Securities Law Section



Message from the Chair

Section Chair: 


 
Charles Niemeier
Williams & Connolly LLP
Washington, D.C.

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The Federal Bar Association - Securities Law Section is a proud sponsor of the virtual museum and archive of the history of financial regulation at www.sechistorical.org. While the museum is free and accessible to everyone at all times, the Section will highlight specific material and information within the museum on securities law issues in the coming months, providing current and prospective Section members with unique insight and context.      

            Through the 1960s, the typical buyers of tax-free municipal bonds were wealthy individuals or institutions like banks and insurance companies. But as inflation created "bracket creep" and the market became attractive to the average investor, crooked dealers set up "boiler rooms" and used high-pressure sales techniques to prey on gullible targets. Prompted by sensational revelations, federal regulators, state officials, and eventually Congress took action to clean up the muni market.

            By the early 1970s, municipal bond fraud had become famous in places like Little Rock, Arkansas, and Memphis, Tennessee. Notable offenders in other states included Paragon Securities in New Jersey and R.J. Allen in Florida. Federal regulator Christopher "Kit" Taylor described a scheme that targeted returning Vietnam prisoners of war. The unscrupulous dealer wrote to the victim and asked for the veteran’s life savings to invest in munis. To establish trust, the dealer claimed to have been a prisoner of war and that he was looking out for the veteran’s best interest. "So they sent them [the life savings] to this guy and he promptly invested it in fly-by-night muni schemes."

            Charles A. Morris & Associates, a Memphis-based firm, operated through several entities to peddle municipal bonds at inflated prices. In fact, The Tennesseean reported that one customer was overcharged by $23,000. To incentivize the bad behavior, Morris executives dangled Cadillacs and other posh performance bonuses before its salespeople. In 1972, after the SEC brought civil proceedings against Charles A. Morris, the phrase "Memphis Bond Daddies" became a catch-all description for crass and unscrupulous muni dealers everywhere.

            Tennessee fought back against its "bond daddies" by establishing a state Municipal Securities Board in 1972. While the SEC fought Morris in court, the Tennessee Board warned the firm it had 30 days to comply with new state regulations or lose its license.

            Three years later, Congress enacted a major revision of securities laws for the first time since the 1930s. One provision of the Securities Acts Amendments of 1975 created a new self-regulatory organization, the Municipal Securities Rulemaking Board (MSRB). The MSRB was made up of, "a board of directors of five dealers from banks, five dealers from securities firms…and five public members, one of which had to be a buyer," explained Taylor, who served as MSRB executive director from 1978 to 2007. In its first few years, the MSRB developed uniform practice rules, including a requirement that all bonds bear CUSIP numbers to ensure their traceability. 

            By then the SEC had shut down Charles A. Morris. In 1974, the Commission obtained a permanent injunction banning the firm from engaging in boiler room sales techniques and price gouging. The bond daddies eventually disappeared, but the MSRB, the self-regulatory organization they had helped create, continues to safeguard the $4 trillion dollar muni market.

 

Resources

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