As Congress works to reauthorize the Government Securities Act of 1986, those of us in state and local government are strongly urging them to include protections for investors in federal securities in the act.
Why do buyers of federal securities need the same protections already afforded those who invest in corporate and municipal securities? Because the increasing complexity of federal instruments -- ranging from the familiar and safe "plain vanilla" Treasury bills and bonds to the more exotic and risky investments -- has opened the door for unscrupulous persons to engineer deals that are putting taxpayer dollars in jeopardy.
Consider the case of McClennan County, Tex. When a "cold" sales call to county officials offered longterm government securities at no risk, the county auditor begain investing the county's idle cash in these obligations. A routine independent auditor's report uncovered a loss that at one point totaled between $2 million and $3 million on a $13 million investment. The sales of these securities to meet payroll obligations ultimately resulted in a net loss of $100,000 and the delay of several county projects.
This wasn't an isolated case. A General Accounting Office report issued in September 1990 indicated that losses to state and local governments due to improper sales practices are on the rise.
The obvious solution to this problem is for Congress to require the broker to know his customer well enough to avoil selling unsuitable investments, to prevent excessive price markups on federal securities, and to limit the practice of "churning," the excessive trading to generate brokers' commissions.
McClennan County's $13 million was just a drop in the bucket. There are $342 billion of state and local investments in federal securities. The Maryland state retirement and pension systems holds $3.3 billion in federal instruments, while Virginia holds $1.7 billion, and the District of Columbia holds more than $400 million.
Why do state and local governments invest in federal securities? They invest tax receipts and pension fund monies in these securities to assure the return of their principal while carrying a reasonable income and ensuring liquidity to pay bills when they come due.
Federal securities are one of the chief vehicles used to provide yield and liquidity while protecting our citizens' hard earned tax dollars and pension fund dollars.
Is it acceptable for the federal government to protect huge investors in corporate and municipal securities but to cynically reply, "caveat emptor," to the small city or town who says, "in Uncle Sam we trust?" Some interests say "yes."
Some regulators and members of the securities industry argue new regulation will increase federal borrowing costs, driving up either taxers or the budget deficit, although they haven't provided any estimates to back up their objections. But complying with sales practice rules when they market to individuals hasn't impeded sales of either corporate or municipal securities.
Attempts to exclude state and local governments from coverage under new rules as "institutional investors" represent a complete departure from practices in the other securities markets. And given the size of the federal securities market, any cost of providing full information to investors would be widely distributed.
While the financial bottom line may be blurred, the ethical bottom line is crystal clear. The federal government and the state and local governments have the same constituents. We should be serving the same master -- the citizens and taxpayers of our great nation.
Congress and the regulators need to be reminded the monies involved belong not to the jurisdictions but to the citizens -- to the small entrepreneur who pays business taxes, to the home owner who pays property taxes, to the teacher who has contributed to a secure retirement, to you and me. Congress must act to protect them and not the unscrupulous bond dealer.
Given the continuing turmoil in today's financial markets, to public good mandates that Congress act quickly and decisively to protect investors and maintain confidence in a strong and efficient federal government securities market.