[Congressional Record Volume 142, Number 14 (Thursday, February 1, 1996)]
[Senate]
[Pages S737-S738]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
By Mr. BROWN:
S. 1549. A bill to improve regulation of the purchase and sale of
municipal securities, and for other purposes; to the Committee on
Banking, Housing, and Urban Affairs.
the municipal securities investor protection act of 1996
Mr. BROWN. Mr. President, I rise to offer a bill to protect municipal
securities investors.
The Securities Act of 1933, and the Exchange Act of 1934 were drafted
in response to the stock market crash of 1929. Congress passed the 1933
and 1934 acts to prevent fraud in the securities markets and ensure
uniform and reliable information for investors. At that time however,
Congress decided to exempt the relatively insignificant municipal
securities market from new laws, because unlike corporations, the
States, cities, and counties issuing bonds could back their obligations
with their power to raise taxes.
Now, with over 52,000 municipal issuers, and $1.2 trillion in
outstanding debt obligations, the municipal securities market in one of
the largest unregulated markets in the world. Complex financing
arrangements are created behind the shelter of the municipal securities
exemption. Over 70 percent of all municipal bonds are revenue bonds,
backed not by tax revenues, but the isolated revenues of special
projects like toll roads, powerplants and airports. Revenue bonds for
major projects can exceed $1 billion, and are often bought and sold
internationally by individuals, corporations, banks, and governments.
These revenue bonds present many of the same investment risks as
corporate enterprises, but because they are municipal securities, they
are subject only to voluntary market guidelines and the SEC's authority
to prevent fraud.
Since its inception, people have questioned whether the Security and
Exchange Commission's lack of authority over the municipal securities
market was adequate to protect investors. A 1993 staff report of the
Securities and Exchange Commission examined that question and commented
on the shortcomings of the SEC's authority: ``Because of the voluntary
nature of municipal issuers disclosure, there is a marked variance in
the quality of disclosure, during both the primary offering stage and
in the secondary market.'' Other groups have echoed the SEC's
sentiment. The Public Securities Association testified that,
``secondary market information is difficult to come by even for
professional municipal credit analysts, to say nothing of retail
investors.'' The SEC staff concluded that while the SEC could take
steps to improve disclosure, any comprehensive changes to the existing
system would require congressional action.
The SEC took an indirect step toward improving municipal securities
disclosure when it began enforcing 15c2-12 last summer. That rule
requires municipal securities dealers to contract with issuers for the
provision of disclosure documents and annual reports. These regulations
however, fall short of the protections offered investors in the 1933
and 1934 acts because they do not give the SEC the authority to review
municipal disclosures, regulate content, or require continuing
disclosure of financial information.
This bill would take additional steps toward full disclosure. Under
my proposal, a municipal security issuer who offers more than $1
billion in related securities, but does not pledge its taxing authority
toward repayment of the obligations, must conform to the registration
and continuous reporting requirements of the Securities Act of 1933 and
the Exchange Act of 1934. In other words, when a municipal issuer acts
like a corporation by pledging the revenues of a particular project
toward repayment of debt, it should be treated like a corporation.
Recent collapses in the municipal securities market underline the
need for congressional action:
New York: After issuing record levels of debt from 1974 through 1975,
New York City was unable to issue additional debt to cover maturing
obligations. As a result, $4 billion of the city's short-term bonds
lost over 45 percent of their value by December 1975, and interest
rates for municipalities across the Northeast and Mid-Atlantic regions
rose 0.05 percent. The subsequent SEC investigation uncovered distorted
financial information including a systematic overstatement of revenues.
Washington Public Power Supply System: With an initial cost estimate
of $2.25 billion to build nuclear reactors, the Washington Public Power
Supply System issued bonds between 1977 and 1981. By the time the final
bond sale was issued, the project's estimated cost exceeded $12
billion. Construction was halted, the WPPSS went into default, and the
SEC began investigating the WPPSS's disclosure practices.
The SEC found that the WPPSS had mislead investors by not releasing
reports about cost overruns, that underwriters failed to critically
analyze the information provided by the WPPSS, that bond rating
agencies failed to conduct due diligence to confirm WPPSS information,
and that attorneys provided unqualified legal opinions as to the
validity of the financing agreements. Ultimately no enforcement action
was taken because several class action civil suits concluded with the
Federal district court approving a $580 million global settlement.
Orange County: In 1994, a lack of disclosure led many investors of
Orange County bonds to be surprised when the Orange County investment
fund declared bankruptcy. The fund's risky investments in derivatives
led to a loss of over $1.7 billion and put every debt obligation of the
county at risk.
Denver International Airport: Original plans called for Denver to
finance its new $1.3 billion international airport with bonds backed by
operation revenues following its October 1993 opening. The actual cost
of the Denver International Airport [DIA] exceeded
[[Page S738]]
$4.8 billion and construction delays postponed its opening to February
28, 1995. Questions regarding contracting practices, construction
problems, and delays caused by its high-technology baggage system led
to several Federal and State investigations and class action lawsuits,
including an investigation by the SEC to review Denver's knowledge and
disclosure of delays with the baggage system.
These examples demonstrate how the voluntary nature of the municipal
market is failing to adequately inform investors. Whereas updated,
accurate information is readily available to investors of corporate
securities, municipal securities investors are often caught offguard
and unaware of the risks associated with their investment. Current law
only encourages municipalities to comply with the voluntary guidelines
of the Government Finance Officers Association, and only requires
disclosure of facts so as not to violate the antifraud provisions of
the 1933 and 1934 acts. In other words, municipal issuers are under no
obligation to provide annual financial information, conform to
generally accepted accounting principals, or report conflicts of
interest. In addition, disclosure is only necessary to avoid making a
material misstatements of fact, a standard which some commentators
argue is met by remaining silent even as material events and facts
change. The end result can be uniformed investors who suffer losses
from undisclosed risks.
This legislation is designed to protect investors by requiring
municipal issuers who act like corporations to meet the same
requirements as corporations. Instead of receiving guidance from
voluntary standards, municipalities and investors would have the
benefit of mandatory guidelines and requirements for judging what
information needs to be disclosed and what form it needs to take.
Instead of relying on documents which can be outdated and unaudited,
investors would be able to review the latest numbers when analyzing
risk. The end result would be greater information for investors, more
security for issuers, and lower cost for consumers.
In Denver's case, the requirements of the 1933 and 1934 acts could
have eliminated some of the problems the city now faces. Since issuers
under the 1933 act are strictly liable for misinformation in their
documents, the city would have taken extra precautions to accurately
disclose information in a timely manner--a practice which could have
prevented the facts driving the current SEC investigation. Investors
would be more willing to invest because they would be able to easily
obtain current, audited financial information similar in form and
content to other offerings. Finally, without the specter of pending
lawsuits and investigations, the cost of borrowing would go down saving
millions of dollars for the city and allowing it to lower rents to
airlines. Lower rents in turn would allow the airlines to pass savings
on to consumers in the form of lower ticket prices.
As the Denver example shows, everyone can benefit from the accurate
and continuous disclosure required of corporations by the securities
acts. If municipalities are going to operate like corporations, and
back securities with revenues from specific projects, then the
investing public deserves to receive complete and updated information
regarding those revenues. This bill takes the commonsense approach of
bringing municipalities who offer revenue bonds totaling more than $1
billion, under the same rules and regulations as faced by private
companies.
I ask unanimous consent that the bill be printed in the Record.
There being no objection, the bill was ordered to be printed in the
Record, as follows:
S. 1549
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Municipal Securities
Investor Protection Act of 1996''.
SEC. 2. TREATMENT OF MUNICIPAL SECURITIES IN THE SECURITIES
ACT OF 1933.
Section 3 of the Securities Act of 1933 (15 U.S.C. 77c) is
amended by adding at the end the following new subsection:
``(d)(1) Notwithstanding subsection (a)(2), a security
issued by a municipal issuer shall only be exempt from the
provisions of this title--
``(A) if the municipal issuer pledges the full faith and
credit or the taxing power of that municipal issuer to make
timely payments of principal and interest on the obligation;
or
``(B) if the municipal issuer--
``(i) offers or sells such securities in a single
transaction in an aggregate principal amount equal to less
than $1,000,000,000; or
``(ii) offers or sells such securities in a series of
related transactions, and at the time of the offer or sale of
such securities, does not reasonably anticipate that the
aggregate principal amount of the series of related
transactions will exceed $1,000,000,000.
``(2) For purposes of this subsection--
``(A) the term `municipal issuer' means--
``(i) a State, the District of Columbia, or a Territory of
the United States; or
``(ii) a public instrumentality or political subdivision of
an entity referred to in clause (i);
``(B) the term `series of related transactions' means a
series of separate securities offerings made--
``(i) as part of a single plan of financing; or
``(ii) for the same general purpose; and
``(C) the term `reasonably anticipate' shall have the
meaning provided that term by the Commission by regulation,
taking into consideration, as necessary or appropriate--
``(i) the public interest;
``(ii) the protection of investors; and
``(iii) the need to prevent the circumvention of the
requirements of this subsection.''.
SEC. 3. TREATMENT OF MUNICIPAL SECURITIES IN THE SECURITIES
EXCHANGE ACT OF 1934.
(a) In General.--Section 3(a)(12) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)(12)) is amended--
(1) in subparagraph (A), by striking clause (ii) and
inserting the following:
``(ii) any security issued by a municipal issuer with
respect to which the municipal issuer--
``(I) pledges the full faith and credit or the taxing power
of that municipal issuer to make timely payments of principal
and interest on the obligation; or
``(II)(aa) offers or sells such securities in a single
transaction in an aggregate principal amount equal to less
than $1,000,000,000; or
``(bb) offers or sells such securities in a series of
related transactions, and at the time of the offer or sale of
such securities, does not reasonably anticipate that the
aggregate principal amount of the series of related
transactions will exceed $1,000,000,000;'';
(2) in subparagraph (B)(ii), by striking ``municipal
securities'' and inserting ``the securities described in
subparagraph (A)(ii)'';
(3) by redesignating subparagraph (C) as subparagraph (D);
and
(4) by inserting after subparagraph (B) the following:
``(C) For purposes of subparagraph (A)(ii)--
``(i) the term `municipal issuer' means--
``(I) a State or any political subdivision thereof, or an
agency or instrumentality of a State or any political
subdivision thereof; or
``(II) any municipal corporate instrumentality of a State;
``(ii) the term `series of related transactions' means a
series of separate securities offerings made--
``(I) as part of a single plan of financing; or
``(II) for the same general purpose; and
``(iii) the term `reasonably anticipate' shall have the
meaning provided that term by the Commission by regulation,
taking into consideration, as necessary or appropriate--
``(I) the public interest;
``(II) the protection of investors; and
``(III) the need to prevent the circumvention of the
requirements of subparagraph (A)(ii).''.
(b) Treatment of Municipal Securities That Are Not Exempted
Securities.--The third sentence of section 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78o(d)) is amended
by inserting before the period the following: ``, except
that, with respect to a class of municipal securities that
are not exempted securities, the duty to file under this
subsection may not be suspended by reason of the number of
security holders of record of that class of municipal
securities''.
(c) Reporting Prior to the Sale of Securities.--Section
15B(d)(1) of the Securities Exchange Act of 1934 (15 U.S.C.
78o-4(d)(1)) is amended--
(1) by striking ``(d)(1) Neither'' and inserting
``(d)(1)(A) Except as provided in subparagraph (B),
neither''; and
(2) by adding at the end the following new subparagraph:
``(B) Subparagraph (A) does not apply to an issuer of any
municipal security that is not an exempted security.''.
SEC. 4. TREATMENT OF CERTAIN MUNICIPAL SECURITIES IN THE
TRUST INDENTURE ACT OF 1939.
Section 304(a)(4) of the Trust Indenture Act of 1939 (15
U.S.C. 77ddd(a)(4)) is amended by striking ``of subsection
3(a) thereof'' and inserting ``of subsection (a), or
subsection (d) of section 3 of that Act''.
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