February 20, 1992
TO: BOARD OF GOVERNORS NO. 11-92
INVESTMENT ISSUES COMMITTEE NO. 4-92
TASK FORCE ON GOVERNMENT SECURITIES MARKETS
RE: INSTITUTE TESTIFIES ON THE GOVERNMENT SECURITIES REFORM ACT
OF 1991
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The Institute testified yesterday before the Subcommittee
on Telecommunications and Finance of the House Committee on
Energy and Commerce on H.R. 3927, the "Government Securities
Reform Act of 1991," and related proposals to reform the market
for government debt outlined in the Joint Report on the
Government Securities Market ("Joint Report"). Copies of the
Institute's written statement and oral testimony are attached.
The Institute stated that liquidity in the government
securities market is of crucial importance to mutual fund
portfolio managers. Thus, according to the Institute's
testimony, the mutual fund industry supported the decision of the
Treasury Department to enlarge access to the bidding process, and
the Institute also supports efforts to automate that process.
The Institute expressed its support for the proposal to separate
competitive and non-competitive bidding, and generally to reserve
non-competitive bidding for smaller investors. The Institute
emphatically endorsed the proposal to authorize the Treasury to
counter short squeezes by increasing the supply of the affected
issue.
The Institute's testimony touched upon the role of primary
dealers and proposals to change from a multiple to a single price
auction system. While generally supporting the recommendations
made in the Joint Report, the Institute's testimony urged caution
and careful assessment in connection with implementing proposals
to change the auction system.
The Institute's testimony also emphasized the importance of
enhancing the transparency of the government debt market, both in
the interest of increasing efficiency and integrity of the market
and to facilitate regulatory oversight. Thus, the Institute
recommended that all relevant information available to inter-
dealer brokers be made available to the investing public on a
real time basis, along with the ability to capture and store such
information.
The Institute's testimony noted that considerable progress
had already been made in increasing transparency in the trading
market for government securities through voluntary actions by the
private sector. However, should this progress not continue,
there would be serious consequences for mutual funds and their
shareholders in terms of diminished access to information
necessary for transactions in government securities. The
Institute, therefore, recommended that in the absence of a clear
demonstration on the part of the private sector to provide such
information that it would support giving the appropriate
government agency "back-up" or stand-by authority with respect to
transparency.
On other matters, the Institute supported: the
reauthorization of rulemaking authority for the Treasury
Department; making it an explicit violation of the Securities
Exchange Act to submit false or misleading written statements in
connection with a primary issuance of government securities;
making existing NASD rules (subject to appropriate modifications)
governing suitability, markups, churning and unauthorized trading
applicable to government securities transactions; granting back-
up authority to require reports from holders of large positions
in Treasury securities; and mandating the adoption by government
securities dealers of written policies and procedures to prevent
violations of the government securities laws.
We will keep you informed of developments.
Lawrence A. Rogers
General Counsel