to the heart of investor behavior in an attempt to discover what kinds of information they need in order to make a rational decision on how it can be better provided. One of the areas that we looked into initially was to survey what was best practice of the municipal bond market in terms of disclosure, provision of information to investors, and to compare this with what other requirements we find developed under the Federal securities laws. This was done in order to set forward a statement of recommended items for disclosure for offerings of municipal securities. That is a big job. As previous witnesses have indicated, it is a big market from the standpoint of the number of issuers-many, many times the size of the corporate security market. But we did feel that, relving upon best practice among municipal analysts, and taking a good look at the

Federal antifraud provisions, such guidelines could be set forward, and that they would be adopted in the market if they had merit.

Now, this occurred really before the New York City debacle and perhaps was prescient from that standpoint.

In any event, a subcommittee of investment bankers, commercial bankers, analysts, finance officials, and others was put together and it drafted a set of recommended disclosure guidelines for municipal securities. The first draft was put into limited circulation in July of last year for comment; and, after many reviews and many comments, it was brought forward November 10 of last year-the November 10 draft of the MFOA disclosure guidelines, as they are often referred to. Approximately 4,000 copies of these guidelines have been distributed throughout the country. We have had training sessions that were sponsored by the Municipal Finance Officers Association in six cities, as well as a large number of programs sponsored by the legal profession, the American Law Institute, Practicing Law Institute, and others. These were dedicated to the question of improving municipal disclosure, and in many cases, the use of the MFOA guidelines.

Now, I want to point out that the guidelines are a draft. They are a set of recommendations. They have no legal standing, as such. But they are an attempt, an effective attempt, at getting a greater consolidation of views in terms of what are the items that investors really need to have disclosed, and to promote this kind of disclosure by issuers and by financial advisers and underwriters who assist them in the preparation of their bond issues.

Another part of the study has been an examination of the contents of official statements that are issued by municipal issuers in conjunction with bond sales. We did two surveys. We did a survey last fall and one again this spring, approximately 200 general obligation bonds were contained in each survey sample.

We haven't completed our analysis yet, but I think that when that analysis is done, it will show a quantum jump in the level of disclosure in the municipal bond industry.

Now, why did this occur?

Well, it occurred because the market demandel it, and the market demanded it because a lot of people were uncertain as to their liabilities under the antifraud provisions. Investors, newly awakened to the problems of municipal credit, started asking more questions, and municipal issures, in order to get successful bids on their bonds, had to supply it.

I don't want to oversimplify what is a very complex problem. But I would say, objectively speaking, that the kinds of analysis that we have done as part of this project do show a greatly heightened awareness of the disclosure problem, and an actual demonstration of an ability of a market to meet the needs as they are perceived.

I don't want to influence unduly the decision of others in terms of what they see as the relative merits of various pieces of Federal legislation that may be brought into the market. But, I do think that it is very important that whatever design we adopt meet the needs of the investors, and that we make other issues secondary. It very well may be that the most efficient and economical system that is available is one which relies on existing statutes and upon the sheer necessity of

issuers, in order to successfully market bonds, to provide the information that is requested.

Mr. MCCOLLISTER. Mr. Petersen, could I interrupt at that point? Mr. PETERSEN. Yes.

Mr. MCCOLLISTER. This is just the disclosure requirements that your organization has put together and distributed.

How well did it match the requirements listed in the bill before us? Mr. PETERSEN. Very closely except that as a matter of fact, the disclosure guidelines go into considerably more detail. It would be my assumption that the items contained in the bill would have to be expanded by regulation in order to encompass the areas that we deal with in the guidelines. The guidelines are an attempt to go to principles, to look at the most important items. But we are faced with very difficult problems in terms of allowing enough flexibility, because we are disclosing on notes, we are disclosing on sewer and water bonds, issues by small issuers, school district bonds. There is a tremendous range and variety in this market's transactions.

Mr. MCCOLLISTER. I am glad that the sequence of your testifying was changed, because one of the questions I am going to put to the next witness is how well is the market responding to this new need for information, and how much more difficult is it for a municipality not meeting the disclosure standards your organizations have put together, how much more difficult is it for them to attract bidders, to attract capital that they need if your point is correct, I hope it is, than the self-correcting features of the market will show that those municipalities not meeting those standards have a much more difficult time marketing their securities.

Mr. PETERSEN. The evidence we have been able to put together thus far would demonstrate there is a considerably higher level of disclosure. I am not going to argue that it is ideal, that it is full disclosure from the standpoint of covering every single item, but the direction is clear and the improvement is substantial.

I would like to add that the draft disclosure guidelines, the November 10 guidelines are in the process of revision. This is part of the project and part of the original intent. There are two committees that are working on these revisions. We hope to have a new set of guidelines available for comment within 1 month or so.

So the progress is continuing, and I think there is ample evidence. that they have had an impact and there has been considerable improvement in this area.

I will submit for the record, if I may, a brief report on the project, and other aspects of the projects which I did not cover this morning. Mr. MURPHY. We will accept that for the record, without objection. [Testimony resumes on p. 84.]

[The documents referred to follow:]

DISCLOSURE GUIDELINES FOR OFFERINGS OF
SECURITIES BY STATE AND LOCAL GOVERNMENTS

INTRODUCTION

7

MUNCHAL FINANCE

OFFICERS ASSOCIATION

A project has been underway for the past year that is designed to assist in satisfying the increased needs for investor information and the increased concern of issuers as to achieving compliance with the antifraud requirements of the Federal securities laws. The project, involving a broad cross-section of bond participants and professionals, has been sponsored by the MFOA, whose participation has been financed, in part, by a grant from the National Science Foundation.

A major product of the project has been to prepare suggested guidelines for informational documents used in municipal securities offerings. These documents are usually referred to as official statements or, sometimes, as prospectuses.

The proposed Guidelines are suggestions of information which may be disclosed in offerings of municipal securities. The Guidelines are not intended to be legally binding. Rather, they are suggestions of information that usually should be included in official statements because it will be relevant to investors on most occasions for most issuers.

All persons interested in these matters should review the Guidelines and should send their comments to: John E. Petersen, Director, MFOA Washington Office, Suite 512, 1730 Rhode Island Avenue, N.W., Washington, D.C. 20036.

GENERAL INSTRUCTIONS

A. USE OF GUIDELINES

These Guidelines are designed for use in providing information to investors in connection with offerings of securities to state and local governments.

*

Exposure Draft, November 10, 1975. An MFOA Analysis "Regulation of the Municipal Securities Market and its Relationship to the Governmental Issuer" that discusses both the use of the Guidelines and the new Federal regulation framework for the municipal securities industry is available from the MFOA at 1313 East 60th St., Chicago, IL 60637 at $1.50 per copy.