Securities Laws and the Municipal Market:

                              

     Points Every Market Participant Should Keep in Mind


                              

                        Paul S. Maco

          Director, Office of Municipal Securities
          U.S. Securities and Exchange Commission 


                              
 Before the Florida Government Finance Officers Association


                       Naples, Florida

                              

                        June 7, 1999


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The Securities and Exchange Commission, as a matter of policy,
disclaims responsibility for any private publication or 
statement by any of its employees. The views expressed herein 
are those of the author and do not necessarily reflect the 
views of the Commission or of the author's colleagues on the 
Commission staff.
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     Our presentation today is one of many efforts we have

underway to remind all participants of the application of

the federal securities laws in the municipal market.  The

Office of Municipal Securities has put together the text of

over 140 Commission enforcement proceedings involving

municipal market participants referred to in the

presentation.  This compilation exceeds five hundred pages,

offering you and your advisors one hundred forty-four

illustrations of "facts and circumstances."


     Several observations may be made from an overview of

these cases, although I should point out that, individually,

each case speaks very well for itself.  First, the cases

involve a variety of issuers, including general obligation

issuers, together with issuers of revenue and conduit bonds.

Stale and misleading accounting frequently is at the heart

of disclosure problems.  A good number of the cases involve

health care facilities and dirt bond projects.  As efforts

to prepare voluntary disclosure guides for these sectors are

underway, the clear message of these cases should not be

overlooked by health care institutions or developers.  Many

of the financial advisor and underwriter cases, including

recent yield burning settlements, contain findings of

professionals breaching their fiduciary duty - often towards

you, the issuer.  Many of the cases involve hidden payments,

kickbacks and other corrupt practices.


     As we warn you right up front, the 500 page compilation

is a small part of the picture. Many key cases interpreting

the antifraud provisions do not even remotely involve a

municipal bond. You will not find them in the compilation,

but your advisors should be familiar with them. Many actions

under the securities laws involving municipal bonds have

been brought by private litigants.  You will not find them

here either. Again, your lawyers should be familiar with

them.


     The compilation was included in materials for the

recent Washington Workshop of the National Association of

Bond Lawyers.  We plan to provide it to the Section of State

and Local Government Law of the American Bar Association and

the International Municipal Lawyers Association.  You may

want to find out if your counsel is familiar with these

proceedings and other basics of the securities laws before

you look to them for advice on securities law matters.


     Enforcement is only one part of the Commission's

efforts to improve the municipal market in the United

States.  By now, I expect that you are familiar with the

framework for secondary market disclosure put in place

almost five years ago by Rule 15c2-12.  Combined with

enforcement activity, our efforts to end pay to play, by

dealers, lawyers and others through MSRB Rule G-37 and

voluntary initiatives have made progress in attacking

corruption and conflict of interest in the municipal market.

These efforts are making what The Economist only a few years

ago called "America's notoriously corrupt municipal bond

market" a thing of the past.


     Even though municipal borrowing in the United States

has been going on for almost two hundred years, the

importance of timely and accurate information to investors

and to markets bears continuing emphasis.  Price

transparency, reliable accounting, accurate disclosure in

primary and secondary markets and markets free from

conflicts of interest and corruption, are concerns of

markets and investors worldwide.  It should be no surprise

that they are of concern at home in our municipal bond

market or that they have been the focus of Commission

efforts over the last five years.


     There are several ideas I will offer you today - on

Y2K, Electronic Disclosure, Internet disclosure, and

continuing disclosure - and information you may find

surprising about the municipal market.  Our enforcement

actions carry messages too -- including don't run with

scissors or play Russian Roulette. I hope you carry these

thoughts with you when this conference is over and you

return to the important work you do every day.


     Now first, for that surprising news.  In testimony

before Congress a few weeks ago, the municipal bond market

was held up as an example for the corporate bond market to

follow.  The issue is price transparency - the ability of an

investor to know the trading price of his or her bonds. In

transparency, the closer market information is to right now,

the better.


     Today, at the end of each day, every broker-dealer

buying or selling municipal securities reports its trades to

the MSRB.  Overnight, the trade data is processed and at

6:00 am on the following business day, the trading data is

released - price and volume for every municipal bond that

traded four or more times during the trading day.  The Bond

Market Association now posts this information on its

website, where anyone with access to the internet may obtain

it. The MSRB has announced that it will shortly expand this

data.  Investors not only benefit from recent price

information, but also from the increased ability of

regulators to oversee the market as a result of the

reporting system.  Regulators now have access to virtually

all trades in the municipal market - and the tracks of any

fraudulent trading activity.


     Last fall, Chairman Levitt called on the NASD to not

only equal but exceed the next day reporting for municipal

bonds and put in place real time reporting for corporate

bond transactions.  The NASD has taken up the challenge, but

as we enter the next century, municipal market transparency

is the model.


     It's hard to mention the next century without bringing

up Y2K.  You should be aware that last summer the Commission

issued a release discussing disclosure responsibilities of

issuers on Y2K matters. A portion of this release

specifically addresses municipal issuers.  Generally, the

release reminds municipal issuers that the effect of the Y2K

problem may be material to investors - and gives a heads up

that such information may need to be disclosed in order to

avoid trouble under the antifraud provisions. Issuers, and

those assisting issuers in preparing disclosure, should

consider Y2K issuers in preparing all disclosure documents,

whether an official statement, a CAFR or other filing under

a continuing disclosure covenant or other disclosure

reasonably expecting to reach investors and the trading

market.  Boilerplate, it should be clear, does not help in

Y2K or any other disclosure topic.  Boilerplate itself can

be misleading.  Don't give in to the temptation to

substitute it for meaningful disclosure.


     You may have heard discussion this past year of use of

electronic official statements.   Perhaps you have used one

yourself.  The Commission has stated in an interpretive

release that electronic delivery of official statements by

broker dealers is permissible under Rule15c2-12 - provided

certain standards are met, including notice, access and

evidence to show delivery.  Some customers may not have

access to means of electronic communications - today,

households with internet access still do not exceed 50% - so

paper remains part of the process for most practical

purposes. Dealers still must file papers official statements

under G-36 - with the MSRB, although the MSRB has indicated

dealers may comply electronically with certain other MSRB

rules.  Issuers should be sensitive to dealer obligations

under the MSRB rules, in this as in other contexts.


     This is a good point for a reminder that regardless of

whether your disclosure is on paper or transmitted

electronically, the antifraud provisions apply.  Keep this

in mind with respect to Internet - and other -- disclosure.

If a statement is made reaching markets or investors, the

anti fraud provisions apply, regardless of whether the

statement is on paper, or delivered electronically.   The

following question may prove a useful rule of thumb for you:

"If it violates the law on paper, how is it suddenly legal

when on the internet?"


     Analysts have frequently complained of delayed and

stale continuing disclosure in sectors such as health care.

Hospital and other conduit borrowers should be aware the

anti-fraud provisions apply to such disclosure and stale,

misleading disclosure carries with it potential liability

under the antifraud provisions. The cases we have brought on

bad disclosure in official statements provide guidance to

other disclosure - including annual reports under 15c2-12

and other statements.  Stale and misleading accounting

information can create as much trouble for you in a report

filed with a central repository as it can in an official

statement in a primary offering.  Two easy ways to avoid

this problem: (1) provide on a timely bases and (2) if

necessary, provide an update.  An issuer providing stale

disclosure into the secondary market is playing Russian

Roulette with the antifraud provisions.


     I promised to talk a bit about our enforcement actions

and the messages they carry.  Earlier, we quickly reviewed

enforcement actions brought by the Commission in the

municipal market over the last thirty years.  This past

year, the Commission brought several enforcement actions

against issuers of municipal securities, including the

settled proceedings involving 39 issuers in Mississippi

found to have violated the antifraud provisions.  The

message is if you authorize something to be disclosed to

investors, be sure you're comfortable with it. As the

Commission's order states: "Issuers may not blindly rely on

professionals such as bond counsel, to ensure that factual

representations being made by the issuers are accurate."  In

other words, you can't just hire someone and go to the

beach.


     Recent enforcement actions include a number of cases

against professionals, including financial advisers and

lawyers, who have defrauded issuers as well as investors.

We have also brought cases against financial advisors who

mislead issuers by failing to disclose the full extent of

the fee's received in a transaction. The recently settled

action with Lazard Freres is another example of a financial

adviser-issuer relationship that proved costly to the

issuer.  If you haven't read it yet, you should.  In

addition, several actions have been taken against dealers

who misled issuers about the risks of investments sold to

those issuers.


     The message is - know the professionals you hire.  If

you hire someone to assist you in disclosure preparation -

be sure they are competent to do so - before you rely on

them.  If your lawyers do not understand the securities

laws, you are put at risk.   I think of  the T-shirt offered

in the PBS Catalogues captioned - "Runs with Scissors" -

this should not be appropriate wear for you.


     Lately, there have been reports of underwriters engaged

in what's termed a "race to the bottom." In an effort to

secure business, the story goes, underwriters are promising

to require less disclosure from issuers than their

competition currently with the assignment.  I can't decide

who is more foolish in this situation - the underwriter or

the issuer hiring the underwriter.  If in the race to the

bottom, the fraud line is crossed, they shouldn't be

surprised to find us waiting with open arms.


     We have also heard complaints from investors that some

official statements include disclaimers such as "In making

an investment decision, investors must rely upon their own

examination of the terms of the offering and the Borrower."

It should be clear to you after this mornings presentation

that such a statement is inconsistent with and does not

override the antifraud provisions.  Another example: "No

representation, warranty or guarantee is made by the

Underwriter as to the accuracy or completeness of any

information in this Official Statement."  Any Underwriter

considering using such language should recall the express

words of the Commission in the March interpretive release

five years ago: " In light of the underwriter's obligation,

as discussed in prior releases, to review the official

statement and to have a reasonable basis for its belief in

the accuracy and completeness of the official statement's

key representations, disclaimers by underwriters of

responsibility for the information provided by the issuer or

other parties, without further clarification regarding the

underwriter's belief as to accuracy, and the basis therefor,

are misleading and should not be included in official

statements."


     We're undertaking new efforts to reach issuers as well,

to educate them as to their disclosure responsibilities.

Many issuers, particularly small ones, do not have the

opportunity or the budget to participate in national or

evening regional conferences.  This January, we began an

effort, jointly with the National League of Cities, NABL,

GFOA ad TBMA to reach small issuers.  We are beginning in

Mississippi.  We will go elsewhere.


     On this point - as well as others, I welcome you

guidance on how best to communicate our message to issuers.

If there is additional work we can do, ask us.  We'll take

you upon the offer if it's all practicable.


     The SEC is a permanent part of the landscape in the

municipal market.  Participants need to understand that.  A

few have questioned when our enforcement actions will end.

I suggest the answer to that question is not in our hands,

but in the hands of participants in the municipal market.

With stale disclosure, races to the bottom and efforts to

disclaim responsibilities imposed by law, that day may not

be anytime soon. We will be delighted, of course, if your

own disclosure practices make us like the Maytag repairman

in those old commercials: on the job but with little to do

in the municipal market because everything is working so

well.

*    I promised you a few thoughts you could take home with

  you - and I've given them to you.  In case you missed them

  here they are again: I hope you put them to good use:


*    Keep Y2K issues in mind when preparing your disclosure.


*    Remember, the antifraud provisions apply to all

  disclosure - including that you make pursuant to 15c2-12

  contracts - and file with central repositories - and

  information you place on the Internet that may reasonably 

  be expected to reach investors.


*    Remember: if it's not legal on paper, why would it be

  legal in the internet?


*    Don't play Russian Roulette.  Avoid problems with

  secondary market disclosure, particularly financial

  information by providing it on a timely basis and if

  necessary providing an update.


*    Issuers are primarily responsible for their disclosure.

  Be sure you're comfortable with it before you approve it.

  You can't just go to the beach.


*    Don't run with scissors.  Be sure the professionals who

  advise you to prepare disclosure know the securities laws

  - If your lawyers do not understand the securities laws, you

  are put at risk.


*    And finally - do your best to make us like that Maytag

  Repairman!

Thank you.