- 17 the purchasing underwriters or syndicate in respect of the sale of (2) If it is impracticable to state the price to the public or to (3) See Explanation 2 to Section 4(b) as to the meaning of the term (b) If there are arrangements for indemnification by the issuer of the purchasing underwriters or syndicate or their controlling persons against liabilities arising under the federal securities laws, a brief description of such indemnification arrangements should be furnished. SECTION A-2. PLAN OF DISTRIBUTION State briefly the Give the names and addresses of the managing underwriters. nature of the purchasing underwriters' or syndicate's obligation to take the securities if it is other than on a firm commitment basis. Explanation of Section A-2: All that is suggested in the last sentence as to the nature of the SECTION A-3. INTEREST COUPONS State in tabular or other appropriate form the rates of interest payable on differing coupons of securities being offered. This should be expressed as the yield to the first call date and to the final maturity date (i) on each such coupon and (ii) on each series of the securities being offered. SECTION A-4. RATINGS State all ratings of the securities being offered and the names of the rating agencies. If the ratings are provisional, that should be stated. In addition, there should be stated ratings of any other outstanding securities of the issuer secured similarly to the securities being offered. If no ratings have been obtained on any such securities, a statement should be made to such effect. Changes in any ratings of any securities of the issuer during the preceding two years should be described. 18 APPENDIX B The disclosure of information in the securities markets is governed by federal regulations that are designed to protect investors against misleading statements or omissions of important facts. Rule 10b-5 promulgated by the Securities and Exchange Commission under 10 (b) of the Securities Act of 1934 provides as follows: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, (a) to employ any device, scheme, or artifice to defraud, (b) to make any untrue statement of a material fact or to omit to (c) to engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. Section 17(a) of the Securities Act of 1933 contains similar provisions requiring full disclosure. "Full" disclosure for this purpose means disclosure of all information material to investors. The Supreme Court has stated that "material" information includes all information which "a reasonable investor might [consider] important in the making of [a] decision." Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54 (1972) [emphasis added]. The antifraud provisions have been held to protect "speculators and chartists" as well as "conservative" investors. SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d Cir. 1968). Consequently, the requirement of full disclosure of material information means a considerable amount of information must be disclosed to prevent liability of parties involved in an offering and to prevent the possibility of injunctions or other legal remedies which may arise as a result of violations of these provisions. In addition to civil remedies for violation of the federal antifraud provisions, Section 24 of the Securities Act of 1933 and Section 32 of the Securities Exchange Act of 1934 provide for criminal penalties in the event of a "willful" violation of any of the provisions, including the antifraud provisions, contained in those Acts. These Guidelines represent an MFOA Exposure Draft dated November 10, 1975. They are currently under review by the MFOA Executive Board and the MFOA Committee on Debt Administration for formal adoption pending comments, criticisms and suggestions from MFOA members and other individuals interested or involved in the marketing of state and local securities. comments should be submitted to: John E. Petersen, Director, MFOA Washington, D.C. office, Suite 512, 1730 Rhode Island Avenue, N.W., Washington, D.C. 20036. All Published by the Municipal Finance Officers Association of the United States and Canada, 1313 East 60th Street, Chicago, Illinois 60637. Last summer, dealers and underwriters of municipal bonds came under regulation by the Securities and Exchange Commission as a result of newly-enacted Amendments to the Federal Securities Laws. The Municipal Rulemaking Board was created to promulgate registration requirements and regulate the municipal securities industry. These new laws are of great importance to state and local debt issuers as well. Although the Amendments exempt issuers from regulation, the development of disclosure requirements under existing securities laws and increasing investor demand for information do necessitate more timely and detailed provision of information by state and local issuers. This Analysis outlines the new framework for regulation of the municipal securities industry and explains such disclosure needs and how these needs might be better fulfilled. MPOA has also developed a set of Disclosure Guidelines for use by issuers in an effort to improve existing information practices in bond sales. These Guidelines are not intended to create disclosure requirements; rather, they are intended to suggest information which may be considered of importance by investors. The Guidelines will be available from MFOA for member review and comment and will be considered by the MFOA Executive Board for formal adoption early next year. For a copy of the suggested Guidelines, at no charge, please complete and mail the coupon attached to page 7 of this Analysis and mail it to MFOA, 1313 East 60th St., Chicago, IL 60637. A copy of the Guidelines will be mailed to you within two weeks. Robert W. Doty is currently Asst. Professor of Law at Creighton Law School in Omaha, Nebraska. He is a Senior Investigator on the MPOA-NSF Grant Project on Reporting, Evaluating and Improving Municipal Credit Condition. John E. Petersen is currently Director of the Washington, D.C. MFOA Office and Staff Economist. He is directing the MFCA-NSF Grant Project. MFOA I. NEW REGULATORY FRAMEWORK AND DISCLOSURE NEEDS The Securities Acts Amendments of 1975. In recent months there has been much turmoil in the municipal securities market. To a great degree, this has been due to the financial problems of New York City, the State of New York and its agencies, and other governmental issuers about whom investors are becoming increasingly concerned. In part, this concern relates to the adequacy of information that is provided about the financial condition of governments and its availability to investors. The market's response to the financial problems of various large borrowers has been such as to place a premium on those issues and issuers that provide good information and who are considered to be of the highest quality in terms of credit risk. Other elements of uncertainty in the municipal bond market have been injected by the recent passage of the Securities Acts Amendments of 1975. These Amendments, signed into law on June 5, 1975, represent the most important changes in the regulation of the securities industry in the last 40 years. A major change is the extension of regulation to the municipal bond market under the Federal securities laws. The new municipal regulation calls for the registration and regulation of municipal security dealers by December 5, 1975. The regulation of the industry will be affected through a new entity entitled the Municipal Securities Rulemaking Board. Prior to the passage of the Securities Acts Amendments, brokers and dealers doing business solely in municipal securities were not subject to regulation by the Securities and Exchange Commission (SEC) or any other regulatory entity of the Federal government. However, pursuant to the new Act the Rulemaking Board will adopt the relevant regulatory provisions, subject to SEC oversight. An important aspect of the Act is that it exempts issuers of municipal securities from regulation. In particular it prohibits the 133 EAST 60TH STREET CHICAGO ILLINOIS 60637 MUNICIPAL FINANCE OFFICERS ASSOCIATION promulgation of information requirements for issuers in connection with the offerings of their securities, either directly or indirectly through disclosure requirements placed on underwriters. 1 Nevertheless, it is extremely important that issuers be aware of the fact that the antifraud provisions of the Federal securities laws apply to their offerings and to other transactions in municipal securities." Consequently, because of the evolutionary development of disclosure requirements under these laws, State and local governmental borrowers should be aware of their obligations for the provision of information to investors. The exact extent of such obligations, however, may be subject to resolution of questions under the 11th Amendment of the United States Constitution and under the common law doctrine of sovereign immunity. Laying aside such questions, State and local governmental issuers, in brief, must not present investors with information that is materially misleading in connection with ofierings of their securities and they must not omit any material fact necessary in the light of the statements made. Of course, aside from the strictly legal requirements that are involved in the antifraud provisions, it is important that issuers in attempting to achieve the best market for their securities provide all information that might be useful to an investor in making an investment decision. The concept of materiality is key in determining the amount and type of information that must be disclosed. This concept will be discussed in more detail below. Suffice it to say that the notion of materiality as embodied in securities law possesses considerable scope and vagueness, according to latest court interpretations. Therefore, its satisfaction in practice quite likely requires the providing of a large amount of information, carefully prepared and disclosed, in order that there not be possible exposure to antifraud liabilities by issuers or underwriters in connection with their bond offerings. Description and Significance of Municipal Regulation. With the amendment of the securities acts to regulate certain transactions in municipal securities several significant relationships have changed. First, the SEC has become directly involved in the regulation of the municipal securities trading markets. Second, the SEC has also assumed certain regulatory functions regarding commercial banks performing a dealer function similar to that of other securities dealers. The banks, as a result, are now subject to dual regulation by the SEC and the bank regulators when they act as dealers in municipal securities. Third, there has been established a new self-regulatory body, the Municipal Securities Rulemaking Board, which now has legislative authority over the municipal securities industry. Fourth, the actual day-to-day enforcement and inspection of the new regulatory scheme will be undertaken by various bank regulatory agencies The new regulation is a form of selfregulation with the primary medium of rulemaking being the Municipal Securities Rulemaking Board. The Board is intended to have broad powers. The Senate report in discussing the development of rules for the municipal market directs that the Rulemaking Board should be the primary mechanism for regulation of the municipal securities market and should be furnished ample opportunity to develop responsible rules for the industry. The Board, which was appointed by the Securities and Exchange Commission in September of this year, consists of 15 members equally divided among public representatives, bank municipal securities dealer representatives, and municipal securities broker and dealer representatives. 2 The Board, under the Amendments Act, has very broad areas of authority. These generally have to do with establishing procedures providing for arbitration of disputes among dealers, periodic examination and inspection programs, record keeping requirements, adoption of rules to assure fair and informative quotations on the municipal securities, and finally, various housekeeping powers pertaining to the internal operation of the Board and its expenses. While the Board has the power to adopt rules, the SEC retains the ultimate authority to delete or amend such rules or to compel the adoption of new rules, if necessary. Thus, the self-regulation is ultimately founded on the basis of a delegation of part of the newly created authority for direct regulation over the municipal bond market that has now been granted to the Securities and Exchange Commission. 4 Of particular interest to governmental issuers is their continued exemption from the registration requirements of the Securities Act of 1933 and from the registration and reporting requirements of the Securities Exchange Act of 1934. Three items contained in the Securities Amendments are of particular importance to issuers: (1) Under Section 3 (d), issuers of municipal securities and their employees are not considered brokers, dealers, or municipal securities dealers and therefore need not register. (2) Under Section 15B (d) (1), neither the SEC nor the Board can require an issuer of municipal securities to file information prior to the sale of securities; and (3) Under Section 15B (d) (2), the Board cannot require an issuer to furnish information regarding the issuer, either directly or indirectly through a municipal securities dealer or otherwise. However, the Board can require dealers to supply only such information about issuers that is generally available from a source other than the issuer. The latter two limitations of authority and power have come to be known as the |