[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''.
                                 ______