The Bond Lawyer - NABL · 2009. 9. 15. · NABL submitted comments to the IRS on its guidelines for...

Volume 16, No. 4 November 1, 1995

The Quarterly Newsletter of the National Association of Bond Lawyers is published on or about February 1, May 1, August 1 and November 1 of each year, for distribution by first class

mail solely to members and associate members of the Association. Membership information may be obtained by writing to Patricia F. Appelhans, Executive Director, National

Association of Bond Lawyers, 911 N. Elm Street, Suite 129, Hinsdale, Illinois 60521, or by calling 708/920-0160. Explicit or implicit editorial positions presented herein do not necessarily

reflect policies adopted or approved by the Board of Directors of the Association.

CONTENTS Washington Saga (Amy K. Dunbar) 1 President Kintzinger's Remarks 4 The Seventeenth Annual Meeting (Perry E. Israel) 7 President McBride's Remarks 9 Thoughts on the Annual Meeting (William H. McBride) 12 The New Directors 13 The Twentieth Bond Attorneys' Workshop 17 Paul S. Maco Speaks to Bond Attorneys' Workshop Attendees 18 Carlson Prize Awarded to James E. Spiotto 27 Actions by the Board of Directors on September 20, 1995 (Perry E. Israel) 28 Actions by the Board of Directors on September 21, 1995 (Susan Weeks) 29 Committee Chairs, Vice-Chairs and Board Advisors Named for 1995-1996 32 1996 Seminars Set 34 Actions by the Board of Directors on November 9 and 10, 1995 (Susan Weeks) 34 Shared Tax Observations (Sharon Stanton White) 39 John J. Cross III Testifies on Proposed and Temporary Arbitrage Regulations 44 SEC Releases "NABL II" in Response to Securities Law and Disclosure Committee's Queries 47 General Tax Matters Subcommittee Submits Comments on Proposed IRS Examination Guidelines 53 Arbitrage and Rebate Committee Presents Views on Establishing Fair Market Value for Open Market Escrow Investments 65 NABL and CLE (Jane Walter) 70 The NRMSIRs 70 The Hilderbrand Fund 71 Editor's Notes 71 Quarterly Limerick 72

THE

QUARTERLY

NEWSLETTER

The Journal of the National Association of Bond Lawyers

MEMBERSHIP SERVICES

Education Program The Association conducts seminars and workshops dealing with matters of interest to the bond law community. These include: ◊ February 8–9, 1996: Tax Seminar, San Francisco: covering issues arising under the Internal

Revenue Code and Treasury Regulations ◊ April 10–12, 1996: Fundamentals of Municipal Bond Law Seminar, Boston: intended for those

with less than three years of experience in bond law ◊ May 9–10, 1996: Washington Seminar: covering the areas of securities, tax, and other timely

Washington topics ◊ September 19–20, 1996: Bond Attorneys' Workshop, Chicago: for lawyers with more than three

years of bond experience: the preeminent annual gathering of bond lawyers, covering virtually all aspects of municipal bond law

These events offer members opportunities to exchange ideas about law and practice with fellow practitioners. For more information, call Executive Director Patricia F. Appelhans at 708/920-0160. Law Reform: Committee Participation Through its Committees on Arbitrage and Rebate, General Tax Matters, and Securities Law and Disclosure, as well as ad hoc committees and task forces, the Association regularly testifies and files written comments about proposed tax, securities and other federal legislation and regulations, and acts as an amicus curiae in judicial and administrative proceedings of general interest to the membership. (Amicus curiae guidelines are available from the Executive Director.) NABL members are invited to participate in committee activities. The Association works closely with public interest groups and industry organizations on matters of mutual interest. Office of Governmental Affairs In Washington, D.C., Director of Governmental Affairs Amy K. Dunbar represents the Association in federal regulatory and legislative matters. The Director cooperates with state and local government groups, congressional and regulatory staffs, the Association's substantive committees and individual members to help identify, inform and educate Congress and federal regulatory agencies about public finance issues. Members may contact the Director at 202/778-2244 (e-mail [email protected]) to discuss legislative and regulatory issues, request copies of current public finance proposals before Congress or regulatory agencies, and obtain NABL comments on proposed securities and tax regulations. For those with Internet access, she maintains e-mail contact with members on timely issues. Other Membership Benefits t Subscription to The Quarterly Newsletter t Information of immediate concern is mailed to the membership t Preferential admission to the Association's educational programs at substantially reduced rates

and reduced air fares

t Discounts on many of the Association's publications, including Disclosure Roles of Counsel in

State and Local Government Securities Offerings, Second Edition; Federal Taxation of Municipal Bonds (through Aspen Law & Business); and seminar course books

t Free access to the Association's Job Bank through which members can receive job listings and

firms can seek members interested in employment opportunities t No charge for placement in The Quarterly Newsletter of brief notices of employment

opportunities available or sought t Budget Rent-A-Car discount

The Quarterly Newsletter November 1, 1995

WASHINGTON SAGA The Budget As I write this on November 20, Congress has just agreed with the President to approve the Continuing Resolution to fund the federal gov-ernment through December 15. Because the Secretary of the Treasury determined earlier that Treasury could "dis-invest" federal trust funds, a vote was not required to extend the debt ceiling in order to meet outstanding debt service obligations. However, the SLGS window was closed effective October 18 and I expect it to remain closed until a final debt ceiling vote has been taken. The Bureau of Public Debt has been ex-tremely helpful during this difficult period of the closing of the SLGS window. They have been very responsive to my inquiries about the status of the SLGS program. Similarly, the Treasury and IRS in cooperation responded very quickly to our request for help when the SLGS window was closed and zero SLGS were not available to avoid yield restriction violations. They released Rev.

Proc. 95-47 regarding the use of yield reduction payments in circumstances when zero SLGS are not available due to the closing of the SLGS window (see Sharon White's column infra). The Bureau will not likely be able to reopen the SLGS window due to the uncertainty in planning created by the volume and maturity of SLGS that might be requested. Due to the constraint of the debt ceiling, such unknowns make it impossible for them to plan to stay within a confined limit. Therefore, unless something dramatic happens to overcome this uncertainty, the SLGS window will not open until there is a debt ceiling extension approved by the Congress and signed by the President. The SLGS window issues have been the most important and difficult for bond lawyers during the budget debate. There were a few items regarding tax-exempt bonds which were considered in the tax component of the Budget Reconciliation bill. Only the simplification provision relating to elimination of yield restric-tion on reserve and replacement funds remains in the final package sent to the President and expected to be vetoed. The bill also eliminates the low income housing tax credit in calendar years 1998 and beyond. Issuers wishing to expand their service area may elect to give up future use of tax-exempt bonds so long as they make an election to do so, do not use tax-exempt bonds for the expansion, and call outstanding bonds within the earlier of six months of the election or the earliest call date on the bonds. The provision also prohibits the issuance of local furnishing bonds by any facility that had not already qualified as a local furnisher, i.e., issued bonds, on the date of enactment. This provision is opposed by other local furnishing systems. Now Congress and the President will sit down and negotiate a "final" budget bill. The parameters appear to be a balanced budget in seven years relying on a combination of Con-gressional Budget Office numbers and updates from the Office of Management and Budget and

The Quarterly Newsletter 2 November 1, 1995

outside sources for verification. Whether the parties can conquer their differences before the end of the year remains to be seen. If they don't, our issuers' SLGS problems will continue. E-Mail One of the wonderful technological devel-opments for NABL has been e-mail access through the Internet. During the SLGS window closing, I have been able to e-mail members about the status of the SLGS window. If I do not have your e-mail address, you are missing out on timely information regarding issues as they happen rather than the historical information you receive in this column. I am also able to alert members to the availability of documents as they are released, for example, SEC settlement documents. Remember this is a service available only to NABL members. You can reach me at [email protected]. Audit Guidelines NABL submitted comments to the IRS on its guidelines for tax-exempt bond audits in early October. See comments infra. Many members participated in this project. There will be follow-up comments submitted shortly, so if you have additional areas of concern, please contact John Cross, Chair of the General Tax Matters Committee. NABL II Moments before the Bond Attorneys' Workshop began, the SEC released a response to the second set of NABL questions regarding the application of Rule 15c2-12. See "SEC RE-LEASES NABL II," infra. The Commission staff was exceedingly helpful in getting this guidance out prior to the Workshop so that NABL members could discuss the guidance and SEC staff could participate in the discussions. The Securities Law and Disclosure Committee is considering additional questions to be posed to

the SEC for NABL III. If you have questions you feel need SEC interpretation, please contact John Overdorff, Chair of the Securities Law and Dis-closure Committee. Political Contributions Survey Early in October, the Board of Directors mailed a survey to the membership to evaluate member reaction to the Statement of Principles on Political Contributions. We have had a good initial response to the survey and will hold open the deadline until mid-December. If you have not yet responded to the survey individually, please do so. I have received several questions from members regarding their firm's response to the survey. There are questions which are directly related to one's firm's response to the survey, but there are a number of questions based on people's individual attitudes, so please respond individually to the survey. Blount v. SEC The D.C. Circuit Court of Appeals rejected William Blount's appeal of its ruling rejecting Blount's challenge to MSRB Rule G-37. Blount is expected to appeal the case to the Supreme Court shortly. Excerpts from the decision appeared in the August number of The Quarterly Newsletter. MSRB Rule G-38 The MSRB adopted NABL's recommenda-tions regarding Rule G-38. Issuer-selected underwriter's counsel is not on the list of con-sultants to be disclosed, nor is bond counsel when acting in its normal capacity. A copy of the final rule will be included in The Quarterly Newsletter after the SEC approves the Rule. Job Bank In this year of continuous movement by bond lawyers between firms and the dissolution of


firms like Mudge Rose, please remember the Job Bank as a resource for our members looking for new firms and firms looking for new lawyers. If you are looking for additional assistance in your bond practice, please be sure to have your personnel people contact Pat Appelhans to register the firm with the Job Bank. This is a service to our members which can be of great help in this time of uncertainty. Tax Reform During Bob Buck's introduction of Mark Shields at the Bond Attorneys' Workshop, Bob reiterated John Cross's call to action in the coming tax reform debate, in which John suggested that our failure to succeed might result in our need to transform NABL into the National Association of Cab Drivers. Mark Shields leaned over to me and asked what we had against cab drivers. But in fact, John's fears about the results of tax reform are no laughing matter. Right now we have a very dismal situation brewing in the tax reform arena. The parameters of the battle will most clearly be laid out on January 3 when the Kemp Commission, appointed by Majority Leader Dole and Speaker Gingrich, chaired by former Congressman Jack Kemp and tasked with developing a comprehensive tax reform recommendation, will unveil its proposal(s). Per-haps the most disturbing insight we have into the Commission's deliberations is that the two state treasurers participating on the Commission have volunteered that tax exemption is expendable for the overall goal of reducing interest rates, as is projected to result from flat or consumption tax reform. The Kemp proposal will be exposed on January 3 and the tax reform debates will be held in 1996, with legislative proposals being pursued in 1997 after the results of the '96 election. The danger in this schedule is that many are lulled into the belief that nothing will happen, or that at a minimum it won't happen until 1997, so no cur-rent action is required. However, the parameters

of the debate will be framed in 1996. If state and local governments are not actively defending tax exemption during that debate, then 1997 will almost certainly be too late. Commission Chairman Kemp identified the four difficult issues to be addressed in pursuing a flat tax scenario: deductibility of state and local taxes, the mortgage interest deduction, tax-exempt bonds, and charitable contributions. Obviously three of the four issues are of great concern to state and local issuers. Elimination of the deductibility of state and local taxes would drive up the real cost of state and local taxes and therefore put pressure on state and local governments to reduce state and local taxes. Elimination of the mortgage deduction would dramatically drive down property values, which would undermine the state and local property tax base. Finally, the flat tax proposals exempt all investment earnings from taxation, thereby eliminating the preference that tax-exempt bonds currently receive, with the result that we can expect tax-exempt rates to exceed Treasury rates. Also inherent in these reform proposals is the notion that state and local governments would be unable to continue to base their tax systems on federal income taxes, and radical reform would be required in state and local tax systems. Obviously these dramatic changes in taxes would challenge state and local governments on a variety of fronts. Of more immediate concern to issuers are the cuts they will be receiving in federal payments due to the Budget Reconcili-ation block grant proposals. State and local government leaders are overwhelmed with the changes being proposed by Washington that will affect their administration of state and local programs. As in 1986, they will have little focus on tax-exempt finance unless those of us who work with them make the effort to educate them on the issues early and often. I am collecting various analyses of the potential impact of tax reform on municipal


finance so that, working in conjunction with the issuer groups in Washington, we can begin the education process. If you would like any of this information for work with your issuers, please contact me and I will get you as much information as I can. If you are interested in working with your local officials, I can be of help in getting you information or plugging you in to any kind of local network that I am aware of through the issu-ing groups. Please do not hesitate to call. I would not suggest that our very livelihood is at stake since the SEC seems to be picking up the slack that loss of tax exemption might cause, but the issues at stake for our clients are numerous and fundamental to their bottom lines. Return to the Budget I just heard Speaker Gingrich addressing the Republican Governors Association where he suggested a working partnership to allow states to take over federal government services like running the Grand Canyon National Park should there be a future shutdown of the government after the 15th of December. Such long-range planning bodes ill for achieving a Budget Rec-onciliation package. He also suggested that they would "negotiate but not compromise." The possible light at the end of the tunnel is the "Coalition Budget" described by one of its authors as the best-kept secret in Washington. The Coalition is a group of conservative Democrats in the House who have developed a budget plan based on no tax cuts, increasing Medicare premiums for those who can afford it, reducing farm price supports, and reducing overstated inflation-based cost of living increases, leading to a balanced budget that is believed to be sus-tainable through 2002 and beyond. Concerns have been raised already that the tax cuts, particularly the IRA and capital gains proposals, in the Republican budget will have exploding budgetary impact beyond the seven-year budget window. Look to the "Coalition Budget" to be the middle ground for the ultimate resolution of the budget battle.

Stay tuned for more news from the Nation's Capitol . . . Amy K. Dunbar Director of Governmental Affairs November 20, 1995


PRESIDENT KINTZINGER'S REMARKS Editor's Note: The following remarks were delivered by outgoing President Andrew R. Kintzinger at the Association's Annual Meeting on September 20, 1995. I am pleased to report that this has been a very productive year for NABL. The Associa-tion's work has been carried out by countless, tire-less volunteers. During the past year I have tried to name and thank many in the President's Columns in The Quarterly Newsletter. While I will highlight several of our members in these brief remarks tonight, there are many who cannot be mentioned in the allotted time period. Suffice it to say that both I and the Association are indebted to many of you for your efforts over the past year. We stand stronger as an Association today because of it. Our year began last fall with administrative challenges. A Search Committee, chaired by immediate Past President Neil Arkuss and including Past President Jane Dickey, Board member Susan Weeks and President-Elect McBride, commenced work to select a new Executive Director to succeed retiring Rita Carlson. This committed nucleus worked together for nearly six months, including multiple trips to the Chicago area, to select our current Executive Director, Pat Appelhans. I am grateful for their work. By early 1995, we were back at full speed for the seminar season. Again, my thanks to the Search Committee, the Executive Committee and the Board for its extra efforts dur-ing this transition period. Our substantive agenda was heavy and challenging over the course of the term. Board members kept a cheerful attitude about weighty Board agenda books carried to our quarterly meetings. Often, our two-day meetings simply did not seem long enough to cover the pressing matters before the Association. Our Directors

developed and adopted guidelines for considering amicus requests. Julie Ebert diligently shep-herded this project from start to finish, the end result being procedures that will serve the Association well as members ask NABL's as-sistance in reviewing appropriate appeals. In addition, the Board tackled the important and timely topic of disclaimers for NABL officers and directors in situations where expressing views may be reported or used to imply an Association position. I am pleased that the Board ultimately adopted a statement that sensitizes Board members about the impact of their statements and expert testimony, and allows Association members to draw some comfort that not all statements by members of the Board are necessarily official Association positions. Of course, the substantive agenda of the past year was impacted by SEC Chairman Arthur Levitt placing regulation of the municipal bond market as his number one priority. I am particularly proud of the leadership our Securities Law and Disclosure Committee, under the aegis of Chair John Overdorff and Vice-Chair Jerry Laporte -- and our Board -- took in addressing the SEC's initiatives. Following November adoption of the continuing disclosure amendments to Rule 15c2-12, the Association sponsored a premier Disclosure Seminar in early January in Chicago, fog notwithstanding. This program was ably led by member Helen Atkeson and attended by many market participants, members and regulators. The Seminar materials that Helen edited for this program are now an Association bestseller as we implement the new Rule amendments. Many thanks to Helen Atkeson for taking on this new year's challenge. Experienced hands and new faces participated on the Securities Law and Disclosure Committee in meeting with the Commission staff on multiple occasions, develop-ing the Washington Seminar curriculum, obtain-ing an interpretive letter of June 23 -- referred to as NABL I -- and obtaining another interpretive letter released just yesterday -- NABL II. Our members have been active in, and well served by,


these Committee efforts. I also wish to thank generously the lawyers of the SEC for their expertise, openness and many contributions to the Association over the past year. Related to SEC matters was the continuing dialogue on the Association's position on political contributions and pay to play. At each Board meeting over the past year, the Association's directors have evaluated our members' views on this important issue and have deliberated further courses of action. As she has done on numerous other occasions over the past year, Director of Governmental Affairs Amy Dunbar summed it up best in last Friday's Bond Buyer: there does appear to be a fundamental "disconnect" between the Commission and many bond lawyers and issuers on this topic -- the Commission believing that political contributions actually or potentially undermine the integrity of the market and many lawyers and issuer clients believing that munici-pal business is not being awarded on the basis of contributions. As NABL was the first private bar association to take a stand on this issue, it was expected that the Association's disclosure approach would be studied and criticized. I am pleased that the lawyers of NABL took the lead in addressing this issue in 1994, and in keeping the dialogue open in 1995. The preoccupation of the past year with municipal securities matters was not to eclipse critical comment work by the General Tax Mat-ters Committee and the Arbitrage and Rebate Committee. The two Committees worked together to deliver excellent written comments to Treasury and the Service on the proposed regulations regarding private activity bonds. Special thanks are due to General Tax Matters Chair Jeannette Bond and Dick Kornblith, editors in chief, and to Neil Arkuss, Perry Israel and Dean Weiner for their work in helping finalize the submission. Equally eloquent in prose was the work of David Walton's Arbitrage and Rebate Committee in submitting comments on the proposed contingent interest payment regulations

and, more recently, Committee correspondence with Treasury and the Service regarding fair market value for open market escrow invest-ments. The tax gurus did not stop at writing: John Cross testified for the Arbitrage and Rebate Committee before the Service on the contingent interest regs, Jeannette on private activity bond regs. The Committees also met with the Service to discuss NABL's "top ten" list. I am partic-ularly appreciative of our tax bar for their devoted efforts over the past year including also the ongoing Section 103 Editorial Board. NABL clearly stands as a leader in dialogue on important tax topics.

Despite time-consuming securities law and tax agendas, the leading Board project for the year -- and one that I think Board members regard as having the most significant impact on our members -- was completion over the summer months, including a special one-day Board meeting at Chicago O'Hare in June, of a revised, second edition of The Function and Professional Responsibilities of Bond Counsel. Next week, members will receive a complimentary bound copy of this new statement. Past President Ric Weber initiated the idea of responding to the newer Model Rules of Professional Responsibility and to the dramatic changes in the practice of bond counsel during the nearly ten years that

NABL has a

J O B B A N K for members and public sector lawyers seeking employment opportunities with private law firms. Contact Patricia Appelhans at 708/920-0160


elapsed since the first edition. The Board began actual revision work under Jane Dickey's presidency, continued work with a significant overhaul of the statement during Neil Arkuss' term, and completed the project this past July. Heartfelt thanks are due to Committee Chair Steve Matthews, Vice-Chair Margaret Angel and Board Advisor Mae Nan Ellingson in seeing this project across the finish line. The Board trusts that readers will find this work a significant contribution to the scholarship of the role and work of bond counsel. In a related vein, the Opinions Committee continued its work under the energetic leadership of Chair Michael Budin, publishing in The Quarterly Newsletter its report regarding use of the Silverado accord. The Committee has already turned to a reevaluation of the model bond counsel opinion project in light of the revised statement on The Function and Professional Responsibilities of Bond Counsel. Many of the earlier-mentioned projects and Committee activities were detailed in this year's numbers of The Quarterly Newsletter. I am grateful to Honorary Director Fred Kiel for his editor's work on the Newsletter. Members told us in a survey that they read the Newsletter and look to it for guidance on current issues. Over the past twelve months, Fred has orchestrated four numbers of the Newsletter, each of law review quality. The publication gets better with each issue, and Fred and his supporting Committee are to be thanked. Our members know us best by our education programs. In addition to the Disclosure Seminar last January, Larry Carlile chaired a well-received Tax Seminar, Lisha Goins oversaw the Fundamentals Seminar in Los Angeles, and Rick Frimmer chaired a timely and topical Washington Seminar. And, as is evident today, Floyd Newton has artfully produced a successful Bond Attor-neys' Workshop. The effectiveness of our seminars was enhanced by a committed Education Committee chaired by Charles Henck and vice-chaired by Mary Jo White, with the

assistance of Board Advisor Susan Weeks. Program reviews were excellent. Our volunteer faculty, too numerous to mention in these re-marks, are always the key to this success, and I thank them. Hand-in-hand with the Education Committee, the Committee on Legal Assistants has continued its education efforts for its Com-mittee members under the able leadership of Carol Caponigro and Ann Atkinson. At the end, I offer special recognition to certain stand-out NABL members. My prede-cessor, Neil Arkuss, kept a full administrative plate during his immediate Past President year, and returned to the speaking spotlight at the Tax Seminar and teaching at the Washington Seminar. He has never tired. Before him, Past Presidents Jane Dickey and Ric Weber have offered guid-ance and support as well as returning to serve as the Nominating Committee with Neil over the past few months. My successor, Wally McBride, has worked on countless projects in his President-Elect year. He has initiated bondholder commu-nication and model indenture projects. He has taken on key administrative tasks. He has been a true leader in handling difficult assignments, and I thank him. Good luck, Wally. Our new Executive Director, Pat Appelhans, has exceeded the high expectations of the Board. Think of it: entering a downtown Chicago hotel room to be questioned for future employment by a group of strangers: Arkuss, Kintzinger, McBride, Dickey and Weeks. Not only did Pat survive the process, but six months later, she is effectively telling us what to do, just as we would like it. Many thanks to Pat for her quick-study and in making the transition a smooth and effec-tive one for our members. Finally, Amy Dunbar continues her unrivaled work on behalf of the Association in Washington. The events of the past twelve months underscore the critical importance of NABL's Washington presence. Amy's expertise and acumen serve us effectively day in and day out. It is impossible to envision the Association speaking as well as it does in


[Board photo] Washington without Amy. Thank you, Amy.

Finally, I thank professionally and personally the Board members on either side of me. You are a collection of special individuals who have selflessly made my job a much easier one. Thank you. I note that Perry Israel, Mae Nan Ellingson and David Baker Lewis leave the Board tonight after years of dedicated service by each of them. You have our gratitude for a job particularly well done. It has been a privilege and honor to serve you and the Association over the past year. I look forward to working with you on future Asso-ciation projects and in bond counsel work in the years ahead. Thank you.

THE SEVENTEENTH ANNUAL MEETING The annual meeting of the National Associ-ation of Bond Lawyers was called to order by President Andrew Kintzinger at 5:55 p.m. Central Daylight Savings Time on September 20, 1995, at the Downtown Chicago Marriott in Chicago, Illinois. The President announced that the purpose of the meeting, as noticed, was the election of the Officers and Directors of the Association and the transaction of such other business as may properly come before the meeting. The President introduced the current Officers and Directors. Secretary Perry Israel reported that notice of the meeting, together with a copy of the meeting agenda and the Report of the 1995 Nominating Committee, was mailed on September 1, 1995, to each member of record as of that date. The Secretary further reported that the mailing of the notice at that time complied with the requirement of the By-Laws of the Association that notice of the annual meeting be given not less than 10 nor more than 40 days prior to the date of the meeting

to each member entitled to vote at the meeting. The President stated that Mr. Arnold Lederman of the accounting firm of Kaplan & Partners had been appointed to serve as the Inspector of the election for the meeting. The


The 1995-1996 Board of Directors and Staff. Seated, L-R: David A. Caprera, Susan Weeks, William H. McBride, Julianna Ebert, William H. Conner, Jeannette M. Bond. Standing, L-R: Amy K. Dunbar, John M. Gardner, Steve A. Matthews, Andrew R. Kintzinger, Robert W. Buck, Howard Zucker, Frederick O. Kiel, Floyd C. Newton III, Patricia F. Appelhans.

President noted that, pursuant to Section 4.05 of the By-Laws, a quorum is deemed present at any annual meeting. Accordingly, the President declared the meeting properly constituted for the transaction of business. Treasurer Stephen Edwards presented his report to the meeting. He reported that the financial situation of the Association was sound, with a capital balance approximately equal to one year's gross expenditures. He noted that during calendar year 1995, the Association expected about a loss approximately equal to 11% of one year's gross expenditures, in part due to special projects including the appointment of a new Executive Director and a one-time change in the dues structure. President Kintzinger presented his report to the meeting (reprinted supra). At the request of

the President, Mr. Lederman reported that of the 3003 members of record of the Association as of September 1, 1995, 329 were present. The President asked Neil Arkuss, as Chair of the 1995 Nominating Committee, to read the report of the Committee. Mr. Arkuss stated that the Commit-tee nominated Julianna Ebert to be President-Elect, William H. Conner to be Treasurer, Susan Weeks to be Secretary, Floyd Newton and Jeannette Bond to be Directors with terms expiring in 1998, John Gardner to be a Director with a term expiring in 1997, and David Caprera and Steve Matthews to be Directors with terms expiring in 1996. He noted that, pursuant to the By-Laws, Robert Buck (as Chair of the 1996 Bond Attorneys' Workshop) would be a Director, that William McBride, as President-Elect, would automatically become President, and that Andrew Kintzinger would have a position on the Board as Immediate Past President. He also noted that


Howard Zucker would continue on the Board until expiration of his term as Director in 1997. Jane Dickey seconded the nominations of the 1995 Nominating Committee. The President noted that the By-Laws allow nominations from the floor only if there was prior written notice of the nomination delivered to the President and the Executive Director. He noted that one such notice was received from James P. Lane with respect to his intention to nominate Stephen Edwards to the Office of President-Elect. Mr. Lane thereupon nominated Mr. Edwards for the Office of President-Elect; the nomination was seconded by George M. Aman III. Upon the motion of Ms. Dickey and second of Mr. Israel, the nominations were closed. The President thereupon allowed Mr. Edwards and Ms. Ebert five minutes each for brief speeches to the meeting. As the Offices of Secretary and Treasurer were uncontested, the President called for a voice vote election of those Officers. Upon unanimous voice vote, Susan Weeks was elected Secretary and William H. Conner was elected Treasurer. Ballots having been previously distributed, the members were asked to vote for the Office of President-Elect by marking the ballots and returning them. After tabulation of the ballots it was reported by the Inspector that 329 ballots had been distributed and one ballot had been returned, leaving 328 ballots. The By-Laws of the Asso-ciation require that a person be elected by a majority of those members present. The tabu-lated ballots indicated that 163 ballots were cast for Ms. Ebert, while 155 ballots were cast for Mr. Edwards. Accordingly, under the By-Laws, no person received a majority vote of the members present. The President announced that ballots must be redistributed for a second balloting. The President interrupted the redistribution

of ballots to report that Mr. Edwards had informed him that he was withdrawing his name from nomination, leaving Ms. Ebert as the only nominee for President-Elect. Accordingly, the President called for a voice vote, and Ms. Ebert was elected unanimously. The President also called for a voice vote for the various nominees to be Directors, and they were unanimously elected to their respective terms. William McBride was introduced by Mr. Kintzinger as the new President of the Associa-tion. President McBride reported that, in light of the hour, he would not read his speech, but would have it published in The Quarterly Newsletter, for which comments he received a standing ovation. The meeting was adjourned by the President at 7:15 p.m. Central Daylight Savings Time.

PRESIDENT MCBRIDE'S REMARKS Editor's Note: The following remarks were not delivered by President William H. McBride at the annual meeting on September 20, 1995. I have found great satisfaction in being a bond lawyer. The reasons for this divide rather neatly into two categories but both relate to people. First, and I put this first only because it was what constituted the initial attraction of the practice area, the work itself is intellectually exacting and challenging. This means the people with whom you practice and those with whom you interrelate in transactions are responsible for a breadth of material that is generally unmatched by other legal specialties. Such people are enjoyable to deal with. Second, I think most bond lawyers get more


than a little satisfaction out of the end-product of our work. Almost always there is some local government better able to achieve its goals or a project otherwise beneficial to the common good that has been financed. It may sound naive, but I suggest each of us sleeps a little better knowing our legal work benefits the common good perhaps a bit more directly than that of most other attorneys. Moreover the clients you deal with are good people. Through the years I have much enjoyed contact with responsible local govern-ment officials. I think it is becoming increasingly true that those citizens who have the interest and take the time and effort to be elected and serve at the local level are good people trying to do a very difficult job. I enjoy working with them for the goals of their communities. I suggest to you all that this is one aspect of this practice that makes it enjoyable to be a bond attorney. This combination of challenging work with intelligent peers on behalf of good clients makes our practice area seem more like a true profession than almost any other. Justice O'Connor, dissenting in the 1988 Kentucky Bar Association case on attorney solicitation, eloquently ex-pounded upon the quality differentiating a profession from other employment when she wrote: One distinguishing feature of

any profession, unlike other occupations that may be equally respectable, is that membership entails an ethical obligation to temper one's selfish pursuit of economic success by adhering to stan-dards of conduct that could not be enforced either by legal fiat or through the discipline of the market.

I think the bond attorneys I have known, and count it a high honor to practice with, exhibit this "distinguishing feature." Certainly it is rare in

other areas of the law.

As some of you know, for the past several years our firm has been involved on behalf of a bank trustee client in the Executive Life matter in California. While I have learned a great deal from this matter, one point is paramount in relation to our practice area. The case confirmed every instinct I had some twenty years ago not to be a litigator. Most of those people (obviously my own partners are an exception) are not nice or even civil to each other. There was language used in open court and in court filings in that matter that I would not allow my sons to use in polite company. You may label me a hide-bound traditionalist for joining with the numerous commentators who have critiqued this aspect of the modern bar, but it is, so far, a trait not shared among the bond attorneys I know and I like it that way. The bond practice still evidences the central trait of integrity. Without personal integrity our opinions are nothing more than advertising — no more meaningful than the three or four word critics' comments put on the back covers of pot-boiler romance novels. We bring value to a transaction by vouching for its procedural compliance. Without integrity, our opinions would not be accepted. Now who would not find satisfaction in working in a practice area so dependent on the seemingly ancient and arcane traits of integrity, intellect and, dare I say, honor? Yet my satisfaction in the practice area is intertwined with the existence of NABL. This organization is, in many respects, integral in the modern bond practice — I cannot conceive of participating in one without the other. Perhaps this is because I became a bond attorney only a few years before this organization was created. However, I believe it is more due to what this organization has become through its early leaders. All of us have many choices of bar associa-tions to work with — not only the ABA but also


our state bar association, frequently two different state associations, as well as numerous local bars. Yet most of us here have chosen NABL for our significant bar activities. Why is that? I suggest it is a combination of the expertise we are exposed to in our joint endeavors plus the timeliness and relevance of those discussions to our practices. As I have explained to my non-bond partners a number of times, the Workshop is a unique combination of bar asso-ciation meeting, professional education seminar and business development. I keep telling them they only pay once for three times the money in value. And it has been some five years since I last heard someone (he was not in my firm) say that attending a NABL function was just "educating the competition." Perhaps it does that, but I think most of us who are active in NABL recognize that to some extent we are all in the proverbial bed together. If one of us makes a serious enough mistake, it will redound negatively on all of us. Thus, wholly aside from educating ourselves, participation in NABL can be viewed as a matter of self-interest in training those who might otherwise besmirch the practice in general. If the last few years have proven anything, they have proven that there are too many clients out there who will award business on reasons not strictly in accordance with our view of the ex-perience level of the potential attorneys. To the extent such bond counsel are better prepared for the work by NABL seminars, I count that a benefit to us all. While it has been consistently fulfilling to be a bond attorney and NABL has, from its beginnings, been a great organization, this is a particularly interesting time to be a bond attorney and involved in NABL. Things are happening which affect our practice more and more frequently. It used to be we only had to worry about the annual or even bi-annual tax code changes. Now we not only have more frequent IRS regulations and Treasury actions but we have

audits. And that is just on the tax side. On the securities side there have been several SEC and MSRB initiatives with more to come. Change is present all around us. As attor-neys striving for the safety of our clients and the certainty of our opinions, we must be ever alert to these new events. As usual, NABL intends to be heavily involved with these developments as they occur. As has been already mentioned, the new edition of The Function and Professional Responsibili-ties of Bond Counsel has been updated to include the most recent cases and statutes on this subject. NABL's Opinions Committee is nearing com-pletion of a new draft of the form opinions which will include consideration of the new version of Function. Our General Tax Matters Committee is getting prepared to send in final thoughts on the Audit Guidelines and react, when they are ex-pected to be issued this year, to reissuance regulations and final or re-proposed private activity bond regulations. The Arbitrage and Rebate Committee has produced its paper on open market escrow purchases and will be focusing on that subject as well as the finalization of the last few open points of the arbitrage regulations. The Professional Responsibility Committee will be revising the form engagement letter to take into account aspects suggested by the most recent version of Function. This committee may also be looking at updating NABL's pamphlet entitled Selection and Evaluation of Bond Counsel. The Education and Securities Law and Disclosure Committees will be undertaking their normal work of carrying through NABL's seminars and reacting to SEC initiatives, re-spectively. The Legal Assistants Committee will be


working on a Handbook for Legal Assistants. Drafts of certain portions of this work have already been prepared and these will be expanded and correlated with responses to the legal assistants survey and questionnaire of last year. The Board will continue wrestling with the questions involving political contributions. A survey will go out soon to the members soliciting recent thoughts on this subject. Further, I am very much excited by a new project — the Form Indenture. There has been a high level of focus in the bond-relevant tax and securities law areas by NABL in recent years. While perfectly understandable, this has left some of our more traditional bond attorney brethren out of the picture. The Form Indenture Project is one way to redress this disparity. I hope the Project will serve to provide an annotated model of the most uniform portions of an indenture — the trus-tee sections, amendment sections, defeasance provisions, etc. If you are interested in participating on any of these Committees or with the Form Indenture Project, please let me or Pat Appelhans know. The Board tomorrow will act to approve Chairs and Vice-Chairs for each of these committees and projects. If you wish to become immediately involved, I strongly suggest you attend the committee meetings of your choice on Friday morning. Pat has times and locations available at the registration desk. No doubt there will be other developments requiring NABL comments or participation this year. In addition, the Board welcomes your suggestions for projects. NABL is a participatory organization. We are member-driven. I think some of our members have perhaps not remembered this on occasion in the past few years — yet it is true. The efforts I have mentioned will only work if we have a number of members willing to participate and add their expertise. I urge each of you to be involved in something. It is a worthy cause — view it as

either fun, a duty or merely something in your own self-interest — but please do it.

This all comes back to what I view as special about our practice area — the high level of education, integrity and ethics espoused by everyone involved. NABL can and should continue to provide leadership in this area for the benefit of our members as well as the over 80,000 local governments in this country. But it can only be done with an active membership. I trust that with your participation NABL will continue to help ensure bond attorneys merit the language used in describing them by the Northern District Court of Ohio in 1976: Meticulous attention to detail,

exactness and veracity coupled with sagacious pedantic legal acumen are the hallmark of successful bond counsel in an astutely discriminating financial community. Eminence is not a-chieved by accepting, at face value, the presentments of the subscrib-er, nor does perfunctory approbation effectuate and maintain probity.

Thank you.

THOUGHTS ON THE ANNUAL MEETING For those of you who were not there (about 90% of the membership), I strongly urge you to read the minutes of the 1995 Annual Meeting which appear supra. Regardless of your view of the outcome, the much-publicized events certainly piqued the interest of a number of us. Even before the Annual Meeting, I had asked Drew Kintzinger, as the most senior voting member of the Board of Directors, to undertake a


review of, among other things, the By-Laws of the Association. It has been a number of years since they were last looked at and I thought they might possibly need updating to reflect current Association practice. Given the events at the Annual Meeting, I have asked Drew to include within his review the nomination and election procedures. If his group makes recommendations to the Board, they will be considered. If agreed to by the Board of Directors, I presume the amendments will be proposed to the membership as a whole at the 1996 Annual Meeting (although the Board is of the current view that the 1996 elections will be run under the present rules). This is not to say that I am predisposed to there being changes in the nominating or election process. Unlike some who made comments at the Annual Meeting, I do not believe there clearly is a problem with the current nominating committee process. I believe it serves to find the best of the most active members who would do a good job on behalf of the Association. The problem, if there is one, is that some members perceive there to be an "in group" or clique in control. I believe this sort of view does not spring from the nominating process, but rather from the fact that the potential selection pool is limited. Since its early years, when none of our members had extensive experience working on behalf of the Association, those picked for membership on the Board have come from the workers for the Association. These include committee chairs or vice-chairs, committee members actively working on major projects and seminar faculty and speakers. With extremely few exceptions, every member of the Board has come from this group within the last six or seven years. I think it is clear new Board members and officers will come from this limited pool regardless of who is on the nominating committee. Recognizing the risk of a perception of a "clique," the Board several years ago instituted a

strict rotation policy for the seminar faculties — insuring that there is some "new blood" in each faculty every year. In addition, each committee chair and vice-chair (who themselves are subject to a time limitation) is urged to find, if possible, new participants in each project undertaken. Sometimes these goals are easy to achieve, but sometimes the only volunteers come from among the "usual suspects." I make no apologies for the fact that working hard on behalf of the Association has become a prerequisite for a position on the Board. Those who have worked on behalf of the Association are the best judges of what should be done by it. If this leads to the same firms being represented because they have committed time, effort and resources to the Association, then that is accept-able. Nevertheless, there will be a review of the process and input from the membership is sought. Please feel free to contact Drew directly with any ideas you might have on this subject. We particularly welcome any ideas you may have as to how to increase membership input to the nominating committee. Even if the nominee pool is restricted to the relatively small number of people who have been actively engaged on behalf of the Association in the recent past, it nonetheless is a benefit to the nominating com-mittee to have the views of a substantial number of people.

THE NEW DIRECTORS JULIANNA EBERT Julianna Ebert, a partner with Quarles & Brady, Milwaukee, was elected President-Elect of the Association. Ms. Ebert has served as a


Director since 1993. Ms. Ebert has also served as Chair of NABL's Legislative Action Com-mittee (1990-1991), as Chair (1993) and Vice-Chair (1992) of NABL's Washington Seminar, as a member of the Steering Committee of the Bond Attorneys' Workshop (1991-1993), and as a panelist on one or more topics at a number of Workshops. Ms. Ebert joined Quarles & Brady in 1988. Her practice there has included serving as bond counsel, underwriter's counsel, issuer's counsel or special counsel to Wisconsin municipalities, counties, school districts and other political subdivisions, as well as the State of Wisconsin for general obligation issues, revenue bond issues, tax incremental financing issues, tax/rev-enue/grant anticipation issues and special as-sessment bond issues. Ms. Ebert received her B.A. cum laude from Ohio Wesleyan University in 1974 and her J.D. from Marquette University in 1981, where she was a Thomas More scholar and a member of the National Moot Court Team. Ms. Ebert was appointed to serve as a citizen member of the Joint Survey Committee on Debt Management of the Wisconsin Legislature (1983-1987). She also participated in the local Government Debt Management Advisory Committee's intensive study of the Wisconsin debt statutes and the drafting of revisions to the Wisconsin municipal financing statutes. She has served as a trustee of the Public Policy Forum. She is a member of the Wisconsin Bar Association and its governmental law section, is Past President of the Wisconsin Association of School Attorneys, and often serves as a speaker on municipal finance topics to the Wisconsin Government Finance Officers Association, the League of Wisconsin Municipalities, the Alliance of Cities and the Wisconsin Association of School District Administrators and Business Officials. FLOYD C. NEWTON III

Floyd C. Newton III, a partner in King & Spalding, resident in its Atlanta office, was elected a Director of the Association for a term expiring in 1998. Mr. Newton previously served as a Director of the Association for a term ending in 1995 by virtue of his chairmanship of the 1995 Bond Attorneys' Workshop. He has also served as a member of the Steering Committee of the Bond Attorneys' Workshop for a number of years and as Vice-Chair of the Legislative Action Committee of NABL. Mr. Newton joined King & Spalding in 1980. His practice includes serving as bond counsel or underwriter's counsel in a variety of financings, particularly exempt facility financings in over 20 states. Mr. Newton received his B.A. magna cum laude in 1977 from Princeton University in Economics and his J.D. magna cum laude from The University of Georgia School of Law in 1980 where he was a member of the Order of the Coif and Executive Editor of the Georgia Law Review. Mr. Newton has been an active speaker at various municipal finance and local governmental seminars. He is a member of various national, state and local bar associations and a member of various civic and community boards. JOHN M. GARDNER John M. Gardner, a partner of Hogan & Hartson L.L.P. and resident in its Denver office, was elected a Director of the Association for a term expiring in 1997. Mr. Gardner has played a prominent role in the continuing dialogue between the municipal securities industry and the Securities and Exchange Commission and the Municipal Securities Rulemaking Board. Mr. Gardner served as principal draftsman of the comments on Rule 15c2-12 submitted by the American Bar Association to the SEC in 1989 and as co-chair of


a special committee of NABL which prepared and submitted comments to the SEC with respect to the secondary market disclosure amendments to Rule 15c2-12 proposed and adopted in 1994. His work for NABL has included participation in many other formal comments and informal meetings with the SEC and the MSRB. Mr. Gardner served as Co-Reporter and Chairman of the Editorial Committee of the NABL/American Bar Association Joint Project on the Disclosure Roles of Counsel in State and Local Government Securities Offerings, original-ly published in September 1987, and as Reporter and Project Coordinator for the second edition of that work, published in 1994. He is co-author of "The Revolution in State and Local Government Securities Disclosure Practices," Insights, Vol. 2, No. 11 (1988). Mr. Gardner served as Vice-Chairman of NABL's Securities Law and Disclosure Committee from 1989 to 1991, and as Chair of that Committee from 1991 to 1994. He is also Vice-Chair of the ABA's Business Law Section, Subcommittee on Municipal and Governmental Obligations. Mr. Gardner has over twenty-five years of experience in municipal and corporate finance, serving as bond counsel, issuer's counsel, under-writer's counsel and trustee's counsel in a variety of types of transactions throughout the United States. Mr. Gardner works with his firm's Aviation and Public Finance Groups and has served in key roles in connection with numerous taxable and tax-exempt financing for various airports in the United States. Mr. Gardner is a graduate of Brown Uni-versity (A.B. 1964) and the University of Michigan Law School (J.D. cum laude 1967) and is admitted to practice in Colorado and Pennsylvania. He joined Hogan & Hartson in 1995. He is named in Who's Who in American Law. DAVID A. CAPRERA

David A. Caprera, a tax partner in the Public Finance Department of Kutak Rock's Denver office, was elected a Director of the Association for a term expiring in 1996. During his sixteen years at Kutak Rock, Mr. Caprera has had primary responsibility for delivering tax opinions in such areas as urban renewal, housing, industrial development financings, refundings and special district issues, as well as traditional local government financings. He has had significant experience in drafting various state legislation, including legislation creating the Colorado Agricultural Finance Authority and legislation concerning the Private Activity Bonds Ceiling Allocation Act, and has been an active participant in seminars and lecture programs on public fi-nance and tax-related matters. Mr. Caprera was designated by the American Bar Association's Committee on Tax-Exempt Finance to chair its task force on the Treasury Regulations implementing the arbitrage rebate provisions of the Tax Reform Act of 1986, is the current Vice-Chair of the American Bar Association Tax Section's Tax-Exempt Financing Committee and served as Chair of its Subcommittee on Arbitrage Matters. He has served as the Chair and Vice-Chair of the Association's Arbitrage and Rebate Committee, has sat on the Steering Committee of the Bond Attorneys' Workshop, is a perennial panelist at the Bond Attorneys' Workshop and the Association's Arbitrage, Washington and Fundamentals seminars, and claims credit for bringing a little humor to the annual "current topics" panels. Mr. Caprera has also been a faculty member for the Practising Law Institute in its seminars on tax-exempt finance. On behalf of both the Association and the American Bar Association, Mr. Caprera has had primary responsibility for submitting comments to the Treasury and Internal Revenue Service with respect to arbitrage, private activity bond, redevelopment bond, and enforcement matters. In recognition of his national prominence as a public finance


practitioner, Mr. Caprera was elected as one of the original fellows of the American College of Bond Counsel. He is a member of the Colorado and Denver Bar Associations. Mr. Caprera received his bachelor's degree magna cum laude from Princeton University in 1975, and M.B.A. with a concentration in finance in 1978 together with his J.D. in 1979 from the University of Chicago. In his spare time, he is an avid flyfisher, runner and duplicate bridge enthusiast. He has been married for 19 years to Anne Brenner, M.D. They have two children and reside in Evergreen, Colorado. JEANNETTE M. BOND Jeannette M. Bond, a tax partner in the firm of LeBoeuf, Lamb, Greene and MacRae, resident in its New York City and Newark, New Jersey, offices, was elected a Director of the Association for a term expiring in 1998. Ms. Bond has been active in the Association since 1983. She chaired the Association's General Tax Matters Committee for 1994-1995 and in that capacity supervised the development of the Association's comments on the proposed Private Activity Bond Regulations and testified on behalf of the Association at the public hearings on the proposed regulations. Ms. Bond served as one of the initial co-editors of the Association's Federal Taxation of Municipal Bonds in 1992-1993 and as Editor-in-Chief in 1993-1994. Ms. Bond has served on the Steering Committee for the Bond Attorneys' Workshops in 1987, 1994 and 1995 and has chaired the panels on Private Activity Bond tests (1994-1995) and Single Family Housing Bonds (1987). She has been active as a panelist on one or more panels each year since 1983 except for 1988 and 1991. Ms. Bond joined Leboeuf, Lamb, Greene & MacRae as a partner in 1992. She was formerly a partner at Pitney, Hardni, Kipp & Szuch, Morristown, New Jersey (1990-1992), where she began her career in the tax aspects of public finance in 1979. She received her B.A. cum

laude in 1975 from Douglass College, New Brunswick, New Jersey; her J.D. cum laude from Rutgers-Camden School of Law in 1978, where she served as Notes and Comments Editor on the Rutgers Law Journal; and her LL.M. in Taxation from New York University in 1980. She is a member of the bars of the States of New York and New Jersey and a member of the Tax-Exempt Obligations and Tax-Exempt Organizations Committees of the Tax Law Section of the American Bar Association and the New York State Bar Association Tax Committee. She is a frequent speaker on tax-exempt finance. STEVE A. MATTHEWS Steve A. Matthews, a member of the firm of Sinkler & Boyd, P.A., resident in its Columbia, South Carolina, office, was elected a director of the Association for a term expiring in 1996. From 1993 through 1995, he chaired the Association's Committee on Professional Responsibility, which, during that time, com-pleted the second edition of The Function and Professional Responsibilities of Bond Counsel. A magna cum laude graduate in history from the University of South Carolina in 1977, Mr. Matthews also attended Warwick University in Coventry, England, and received his J.D. degree from Yale Law School in 1980. He is admitted to practice in South Carolina and the District of Columbia, as well as before the U.S. Claims Court and the U.S. Court of Appeals for the Fourth Circuit. Mr. Matthews was a member of the Reagan administration from 1985 through 1988, serving as the Executive Assistant to United States Attorney General Edwin Meese III (1988), Deputy Assistant Attorney General for Judicial Selection (1986-1988), and Special Counsel to the Assistant Attorney General for Civil Rights (1985-1986). From 1981 through 1985, he practiced with Dewey, Ballantine, Bushby, Palmer & Wood, primarily in the areas of federal


securities law, corporate finance and corporate acquisitions, divestitures and takeovers. Since joining Sinkler & Boyd in 1988, he has served as bond counsel, underwriter's counsel, trustee's counsel and bank counsel, primarily in governmental purpose bond issues for the State of South Carolina, its agencies and institutions, and cities, counties, school districts and special purpose districts throughout the State, and as litigation counsel in matters involving securities laws, voting rights, local government matters, and intellectual property rights. He is active in and lectures for various state-wide associations of political subdivisions, and has been called upon periodically by the office of the Governor, officials of the General Assembly and political subdivisions to draft, revise, or comment upon legislative proposals relating to public finance and local government law. In addition, Mr. Matthews is a founding member of the American College of Bond Counsel, currently serving on its Board of Directors and as its Secretary. He is also on the Board of Directors of Helpline of the Midlands, Inc. (a non-profit crisis intervention hotline), is the Chairman of the Board of Collegiate Network, Inc. (a non-profit corporation that provides funding and technical advice and assistance to alternative campus newspapers at the collegiate level), is a founder and Board member of the South Carolina Chapter of the Federalist Society, is a member of the Phila-


delphia Society, and serves on the Brennen Ele-mentary School Improvement Council (where the older of his two children is in the first grade). ROBERT W. BUCK Robert W. Buck is a partner in the Tax Department of Palmer & Dodge, Boston. He will serve a one-year term on the Association's Board of Directors by virtue of his chairing the Bond Attorneys' Workshop. He graduated from Boston College Law School, magna cum laude, in 1981. He also holds an LL.M. (Taxation) from Boston University School of Law, where he was first in his class. Mr. Buck's primary area of practice involves federal and state tax issues surrounding public-purpose finance transactions. He has experience in the issuance of bonds for govern-mental entities, health care organizations, universities, sewage and solid waste disposal facilities, housing projects, student loans and industrial development. Mr. Buck has served on the Steering Com-mittee of the Workshop from 1988 through 1992 and on its Executive Committee in 1994 and 1995. He was Chairman of the 1989 Washington Workshop and a member of the faculty of the Ar-bitrage/Tax Seminar from 1991 through 1995. He also served as Chair (1992-1993) and Vice-Chair (1992) of NABL's General Tax Matters

Committee and as Vice Chairman of its Legisla-tive Policy Committee (1987-1988). Mr. Buck's hobbies are sailing, skiing and woodworking.

THE TWENTIETH BOND ATTORNEYS' WORKSHOP The twentieth Bond Attorneys' Workshop, ably and cheerfully chaired by Floyd C. Newton III of King & Spalding, Atlanta, convened on September 20 with 918 practitioners, industry participants and Federal agency representatives in attendance. Twenty-nine concurrent workshops were conducted, two of them (New Issue Disclosure and Rule 15c2-12 Issues) seven times each so as to accommodate demand. At the General Session on September 21, after opening remarks by Mr. Newton, John J. Cross III, of Hawkins, Delafield & Wood, Wash-ington, spoke on Current Developments in Tax Law. Professor Clayton P. Gillette, of the University of Virginia School of Law, addressed Current Developments in State Law, and Paul S. Maco of the SEC (whose remarks are reproduced infra) dealt with Current Developments in Secu-rities Law. In the early evening, The Bond Buyer generously financed a sumptuous cocktail party with hot and cold running hors d'oeuvres. The Bond Buyer also distributed free copies of its daily publication throughout the Workshop, offering a substantial discount to new subscribers. At the September 21 luncheon, then-Work-shop Vice-Chair Robert W. Buck, of Palmer & Dodge, Boston, introduced Mark Shields, syndicated columnist and denizen of the Mac-Neil/Lehrer NewsHour, who variously noted that "Al Gore is only a heartbeat away from the vice-presidency;" that "the political party that represents optimism has historically prevailed;" that "in the fifty-two weeks before he took office, Ike became a Republican and a Presbyterian;" that "the most self-indulgent people on the planet live in New Hampshire: they know they name the

Floyd C. Newton III addresses the Bond Attorneys' Workshop.


President;" and that "Bill Clinton has failed to separate the interesting from the important; he finds everything interesting."

PAUL S. MACO SPEAKS TO BOND ATTORNEYS' WORKSHOP ATTENDEES Editor's Note: The following remarks were delivered at the General Session of the Bond Attorneys' Workshop on September 21, 1995, by Paul S. Maco, Director of the SEC's Office of Municipal Securities and a former Director of the Association. Good morning. Once again, I am delighted to provide a review of the past year's activities in federal securities law, together with a few words on what may lay ahead. Before I continue, however, I must remind everyone that my remarks here today do not necessarily represent the position of the Com-mission or the staff, but represent my own thoughts. This morning, I will review significant developments in rulemaking and in enforcement of the securities laws in a municipal bond context and offer as well some observations on what these events may mean for the practicing bond attorney. Pausing to look back over the past year's developments, which these presentations require us to do, it's not too difficult to conclude that not only is a major effort underway to improve practices in the municipal bond market, but the effort has already made solid progress: · In the brief period of time since we last

gathered, the Commission adopted amendments to Rule 15c2-12 creating for the first time a regulatory framework for secondary market disclosure in the

municipal market. · The Commission's Division of En-

forcement has brought proceedings for violation of the securities laws in four cases involving the municipal markets since January; seven since last June; and numerous investigations are underway.

· A bond dealer's challenge to the con-

stitutionality of MSRB Rule G-37 was unanimously rejected by a three judge panel of the U.S. Court of Appeals for the District of Columbia Circuit.

· Underscoring its commitment to im-

proving the municipal bond market, the Commission has created the Office of Municipal Securities to facilitate implementation of its municipal securi-ties initiatives, both within the Com-mission and in the marketplace.

Reform of the municipal bond market has become, in fact, a common topic for our nation's leading daily newspapers and financial magazines. For quite a stretch this past year, daily updates on Orange County, California, were even provided on Headline News. It is difficult to talk today about municipal bonds without uttering the name "Orange Coun-ty," and while I may not discuss our Enforcement Division's investigation, it's worth noting that since the County's filings in bankruptcy court, three separate Congressional committees have explored the issue of the adequacy of disclosure regulations in our nation's municipal bond market. All of these developments are best under-stood, in my view, as the development of a mosaic, if you will, depicting the federal securi-ties law as applied to municipal finance. The pieces of this mosaic are inlaid in the cement of the antifraud provisions of federal securities law, which apply without exception to municipal


securities. The design has been shaped by the Commission for almost two decades, from the staff report on the City of New York in 1977 to last Fall's release adopting amendments to Rule 15c2-12. Greater definition may be provided by no-action, exemptive and interpretive letters from the Division of Market Regulation and sharpened by the actions of the Division of Enforcement. Work on this latter task is progressing at a rapid pace and will continue from time to time, as long as market participants require the design be clari-fied or reinforced. It seems safe to assume that no securities law development this past year is likely to have affected your daily practice as much as the amendments adopted last November to Rule 15c2-12. While a professing of ignorance on these amendments, at least among those in this room, is arguably akin to asking "O.J. who?" or "what bloody glove?," I'll nevertheless offer a brief review for the sequestered. On November 10, 1994, the Commission adopted these amendments in final form, with modifications that had their origin in extensive cooperation from industry groups, and the thoughts and suggestions contained in over 390 comment letters. The amendments require underwriters to reasonably determine that an issuer or obligor has undertaken to provide annual financial information and operating data; audited financial statements, when and if available; notices of eleven specified events, if material; and notice of a failure to provide annual financial information, with respect to those persons who are committed by contract or other arrangement to support payment of all or a part of the obligations on the municipal securities, and for whom financial or operating data is presented in the final official statement. Underwriters must reasonably determine that the undertakings specify the identity of each

person for whom annual financial information and notices of material events will be provided (either by name or by the objective criteria used to select such person), as well as the type of financial information and operating data to be provided as part of the annual financial information; the accounting principles to be used in the prepara-tion of financial statements, including whether audited financial statements will be provided; the date on which annual financial information for the previous year will be provided; and to whom it will be provided. The parties to an initial offering of municipal securities establish which parties will provide ongoing secondary market disclosure, and what information is material to an understanding of the securities being offered. The financial information and operating data in the final official statement determine the type of financial information and operating data to be provided on an ongoing basis pursuant to the undertakings, and the persons about which that data will relate. This approach is designed to provide meaningful secondary market disclosure under standards that are flexible, yet enforceable. The approach is consistent with that traditionally followed by the Commission with respect to official statement disclosure, which relies on market discipline and general anti-fraud considerations to ensure that disclosure provided is meaningful. Prior to amendment, the underwriters' obligation to deliver final official statements to potential customers for a 90-day period after the close of the underwriting period was shortened to 25 days if the final official statement can be obtained from a Nationally Recognized Municipal Securities Information Repository ("NRMSIR"). NRMSIRs essentially served the function of disseminators of official statements on behalf of underwriters. As a result of the amendments to Rule 15c2-12, NRMSIRs play an expanded role in the collection and dissemination of secondary market


information. Under the amendments, issuers' disclosure undertakings call for annual financial information to be provided to each NRMSIR and the appropriate state information depository ("SID"), if any. In addition, notices of material events, including notices of a failure to provide annual financial information, will be provided to each NRMSIR or the MSRB, and to the appropriate SID. Therefore, in addition to the collection and dissemination of final official state-ments, NRMSIRs will collect and disseminate annual financial information and notices of material events. The three existing NRMSIRs, the American Banker-Bond Buyer, the J.J. Kenny Company, and Bloomberg, L.P, received no-action letters recognizing them as NRMSIRs under the new standards on June 23, 1995, together with two new information vendors, Disclosure Inc. and Moody's Investors Services. Under the amendments, a SID would be a depository operated or designated by the state that receives information from all issuers within the state, and makes this information available promptly to the public (including NRMSIRs) on a contemporaneous basis. The Municipal Advisory Council of Texas is the first SID, pursuant to a no-action letter issued August 29, 1995. Based on a number of informal inquiries, it appears that other states are seriously considering the pos-sibility of establishing state-based depositories. The amendments prohibit brokers, dealers, and municipal securities dealers from recom-mending the purchase or sale of municipal securi-ties to which the underwriting prohibition applied unless they have in place procedures that provide reasonable assurance that they will receive promptly any notices of material events regarding these securities. For example, a dealer could rely on a vendor system that electronically reported all material events to the dealer when they occurred, if these reports were made available to persons responsible for the recommendations. Although the amendments only create

specific receipt obligations with respect to material event notices, annual financial informa-tion disseminated into the marketplace must be taken into account by dealers in making recom-mendations to investors in order to meet their obligations under MSRB Rules G-17, G-19, and G-30, and their existing obligation to have a reasonable basis on which to recommend securi-ties to investors. Material event notices are the type of information required to be disclosed to a customer pursuant to MSRB Rule G-17. The amendments provide an exemption that reflects the concerns of small and infrequent issuers of municipal securities. If neither the issuer nor any obligated person is obligated with respect to more than $10 million in municipal securities outstanding following an offering, the offering will be exempt from the amendments on the condition that an issuer or obligated person makes a limited undertaking to provide upon request, or annually to a SID, at least the financial information or operating data that is customarily prepared, and made publicly available. In addition, the undertaking must meet the amend-ment's requirement regarding notices of material events. According to one commenter on the proposed amendments, in 1993, 71% of the approximately 52,000 municipal issuers had under $10,000,000 in outstanding municipal securities. Because over 20% of the total issuances in 1993 were under the $1 million principal amount threshold for application of the rule generally, a significant percentage of offerings would remain totally exempt from the amendments. The pre-existing exemptions for offerings that are limited placements, short-term securities, and securities with demand features remain. The amendments add an exemption from the annual information requirement for offerings of securities with maturities of less than 18 months. The amendments are being phased in over a short period of time to allow municipal issuers


and underwriters the time to put necessary procedures in place to comply with the new rules. The requirement that underwriters reasonably determine that an issuer or obligor has undertaken to provide disclosure went into effect on July 3, 1995. The limited undertaking conditions of the small issuer exemption will be effective for offerings commencing on or after January 1, 1996. The requirement that brokers, dealers, and municipal securities dealers have procedures in place that provide reasonable assurance that they will receive promptly any notices of material events regarding the securities they recommend for purchase or sale also will go into effect on January 1, 1996. Given the complex nature of the municipal securities markets, questions of interpretation and application of the rule undoubtedly will arise from time to time, particularly during this period of implementation. Informal assistance is easy to receive; simply telephone one of the staff members listed in the release. More formal interpretive letters and no-action guidance may be received by contacting the Chief Counsel's Office in the Division of Market Regulation. The staff has issued two interpretive letters in response to requests for guidance from this Association, the first released on June 23, 1995 addressing twenty-two different questions. This first letter has been available for some time and undoubtedly will be discussed in the various panel sessions, so I will not go into its details this morning. The most recent letter, released yesterday, responds to thirteen questions of a more technical nature than the first. Because of their technical nature, I won't go into it either, save for one matter. Undertakings may not eliminate references to those of the eleven events that are not applicable at the time of the offering, nor may undertakings, through the use of qualifying words or phrases, narrow the scope of the eleven events. Aside from the discarding the simplicity inherent in the

phrasing "eleven events, if material" and requiring the secondary market to examine the adequacy of this most concise portion of the undertaking that a contrary reading would allow, the staff is con-cerned that by either excluding certain events, or by adding qualifications to the list of events in Rule 15c2-12, issuers and obligated persons would be making materiality determinations about certain events prior to the issuance of securities instead of at the time an event occurs. Put another way, if when looking at language this clear and concise, you begin to feel that overwhelming compulsion to edit, universally experienced by attorneys presented with a simple writing, kill it. Both letters, I understand, are available at this seminar. In a few minutes, I'll have more helpful hints, but first I'd like to review several of the actions brought by the Enforcement Division this year. Along with Rule 15c2-12, a good portion of the shape and design of the mosaic was established in the March 1994 Interpretive Release, about which I spoke to you last year. The Interpretive Release states the Commission's interpretation of existing law under the antifraud provisions as applied to the municipal market and is worth reading closely. Over the past two years, the Commission's enforcement program has focused greater attention on the municipal market and already has brought several cases. I will summarize a few. SEC v. Stifel, Nicolaus and Company, Inc., Civil Action No. 95-1190T (W.D. Okla.), Lit. Rel. No. 14587 (August 3, 1995). The Commission brought this injunctive action against Stifel, Nicolaus & Co., a St. Louis broker-dealer, alleging that from 1989 through 1993, Stifel's Oklahoma Public Finance Office received millions of dollars in undisclosed payments from third parties that sold or brokered


investments to municipal issuers, in municipal securities transactions where the Oklahoma Public Finance Office served as an underwriter, financial advisor or investment banker. The Complaint alleged further that Stifel undermined the integrity of the bidding process set up for the purchase of certain of those investments. According to the Complaint, in advising the issuers about the purchase of the investments, Stifel had a duty to disclose conflicts of interest. Stifel breached its duty and defrauded the issuers in accepting undisclosed payments from the investment providers or investment brokers. The Complaint further alleges Stifel defrauded investors by failing to disclose the payments to participants in the

bond issues, including the issuer, bond counsel and/or special tax counsel, thereby depriving investors of information material to an assessment of the tax exempt status of the bonds.

The Complaint alleged that in accepting undisclosed payments from third parties that sold investments to municipal bond issuers, Stifel violated Section 17(a) of the Securities Act of 1933, Sections 10(b), 17(a)(1) and 15B(c)(1) of the Securities Exchange Act of 1934 and Rules 10b-5, 17a-3 and 17a-4 thereunder. Stifel also violated Rules G-8, G-9 and G-17 of the MSRB. Simultaneous with the filing of the Complaint, without admitting or denying the allegations contained in the Complaint, Stifel consented to the entry of a Final Judgment enjoining it from future violations of the provisions of the federal securities laws cited above. In addition, Stifel agreed to disgorge $922,741, pay prejudgment interest on that amount of $263,637 and pay a civil money penalty pursuant to Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act of $250,000. The Commission's investigation as to the conduct of other entities and individuals involved in this matter is continuing. SEC v. Nicholas A. Rudi, et. al., 95 Civ. 1282 (AGS) (S.D.N.Y.), Lit. Rel. No. 14421 (Febru-ary 23, 1995). The Commission filed this Complaint alleging violations of the federal securities laws and the MSRB rules arising out of the payment of more than $300,000 in kickbacks in connection with the Camden County Municipal Utilities Authority's ("CCMUA") February 1990 offering of approximately $237,000,000 of debt securities. The Complaint alleged Nicholas A. Rudi, President and who was with Joseph C. Salema, a fifty percent owner of Consolidated Financial Management, Inc. ("CFM"), the financial advisor to the CCMUA, told George L. Tuttle, Jr., senior vice-president of First Fidelity Bank, N.A., that the CCMUA had reduced CFM's financial advisory fee on the Offering to a flat fee of $15,000. In prior offerings, CFM had received one dollar per $1,000 face value of bonds. Rudi,

MASSACHUSETTS HOUSING FINANCE AGENCY REQUEST FOR PROPOSALS FOR BOND COUNSEL The Massachusetts Housing Fi-nance Agency (MHFA), which since 1970 has provided more than $4.9 billion in bond financing for affordable rental and homeownership programs, is seeking proposals from firms interested in serving as bond counsel to the Agency. Interested firms should contact Wendy Warring, MHFA General Counsel, MHFA, One Beacon Street, Boston, MA 02108, (617) 854-1875, for a complete RFP package. Responses to the RFP are due to Wendy Warring no later than 5:00 p.m., Friday, December 15, 1995.


who said that he thought CFM should still get paid one dollar per bond for working on the Offering, told Tuttle that he wanted First Fidelity to pay CFM the difference. According to the Complaint, Tuttle and Alexander S. Williams, the head of First Fidelity Securities Group, caused their employer, First Fidelity, to pay a kickback of over $200,000 between February and April 1990 to CFM, which was shared by Rudi and Salema. The Complaint further alleged that Salema solicited and received an additional $90,000 kickback from Robert J. Jablonski ("Jablonski"), currently a Commissioner of the New Jersey Highway Authority. In exchange for Salema's assistance in securing for First Fidelity the lead underwriter position on the Offering, Jablonski agreed to pay Salema a portion of the finder's fee that First Fidelity paid to Jablonski in connection with the Offering. The Complaint alleged that Salema and Jablonski agreed that Jablonski's kickback to Salema would be reduced by any political contributions that Jablonski chose to make in the interim. Also, according to the allegations in the Complaint, to conceal the kickback to CFM, Tuttle and Williams paid the kickback through Jablonski and disguised these payments on First Fidelity's municipal securities dealer books and records. At Salema's direction, Jablonski in turn paid to Armacon Investment Co., a company owned by Salema, First Fidelity's kickback to CFM and Jablonski's kickback to Salema. The Commission further alleged that, among other things, Tuttle caused First Fidelity to make an additional $22,000 kickback to CFM in connection with the Offering through a fictitious invoice on another municipal securities trans-action and concealed this payment on First Fidelity's municipal securities dealer books and records. The Commission alleged that each of the Defendants violated Section 17(a) of the Securi-

ties Act, Section 10(b) of the Exchange Act, and Rule 10b-5. In addition, the Complaint alleged that Tuttle and Williams violated Section 15B(c)(1) of the Exchange Act, which prohibits effecting transactions in municipal securities in contravention of any rule of the MSRB, and MSRB Rules G-8 (books and records), G-17 (fair dealing) and G-20 (gifts and gratuities). Salema consented, without admitting or denying the allegations of the Complaint, to the entry of a final judgment permanently enjoining him from violating Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. Salema also agreed to pay $324,764.55, representing disgorgement of the money he received as a result of the conduct alleged in the Complaint and prejudgment interest. Tuttle and Williams, without admitting or denying the allegations of the Complaint, have each consented to the entry of a final judgment permanently enjoining them from violating Section 17(a) of the Securities Act, Sections 10(b) and 15B(c)(1) of the Exchange Act and Rule 10b-5, and MSRB Rules G-8, G-17, and G-20, and have agreed to disgorge $18,171.48 and $4,684.14, respectively, representing the money each received as a result of the conduct alleged in the Complaint. Tuttle has also agreed to cooperate with the Commission. Finally, Tuttle and Williams each agreed to consent to the entry of an Order by the Commission barring them from association with any broker, dealer, investment adviser, investment company or municipal securities dealer. In the Matter of George L. Tuttle, Jr. and Alexander S. Williams, SEA Rel. No. 35605 (April 14, 1995). The Commission's investigation is continu-ing. The litigation is pending as to defendants Rudi and CFM, now known as Public Capital Advisors, Inc. SEC v. Terry D. Busbee and Preston C.


Bynum, Civil Action No. 95-30024 RV (N.D. Fla.), Lit. Rel. No. 14387 (January 23, 1995). On January 23, 1995, the Commission filed a Complaint for Injunctive and Other Equitable Relief and Civil Money Penalties ("Complaint") against Terry D. Busbee ("Busbee"), an elected public official of the Escambia County Utilities Authority ("ECUA") from approximately 1984 through 1994, and Preston C. Bynum ("Bynum"), an employee of Stephens Inc. ("Stephens"), a municipal securities underwriter. The Complaint alleges that from at least 1990 through at least 1993, the defendants defrauded the ECUA and investors in three offerings of municipal securities issued by the ECUA. According to the Complaint, Busbee and Bynum entered into cer-tain financial arrangements, pursuant to which Busbee received certain benefits from Bynum, during a time when Busbee had an important role in selecting the underwriter for municipal securities issued by the ECUA. The Complaint alleges that Bynum caused the following benefits to be provided to Busbee: 1) the extension and guarantee of four loans totalling $36,700 from an Arkansas bank; 2) repayment of approximately $27,000 in principal and interest on three of the loans; and 3) payment of approximately $3,500 to Busbee directly. The Complaint further alleges that Busbee voted to select, and otherwise par-ticipated in the selection of Bynum's employer as the underwriter or senior managing underwriter for three ECUA municipal securities offerings. According to the Complaint, Busbee and Bynum each had a duty to disclose the financial arrangements to the ECUA in connection with Stephens' selection as underwriter in the three offerings and to investors in the three offerings. The Complaint alleged that Busbee's and Bynum's failure to disclose the financial ar-rangements and the actual and potential conflicts of interest created by those arrangements, at the time Bynum's employer was selected as underwriter and at the time those ECUA securi-ties were offered and sold to the public, violated

the following antifraud provisions of the federal securities laws: Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. In addition, the Complaint alleged that Bynum also violated Rules G-17 and G-20 of the MSRB, which prohibit unfair practices in the conduct of municipal securities business and place limitations on gifts in relation to certain municipal securities activities, and Sec-tion 15B(c)(1) of the Exchange Act, which prohibits effecting transactions in municipal securities in contravention of any rule of the MSRB. On May 24, 1995, the Commission an-nounced a settlement in the matter. Bynum consented to the entry of a final judgment that permanently enjoined him from future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 15B(c)(1) of the Ex-change Act and Rules G-17 and G-20 of the MSRB. In addition, Bynum also agreed to pay a civil money penalty in the amount of $25,000. As part of the settlement, Bynum agreed to the issuance by the Commission of an Order Insti-tuting Proceedings, Making Findings and Im-posing Sanctions, that bars him permanently from association with any entity regulated by the Commission. In the Matter of Preston C. Bynum, SEA Rel. No. 35870 (June 20, 1995). Busbee consented to the entry of a final judgment that permanently enjoined him from future violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and that noted that no penalty is imposed on Busbee based on his demonstrated inability to pay. See Lit. Rel. No. 14508 (May 24, 1995). Also, on January 23, 1995, the United States Attorney for the Northern District of Florida an-nounced that a federal grand jury indicted Busbee and Bynum on charges relating to the conduct alleged in the Complaint. On May 17, 1995 Busbee was sentenced to twenty-seven months in


prison, with three years probation for violations of 18 U.S.C. § 666 (bribery concerning programs receiving federal funds) and 26 U.S.C. § 7206 (false statement on an income tax return). On May 18 Bynum was sentenced to a prison term of twenty-four months with two years probation, for his violation of 18 U.S.C. § 666. Both defendants had previously pleaded guilty to those charges, on March 3, 1995. The Commission's investigation continues as to the conduct of other individuals and entities involved in this matter. In the Matter of Thorn, Alvis, Welch, Inc., John E. Thorn, Jr., and Derryl W. Peden, SA Rel. No. 7069, SEA Rel. No. 34248, AP File No. 3-8400 (June 23, 1994). The Commission instituted administrative and cease-and-desist proceedings against Thorn, Alvis, Welch, Inc. ("TAW"), a registered broker-dealer; John E. Thorn, Jr. ("Thorn"), the president of TAW; and cease-and-desist proceedings against Derryl W. Peden ("Peden"), bond counsel for TAW, alleging violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by TAW, Thorn and Peden, and violations by TAW, aided and abetted by Thorn, of Section 15B(c)(1) of the Exchange Act and Rule G-17 of the MSRB. According to the order, from August 1992 through October 1993, TAW, as underwriter, raised approximately $20 million through seven municipal revenue bond offerings ("TAW offerings"). The bonds were sold as qualified tax-exempt bonds pursuant to the Internal Revenue Code (the "Code"). Section 147(g) of the Code provides that no more than two percent of the proceeds of such offerings can be used to finance issuance costs such as bond counsel fees. Section 142(a) of the Code provides that at least ninety-five percent of the bond proceeds must be used to provide the financed facility. According

to the allegations in the order, TAW, through Thorn and Peden, devised a scheme which utilized sham transactions to conceal the fact that bond proceeds in excess of the amounts permitted by Sections 147(g) and 142(a) of the Code were used to pay issuance costs. This created a substantial risk, which was not disclosed to investors, that the TAW offerings may have failed to comply with the requirements of the Code and that the bonds may not have been tax exempt as represented. Peden, the bond counsel, consented to the entry of an order finding that he had violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, without admitting or denying the allegations in the order. In the Matter of Derryl W. Peden, SA Rel. No. 7069, SEA Rel. No. 35045, AP File No. 3-8400 (December 2, 1994). The remainder of the case is pending. Additional Commission actions that may be of interest include: SEC v. Michael Goodman, et. al., Civil Action No. 95CV 71563 (E.D. Mich.), Lit. Rel. No. 14471 (April 18, 1995); SEC v. John A. Genetti, Westley Scher and Louis F. Vargas, CA No. 94-4727 R (C.D. Cal.), Lit. Rel. No. 14164 (July 14, 1994); and In the Matter of Synovus Securities, Inc., SA Rel. No. 7070, SEA Rel. No. 34313, IA Rel. No. 1423, AP File No. 3-8408 (July 7, 1994). Another development of this past year is the creation of the Office of Municipal Securities, which provides a source of advice and expertise to the Commission and its Divisions on matters relating to municipal securities. I have been joined in this office by several members of the municipal finance community who may be familiar to you: Mary Jo White, Curtis Young and Brian Hourihan as well as by Susan Golden, the Deputy Director, who has joined us from the Division of Enforcement. Together, the group represents thirty-seven years of experience in the municipal bond market as well as experience in the enforcement process that will work with existing divisions and experienced staff as we


continue to fill in the mosaic. One matter that remains of great concern to the Commission is hidden arrangements and the integrity of the offering process, especially those surrounding the practice known as "pay-to-play." While some in this Association have argued, strenuously at times, that "pay-to-play" is not a problem in the municipal market, you should be aware that there are some in the press and the judiciary who disagree with you. We've made great strides in our efforts to improve this market, yet we find ourselves in a situation in which an internationally renowned financial magazine like The Economist can still refer to "America's notoriously corrupt municipal bond market," as it did on April 15th of this year, and Fortune magazine can headline an article "The Big Sleaze in Muni Bonds," as it did not long ago. In sentencing Busbee in the case described earlier, Florida U.S. District Court Judge Roger Vinson called the facts of the case "symptomatic of a pervasive problem in government today. Government officials believe they are entitled to special treatment by lobbyists." Referring to the bribes and numerous dinners given to the defendant by a local underwriting firm, Judge Vinson stated that such practices "corrupt the integrity of our government. There is no area where the temptation is greater than in the area of bond issues." And in its recent, unanimous decision upholding the MSRB's Rule G-37, the Court of Appeals for the District of Columbia stated quite clearly, "Underwriters' campaign contributions self-evidently create a conflict of interest in state and local officials who have power over municipal securities contracts, and a risk that they will award the contracts on the basis of benefit to their campaign chests rather than to the governmental entity."

Not only does pay-to-play undermine the integrity of the offering process – it also harms issuers and the taxpayers that stand behind them. You need look no further than the Stifel, Nicolaus matter and the proceedings against the underwriters and financial advisers to the Cam-den County Municipal Utilities Authority earlier this year. Some jurisdictions – Florida, for example – have made the ban on pay-to-play a matter of law. Connecticut recently adopted legislation that went further than most, barring contributors and State treasurers alike from doing business together. The City of New York has also demonstrated leadership on this issue; in its recent request for services, the City asked poten-tial counsel whether they disclosed their political contributions. And now, the Association of the Bar of the City of New York has recommended adoption of a disciplinary rule barring pay-to-play among lawyers. This, in turn, has prompted the American Bar Association to review the problem on a national level. One year ago, as formation of the amend-ments to Rule 15c2-12 were nearing completion, NABL was urged to "get with the program" to help implement the rule. The leadership dem-onstrated by the Securities Law and Disclosure Committee in preparing the interpretive requests has produced positive steps for that program. Now that the Association of the Bar of The City of New York and the American Bar Association have chosen to tackle the thorny problem of political contributions and the award of bond counsel work, I urge you to work with them con-structively to improve the municipal market. Before I close, I'd like to share an observa-tion that may be critical to a full understanding of the mosaic I have discussed today; perhaps more importantly how you might more easily assist your clients in understanding the mosaic. The


observation is on the use of analytic tools. Members of the municipal finance bar have gathered here in Chicago at this Workshop for more than fifteen years to sharpen the analytic tools used in your practice, and sometimes you acquired new tools. For the most part, these tools have helped interpret the often complex and technical regulations that resolve whether the nickel is the issuer's or the Federal Government's, or assisted in the construction of a statute drafted several decades ago to determine whether an innovative product such as a swap is within its scope. While much of the body of federal securities law can be quite technical, the mosaic described today is free of the registration, reporting and proxy provisions where much of the technicality rests. The antifraud provisions are really quite simple at their core. They call for full disclosure of information material to investors in making an investment decision. Materiality is determined, the Supreme Court tells us, by a hypothetical reasonable investor who would want to know the information in order to decide whether to sell, buy, or hold. The overall goal remains more open and effective communication with the market. Keeping these thoughts in mind may make a transition to this area of practice much more smooth and certainly more understandable to clients. As we move forward and implement Rule 15c2-12, the great challenge facing bond lawyers may very well be to suppress the predisposition for philosophical debate that is an endearing quality possessed by so many lawyers and instead strive to increase your understanding of federal securities laws, and join with the underwriters and issuers as they move into this era of improved disclosure. We are here to help in that process. All we ask is that you roll up your sleeves and get to work with us.

Thank you.

CARLSON PRIZE AWARDED TO JAMES E. SPIOTTO James E. Spiotto, of Chapman and Cutler, Chicago, was awarded The Carlson Prize of the Association at the annual Bond Attorneys' Workshop luncheon on September 21, 1995. Mr. Spiotto was honored for his written


testimony before the Subcommittee on Capital Markets, Securities, and Government Sponsored Enterprises of the Committee on Banking and Financial Services of the U.S. House of Repre-sentatives, which was published in the August 1, 1995, issue of The Quarterly Newsletter.

The Carlson Prize, named in honor of Rita J. and Charles P. Carlson, is awarded to the author of the best scholarly article submitted for publica-tion in The Quarterly Newsletter during the one-year publication cycle ending on August 1, and is accompanied by a check for $500 and a tuition grant for attendance at the next Bond Attorneys' Workshop. This year's recipient was selected by an ad hoc committee whose members were George M. Mack, of Foster Pepper & Shefelman, Seattle; Floyd C. Newton III, of King & Spalding, Atlanta; and your editor.

[Art Guild Ad ("The Happy Booker")]


ACTIONS BY THE BOARD OF DIRECTORS ON SEPTEMBER 20, 1995 The meeting of the Board of Directors of the Association on September 20, 1995, was called to order by President Andrew Kintzinger at 9:16 a.m. Central Daylight Savings Time. Also attending were President-Elect William McBride, Treasurer Stephen Edwards, Secretary Perry Israel, Directors William H. Conner, Mae Nan Ellingson, Julianna Ebert, Floyd Newton, Susan Weeks, and Howard Zucker, Immediate Past President Neil Arkuss, Honorary Director Freder-ick Kiel, Executive Director Patricia Appelhans, and Director of Governmental Affairs Amy Dunbar. Due to a conflict, Director David Baker Lewis was unable to attend. Minutes Mr. Israel reported that only a few minor comments had been received on the most recent draft of the minutes of the July 13 and 14, 1995, meeting of the Board. Mr. Israel moved that the minutes be adopted, with those minor corrections; Mr. Conner seconded the motion, and it passed unanimously. Report of the Executive Director Ms. Appelhans reported that the member count, as of September 19, was 3010. She reported that 988 persons had registered for the Bond Attorneys' Workshop, of which 888 were members of the Association. She noted that she would send membership applications to the 100 nonmembers attending the Workshop. She also reported that The Bond Buyer was hosting the reception at Workshop and that The Bond Buyer would set up a table to distribute free copies at the Workshop. Report of the Treasurer Mr. Edwards reported that the projected

deficit for the year was likely to be into "six figures, but not too far." He noted that about half of the loss comes from nonrecurring costs. However, about half of the loss represents increases in the costs of the Washington and Na-tional offices and a drop-off in seminar regis-trations. He noted, however, that all of the seminars did make money. Mr. Kintzinger reported that the Executive Committee had decided to try to defer the computer update until 1997 to keep costs down next year. Ms. Appelhans reported that the Chicago Society of Association Executives is working on a computer project in 1996 on which the Association may be able to piggyback to save money. National Office Space Mr. Kintzinger noted that the first draft of a lease for new office space for the National Office was included in the Board meeting materials. Ms. Ebert reported that the new space is "nice, modest, not pretentious." Other tenants in the proposed building include small law firms and ac-counting firms. She reported that the site is 35-45 minutes from Chicago and from O'Hare. The anticipated move is to occur on or before April 1, 1996. Report of the Director of Governmental Affairs Ms. Dunbar reported that on the prior evening, the SEC had released NABL II, and that the open market escrow letter in the meeting materials been delivered to the IRS. Committee Reports General Tax Matters. Mr. Kintzinger noted that Mary Reichert and David Caprera were working on proposed comments on the audit guidelines. Arbitrage and Rebate. Mr. Conner stated that following its recent endeavors, the Commit-tee still needed to get back to comments on the


determination of value under the arbitrage regulations. Education. The Board unanimously ap-proved the appointment of Lauren McNulty, of Gardner, Carton & Douglas, Chicago, as Vice-Chair of the Fundamentals Seminar. Ms. Weeks stated that the Association needed to develop a policy for third party vendors at seminars and workshops. It was agreed that a form of contract and a policy should be the first items on the agenda of the Committee. Professional Responsibility. A copy of the final version of Function is in the meeting materials. Mr. Kintzinger reviewed the changes from the last draft. The Board gave general con-gratulations to Ms. Ellingson for her hard work. The Committee will be working on an update of the model engagement letters. Opinions. Ms. Ebert reported that Michael Budin was eager to get going on the Model Opinions Project. Mr. McBride indicated that he had asked Mr. Budin and the current Vice-Chair to stay on for 1996. Ms. Weeks noted that the Opinions project ought to involve someone who worked on Function. Legal Assistants. Mr. Newton reported that the Committee had been quiet for the last couple of months. Securities Law and Disclosure. Mr. Zucker and Ms. Dunbar reported that this week had involved the first mention of "NABL III." Mr. Zucker reported that Ms. McGuire believes that the undertaking must contemplate notice of any event of default even though, because a grace period has not yet passed or because of some other event, it may not be an Event of Default under the documents. A materiality determination would then be made at the approxi-mate time of possible notice. It was noted that there were also some outstanding questions on pooled financings. Mr. Kintzinger noted that

because of vacations and office moves, the Blue Sky Survey was not yet done. Political Contributions. Mr. Kintzinger indicated that the meeting materials include a draft questionnaire for members regarding political contributions, as well as Mr. Charles Carlson's transcriptions from a meeting involving the ABA. Mr. Zucker reported that a proposed rule is now before the New York Court of Appeals that would generally make it illegal for lawyers to make political contributions if they work in the municipal finance area. The ABA has unearthed some intramural questions about jurisdiction over the "pay-to-play" project. It was unclear where within the ABA the project will wind up. The Board had a general discussion of the proposed New York rule. The Quarterly Newsletter Mr. Kiel reported that the August 1 number of the newsletter had been mailed the previous day. He stated that he thought that the November 1 issue would also likely be somewhat delayed, to accommodate reporting on the November Board meeting. Bond Attorneys' Workshop Mr. Newton reported that all was in good shape for the Workshop. He stated that the computer was used for the first time to do breakout room assignments; he hoped that all would work out. A new, separate CLE desk was being set up. He reported that there was a substantial increase in the cost of the book due to the increase in page count. He stated that an effort should be made next year to insure that only the important, required material goes into the book. Closing Matters Mr. Kintzinger noted that, for the election at the annual meeting, Chapman and Cutler would


act as counsel and Arnold Lederman from the Association's outside accounting firm would act as Inspector. Perry E. Israel Secretary

ACTIONS BY THE BOARD OF DIRECTORS ON SEPTEMBER 21, 1995 The Board of Directors of the Association met on September 21, 1995. President William McBride presided and called the meeting to order at 8:05 a.m. Also present were the following: Julianna Ebert, President-Elect, William H. Conner, Treasurer, Susan Weeks, Secretary, Directors Jeannette Bond, Robert Buck, David Caprera, John Gardner, Steve Matthews, Floyd C. Newton III and Howard Zucker, Patricia Appelhans, Executive Director, and Amy Dunbar, Director of Governmental Affairs. Frederick O. Kiel joined the meeting in progress. President McBride welcomed the new officers and members of the Board and circulated for their review a draft of the 1995-1996 let-terhead and expense guidelines, the officer and director disclaimer policy, the Association's investment and amicus request guidelines, the 1996 budget and a list of officers and directors. Committee Chair and Vice-Chair Recommendations Upon motion of President McBride, sec-onded by Director Newton, the Board unani-mously approved the appointment of Chairs and Vice-Chairs listed infra, as well as a waiver of the committee operating policy which provides that members appointed as Chairs be from differ-ent law firms (and which otherwise would have prohibited Charlie Henck, a Ballard Spahr lawyer, and Kathryn Hanzsek, a Ballard Spahr legal

assistant, from serving as Chair of the Committee on Education and Chair of the Committee on Legal Assistants, respectively). Committee Projects President McBride then reviewed the projects to be undertaken by each committee for the upcoming year. The Opinions Committee will continue to update the model opinion form, taking into consideration The Function and Professional Responsibilities of Bond Counsel (the "FPR") recently approved by the Board. President McBride voiced his expectation that an updated draft of the model opinions and commentary will be available for review by the Board at its November meeting. The primary undertaking of the Professional Responsibility Committee will be the revision of the form engagement letters, again with an emphasis on incorporating concepts set forth in the FPR. President McBride expressed his hope that the committee will also be able to update the Association's pamphlet on the Selection and Evaluation of Bond Counsel as a part of this year's projects. The General Tax Committee will continue to provide input on the private activity bond regulations and on the reissuance regulations (when and if they appear). President McBride indicated that the Arbi-trage and Rebate Committee would focus on investment valuations, provide further comments on arbitrage and rebate regulations, react to the IRS open market escrow letter response and coordinate with the General Tax Matters Committee, as needed. In addition to undertaking a NABL III SEC letter and response project, the Securities Law and Disclosure Committee will be requested to


continue the bondholder communication project begun by President McBride last year and possibly to evaluate membership response to the political contributions "pay-to-play" questionnaire which is to be circulated to all members in October. The project of the Legal Assistants Commit-tee will be to refine and redraft the Handbook for Legal Assistants which began during Carol Capo-nigro's tenure but which is still an incomplete draft. Director Matthews, Board advisor to the Education Committee, was urged by President McBride to coordinate with Executive Director Appelhans to improve attendance at the Associ-ation's educational seminars and to study and recommend to the Board a vendor policy, in coordination with the Chair of the Bond Attor-neys' Workshop. President McBride stated that The Quarterly Newsletter Committee, headed by Bill Noth, will continue to assist Editor Kiel in obtaining articles and provide backup copy review. President McBride then discussed other efforts which would be undertaken by Associa-tion volunteers, including the form indenture pro-ject which will be led by Morris Knopf, with Immediate Past President Kintzinger as Board advisor. Due to the broad scope of the project, it is not President McBride's expectation that it will be completed during his tenure as president. President McBride indicated that Sharon Stanton White has agreed to lead the review and coordination of amicus requests in accordance with the amicus guidelines approved by Board on July 13, 1995. President-Elect Ebert, who was responsible for drafting the guidelines, will serve as Board liaison. President McBride indicated that Immediate Past President Kintzinger has agreed to undertake

a By-Laws and policy review. President McBride then requested Director Zucker to coordinate a plan for membership development with Executive Director Appelhans. President-Elect Ebert, who recently accom-panied Executive Director Appelhans on a visit to the proposed new national office space, was asked by President McBride to work with Executive Director Appelhans to review the proposed lease of the new space for consideration and approval by the Board at its November meeting, if possible. President McBride then directed Treasurer Conner, Secretary Weeks and Executive Director Appelhans to make a recommendation to the Board at its November meeting with respect to the retention of a new accounting firm since Kaplan and Associates have served as the Association's accountants for over five years. Executive Director Appelhans indicated that it is customary for non-profit associations to retain a new accounting firm every three to five years in order to improve the services and responsiveness of the accountants.


Board members were requested by President McBride to provide comments to Director of Governmental Affairs Dunbar on the political contributions "pay-to-play" survey by September 30, and it was moved by Director Zucker, seconded by Director Matthews and unanimously approved that the Executive Committee be authorized to approve the final form of survey and to distribute it to the membership. President Mc-Bride, Director Gardner, Immediate Past President Kintzinger and Director Zucker announced their plan to schedule a luncheon meeting with an ABA representative following the Board meeting in order to coordinate the political contribution issue with the ABA. Expense Guidelines The expense guidelines for officers and directors were recommended for approval by President McBride and unanimously approved. Treasurer Conner was requested to present to the Board at its November meeting a proposed travel reimbursement policy with respect to Saturday night stay-overs which reduce airfare costs. Computer On the computer front, Director Newton volunteered to undertake a review of the national office computer system and Director Caprera agreed to continue the NABL-net effort begun by Steve Edwards. Check Signing Authorization Executive Director Appelhans submitted to the Board for its approval forms of resolutions authorizing officers of the Association to sign checks issued on the bank accounts of the Association and the Bond Attorneys' Workshop. Upon the motion of President McBride, seconded by Director Gardner, the Board unanimously approved the adoption of the resolutions with modifications. Executive Director Appelhans indicated that all Association checks (other than

payroll checks) must be signed by two of the following officers: President, Treasurer or Executive Director. She further indicated that payroll checks must be signed by either the President or Treasurer and that checks drawn on the Bond Attorneys' Workshop account must be signed by either the Chair of the Workshop or the Executive Director. Susan Weeks Secretary

COMMITTEE CHAIRS, VICE-CHAIRS AND BOARD ADVISORS NAMED FOR 1995-1996 The following Committee Chairs, Vice-Chairs and Board Advisors were appointed by or pursuant to action of the Association's Board of Directors at its September 21 meeting: ARBITRAGE AND REBATE Chair David A. Walton Jones Hall Hill & White San Francisco, CA 415/391-5780 Vice-Chair Steven H. Gerdes Vinson & Elkins, L.L.P. Houston, TX 713/758-4516 Board Advisor Susan Weeks BOND ATTORNEYS' WORKSHOP Chair


Robert W. Buck Palmer & Dodge Boston, MA 617/573-0267 Vice-Chair Virginia D. Benjamin Calfee, Halter & Griswold Cleveland, OH 216/622-8367

Second Vice-Chair J. Hobson Presley, Jr. Maynard, Cooper & Gale, P.C. Birmingham, AL 205/254-1051 EDUCATION Chair Charles S. Henck Ballard Spahr Andrews & Ingersoll Washington, DC 202/383-8840 Vice-Chair William L. Gehrig Arter Hadden Haynes & Miller Washington, DC 202/775-7137 Board Advisor Steve A. Matthews GENERAL TAX MATTERS Chair John J. Cross III Hawkins, Delafield & Wood Washington, DC 202/682-1487 Vice-Chair James L. Henderson, III Sutherland, Asbill & Brennan Atlanta, GA 404/853-8086 Board Advisor David A. Caprera OPINIONS Chair Michael A. Budin Wolf, Block, Schorr and Solis-Cohen Philadelphia, PA


215/977-2038 Vice-Chair Edwin F. Lucas, III Robinson, Bradshaw & Hinson Charlotte, NC 704/377-8330 Board Advisor Howard Zucker PROFESSIONAL RESPONSIBILITY Chair Margaret B. Angel Buchanan Ingersoll, Professional Corporation Pittsburgh, PA 412/562-3982 Vice-Chair Roy J. Koegen Perkins Coie Seattle, WA 206/583-8671 Board Advisor Robert W. Buck SECURITIES LAW AND DISCLOSURE Chair John S. Overdorff Chapman and Cutler Phoenix, AZ 602/256-4082 Vice-Chair Gerald J. Laporte Patton Boggs, L.L.P. Washington, DC 202/457-6525 Board Advisor Floyd C. Newton III

LEGAL ASSISTANTS Chair Kathryn Hanzsek Ballard Spahr Andrews & Ingersoll Philadelphia, PA 215/665-8500 Vice-Chair Michelle C. Kelly Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. Boston, MA 617/542-6000 Board Advisor William H. Conner SECTION 103 EDITORIAL BOARD Jeffrey M. McHugh (1996) Miller, Canfield, Paddock and Stone Detroit, MI 313/496-7592 Linda L. D'Onofrio (1997) Jones, Day, Reavis & Pogue New York, NY 212/326-8356 Clifford M. Gerber (1998) Brown & Wood San Francisco, CA 415/772-1246 Board Advisor Jeannette M. Bond THE QUARTERLY NEWSLETTER Chair William J. Noth Ahlers, Cooney, Dorweiler, Haynie, Smith & Allbee Des Moines, IA 515/246-0332


Vice-Chair Scott R. Lilienthal Hogan & Hartson L.L.P. Washington, DC 202/637-5849 Board Advisor John M. Gardner AMICUS REVIEW Chair Sharon Stanton White Jones Hall Hill & White San Francisco, CA 415/391-5780 Board Advisor Julianna Ebert

FORM INDENTURE Chair Morris E. Knopf Best & Flanagan Minneapolis, MN 612/341-9714 Board Advisor Andrew R. Kintzinger

1996 SEMINARS SET To facilitate early calendaring, there follows a list of the dates, places, and Chairs and Vice-Chairs of the Association's 1996 educational events: TAX SEMINAR February 8-9, 1996 — San Francisco, CA Chair Kristin H.R. Franceschi Piper & Marbury Baltimore, MD 410/576-1818 Vice-Chair John J. Cross III Hawkins, Delafield & Wood Washington, DC 202/682-1487 FUNDAMENTALS SEMINAR April 10-12, 1996 — Boston, MA Chair William L. Nelson Squire, Sanders & Dempsey Phoenix, AZ 602/528-4042


Vice-Chair Lauren K. McNulty Gardner, Carton & Douglas Chicago, IL 312/644-1300

WASHINGTON SEMINAR May 9-10, 1996 — J.W. Marriott Hotel Chair Thomas K. Downs Ice Miller Donadio & Ryan Indianapolis, IN 317/236-2339 Vice-Chair J. Douglas Rollow Ballard Spahr Andrews & Ingersoll Philadelphia, PA 215/864-8525 BOND ATTORNEYS' WORKSHOP September 18-20, 1996 — Chicago, IL Chair Robert W. Buck Palmer & Dodge Boston, MA 617/573-0267 Vice-Chair Virginia D. Benjamin Calfee, Halter & Griswold Cleveland, OH 216/622-8367 Vice-Chair J. Hobson Presley, Jr. Maynard, Cooper & Gale, P.C. Birmingham, AL 205/254-1051

ACTIONS BY THE BOARD OF DIRECTORS ON NOVEMBER 9 AND 10, 1995 The Board of Directors met on November 9 and 10, 1995, at The Mansion on Turtle Creek, Dallas. President William H. McBride presided.


Also present were: Julianna Ebert, President-Elect, Andrew R. Kintzinger, Immediate Past President, William H. Conner, Treasurer, Susan Weeks, Secretary, Directors Jeannette M. Bond, David A. Caprera, Howard Zucker, Robert W. Buck, John M. Gardner, Steve A. Matthews and Floyd C. Newton III, Honorary Director Frederick O. Kiel, Patricia F. Appelhans, Execu-tive Director, and Amy K. Dunbar, Director of Governmental Affairs. President McBride welcomed Board mem-bers, gave a brief overview of items to be dis-cussed at the Board meeting, and called on Secretary Weeks for a review of the minutes. Minutes Upon motion of Honorary Director Kiel, seconded by Director Matthews, the Board unani-mously approved the minutes of the meetings of the Board of September 20 and 21, 1995, and the minutes of the annual meeting of members of the Association of September 20, 1995. Report of the Executive Director Executive Director Appelhans gave her report, including the following: 1. Membership and Dues - As of No-vember 7, 1995, the Association has 2700 regular members, 123 associate members, 186 legal assistant members and 6 retired members for a total of 3015. The first and second dues invoices have been mailed and a third invoice will be sent in early December. 2. Accountants - The RFP for a new accounting firm for the Association and The Robert H. Hilderbrand, Jr. Fund was mailed on October 30, 1995, to a list of six firms experi-enced in association accounting selected by Executive Director Appelhans based on infor-mation obtained from the Chicago Society of Association Executives. President McBride re-

quested that Treasurer Conner and Secretary Weeks assist Executive Director Appelhans in her evaluation of the responses with a view to recommending a choice to the Executive Com-mittee during its December 8, 1995, conference call. Upon motion of Director Newton, seconded by Director Buck, the Board unanimously authorized the Executive Committee to select and retain an accounting firm for the fiscal years end-ing December 31, 1995, through 1997 to perform the services described in the RFP. 3. National Office Lease - Executive Director Appelhans circulated to Board members a revised budget for the National Office move, to-gether with a revised draft of the proposed National Office lease. She noted that the initial lease term is 5 years, commencing on February 1, 1996, with a 5-year option to renew and one month's free rent. Upon motion of Treasurer Conner, seconded by Director Newton, the Board of Directors unanimously authorized the President or the President-Elect to finalize, execute and deliver the lease. 4. Affinity Credit Card - Executive Direc-tor Appelhans presented details of an affinity credit card program, but it was the consensus of Board members that this program would not generate sufficient interest among NABL mem-bers or benefits to the Association to warrant enrolling.

Report of Director of Governmental Affairs Director of Governmental Affairs Dunbar proceeded with her report: 1. Bondholder Notification - The Asso-ciation is awaiting a reaction from PSA and the ABA with respect to the proposal of the Ad Hoc Bondholder Notification Committee that the SEC adopt a rule requiring DTC and its participants to transmit notices from issuers and trustees to the beneficial owners of bonds through the DTC System.


2. E-mail - E-mail is proving useful in sharing information with and receiving informa-tion from members. 3. Municipal Bankruptcy - Members who testified at the Orange County bankruptcy hear-ings held by the Capital Markets Subcommittee of the House Banking Committee have been requested to consider amendments to the munic-ipal bankruptcy code. 4. Electronic Information Delivery - PSA is forming a task force to establish industrywide standards for electronic delivery of official state-ments. 5. MSRB Rule G-38 - Director of Govern-mental Affairs Dunbar noted the MSRB view that issuer selection of underwriter counsel is not required to be disclosed to the MSRB, as ex-pressed by MSRB Chair Handy in a recent article in The Bond Buyer. 6. IRS Random Audit Program - Director of Governmental Affairs Dunbar discussed the need for the Association to provide further input to the IRS concerning its audit guidelines in light of the SEC's view that an IRS audit letter should not indicate whether or not it is a random audit. The General Tax Matters Committee headed by John Cross will urge the IRS to stay with its origi-nal plan to indicate whether an audit is a random audit. 7. IRS Business Plan - John Cross and Da-vid Walton have suggested that the Association's tax committees review the top 10 list of items dis-cussed at the 1995 IRS Seminar with a view to urging that one or more of these items be included in the IRS business plan, as it is this plan which is most likely to be acted on by the IRS. 8. SEC NABL III Letter - Topics for this letter are under consideration by the Securities Law and Disclosure Committee and it is likely

that they will be discussed in a face-to-face meet-ing with SEC representatives prior to the submission of a formal letter request by the Committee. 9. Tax Bill - Director of Governmental Affairs Dunbar circulated information describing the negative impacts of a flat tax on state and local government finances and urged dis-semination of such information to issuer and underwriter groups who have been lethargic in their resistance to the flat tax proposals. 10. SLGS - Director Caprera praised Director of Governmental Affairs Dunbar for her coordination of information supplied by Associa-tion members to the IRS leading to the release of IRS Rev. Proc. 95-47 which authorizes issuers with pre-existing open market treasury escrows to make yield reduction payments in lieu of zero SLGS reinvestments which are precluded at this time by the closure of the SLGS window. They both praised Linda Schakel, Attorney Advisor in the Office of Tax Legislative Counsel, for her cooperation in this matter. Budget President McBride requested that Treasurer Conner review the October 31, 1995, year-to-date figures and the draft 1996 Budget contained in the Board meeting materials. Treasurer Conner noted that he anticipated a 1995 net operating deficit due in part to the non-recurring expense incurred by the Executive Director search com-mittee. He noted that cash reserves are still in the amount of approximately one year's operating expenses and that the 1996 net operating deficit in the preliminary 1996 Budget includes non-re-curring National Office moving-related expenses. The review and analysis of the revenue side of the budget generated a lively and at times philosophical discussion of the Bond Attorneys' Workshop, including the historical role and sepa-rate governance of the Workshop and its unique


nature and value as an educational forum. Board members agreed that the Workshop should be self-supporting and bear its fair share of National and D.C. Office expenses with the result that Director Buck (1996 Workshop Chair) was urged to recommend a fee increase for the 1996 Workshop to his Steering Committee to accomplish this goal. Various other line items of the revenue side of the 1996 Budget were discussed, including the pricing of Blue Sky Regulation of Municipal Securities. Upon motion of Director Newton, seconded by President-Elect Ebert, the Board unanimously approved pricing of $40 for mem-bers and $65 for non-members. President McBride reminded tax and secu-rities committee Board advisors to direct their committee chairs to select IRS and SEC Seminar leaders so that they can provide budget information to Treasurer Conner and begin their work on the Seminars. Director Caprera recommended that the Association create a NABL home page on the World Wide Web at an estimated cost of $1,000 plus monthly service charges, and President-Elect Ebert suggested exploring whether a home page could be made available at no initial cost through NABL member resources. At the end of the budget discussion, upon motion of Director Newton, seconded by Secre-tary Weeks, the Board unanimously (i) authorized Treasurer Conner and Executive Director Appelhans to revise the 1996 Budget to reflect the items discussed in the Board's review of the Budget, including the allocation of an appropriate percentage of National Office and D.C. Office expenses to the Bond Attorneys' Workshop and the commingling of Workshop and NABL funds for administrative convenience (although the accounting and Workshop structure must remain separate as contemplated by the By-Laws); (ii) approved (a) the National Office moving budget,

(b) conforming the policy of National Office billing for member services to that of the D.C. Office, (c) a "NABL Net" home page, and (d) matters to be discussed in Executive Session; and (iii) deferred the purchase of new computer equipment for the National Office until 1997. Committee Reports 1. Arbitrage and Rebate. Treasurer Weeks referred to David Walton's November 2, 1995, letter in the Board meeting materials summarizing committee activities, including John Cross's testimony on October 12, 1995, at the IRS public hearing concerning the hedging provi-sions of the May, 1994, technical corrections to the arbitrage regulations, progress on drafting comments on these technical corrections, and discussions with Treasury regarding the closing of the SLGS window covered in Director of Governmental Affairs Dunbar's report. 2. General Tax Matters. Director Caprera reported on committee efforts to include in the IRS Business Plan items in NABL's top ten list provided to the IRS at the May 10, 1995, IRS Seminar, as well as the divergent views of the IRS and SEC with respect to random audit letters referred to in Director of Governmental Affairs Dunbar's report. He also discussed the desirability of a private activity bond regulations submission requesting that the IRS finalize and adopt the management contract, change-in-use and procedural rules contained in the proposed private activity bond regulations even if the balance of the regulations are not then finalized. Finally, Director Caprera referenced the Committee's October 6, 1995, comments on the IRS audit guidelines contained in the Board meeting materials. President McBride suggested that the Committee attempt to assist the IRS in reconciling the holding of the Southwest Texas case relating to unrelated trade or business in-come with the views traditionally taken by the IRS and the tax bar in the Section 103 practice area.


3. Opinions. Director Zucker was re-quested by President McBride to urge the Opinions Committee to produce revised draft model opinions for consideration at the Board's February meeting in Naples. 4. Professional Responsibility. Director Buck reported that the Committee has begun its work of revising the model engagement letters, identifying a need to coordinate the letters with The Function and Professional Responsibilities of Bond Counsel recently published and circu-lated to the membership. Margaret Angel plans to submit draft engagement letters to the Board at its Naples meeting and then to focus on the revisions to Selection and Evaluation of Bond Counsel. 5. Securities Law and Disclosure. Direc-tor Newton reported that the principal activity of the Committee is identifying the issues to be pre-sented to the SEC in a NABL III letter. The Committee is also analyzing the conflict of interest issues in the SEC's position taken in the Mark Ferber case. 6. Legal Assistants. After describing Committee Chair Kathryn Hanzsek's plans to present the Handbook to the Board for final approval at its July meeting, Treasurer Conner was urged by Board members to counsel with the Chair to narrow the focus of the book so that it is a basic learning tool for legal assistants and to request that Ms. Hanzsek present an outline of the book to the Board at its February meeting. 7. Section 103 Editorial Board. Director Bond reported on the Committee's plans to add chapters on IRS enforcement and original issue discount to Federal Taxation of Municipal Bonds. Director Bond also indicated that she plans to participate in the discussions with Aspen, Inc., concerning a CD-Rom product, particularly in light of low-cost competing materials already on the market and will follow up on other matters.

8. Education. Director Matthews reported that Education Chair Charles Henck is in the process of setting up meetings with each seminar Chair and Vice-Chair in Washington (with the exception of a Fundamentals meeting which will be held in Chicago). Budgeting and a vendor policy still need to be addressed by the Education Committee. President McBride urged that the Committee also focus on the legal assistants' presentation at the Fundamentals Seminar with a view to improving this program. 9. Bond Attorneys' Workshop. Director Buck indicated that the evaluation sheets for the 1995 Bond Attorneys' Workshop were even more favorable than in prior years and commended Director Newton for his efforts as 1995 Workshop Chair. Director Buck reported that he is seeking input in his selection of new members of the Steering Committee and has scheduled a conference call in late November with the Vice-Chair and Second Vice-Chair to finalize the selection. Special Projects 1. By-Laws Review. Immediate Past President Kintzinger led the Board in a review of Director Buck's memorandum of October 21, 1995, analyzing the current By-Laws. Items dis-cussed included the need to have an overall amendment and restatement rather than specific amendments, the timing of adoption of revisions, the applicability of Robert's Rules of Order, the relative merits of mail, proxy and in-person voting requirements, provisions concerning the rights of various classes of members, Illinois non-profit corporation law issues, telephone meetings, status of the Executive Committee, succession of the President-Elect, composition of the nominating committee for officers and directors and conforming the By-Laws to current practices and procedures of the Bond Attorneys' Workshop. There are no plans to revise the Association's Articles of Incorporation. The Committee is tar-


geting approval of amended and restated By-Laws by the Board at the July meeting with a view to notifying the membership of proposed revisions well in advance of the 1996 annual meeting. It was generally agreed that the annual meeting should be conducted under the current By-Laws and that the amended and restated By-Laws would be presented for member approval only after the 1997 officers and directors were voted on by the membership. 2. Form Indenture. Immediate Past President Kintzinger indicated that Morris Knopf had taken over this project. He reviewed the schedule for the project and indicated that Allen Bass had volunteered to be responsible for an initial draft.

3. Blue Sky Survey. Executive Director Appelhans reported that notice concerning the availability of the new Blue Sky book will be given by a post-Thanksgiving mailing to members and will also be reported in The Quarterly Newsletter. 4. Travel Policy. Treasurer Conner explained the rationale underlying the new Saturday Night Stay travel policy distributed at the meeting, including the general presumption that the measure of reimbursement is airfare to and from the director's residence. President McBride indicated that the Executive Committee recommends the adoption of the Saturday Night Stay travel policy with the caveat that special arrangements be subject to review by the Executive Director and the Treasurer. He further urged Board members to take advantage of 30-day advance-purchase and other reduced airfares, indicating that Board members could be reimbursed for change-over fees in the event of a rescheduling. Upon motion of President-Elect Ebert, seconded by Director Bond, the Board unanimously approved the amendment to the Association's expense guidelines for officers and directors so as to provide for reimbursement of the Saturday Night Stay airfare and lodging in the

event that it provides a lower overall travel cost as set forth in the amendment circulated to Board members at the meeting, and the Board unanimously authorized the Executive Director and the Treasurer to administer the policy and ap-prove special travel arrangements in accordance with the travel policy guidelines. 5. Membership Recruitment. Executive Director Appelhans reviewed her suggestions for membership recruitment including follow-up phone calls to those requesting information from the National and D.C. Offices and the mailing of promotional information and a VIP letter to mem-bership prospects. There followed a discussion of other membership enhancement initiatives such as discounts, Red Book mailings, targeting of issuer counsel groups and defense lawyers and emphasis on CLE credits obtainable at Association seminars. President McBride re-quested that Director Matthews urge the Education Committee to highlight CLE benefits in the seminar mailings. It was the consensus that non-member attendees at the Fundamentals Seminar should be offered a complimentary membership for the balance of the year. 6. Political Contribution Survey. Presi-dent McBride noted that nine firms had so far approved the Board's May 24, 1994, Statement of Professional Principles of Political Contribu-tions and Director of Governmental Affairs Dunbar indicated that several additional firms had adopted the Statement with modifications. There was a discussion on the wide range of views ex-pressed by members responding to the survey. Director Zucker reported on meetings with ABA and SEC representatives to discuss the pay-to-play issue at which he described NABL's plan to obtain membership feedback via the survey and the Board's desire to coordinate this matter with the ABA. It was Director Zucker's view that both the Business Law and State and Local Government Sections of the ABA will address the pay-to-play topic. Immediate Past President Kintzinger noted that the diversity of views


expressed by the members responding to the survey validates the diversity of views of the NABL Committee members who worked on the Statement and that no consensus has emerged from the membership that NABL is the appropriate organization to pursue this issue. It was the view of the Board that the survey results should be discussed orally with the ABA and summarized in The Quarterly Newsletter for the benefit of the membership. Susan Weeks Secretary

SHARED TAX OBSERVATIONS

As you read this, the threatened default of federal securities will almost certainly have passed; but as this is written, the political negotiations continue. The least of our concerns may be defaulting advance refunding

[Northern Bank Note ad]


escrows. Our greater concern may be the slight shift in our comfort level regarding reliance on federal faith and credit. (In California, once you have survived one earthquake, your perception of the strength of your home's foundation is never again quite as unquestioned as it was before that earthquake.) State and Local Government Series Treasury Securities On October 31, 1995, the Department of the Treasury issued Revenue Procedure 95-47 permitting the investment in alternative securities and the payment of a commensurate yield reduction payment for those pre-existing refund-ing escrows unable to roll into zero percent SLGS due to the suspension of sale of SLGS by the

federal government. Thus, taxability is


avoided for bonds that funded advance refunding

escrows producing an initial yield in excess of the yield of the bonds. Although the Treasury Department is to be congratulated for acting quickly to alleviate a problem that might otherwise have seriously af-fected a number of issuers, somewhat troubling is the failure of the Treasury to permit a similar ap-proach for those refunding issues delivered during the suspension of SLGS issuance where the yield of open market federal securities is in excess of the yield of the refunding issue. (Who said that the squeaking wheel does not receive the grease?) Revenue Procedure 95-47 permits the yield reduction payment procedure if the issuer reasonably expected on the issue date of the re-funding bonds to use bond proceeds to purchase zero percent SLGS on the date upon which the alternative investment is purchased, and if the alternative investment matures not more than 90 days from its purchase and is purchased on a date when SLGS are unavailable because the Treasury Department has suspended SLGS sales. The yield reduction payment is required to be made not later than 180 days after the date of purchase of the alternative investment and equals the difference between the purchase price of the alternative investment and the amount of all receipts from the alternative investment. (Note that the Revenue Procedure does not refer to the present value concepts.) The yield reduction payment is to be made in the same manner as yield reduction payments otherwise permitted in the regulations, but the top margin of Form 8038-T is required to state the following words "Special Yield Reduction Pay-ment Made Pursuant to Revenue Procedure 95-47." The Revenue Procedure applies to purchase of an investment on or after October 17, 1995.

Private Letter Rulings Change of Use. Change of use questions again dominated the private letter rulings issued during the past quarter. PLR 9533016 (May 16, 1995) permitted the sale of a bond-financed hospital to a non-501(c)(3) entity that, in turn, bought and canceled the bonds. PLR 9543033 (July 28, 1995) and PLR 9535037 (June 2, 1995) permitted the sale of a bond-financed hospital at fair market value with the sale proceeds to be used in part for paying tendered bonds and in remaining part for creating a yield-restricted escrow to pay debt service to the first call date for the non-tendered bonds. In the same context, PLR 9538026 (June 16, 1995) held that the sale arrangement would not result in unrelated business taxable income to the selling 501(c)(3) entity or affect that entity's 501(c)(3) status. Finally, PLR 9544007 (July 26, 1995) permitted the lease of a partially bond-financed hospital facility to a 501(c)(3) corporation shortly after completion of renovations, without bond redemption, where the original financing had satisfied all of the requirements for qualified 501(c)(3) bonds except the public approval requirement and where a public hearing and approval were to be effected subsequent to receipt of the ruling. Private Business Use. In a very interesting ruling, the IRS in PLR 9543016 (July 26, 1995) permitted a hospital district to create a 501(c)(3) entity and lease bond-financed facilities to the new entity without finding a prohibited change of use. Because the new entity was an "instru-mentality" of the district, being wholly controlled by the district, the use of the facilities by that entity was not a private business use, but rather was a governmental use (i.e., a deemed use by the governmental unit for which the instrumentality acted), and the bonds were not private activity bonds. Private Payment Test. PLR 9534014 (May 26, 1995) permitted the issuance of bonds by a


state authority to pay owners and operators of un-derground storage tanks for corrective action. The bonds were held not to be private activity bonds because debt service was to be paid from a regulatory fee imposed on refiners and importers of petroleum products and not to be paid by the owners and operators of the storage tanks. Although the latter paid certain amounts, those amounts would not be available either for debt service or for the original corrective actions. Advance Refunding Restrictions. In a ruling unique to its facts, PLR 9534009 (May 25, 1995) barred the issuance of an advance refunding issue as a prohibited second refunding under Code section 149(d) where the second refunding issue was proposed to be issued by a local government unit that had assumed the assets and liabilities of the issuer of the first advance refunding issue upon dissolution of that issuer. That both units possessed substantial sovereign powers was not relevant, for the units would be related parties when the second refunding bonds were to be issued. Reaffirmation of Northwest Power Act Provisions. PLR 9539019 (June 30, 1995), in conformity with similar prior private letter rulings, held that bonds were not private activity bonds where the bonds were issued by an agency to finance energy conservation measures for member municipal utilities that provided retail electric services, even though a private power company would pay the issuer amounts including debt service in consideration of the agency's installation of those measures. Less than a major portion of the conservation project (in the terms of the Northwest Power Act) would be furnished to the company's nongovernmental wholesale customers. Original Issue Discount. In Technical Advice Memorandum 9538007 (June 13, 1995), the IRS held that OID must continue to be accrued by the holder of the OID debt even though there is a reasonable expectation that the

debt instrument will not be redeemed in accor-dance with its terms, i.e., regardless of the financial condition of the issuer. There is no "doubtful collectibility" exception to the OID accrual requirement. Procedural Compliance. Also released in this period were PLR 9533035 (May 22, 1995) permitting late filing of Form 8328 to carry forward unused 1994 private activity bond volume cap and PLR 9537016 (June 19, 1995) accepting the issuer's calculations regarding pur-chase price for existing single-family residences. Judicial and Administrative Proceedings Tax Court Decision in Harbor Bancorp. On October 16, 1995, the U.S. Tax Court decided Harbor Bancorp v. Commissioner, 105 T.C. No. 19. This case, you will remember, related to multifamily housing bonds, involving a "black box" structure, sold to Matthews & Wright, Inc., on December 31, 1985, pursuant to a warehousing arrangement that involved purchase of the bonds with share drafts on a credit union without funds, endorsed to a Saipan GIC bank also without funds. The bonds were sold to the public on February 20, 1986, and proceeds ultimately were traceable to the purchase of Crown Life guaranteed investment contracts ("GICs") dedicated to payment of special purpose corporation letter of credit payments sufficient to pay debt service on the bonds and unavailable for project purposes. The Court held that the bonds were taxable arbitrage bonds for failure to pay rebate. The Court states, among other matters, the following: (i) The issue date of the bonds was

February 26, 1986 (rather than December 31, 1985). "Courts have never regarded _the simple expedient of drawing up papers_ as controlling for tax purposes when the objective realities are to the contrary. [cite] Here, the hastily drawn up papers used at the putative closings on December 31, 1985,


utterly fail to reflect objective reality." The share drafts and the Saipan GICs "fell embarrassingly short of representing actual payment for the Bonds within the meaning of the Commissioner's regulations [defining _date of issue_]."

(ii) Because the bonds were issued

after December 31, 1985 (i.e., on February 20, 1986), the bonds were subject to the rebate requirement of section 148(f) of the 1986 Code.

(iii) The Crown Life GICs were ac-

quired with the gross proceeds of the bonds (effectively, rather than the proceeds of the reimbursement notes involved in the black box structure) and, because the GICs could not be drawn upon to pay project costs, the GICs were not acquired to carry out the gov-ernmental purpose of the bonds and so constituted nonpurpose investments. That the issuer did not intend that bond proceeds be used to purchase the Crown Life GICs is irrelevant since there is no exclusion in the statute for this reason.

(iv) "Logic indicates" that the Crown

Life GICs earned substantially more than bond yield because the GIC payments equaled debt service on the bonds even though the amount paid for the GICs was substantially less than bond proceeds (be-cause the proceeds were diminished by sub-stantial fee payments and by land purchase). (Calculations are included in the decision.) "When all the smoke had cleared, the underwriters, bankers, and attorneys had received substantial amounts from the Bonds' proceeds, and the repayment of those Bonds had been secured by the purchase of the [Crown Life] GIC's. The relatively small amount left was insufficient to accomplish the governmental purpose of the bonds."

(v) That the issuer did not intend to

invest in higher-yielding investments is also irrelevant. "There is no indication in the statute or legislative history that Congress wanted to limit section 148(f) to situations where the issuer intended, or reasonably expected, to earn arbitrage. Were we to superimpose an intent requirement onto section 148(f), that section would become redundant. . . . The regulations under section 148(f) . . . are mechanical in nature and require no reference to the issuer's intent or expectations."

(vi) Because the Crown Life GICs

produced an excess amount within section 148(f)(2) and because the issuer had refused to rebate that amount to the federal government, the bonds were arbitrage bonds and the interest on the bonds was taxable. The bondholders, rather than the bond issuer "bear the immediate brunt of the issuer's failure to pay the amount required by section 148(f)(2). . . . [E]xclusions from taxable income are to be narrowly construed. [cite] The simple fact is that the statutory requirements for exempting the interest on the Bonds have not been met."

(vii) ". . . [I]t seems clear that, as

between it [the Housing Authority issuer] and the Federal Government, the Housing Authority should bear responsibility for what happened. The Housing Authority issued the Bonds and selected those who were responsible for implementing their issuance and applying the proceeds. Congress clearly wanted bond issuers to be responsible for meeting the requirements for tax exemption."

The decision includes two concurring opinions (one on different grounds than set forth in the primary holding) and one dissenting opin-ion (by the trial judge). Among other matters, the dissenting opinion states: "The Housing Authori-ty [i.e., the issuer] did not benefit from the misuse of the Bond proceeds. The majority, however,


would attribute the shenanigans of the wrongdoers to the Housing Authority; I would not." SEC Administrative Proceedings Against Underwriter and Bond Counsel. SEC adminis-trative proceedings apparently continue with respect to Thorn, Alvis, Welch, Inc. (see 1994 Sec Lexis 1902). These proceedings allege, among other matters, that Section 10(b) of the Exchange Act and Rule 10b-5, as well as other securities laws provisions, were violated by the concerned underwriters and bond counsel because the official statement for the private activity bonds failed to disclose that the two percent costs of issuance limit of Code section 147(g), as well as the 95 percent requirement of Code section 142(a), had been violated and that the bonds were not tax-exempt. The facts involve an alleged scheme under which, in a series of transactions, the underwriter and bond counsel "informed the developer that it would be receiving bond proceeds, in addition to those contracted for by the developer in exchange for its services, for the sole purpose of paying issuance costs, including payments to [the underwriter and bond counsel], through a Developer's contribution." It was alleged that, effectively, the project costs were artificially increased by the bond proceeds paid to the Developer in order to enable the Developer to pay costs of issuance in excess of the two-percent limit. "There was no consideration given nor was there bargaining by the developer for the additional bond proceeds that it received." Interpretations of the Tax Code by the SEC form the basis of SEC proceedings, without (official) involvement by the IRS or Treasury Department. SEC Investigation of Financial Advisor. The Bond Buyer (June 15, 1995) indicates that an issuer official stated that the SEC is investigating the role of the issuer's former financial advisor

concerning whether the issuer was overcharged for federal securities it purchased


[Grimm Ad]

from the financial advisor and whether three underwriting companies misled the issuer when they provided market-price verification letters indicating that the financial advisor was charging a fair markup for the securities. Obviously, if the purchase price paid for the securities was not fair market value, then compliance with the yield restrictions applicable to the refunding escrow and the tax-exemption of the bonds would be called into question. Justice Department Fraud Charges. On September 28, 1995, the U.S. Justice Department Antitrust Division brought criminal securities fraud charges against a securities brokerage firm for using fictitious noncompetitive bids relating to a forward supply contract during the restructuring of a municipal bond escrow account. Among other matters, the action alleges that the defendant broker-dealer misrepresented that it had obtained three independent, arm's length bids for the forward purchase agreement when in fact the defendant and others knew and failed to disclose to the issuer that the defendant (which was a bidder) and another bidder were not independent but instead had a written agreement to share the profits that either obtained from the transaction. Again, if the purchase price paid for the agreements did not comply with arbitrage valuation regulations of the

Treasury Department, then compliance with the yield restrictions applicable to the refunding escrow and the tax-exemption of the bonds would be called into question.

In sum, the business of tax-exemption extends beyond the IRS and the Tax Code as, increasingly, the rules for tax-exemption are used as a basis for enforcement of other laws.

JOHN J. CROSS III TESTIFIES ON PROPOSED AND TEMPORARY ARBITRAGE REGULATIONS Editor's Note: The following testimony was presented orally on October 12, 1995, at a public hearing held by the Internal Revenue Service, by John J. Cross III of Hawkins, Dela--field & Wood, Washington, Chair of the Associ-ation's Committee on General Tax Matters. I. Introduction. Good morning ladies and gentlemen. I am John Cross from Hawkins, Delafield & Wood. I appreciate the opportunity to be here on behalf of the National Association of Bond Lawyers ("NABL"). NABL has over 3,000 member attorneys who practice law in the area of tax-exempt bonds. II. Comments. A. General. Initially, I want to take the opportunity to commend the IRS and Treasury for this generally constructive package of technical amendments to the arbitrage regulations. I know that too often, positive comments are left unsaid. On balance,


these changes are constructive, useful, and should make the final arbitrage regulations work better, particularly the qualified hedge provisions under section 1.148-4(h). We commend you for persevering to get these amendments published. B. Focus on proposed-only amendment to

investment-type property definition for hedges with a significant investment element.

1. Introduction. I will focus primarily on the proposed-only provision of section 1.148-1(e)(3) of the regula-tions which proposes to define when a hedge will be treated as containing an impermissible significant investment element. 2. Level payment rule for interest

rate caps. In particular, I want to comment primarily on the provision on interest rate caps which states that an interest rate cap categorically will be treated as having a significant investment element if the cap premium is paid faster than in level annual installments over the term of the cap. a. Positive comments -- simple

and administrable. This proposed rule has several things in its favor. It is simple, clear, and administrable. Thus, this proposed rule may represent a decent administrative line and maybe that is the best that can be hoped for here. The industry probably can live with this rule. b. Credit concern. At the same time, this proposed rule does raise several concerns. First, hedge providers customarily and arguably reasonably sell interest rate caps for single up-front premiums as a matter of standard industry practice. An up-front cap premium may have a very legitimate credit aspect

because it may allow a less creditworthy person to purchase an interest rate cap for hedging purposes in circumstances in which that person's credit would not be strong enough to enable that person to purchase an interest rate swap. Even a large issuer like New York City faced this problem recently. 3. More fundamental concern on

hedge versus investment distinc-tion.

More fundamentally, the proposed rule raises difficult collateral implications on analyzing the existence of a hedge versus an impermissible significant investment element. Economically, an interest rate cap can be viewed as a series of cash-settlement options on the floating index which is the subject of the cap. The proposed rule reflects a view that in a long-term option, the premium for the option relates increasingly towards the later years. The proposed rule may suggest a concern with an undue amount of tax-exempt bond proceeds being used to finance the cost of hedges with some arbitrage benefit in an economic prepayment. We believe this concern is overstated. The proposed rule leaves much less clear the far more fundamental threshold issues on pro-viding reasonable bright lines on how to distin-guish a hedge from an investment (for any hedge beyond the comparison made in the existing regulations to the on-market swap rate in the case of a cap). It is well-known that, in pending regulation projects on both contingent debt and hybrid debt, the IRS and Treasury have been struggling with how to draw a sensible line between debt (which essentially is the same thing as an investment viewed from the borrower's side) and other financial products, such as options.


We urge that you consider providing some reasonably bright lines to distinguish hedges from investments. We don't come here with any silver bullets on what those lines should be. To promote uniformity and to avoid re-inventing the wheel in this area, serious consideration should be given to following whatever lines are drawn under general federal tax principles to distinguish between debt and other financial products to the fullest extent possible consistent with tax-exempt bond arbitrage considerations. For example, if an option is treated as all option so long as it is not "deep-in-the-money" under some percentage standard, such as a 20% test or a 15% test like under section 1092(c)(4)(D), that option ought to be able to qualify as all hedge. We fully appreciate that such line-drawing is no easy task, but we strongly underscore the need to draw some reasonably bright lines to simplify adminis-tration of the tax system for taxpayers and the

IRS alike. 4. De minimis or simplifying percentage rules. In addition, given the highly debatable economics of various hedges, we caution you against a too-rigid approach. Some measure of flexibility is needed. You might consider some types of de minimis rules or permitted up-front payments for hedges without throwing the hedge into the investment-type property category. Similarly, you might look to the provisions on qualified guarantees which provide some flexibility on up-front payments for bond insurance while imposing some constraints. 5. Break out investment compo-nent. In addition, consideration should be given to permitting issuers to break out the investment component of a hedge under section 1.148-4(h)(5)(i) regardless of whether

the up-front payment is made or received by the issuer. 6. Implications for option-based

synthetic advance refundings. We also point out that this provision on inter-est rate caps may have some negative implica-tions for option-based synthetic advance refund-ings. Here again, the real question presented is whether a financial product properly is a hedge or an investment with some clear, quantifiable expected rate of return. We do not believe that options automatically should be treated as investments whenever an issuer purchases or sells an option for an up-front premium. 7. Appropriateness of cross-

reference to VRDI definition.

[Walker ad]


On another point, some NABL members have serious concerns about linking the qualified hedge definition to the definition of a variable rate debt instrument under the original issue discount regulations. NABL does not wish to make substantive comments on this point here. NABL, along with the ABA and many others, has commented directly on the definition of variable rate debt instrument under the contingent debt regulations. C. Technical comments on hedging provi-

sions. Let me turn now to just mention the need for some technical amendments to the hedging provisions under section 1.148-4(h). Given the current interest in this technical amendment package, NABL has decided to undertake a project to prepare some technical recommenda-tions in this area, particularly on section 1.148-4(h). NABL expects to submit those comments promptly in the next few weeks. In general, NABL expects that these technical comments may make suggestions on how to fit the new anticipatory hedge provisions better into the existing qualified hedge eligibility requirements. There are several ambiguities in this regard. D. Other comments. Finally, I want to highlight briefly a couple of other general comments on the hedging provisions. 1. Asset hedges. NABL underscores the comments of others that a continuing issue that sorely needs ad-dressing is how to consider hedges of assets for arbitrage purposes. One possible approach would be to extend the integration principles currently applicable to hedges with respect to tax-exempt debt generally to include comparable principles for hedges with respect to assets financed by tax-exempt bonds (e.g., construction

fund investments). 2. Need for greater certainty. NABL has some concerns about the need for greater certainty with respect to the treatment of hedges. While we recognize the need for a broad anti-abuse rule, the breadth of that rule diminishes considerably the certainty on hedge treatment. III. Conclusion. In conclusion, I come back to my first point generally to commend the IRS and Treasury on these technical amendments. We urge you to consider our comments with the constructive intent with which they are made. Thank you very much. I would be glad to answer any questions.

SEC RELEASES "NABL II" IN RESPONSE TO SECURITIES LAW AND DISCLOSURE COMMITTEE'S QUERIES Editor's Note: The following interpretive letter was received on the eve of the 1995 Bond Attorneys' Workshop. September 19, 1995 John S. Overdorff, Chair Securities Law and Disclosure Committee National Association of Bond Lawyers 2000 Pennsylvania Avenue, N.W. Suite 9000 Washington, D.C. 20006 Re: Rule 15c2-12. Dear Mr. Overdorff: The Securities Law and Disclosure Com-mittee of the National Association of Bond Lawyers ("NABL"), in its letter of September 19,


1995, requested staff interpretive guidance regarding the recent amendments to Securities Exchange Act of 1934 ("Exchange Act") Rule 15c2-12, as adopted in Exchange Act Release No. 34961 (Nov. 10, 1994) ("Adopting Re-lease"). The staff provided earlier guidance to NABL in a June 23, 1995 letter ("NABL Letter") [printed at page 62 in the August 1 Quarterly Newsletter]. For ease of reference, the questions in the attached letter have been restated with the responses.

Question 1. In response to Question 1 of the NABL

Letter, the staff referred by way of illustration to Exchange Act Rule 13d-3 for a definition of the term "beneficial owner." We interpret the reference to Exchange Act Rule 13d-3 as providing one basis of analysis for the term "holders" but not prohibiting use of other sources for a definition. May an undertaking be negotiated to specifically define "holders" in a manner that would include persons who have or share investment power but exclude persons deemed to be beneficial owners merely by reason of having rights to acquire securities within 60 days?

Response: The reference in the NABL Letter to the definition of beneficial owners in Exchange Act Rule 13d-3 was a reference to "analogous provi-sions of the federal securities laws . . . [that] may be helpful." It was not stated to be nor should it be construed as a sole or exclusive reference. Therefore, an undertaking may specifically define "holders" in a manner that would include persons who have or share investment power but exclude persons who have rights to acquire securities in the future. Question 2. Paragraph (b)(5)(i)(C) of the Rule re-

quires a Participating Underwriter to reasonably determine that an Issuer or Obligated Person has undertaken to supply notice of each of 11 specified events, if material. Current practice has varied with some Participating Underwriters accepting undertakings that list less than all of the events specified in the Rule in situations where certain of the events are not relevant in


the primary offering (for example, the bonds have no reserve fund or there is not credit enhancement) while other participating underwriters require all 11 events to be listed in the Undertaking under all circumstances. May the written undertaking eliminate references to those of the 11 specified events that may not be applicable to the bonds in question? If all 11 events should be listed, may the undertaking indicate that certain events may not be applicable?

Response: Undertakings pursuant to Rule 15c2-12(b)(5)(i)(C) may not eliminate references to any of the eleven events, regardless of whether any particular event is believed to be applicable to the securities being offered. In addition, undertakings with respect to material events should list all events in the same language as is contained in the rule, without any qualifying words or phrases, except as the staff has indicated otherwise with respect to mandatory redemptions of bonds. See response to NABL Letter at Question 8. As a general mater, the staff is concerned that by either excluding certain events, or by adding qualifications to the list of events in Rule 15c2-12(b)(5)(i)(C), issuers and obligated persons will be making materiality determinations about certain events prior to the issuance of securities. Materiality determinations need to be made at the time an event occurs. An official statement describing the under-taking may indicate that certain of the eleven events may not be applicable. Question 3. After the primary offering of bonds, credit

enhancement may be added to the bonds. The issuer typically does not apply for, nor participate in, obtaining such credit enhancement and the credit

enhancement is not described in the final official statement related to the bonds. In these circumstances, is an issuer required to provide material event notice with respect to credit enhance-ment that is obtained by a holder of municipal securities in the secondary market?

Response: No. An issuer is not required to provide material event notices with respect to credit enhancement when the credit enhancement is added after the primary offering of the bonds, the issuer does not apply for or participate in obtaining such credit enhancement and such credit enhancement is not described in the final official statement relating to the bonds. Question 4. In paragraph (g) of the Rule, is the phrase

"offering of municipal securities com-mencing prior to January 1, 1996," which is contained in the second sentence, intended to state a different test than the "contractually committed" test which is contained in the first sentence of paragraph (g)?

Response: The test is the same. As with the application of Rule 15c2-12(b)(5), the commencement of an Offering, as the term is used with reference to the exemption in Rule 15c2-12(d)(2), is the time that the Participating Underwriter makes a contractual commitment to purchase securities. Therefore, Rule 15c2-12(d)(2)(ii) and (d)(2)(iii) shall not apply to an Offering of municipal securities if there is a contractual commitment by a Partici-pating Underwriter to act as an underwriter in an Offering of municipal securities prior to January 1, 1996.


Question 5. Is it a correct reading of paragraph (g) that it

provides transitional relief for bonds eligible for the small issuer exception from both the material events and annual reporting requirements for any bond issue commencing prior to January 1, 1996 for the life of the issue?

Response: Yes. Question 6. Paragraph (f) of the Rule provides that in

determining "authorized denominations of $100,000 or more," the purchase price is used for municipal securities with an original issue discount of 10% or more rather than the principal amount of the securities. For purposes of de-termining the aggregate principal amount under paragraph (a) of the Rule (the $1,000,000 threshold) or under paragraph (d)(2) of the Rule (the $10,000,000 threshold), would the same 10% threshold rule apply to securities issued with original issue discount or for securities sold at a premium?

Response:

No. The thresholds for the rule generally in rule 15c2-12(a) and the small issuer exemption in Rule 15c2-12(d)(2) are calculated based on the aggregate principal amount of securities for which an issuer or obligated person ultimately is liable. Only for purposes of determining authorized denominations of $100,000 or more under Rule 15c2-12(d)(1), where securities are sold with an original issue discount of 10% or more, is the use of the purchase price appropriate. Question 7. Depending upon the facts and circumstances

of a specific exemptive letter or no action letter, are classes of transactions exempted under paragraph (e) of the Rule required to be counted towards the $10,000,000 threshold in paragraph (d)(2) of the Rule? For example, are the "whole agreements" exempted in the First Continental Financial Corporation letter (June 1, 1990) required to be counted?

Response: As a general matter, no-action and exemp-tive requests should specify those sections of Rule 15c2-12 for which relief is requested. Un-less relief specifically is granted for exclusion of certain transactions or classes of transactions from the threshold calculation for the Rule 15c2-12(d)(2) exemption, these transactions or classes of transactions must be included in that calculation. Securities exempt pursuant to the exemption in First Continental Financial Corporation (June 1, 1990)1/ need not be counted toward the $10,000,000 threshold amount. Question 8. The definitions of "final official statement"

and "annual financial information" state

1/ In June of 1990, the Commission granted

an exemption to First Continental Financial Corporation and certain brokers, dealers, and municipal securities dealers participat-ing in offerings of governmental lease-pur-chase and installment sales agreements. See First Continental Financial Corporation (June 1, 1990).


financial information may be included by reference to documents previously provided to each NRMSIR and to a SID, if any, or to the Commission. The next sentence then reads: "If the document is a final official statement, it must be available from the [MSRB]." May the last sentence be interpreted to mean that a final official statement or annual financial information may include by reference information set forth in another official statement that is filed with the MSRB, but has not been filed with the Commission or each NRMSIR and the SID, if any?

Response: Yes. To be considered publicly available, a final official statement must be available from the MSRB. It need not be available from each NRMSIR and the appropriate SID, if any. See Adopting Release at n. 47. Question 9. Certain municipal obligations may be

secured by a pledge of assets that are insured or guaranteed by public third parties where no contractual or other ar-rangement directly commits such third parties to support payment of all, or of any part, of the municipal obligations. Depending upon the performance of the pledged assets, receipts in respect of such guarantee may be a material source of payment of the municipal obli-gations and, accordingly, information with respect to such insurance or guarantee may be included in the final official statement. However, such insurance or guarantee of the payments of pledged asset obligors exists inde-pendently of the existence of any municipal obligation. An example of these types of guaranteed or insured assets would be loans insured or guaranteed by State or local housing agencies or programs. Will the exis-tence of such insurance or guarantee of the assets, by itself, cause the provider of such security to be deemed an "Ob-ligated Person" within the meaning of the Rule?

Response: Rule 15c2-12 requires a covenant to provide ongoing information with respect to any person who is committed by contract or other arrange-ment to support payment of all or part of the obligations on the municipal securities (other than


providers of municipal bond insurance, letters of credit, or other liquidity facilities), for which financial information or operating data is included in the final official statement. Entities that insure or guarantee performance of assets that have been pledged to secure the repayment of the municipal obligation may fall within the definition of "obligated person," and ongoing information may be required on such parties, unless such insurance or guarantee has been obtained prior to and not in contemplation of any offering of municipal securities, the insurance or guarantee relates only to the individual pledged assets, and the insurance or guarantee exists inde-pendent of the existence of a municipal obligation. The ultimate determination as to whether an insurer or guarantor is an obligated person depends on the relationship to the financing itself -- a factual analysis.

A determination of whether a guarantor or insurer would fall within the exclusion for providers of bond insurance, letters of credit or liquidity facilities will depend on the particular facts and circumstances. Your attention is directed to response to Question 22 in the NABL Letter. The staff is willing to consider the application of the definition and the rule to such persons based on specific facts and cir-cumstances. Question 10. In response to Question 8 in the NABL

Letter, Commission staff stated that a "notice of the occurrence of a manda-tory, scheduled redemption not otherwise contingent upon the occur-rence of an event, is not required under the Rule if the terms under which the re-demption is to occur are set forth in detail in the final official statement." Please confirm that mandatory redemptions of bonds as a result of re-quired sinking fund payments as set forth in the final official statement do not require notices under the Rule. We recognize that notices pursuant to the transaction documents or pursuant to Exchange Act Release No. 23856 may be required. Will the fact that the sinking fund redemption schedule set forth in the final official statement may be reduced by other redemptions or bond purchases change the result?

Response:


As noted in the NABL Letter, a notice of the occurrence of a mandatory, scheduled redemp-tion, not otherwise contingent upon the occur-rence of an event, is not required under the rule if the terms under which the redemption is to occur are set forth in detail in the final official statement, and the only open issue is which bonds will be redeemed in the case of a partial redemption. This position is conditioned on the provision of notice of the redemption to the bondholders as required under the terms of the governing instrument, and on the provision of public notice of the redemption. See Exchange Act Release No. 23856 (Dec. 3, 1986). If notice pursuant to Exchange Act Release No. 23856 is given, the rule does not require additional notice of mandatory redemptions of bonds as a result of sinking fund payments, if the sinking fund payment amounts and dates are set forth in the final official statement, even where the sinking fund redemption schedule set forth in the final official statement may be reduced by other redemptions or bond purchases. Question 11.

An issuer of special limited obligation bonds may choose to not include its audited financial statements in the final official statement. This may be because the bonds are not payable from the is-suer's general assets or because the bonds are payable from sources which did not exist at the time the audited financial statements were prepared (e.g., revenues received from a project to be constructed with proceeds of the bond issue), and accordingly the audited financial statements do not contain any relevant information. Paragraph (b)(5)(i)(B) requires that an issuer must undertake to deliver audited financial statements, when and if available, in addition to the requirement to deliver "annual financial information," which must be incorporated in an undertaking. If audited financial statements are not prepared with respect to the specific funds and accounts pledged to repay-ment of the bonds, is the issuer required to submit its audited general purpose financial statements, when and if available?

Response: Yes. In a financing involving an issuer of special limited obligation bonds, if audited financial statements are not prepared with respect to the specific funds and accounts pledged to repayment of the bonds, the issuer, if an obligated person, is required to submit its audited general purpose financial statements, when and if available, regardless of whether separate in-formation regarding such funds or accounts, or related underlying assets, are separately presented. Question 12. Paragraph (d)(3) of the Rule is applicable to

offerings of municipal securities with a


stated maturity of 18 months or less. In a multi-modal bond issue, would paragraph (d)(3) apply to modes where such bonds, at the option of the holder thereof may be tendered to an issuer of such securities or its designated agent for redemption or purchase at par value or more at 18 months or less until matu-rity, earlier redemption, or purchase by an issuer or its designated agent?

Response: As the Adopting Release notes, the 18 month exemption from providing annual financial information addresses situations where the se-curities would mature shortly after, or possibly even before, the annual financial information would be due. In a multi-modal bond issue, the final maturity of the bond issue is often far longer than 18 months, and therefore the provisions of Rule 15c2-12(b)(5) apply, unless another exemption is available. Question 13. If a multi-modal bond issue is not

exempt from the provisions of the Rule in its initial offering and accordingly the issuer enters into a written undertaking meeting the requirements of the Rule, may the undertaking be suspended or terminated if in a future remarketing the bond issue qualifies for an exemption under the Rule? We assume that the undertaking provides that it may be sus-pended or terminated under such circumstances.

Response: If a multi-modal bond issue is in a mode that allows an exemption under the rule, then the written undertaking may be terminated or sus-pended in accordance with the terms of the written undertaking. However, it is important to

note that in this scenario an underwriter would be prohibited from re-marketing the bonds in a future mode if that mode does not qualify for an exemption and a new undertaking has not been entered into in the case of a termination, or re-activated in the case of a suspension. * * * * The foregoing responses address only the questions raised in your letter relating to Rule 15c2-12, as amended. The responses do not ad-dress the staff's or the Commission's position regarding the obligations of municipal market participants, and in particular, issuers, brokers, dealers, and municipal securities dealers, under the antifraud provisions of the federal securities laws. In that regard, please refer to Exchange Act Release No. 33741 (March 9, 1994) for fur-ther guidance. Should you have questions regarding the responses, please contact the Office of Chief Counsel, Division of Market Regulation, at (202) 942-0073.

GENERAL TAX MATTERS SUBCOMMITTEE SUBMITS COMMENTS ON PROPOSED IRS EXAMINATION GUIDELINES Editor's Note: The following comments on the IRS's Proposed Examination Guidelines for Municipal Financing Arrangements were submitted to the IRS on October 6, 1995. Introduction


On August 7, 1995, the Internal Revenue Service (the "IRS") published in the Feder-al Register "Proposed Examination Guidelines for Municipal Financing Arrangements," An-nouncement 95-61 (the "Guidelines"), intended to provide a framework that agents may follow in conducting an examination of the financing arrangements of states and their political subdi-visions for compliance with the Code and regulations. The Guidelines invite public comments, to be submitted in writing. This submission represents the comments prepared by a subcommittee of the General Tax Matters Committee of the National Association of Bond Lawyers ("NABL"). The subcommittee was co-chaired by David A. Caprera, Denver, Colora-do, and Mary Gassmann Reichert, St. Louis, Missouri. Jeannette M. Bond, New York City, served as chair of the General Tax Matters Committee. Members of the subcommittee who participated in the preparation of these comments include William R. Britton, Jr., Michael I. Diamond, Joseph P. Fasi, Irving G. Finkel, Daniel E. Fisher, Terence J. Greene, Perry E. Israel, Joseph C. Mandarino, J. Alexander Meleney, Mark E. Mendel, Lynd K. Mische, Mitchell H. Rapaport, Ira B. Sacks, Jeremy A. Spector and John O. Swendseid. Comments were also pro-vided by William H. McBride, Amy K. Dunbar, William H. Conner and Robert W. Buck. NABL was incorporated as an Illinois non-profit corporation on February 5, 1979 for the purposes of educating its members and others in the law relating to state and municipal bonds and other obligations, providing a forum for the exchange of ideas as to law and practice, im-proving the state of the art in the field, providing advice and comment at the federal, state and local levels with respect to legislation, regulations, rulings and other actions, or proposals therefor, affecting state and municipal obligations, and providing advice and comment with regard to state and municipal obligations in proceedings before courts and administrative bodies through briefs and memoranda as a friend of the court or

agency. NABL has more than 3,000 members. These comments were prepared in accor-dance with NABL's purposes. While not all members of the subcommittee concur in each of these comments, the comments represent the consensus of the participants. We welcome the opportunity to discuss the comments set forth below with representatives of the Department of the Treasury (the "Treasury") and the IRS and to attempt to answer any questions that these comments may raise. Further, pursuant to the "Public Comments" provision of the Guidelines, we request that the IRS schedule a public hearing to discuss the Guidelines before they are finalized. I. Proposed Random Audit Program The Guidelines provide that cases may origi-nate from various sources, including referrals from the National Office, other federal agencies, informants, or news articles. They


[Easycalc ad]


may also arise from an information gathering pro-gram or review of returns filed by issuers or by conduit borrowers. NABL acknowledges the appropriateness of having a comprehensive plan for examining municipal finance arrangements but is concerned that any random tax-exempt bond audit program would inevitably lead to disruption of the tax-exempt bond marketplace, while yielding very little in terms of real enforcement benefit. NABL acknowledges that the information produced by a random audit program of broad scope may provide the IRS with an empirically-based, statistically valid view of compliance in the tax-exempt bond marketplace, and, possibly, a statistical profile of issuers likely to be in at least partial noncompliance. Likewise, such a program could produce at least two enforcement effects: some "problem" deals would probably surface, and the marketplace as a whole would likely be driven in a more conservative direction. Even if it is concluded that these predictable consequences of a random audit program represent clear benefits from an enforcement perspective, in our judgment they are clearly outweighed by the costs which such a program would impose on issuers. From the perspective of the resources at the disposal of the IRS for enforcement, we believe that these finite resources would be better expended pursuing "qualified" leads in this or other areas. It is simply more cost-efficient to examine transactions where a likelihood of noncompliance has already been identified. NABL also believes that a rigorous analysis of cases developed from qualified referrals may yield certain statistically valid earmarks of noncompliance, without resorting to a random survey of existing bond issues. Such a profile of noncompliance, when contrasted against the marketplace as a whole on the basis of industry knowledge, might then be used to separate deals more likely to have problems from the pool of existing issues.

The market disruption resulting from a random audit program would also amount to a partial tax on tax-exempt bondholders and new issuers: holders and prospective purchasers could be expected to demand increased yields in order to compensate for the risk of random audit. The upward pressure on yields engendered by random audits could be expected to be both systemic, to compensate for the potential of audit, and, more dramatically, specific to any bond issue and issuer known by the marketplace to be under audit. It is, in fact, the judgment of many market participants that investors have already begun to demand increased yields in compensation for audit risk. In particular, public knowledge of an ongoing audit could be expected to negatively impact other tax-exempt financings of an issuer; this financial "knock-on" effect could, in the case of a large municipal issuer, far outstrip the size of any potential abuse present in the issue selected for random audit. Equitable concerns also dictate that the vast majority of issuers, who have already expended a good deal of effort and incurred considerable expense in order to comply with the relevant tax rules, not be asked to incur redundant effort and expense explaining their transactions to the IRS. These burdens would be particularly high during the initial phases of the audit program. While NABL appreciates that the IRS has attempted to minimize the costs of the audit process by instituting close National Office supervision of agents, as well as by preparing reference materials such as the Exempt Organizations Technical Instruction Program for Fiscal Year 1996, a learning curve should still be expected. It is therefore preferable that the initial phases of the audit program focus on transactions in which the IRS has reason to believe that noncompliance may exist. We believe that the IRS has essentially recognized this fact already, in having decided to select audit cases through the National Office until return processing managers have developed proficiency in this area.


In the event that the random audit program is nonetheless implemented, the procedures set forth in the Guidelines should clearly distinguish between reviews that are initiated as part of a random, information gathering audit and those that arise from some other substantive basis. During the initial review process and before a preliminary determination has been made as to the tax-exempt status of the bonds, the mere initiation of the audit procedure may adversely af-fect the value and marketability of the bonds. In order to avoid, or at least minimize, the potential impact on the issuer, the bondholders and other participants in the financing, the issuer should be apprised at the initial stage as to the nature of the audit and whether the audit is merely part of a random sample or is based on some other criteria. Although the Guidelines do provide that the National Office will provide specific instructions concerning the initial contact letter from examination arising from an information gathering program, a Compliance 2000 project or other project based on statistical sampling, NABL suggests that those instructions be incorporated into the Guidelines in proposed form and be subject to public comment prior to implementation. II. Control by the National Office The Guidelines provide for the involvement of the National Office prior to any determination that the bonds are in violation of the requirements of the Code and the Regulations. An agent must coordinate with the National Office before providing a legal determination to the issuer that the financing does not comply with the Code and the Regulations. The agent must also consult with the National Office to create a plan for obtaining the names of the bondholders. If the agent, after appropriate Key District review and concurrence, concludes that a municipal financing arrangement does not comply with the Code and the Regulations, a Technical Advice Memorandum must be requested before proceeding to tax bondholders.

NABL recommends that the involvement of the National Office in the form of a Technical Advice Memorandum should be incorporated ear-lier into the process, in order to ensure review and determination by the National Office before other adverse events (other than taxation of bondholders) occur. More generally, the Guidelines should provide for greater involvement at the national level throughout the audit procedure. While the National Office would play an instrumental role in connection with negotiation of a closing agreement or determination that bondholders will be taxed, it is critical that the National Office be involved during the initial stages of the process when the decision is made to initiate the review. Under the Guidelines, the local agent has broad discretion to initiate a review, without the assistance of the National Office's expertise in this area of law. The Guidelines provide that, if the agent has "reason to believe" that a bond may not comply with the Code and the Regulations, an issuer level examination must be started. Such determination may currently be made by the agent without consultation with, or approval by, the National Office. The Guidelines acknowledge the need for considerable coordination, reporting and review in order to prevent unnecessary burdens on is-suers. In furtherance of this objective, the agent is instructed to contact the District Counsel Bond Liaison early in any examination where questions arise or where there is an indication that interest on a bond may not be excluded from gross income. NABL recommends that the Guidelines also instruct the agent to contact the District Counsel Bond Liaison prior to initiating the audit process if the examination does not begin under the auspices of the National Office.

III. Status of Issuer and Other Parties The Guidelines state that issuers are pri-


marily responsible for the structuring of the transactions, have access to the necessary information, and have continued responsibility to ensure that the bond proceeds are spent and invested in compliance with the Code and Reg-ulations. Consequently, so the Guidelines conclude, the examination of a municipal fi-nancing arrangement is conducted at the issuer level. NABL believes that, in so limiting the examination, the IRS has failed to recognize the roles, rights and responsibilities of parties other than the issuer of the obligations in many municipal financing arrangements. The issuer of tax-exempt obligations faces potential liability and costs if it fails to defend an audit to the best of its ability. At a minimum, an issuer would appear to have a duty implied to bondholders, if not an express duty under the applicable documentation, to represent the best interests of the bondholders in an audit by the IRS. Many issuers may lack the economic re-sources to engage counsel and other experts needed to respond to questions and issues which

may be raised in the course of an audit. However, the ramifications of a failure by an issuer to defend seriously and purposefully an audit may be significant. Not only may bondholders bring suit against the issuer, but a refusal or inability to cooperate and settle may subject the issuer to claims from bond counsel, trustees, underwriters and other associated parties who may well be brought into a damage suit by affected bondholders. Under the laws of many states, there exists a real question as to whether issuers can enter into closing agreements and pay money where they lack the statutory grant of power to do so. Under "Dillon's Rule," local governmental units are empowered to do only those things which are expressly set forth in statute or constitution. By subjecting an issuer to an IRS audit, an issuer may be placed in the position of incurring liability without having either the resources or ability to

[Bond Case Briefs ad]


defend itself. Nowhere is this more true than in the case of "on behalf of issuers" and "conduit financings." In such circumstances, the assumptions which underlie the Guidelines with respect to issuer responsibility and control are inapplicable. Gen-erally, in those situations, the "on behalf of issuer" or "conduit borrower," which is typically a 501(c)((3) organization, corporation or partnership, structures the transaction and is contractually responsible under the documents for ensuring that the bond proceeds are spent and invested in compliance with the Code and Regulations. An examination of these types of borrowings should take place at the level where the information about the investment and use of bond proceeds, and the responsibility for their expenditure, is likely to be found. Similarly, duties of confidentiality should apply at this level. Only in circumstances where the "on behalf of issuer" dissolves or is inactive, or where the conduit financing has been defeased, should the state or local governmental unit be considered the only accountable party. An additional level of complexity may occur in circumstances where conduit issuers undertake financings for multiple conduit borrowers (customarily referred to as "pooled financings"). Such issuers will have little or no knowledge, or participation in, the actual financing, use of proceeds and ongoing responsibilities for what may be numerous and disparate ultimate obligors. Typically, such issuers expressly disclaim any post-closing responsibilities or obligations whatsoever. Similarly, the conduit borrowers frequently retain direct contractual liability to the bondholders for events concerning the tax-exempt status of their proportionate share of the conduit issuer's obligation. In many cases, parties other than the issuer may need to be involved in the audit process. Al-though the Guidelines are silent on the procedures to be followed in affording other parties the

opportunity to participate in the audit, after the Guidelines were issued the IRS informally advised NABL that any party may participate in the audit process provided the IRS receives a waiver which satisfies the provisions of Code Section 6103(c). A waiver which satisfies the Code and facilitates a meaningful participation by such a third party, however, may constitute a breach of the attorney-client privilege for the issuer in the event issuer's counsel later wishes to assert the privilege defensively. Moreover, such a general waiver may not satisfy the example in Reg. Section 301.6103(c)-1. NABL, therefore, recommends that the Guideline procedure be modified to ensure participation by the conduit borrower and other third parties who were involved in the financing. IV. Filing Information Returns: Form 1099-

INT A. In General Section 7(10)(15)6.2 of the Guidelines provides that if the IRS has made a "preliminary determination of taxability" regarding interest on a bond, the examining agent should instruct the issuer to notify the payor of interest that it should commence sending Forms 1099-INT to the bondholders. Thus, the IRS implicitly has taken the position that its determination of taxability is final, which position the issuer and the bondholders may strongly contest and which may in fact subsequently be determined judicially to be erroneous. Moreover, the legislative history of Code Section 6049 provides that payors of municipal bond interest have no obligation to file a Form 1099-INT: Third, the definition of interest

is amended to provide that interest on an obligation which is exempt from tax is not "interest" within the meaning of this provision regardless of when issued. In this


connection, the conferees note that in determining whether an obligation is exempt from tax, middlemen such as financial institutions have no duty to inquire beyond the face of the obligation (emphasis added). H.R. Conf. Rep. No. 760, 97th Cong., 2d Sess. at 563 (1982).

The legislative history indicates that a payor has no duty to file a Form 1099 merely because of a position asserted by the IRS. The middleman (indenture trustee or nominee) has no obligation to go "beyond" the face of the obligation that generally contains a representation of bond counsel regarding the tax-exempt status of interest on the obligation. Moreover, the filing of a Form 1099 prior to a judicial resolution of the issue will likely trigger liability for that payor if the interest is finally adjudicated to be tax-exempt. Such damages would include liability for tax deficiencies erroneously paid which may not be recoverable through the filing of a timely claim for refund, potential trading losses and other ancillary damages incurred in connection with the decision of the bondholder to treat the interest income as includible in federal gross income. Under the terms of some financing docu-ments, the issuance of an information return may also raise an issue about whether an event of de-fault has occurred, thereby triggering a higher interest rate under the terms of the financing documents. Further, a conduit obligor's duty to pay a higher rate of interest triggered by an IRS agent's direction or instructions to commence filing Forms 1099 is inappropriate given the potential liability to the conduit obligor and the effect publication of such determination could have on the remarketability of the bonds in the event the bonds are variable rate bonds and on secondary market transactions. Consequently, this provision should be deleted from the Guide-

lines because it is contrary to the legislative history of Code Section 6049 and is likely to proliferate unnecessary lawsuits and disrupt the municipal bond market. B. Penalties for Failure to File Informa-

tion Returns Although section 7(10)(15)6.3(2) of the Guidelines indicates that it may be appropriate for the agent to assert penalties against the payor for failure to file information returns under Code Sections 6721 and 6722, that same section implies that because a determination of taxability generally means that interest is includible in gross income from the issue date, a waiver of the penalty may not be appropriate. Because the agent's determination of taxability is merely the Commissioner's position, and is not a final adjudication of the tax issue, assertion of any pen-alties is inappropriate until a final determination of the issue by a court. Where the issuer is also the payor of the interest and thus may in some cases be deemed to have acquired "new information" since the issue date, it is unlikely that Congress intended to treat the state treasurer, for example, differently from the trustee bank. Neither payor should be deemed to have a duty to examine the financing transcript nor will either be afforded the op-portunity to review the work papers of the IRS to determine whether or not they may continue to rely on bond counsel's opinion. Based on the legislative history of Code Section 6049, neither type of payor should be burdened with the duty to act as an arbiter of the tax issues. The legislative history indicates that Congress did not so intend, and the payors of municipal bond interest - the "middlemen" - should not be made the unpaid solicitors of the IRS. Based on the legislative history of Code Section 6049, the suggestion or implication in the Guidelines that in certain circumstances it may be appropriate for the agent to assert penalties for a payor's failure to file information returns should be deleted.


C. Information Returns: An Avenue to

the Court? One way to get into the Tax Court after receipt of a Form 1099 is for the bondholder to report the interest and exclude it on Schedule B of Form 1040. If the IRS contests the issue, the bondholder can litigate in the Tax Court or pay the tax and file a claim for refund in the federal District Court or the U.S. Claims Court. Access to court, however, is only the first step. The more important issue is how individual bondholders will gain access to the relevant books and records of the issuer essential to presenting the case in court. Because of the binding effect of a judicial determination on all bondholders, an issuer may not be likely to cooperate with a bondholder in this regard unless the issuer determines that counsel for the bondholder will adequately present the legal issues to the court. These circumstances subject the issuer to substantial risk and, therefore, the approach taken in the audit procedures should be reconsidered. V. Technical Advice Memorandum and Inde-

pendent Review In view of the input that members of the respective staffs of Assistant Commissioner (Employee Plans/Exempt Organization) and the various branches of Assistant Chief Counsel (Field Service) will have in the examination process, an issuer is not likely to request a technical advice memorandum because the very same individuals from Field Service, District Counsel Bond Liaison, and the Headquarters Contact will already have been involved in the audit process which resulted in a "determination of taxability" of a particular bond. Unless an issuer is assured of a "fresh start review," it has little, if any, incentive to incur the legal fees of special tax counsel to prepare a memorandum on the issue(s) presented in the technical advice request. Furthermore, assuming that District Counsel Bond Liaison, Field Service and Head-

quarters have done their job appropriately, the issues to be raised in the technical advice request are likely to be highly technical tax issues, not previously decided by a court, and not the subject of a private ruling issued by the IRS. Absent published authority on the legal issues, special tax counsel will likely be put in the position of trying to change a mind "already made up." The appellate review procedures for tax deficiencies were designed to avoid that result by providing an independent and fresh review. The protocols established in the Guidelines not only frustrate that independent review process but make dispute resolution on an administrative level unlikely. Absent independent review authority being vested in the appellate branch of the IRS or some newly-created comparable body at the National Office, the appellate review function of a technical advice request may be of no practical assistance to the issuer. NABL, therefore, recommends that the IRS consider alternatives like those suggested in Announcement 95-2, 1995-2 IRB 1. As previously noted, NABL also recom-mends that the involvement of the National Office in the TAM process should begin earlier in the audit process in order to ensure that review and coordination by the National Office occur before other adverse events (other than taxation of the bondholders) occur. NABL also recommends that more involvement by the National Office occur throughout the audit procedure especially at the audit initiation stage. While the Guidelines provide that if the agent has reason to believe that a bond may not comply with the Code it may initiate an audit, NABL proposes that such a determination be made only in consultation with or following approval by the National Office in order to reduce market disruption to the greatest extent possible. VI. John Doe Summons The Guidelines provide that the process of obtaining bondholder names should begin as soon as the agent has reached a quirement, but a John Doe Summons should be used only if the parties appear to be unable to


reach a settlement. Before that, the requirements of obtaining a John Doe Sum-mons [Code Section 7609(f)] may not be satisfiable. Under Code Section 7609(f) a John Doe Summons may be issued only after a court proceeding in which the Secretary establishes that (1) the summons relates to the investigation of a particular person or ascertainable group or class of persons; (2) there is a reasonable basis for believing that such person, group or class may fail or may

have failed to comply with any provision of the internal revenue law and, (3) the information sought to be obtained from the examination of the records and the identity of the person or persons with respect to whose liability the summons is issued is not readily available from other sources. The threshold question is "what is `a reason-able basis'?" Is a mere "taxability determination" by an IRS agent sufficient? Does reasonable basis depend on the nature of the violation alleged by the agent in the supporting affidavit attached to the ex parte petition for leave to serve a John Doe Summons? Will any general allegation, repre-sentation or affirmation in the affidavit be sufficient to satisfy the "reasonableness" re-

quirement or will very specific detail be required to obtain a court order? Obtaining a John Doe Summons is an ex parte proceeding; no other party will be given notice to protest or contest the allegations of the IRS. The potential adverse effects to the borrower, issuer and other partici-pants in the plan of financing suggest that a John Doe Summons should be used only after negotia-tions fail and the IRS has a high degree of con-fidence in its reasons for reaching a determination of taxability rather than at the earlier date on which the agent has made a preliminary deter-mination. The Guidelines do not contain such requirements. Section 7(10)(15)11.4 of the Guidelines also

[New Deloitte ad]


provides that a dual purpose summons may be available if the person to whom the summons is being issued is also a possible beneficial owner of the bonds. This strategy may be used by an agent to avoid compliance with the John Doe proce-dures and the requirements of Code Section 7609(f). Thus, the Guidelines should clarify that a dual purpose summons cannot be used unless the agent has actual knowledge that the recipient of that summons is a beneficial owner of the bonds and has obtained the necessary consent from the National Office to use the summons procedure. Using this criteria will limit the audi-tor's access to memoranda, documents, etc. without the guidance and concurrence of Headquarters. The Guidelines give broad discretion for audits to be initiated by local agents rather than by specialized teams with National Office approval. Therefore, local agents might initiate an audit in an uncontrolled or abusive fashion in order to gain access to materials not otherwise obtainable under the John Doe proce-dures. Hopefully the requirement of guidance from the Headquarters Contact before use of summons should reduce this risk. Further, in the case of an audit of a 501(c) tax-exempt organization which is also a conduit borrower, the agent may use the threat of ini-tiating a bond audit to coerce the audited orga-nization into entering into a closing agreement more favorable to the Service with respect to an issue such as UBTI [unrelated business taxable income]. The Guidelines should specifically clarify that if the issuer and the conduit borrower are different taxpayers, an audit of the conduit borrower should not extend to bond matters without a reasonable basis and without Head-quarters approval. VII. Model Closing Agreement A. In General The Regulations under Code Section 7121 which provide that a closing agreement is an

agreement in writing with any person relating to the liability of such person (or of the person or estate for whom he acts) cast doubt on the validity of a closing agreement executed by the IRS and the issuer. Neither the bondholders (whose tax liability is at issue), the conduit borrower, credit enhancer nor any other real party in interest in the plan of financing are parties to the agreement, nor is there any representation or implication that the issuer, as signatory to the closing agreement, is authorized to act on their behalf. Therefore, NABL recommends that the IRS consider procedures comparable to the unified audit provisions in the partnership and Subchapter S corporation area. B. Other Aspects of the Model Closing

Agreement With respect to the closing agreement "amount," the settlement amount should not be a function of the time invested by the Service inasmuch as the issuer has no control over how the IRS allocates its time in an examination. Also, the criteria of "whether the abuse was severe" is too vague and provides an incentive for an agent to characterize every situation as abusive. Moreover, the criteria for quantifying the settlement amount does not refer to the hazards of litigation. Inasmuch as one of the announced goals of the Guidelines is to improve compliance in the municipal bond area, the hazard of litigation to the IRS should be an essential criteria for determining the settlement amount, especially because the IRS's determina-tion of taxability may not be upheld by a court. Equally important is the time the IRS would otherwise invest in prosecuting a claim against each one of the individual bondholders. If each bondholder in a typical retail transaction were to request an appellate conference, the results could be an administrative catastrophe for the Appeals Division of the IRS. Therefore, the cost to the IRS to process an appellate review and/or a Tax Court petition with respect to each one of the bondholders of the audited bond issue should


likewise be taken into consideration in determining the settlement amount. Further, although the guidelines state that: "consideration should be given to whether bonds can be redeemed early," they do not state whether or how the redemption of bonds will effect the calculation of total taxpayer exposure and the closing agreement amount. Although the Guidelines are unclear on whether there are situations which are not appropriate for a closing agreement, NABL's position is that an issuer should always have the opportunity to enter into a closing agreement if the goal of the Guidelines is compliance and not revenue collection. Although there is a suggestion that the existence of and the terms of a closing agreement should be disseminated to the bondholders, the potential adverse impact in the market to the issuer may outweigh the advisability of this proposal. The decision of whether or not to disseminate the information to the holder of its bonds should be left to the issuer and its counsel. Bondholders will have continued to treat the interest as excludable from gross income. The model agreement recites that no amount will be includible in the federal gross income of the bondholders as a result of the issuer having entered into the closing agreement. Thus the bondholders are not disadvantaged by not having received information about the existence and the terms of a closing agreement. Likewise, the reputation of the issuer who may have decided to settle rather than incur subsequent legal fees in defending a suit by bondholders will not be affected. There is no provision in the model closing agreement to prevent the IRS from asserting penalties against the conduit borrower and other interested parties even after entering into a closing agreement on a bond issue. To assure finality, the closing agreement should include a recital that the IRS will not attempt to assert

penalties against other participants in the plan of financing which is the subject of a closing agreement executed by the issuer and the IRS. Because the closing agreement amount is based on total taxpayer exposure, which is the difference between interest on the bonds being taxable and tax-exempt, the assertion of penalties should generally be inappropriate. All references to penalties should be removed from the Guidelines to prevent undue emphasis by the agent on the assertion of penalties. The examining agents are not likely to agree to an issuer's request to delete provision 10 of the model closing agreement merely because the National Office has included it in its model. Experience with IRS auditors is that if it is "in the manual" it is "required." No issuer of municipal obligations will execute a closing agreement with this provision included in it because of the adverse impact it will have on its bond rating. Consequently, NABL suggests that this provision be deleted from the model agreement without further consideration. Paragraph 5 of the closing agreement is problematic inasmuch as the IRS reserves the right to tax bondholders for violations other than those set forth in the closing agreement and for violations that are the same but which arise after the effective date of such closing agreement. No issuer will agree to enter into a closing agreement pursuant to which any sizeable sum of money is tendered to the IRS unless there is a guarantee of finality with respect to the tax issues involving the bond issue which is the subject of the closing agreement. Consequently, this provision should be deleted from the model agreement. The closing agreement should cover any violation, whether past or future, because any additional violation would not result in any additional taxpayer exposure. In summary, because the model closing agreement will be interpreted by auditors as not


subject to variation or alteration, the Guidelines should specifically state that this is a model only, that it is subject to negotiation between the parties, and that no one of the provisions is mandatory except for those provisions included in paragraph 11 which are provided for in the regulations. VIII. Resolving Questions About Arbitrage The Guidelines identify as an example of a violation under the Code circumstances where a bond will be considered to be an "arbitrage bond." After recognizing that "arbitrage computations are often complex," the Guidelines nonetheless present an overly simplistic and potentially misleading framework for auditing a potential arbitrage situation. For example, the Guidelines advise the agent to "compute the yield on investments allocated to the issue." NABL believes that, in many circumstances, such a task requires expertise developed only after years of study and experience, and that it is misleading to state so simply what is an exceedingly difficult undertaking. It is the recommendation of NABL that all calculations of investment yield and rebate be performed by a centralized section of the IRS in the National Office to provide for standardiza-tion of these calculations and develop expertise to perform them at a uniform level. Standardization and uniformity of the calculations would be more efficient for the IRS and fairer to all issuers throughout the country. The simplistic approach set forth in the Guidelines should be broadened and made more definitive to include a hierarchy of tests and directives to examiners with regard to rebate calculations in the following areas: A. Exceptions to, exemptions from,

and limitations on the rebate requirements should be a required first step as part of the preliminary review process of Step 1. This would include testing for the small issuer exception, general 6-month expenditure

exception, 18-month expenditure ex-ception, 2-year construction bond exception and universal cap;

B. "Gross proceeds" guidance should

be given in the Guidelines to determine which "proceeds" of a particular issue are deemed subject to the arbitrage restrictions with corresponding issue funds/accounts as subject or not subject to the rebate require-ments. Preliminary analysis would address how to identify "proceeds" with direction to review relevant Regulations to define "original proceeds" and in the 1993 Regu-lations' "proceeds"/"sales proceeds," with a discussion of the subsidiary concepts of investment proceeds, transferred proceeds, replacement proceeds, etc. This is necessary because identification of nonpurpose invest-ments in Step 4 of the Guidelines assumes a working understanding of the various pro-ceeds, funds and accounts that may or may not be included in the rebate calculations. Tests should be required for "bona fide debt service funds," flagging of investments out-side of the arbitrage rules as tax-exempt obligations and SLGS, one issue for pro-ceeds rule/universal cap;

C. The accounting rules are an im-

portant underlying premise of the rebate process as stated in the Guidelines Over-view, and highlights of these rules should be reflected in the Guidelines framework;

D. The Guidelines need to address the

valuation of investments at their historic or fair market value and the technical rules governing the process of this valuation. The Regulations allow utilization of several different valuation methods for situations not involving initial purchases of an investment. Qualified administrative costs are deductible and should be checked for during the data gathering phase;


E. Advance refundings involve a number of specialized issues including yield limits on investment of proceeds and unspent proceeds of prior refunded issues as "transferred proceeds" as the prior issue is retired. This is an area where National Office control is imperative.

IX. Other Areas of Concern A. Using Audit Process to Resolve Unre-

solved Legal Issues NABL strongly believes that the audit

process is not the appropriate forum to be used deliberately to resolve unclear legal issues. It would be unfair to single out one entity for punitive measures rather than pub-licly promulgate guidance in an area.

B. Section 6700 Penalties Specific guidance should be provided

concerning the application of Section 6700 to tax-exempt bond transactions. Guidance is requested concerning the parties to the transaction subject to the penalty and the degree of involvement and participation in the transaction which would trigger the penalty and any available defenses. In order to protect innocent parties from damage to their reputations, before this penalty is asserted, NABL recommends appropriate evidence thresholds be established and technical advice be sought from the National Office as a prerequisite.

C. Section 150 Change-In-Use Penalties Guidance should be provided to agents

concerning when a change in use is qualified or unqualified and when Section 150 change-in-use penalties are applicable. This analysis must be sensitive to applicable law and the date of enactment of the Tax Reform Act of 1986.

D. Secondary Market Transactions The secondary market transactions

described in the Guidelines generally raise reissuance questions, working capital issues and abusive arbitrage device issues. Before raising a red flag, audit agents should be advised that these transactions should generally not be flagged if the terms of the underlying obligations are not materially changed, the bonds are to be sold in an amount not in excess of a property's fair market value and there are no replacement proceeds held by the issuer, bondholder or other interested party.

ARBITRAGE AND REBATE COMMITTEE PRESENTS VIEWS ON ESTABLISHING FAIR MARKET VALUE FOR OPEN MARKET ESCROW INVESTMENTS Editor's Note: The following letter was dis-patched to its addressees on September 13, 1995. Michael G. Bailey, Esq. Timothy L. Jones, Esq. Lon B. Smith, Esq.


Internal Revenue Service 1111 Constitution Ave., N.W. CC:DOM:FI&P Room 4011 Washington, DC 20224 Linda B. Schakel, Esq. Department of the Treasury Office of Tax Policy Room 4028 1500 Pennsylvania Ave., N.W. Washington, DC 20220 RE: Comments on Establishing Fair Market

Value for Open Market Escrow Investments Dear Ms. Schakel and Gentlemen: At a meeting held on May 10, 1995, among representatives of the Internal Revenue Service, Treasury and the National Association of Bond Lawyers ("NABL"), the issue of establishing fair market value for investments of bond proceeds was discussed. At this meeting, as well as in various public forums, IRS personnel have expressed concern that, on occasion, the prices of investments purchased with bond proceeds (including replacement proceeds) may have been in excess of their fair market values. This con-cern appears to be particularly acute with respect to purchases of open market securities (i.e., securities other than U.S. Treasury Obligations, State and Local Government Series "SLGS") for advance refunding escrows ("Escrow Securities"). For instance, the Tax-Exempt Bond Action Plan released by the IRS on January 10, 1994, indicates that, among other things, "open market purchases of Treasury obligations for advance refunding escrows and purchases of long-term guaranteed investment contracts" will be the focus of the examination program. The Arbitrage and Rebate Committee of NABL (the "Committee") has considered the issue of fair market valuation of Escrow Securities and would like to present its views to you. The members of the Arbitrage and Rebate Committee who partici-

pated in preparing these comments are Neil P. Arkuss, William H. Conner, John J. Cross, III, Amy K. Dunbar, Perry E. Israel, Arthur M. Mil-ler, Mitchell H. Rapaport, David A. Walton and Patti T. Wu. NABL was incorporated as an Illinois nonprofit corporation on February 5, 1979, for the purposes of educating its members and others in the law relating to state and munici-pal bonds and other obligations and participating in national and local forums in order to advise and comment on legislative, regulatory and judicial issues affecting said bonds and obligations. NABL currently has 3,000 members. Current Bond Counsel Practice in Assuring Fair Market Value Purchases and Due Dili-gence The Committee believes that the vast majority of issuers of tax-exempt obligations diligently comply with fair market value invest-ment requirements and do not knowingly pay in excess of the fair market price for investments purchased with bond proceeds. Most issuers covenant in the relevant bond documents not to purchase investments with bond proceeds at other than their fair market value. In the case of Escrow Securities, most bond counsel usually require a certification from a qualified investment professional (usually an underwriter or financial advisor) to the effect that the investment was pur-chased at its fair market value. Such fair market value certifications are not customarily required by bond counsel for other investments of bond proceeds. The due diligence exercised by bond counsel with respect to the fair market value certification regarding Escrow Securities is, and must necessarily be, limited to assuring that the person making the certification is qualified to do so. Bond counsel do not customarily review the methodologies employed by the person making the fair market value certification nor do bond counsel seek to independently verify the certifier's conclusions. Such a review or independent verification by bond counsel is not appropriate because bond counsel does not possess the


necessary financial and market expertise to perform these reviews and verifications. All Investment Problems Are Related to Lack of Economic Incentive In the case of proceeds of tax-exempt obligations subject to arbitrage yield restriction or to rebate, the economic motivation to maximize aggregate investment yield generally ceases once bond yield, in the aggregate, is attained since, in the former case, the issuer is prohibited from earning a higher yield and, in the latter case, the issuer is not allowed to keep any earnings in excess of bond yield. We believe that the simplest, fairest and most effective solution to this problem is for Congress to amend the Internal Revenue Code to permit issuers to retain a meaningful portion (e.g., at least 25%) of earnings in excess of bond yield and to treat such retained earnings as proceeds for sizing and expenditure purposes. Such an amendment would (i) delete all yield restriction requirements and (ii) reduce the required rebate percentage from 100% to something significantly less (e.g., 75%). Yield restriction requirements would be unnecessary because the rebate requirement would discourage arbitrage motivated transactions (in the case of refundings, the re-tained earnings could be required to be used to reduce the size of the refunding issue). These two simple changes would provide a sufficient economic incentive to issuers to insure that all investments of bond proceeds are at fair market value. We believe that the adoption of the amend-ments discussed in the preceding paragraph would not result in any significant revenue loss to the Federal government because current law encourages issuers not to maximize their invest-ment yields which, in turn, results in less or no rebate paid to the Federal government. For example, assume that an issuer issues 6 percent bonds and needs to invest the bond proceeds for a three-year temporary period. The issuer has the

option of investing in Fund A that earns 6 percent per annum, is rated AAA, is strongly collateralized, and has very liberal withdrawal provisions. The issuer also has the option of investing in Fund B that earns 7 percent per annum, is rated A, is not as well collateralized as Fund A, and has limited withdrawal provisions. The issuer chooses to invest in Fund A because the extra benefits of Fund A do not really cost the issuer anything since Fund A


earns bond yield and all the excess earnings above bond yield on Fund B would be required to be rebated to the Federal government. In making the decision to invest in Fund A, the issuer has chosen the safest investment alternative, and has complied in all respects with all fair market value investment requirements. A statutory change allowing the issuer to retain a portion of the arbitrage earned may provide the incentive for the issuer in this example to assume additional credit risk and reduced liquidity and invest in Fund B which would provide the issuer with more earnings and the Federal government with more rebate. We encourage the IRS and Treasury to support such a legislative change. Recommended Improvements to the SLGS Program The Committee believes that SLGS are underutilized as Escrow Securities and as other investments because of the current inflexibility of, and low rates of return offered by, this program. Investments in SLGS do not present the same fair market value concerns as do investments in other securities and the Committee believes that if the problems with the SLGS program are remedied,

investments of bond proceeds in SLGS will increase. In October, 1989, the Anthony Commission on Public Finance (the "Anthony Commission") issued its report entitled "Preserving the Federal-State-Local Partnership: The Role of Tax-Exempt Financing" (the "Anthony Commission Report"). On page 38 of the Anthony Commission Report . . . , the major problems with the SLGS program are described and the following suggestions for improvements are made: (1) Provide an adequate return to state and

local governments, (2) Permit the Treasury Department to enter

into a contract with private businesses to run the program, and

(3) Permit investments by the issuer to be

divided between time-deposit and demand-deposit obligations and be-tween zero interest SLGS and open market obligations to lower yield to meet arbitrage restrictions.

The Committee concurs in these recommenda-

[Midwest Bank Note ad]


tions. We urge the Treasury Department to promptly make these suggested changes to the SLGS program.


Recommended Safe Harbors for Determining Fair Market Value For Escrow Securities and Enforcement of Existing Regulations The Committee believes that the methods for determining fair market value as set forth in Treas. Reg. §1.148-5(d) are adequate and do not need to be expanded. To the extent investments of bond proceeds, in fact, are made at prices in excess of fair market value, such actions are not due to an inadequate definition of fair market value, but instead are due to misrepresentations by those certifying the fair market value of said securities. Regulatory expansion of the definition of fair market value will not solve this problem. We believe that only effective enforcement of the current fair market value requirement will prevent willful misrepresentation of fair market value. We encourage enforcement efforts aimed at discouraging deceptive pricing practices;

however, as stated above, the Committee believes that the vast majority of issuers investing bond proceeds and, in the case of Escrow Securities, those certifying the fair market value thereof, are honest in their dealings. To the extent there are problems in this area, the Committee believes that they exist with a small minority of market participants. Should the IRS or Treasury decide that addi-tional action in this area is necessary, the Committee suggests that such action be limited to Escrow Securities. We suggest that a safe harbor be established providing that investments are pre-sumed purchased for fair market value if (1) a qualified professional certifies that the purchase price, taking into account the facts and circumstances, is fair market value, (2) three bids from non-interested parties are obtained and the investments are purchased at the lowest price or

[Municipal Resource Center ad]


the highest yield offered, or (3) the yield on the investments is significantly below the relevant bond yield. The Committee does not believe that the safe harbors for three bids or a fair market value certification will be workable in all circumstances for investments of bond proceeds other than Escrow Securities and, therefore, we recommend that the safe harbors only explicitly apply to Escrow Securities. If the foregoing safe harbors are adopted, the Committee recommends that when the aggregate investment yield of all the Escrow Securities produces significant negative arbitrage, determined without taking into account non-escrowed securities (e.g., the lower of 25 basis points below the refunding bond yield or $200,000), the purchase price of the Escrow Securities should be deemed to be their fair market value. We believe that in these circum-stances, the loss realized by the issuer is signifi-cant enough to warrant the presumption that the securities were purchased at fair market value. The Committee suggests that the safe harbor be promulgated in the form of a proposed Revenue Procedure, and that it be drafted, with modifica-tions, in a manner similar to Treas. Reg. §1.148-5(d)(6)(iii) relating to guaranteed investment contracts. We suggest the following language for the Revenue Procedure: Safe harbor for establishing fair market value for securities to be deposited in advance refunding escrows. Except as

otherwise provided in this Revenue Proce-dure, in the case of securities purchased with proceeds of an advance refunding issue or with other moneys that are deposited in an advance refunding escrow, the purchase price of such securities is treated as the fair market value on the purchase date if either --

(1) A person or entity knowledgeable

about similar securities and investments cer-tifies to the Issuer that the purchase price of the securities is the fair market value thereof (as defined in §1.148-5(d)(6)) and such person or entity agrees to maintain objective

evidence of the methodology and data used in arriving at such conclusion and to provide it to the Internal Revenue Service in the event such information is requested in writing by an authorized representative of the Internal Revenue Service in connection with its audit or examination of the bonds or to a participant in the financing provided such participant is subject to an Internal Revenue Service investigation in connection with the bonds and enters a non-disclosure agreement satisfactory to the person or entity providing such certification; or

(2) The issuer, or any person or entity

acting on behalf of the issuer complies with each of the following:

(i) Makes a bona fide solicitation for

specified securities and, of the bids re-ceived, at least three are bona fide bids from sellers that have no material in-volvement in the pricing of the issue; and

(ii) The issuer purchases securities

from the bidder which made the highest yielding bid and such securities have a yield at least as high as such bid.

Safe harbor for below bond yield

investments. In the case of securities pur-chased with proceeds of an advance refund-ing issue that are deposited in an advance re-funding escrow, the purchase price of such securities is treated as the fair market value on the purchase date if either the aggregate yield to maturity of such securities is less than the yield of the advance refunding issue by at least .25 percent or the aggregate ex-pected cash flow from such securities which would have resulted had the securities been invested at an aggregate yield equal to the yield of the advance refunding issue is at least $200,000 more than the actual aggre-gate expected cash flow from such secu-


rities, and no other investments are treated as the same class of investments as such securities within the meaning of §1.148-5(b)(2). In the case of securities purchased with moneys other than proceeds of the refunding issue that are deposited in an advance refunding escrow, the purchase price of such securities is treated as the fair market value on the purchase date if either the aggregate yield to maturity of such securities is less than the yield of the re-funded issue by at least .25 percent or the aggregate expected cash flow from such securities which would have resulted had the securities been invested at an aggregate yield equal to the yield of the refunded issue at least $200,000 more than the actual aggregate cash flow from such securities, and no other investments are treated as the same class of investments as such securities within the meaning of §1.148-5(b)(2).

We appreciate your consideration of these comments. We would be pleased to make ourselves available to discuss them with you and other representatives of the IRS or Treasury at your convenience should you believe that to be helpful. Questions should be directed to David A. Walton, Chair of the Arbitrage and Rebate Committee, at (415) 391-5780. Sincerely, David A. Walton Chair, Arbitrage and Rebate Committee

NABL AND CLE Before each Association seminar or work-shop, the National Office staff applies to each of 38 states — those known to have mandatory con-tinuing legal education requirements — to qualify

the event for appropriate credit. Each state's requirements are different, and subject to change: that keeps the process interesting. Most states focus on in-state pro-grams: that can make the process difficult. The Association currently endeavors to qualify pro-grams in Alabama, Arizona, Arkansas, California, Colorado, Delaware, Florida, Georgia, Idaho, In-diana, Iowa, Kansas, Kentucky, Louisiana, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin and Wyoming. Jane Walter

THE NRMSIRS The following is the best currently available information on the entities which have received no-action letters from the SEC with respect to their acting as nationally recognized municipal securities information repositories under Rule 15c2-12: Bloomberg Municipal Repository P.O. Box 840 Princeton, NJ 08542-0840 Phone: (609) 279-3200 Fax: (609) 279-5962 The Bond Buyer Attn: Municipal Disclosure 395 Hudson Street New York, NY 10004 Phone: (212) 807-3814 Fax: (212) 989-9282 Internet: [email protected]


Disclosure, Inc. 5161 River Road Bethesda, MD 20816 Attn: Document Acquisitions/Municipal Securities Phone: (301) 951-1450 (issuer-related questions) (800) 638-8241 (for purchase of documents) Fax: (301) 718-2329 Moody's NRMSIR Public Finance Information Center 99 Church Street New York, NY 10007 Phone: (800) 339-6306 Fax: (212) 553-1460 Kenny Information Systems, Inc. 65 Broadway 16th Floor New York, NY 10006 Phone: (212) 770-4595 Fax: (212) 797-7994 Municipal Securities Disclosure Archive 559 Main Street Hudson, MA 01749 Phone: (800) 580-3670 Fax: (508) 562-1969 Internet: http://www.municipal.com

THE HILDERBRAND FUND Year-end presents itemizers with the oppor-tunity to contribute charitably to the Robert H. Hilderbrand, Jr. Fund. The Hilderbrand Fund, the Association's §501(c)(3) affiliate, supports the educational activities of the Association by

granting stipends to government employees to cover their personal costs of attending Associa-tion seminars or serving as panelists at the Bond Attorneys' Workshop. Gifts to the Hilderbrand Fund may be sent in care of the Association at 911 N. Elm Street, Suite 129, Hinsdale, IL 60521, and will be acknowledged by written receipt. Unless the donor otherwise requests, the fact (but not the amount) of his or her contribution will be mentioned in the next number of The Quarterly Newsletter.


EDITOR'S NOTES Joe Mysak (Grant's Municipal Bond Ob-server) tells us that some of us have been advertently or inadvertently acquiescing in yield-burning, escrow-churning and other suspect activities. There is reason to believe that the IRS and, probably, the SEC have taken notice. Your editor doesn't know how to do these things. He now confines himself right much to plain vanilla. But his generous ears prick when Joe grouses, and so should yours. This is the only holiday greeting you will get from the Association, so settle for it. Holiday seasons past meant multiple frantic year-end closings, a few of which were allegedly conducted without the crossing of the palm. This year, one can enjoy the season with one's loved ones, basking in the light of the menorah or the tree, hoping for more market volume in 1996. Speaking of matters transubstantial, let's us have a fifty-state round of applause for two nifty ladies: Executive Director Pat Appelhans, still attaching her spurs, and Director of Gov-ernmental Affairs Amy Dunbar, sharpening hers for the coming war to save tax exemption. They both do more for us and ours than we will ever know. A week or so ago, we got a bat book from a Texas bat-hugger, the guy who has of late made bats respectable around Austin. A friend is to make some bat boxes for us and for the market; we're hoping for legions of furry insecticidal fighter pilots. Maybe we shouldn't sweat the flat taxers so much. Note that Arthur Levitt is on our side (The Bond Buyer, October 17) on this one. We began with validity opinions and we will go on giving them, come Hell, High Water, or Dr. Newt, who (by the way) should be figuring out what an appropriate indemnity to the holders of $1.2

trillion of outstanding bonds might cost the Federal fisc.


"Wally," as in (for example) our Wally McBride, is now a registered trademark, as in the "Wally® Clamp" which is part of "Quite Possibly The World's Finest Garment Bag," as advertised in the current Rand McNally Compass catalogue at $200, and available in 1000 denier Cordura® Plus in black, evergreen or oak. Then there's Wally World, in one of those Chevy Chase movies. The Association's new blue sky book — Blue Sky Regulation of Municipal Securities, by Martin R. Miller, Robert A. Boresta, Mark T. Lab and Richard I. Alvarez — is expected to be available in short order. It will be priced at $40 to members and $65 to non-members.

QUARTERLY LIMERICK Winter collects this fall's arrearages (Here come Santas, bells and carriages). Newt 'n Bill And all the Hill Remind of those difficult marriages. Orin Magruder

[Merrill ad - inside front cover]

The Bond Lawyer - NABL · 2009. 9. 15. · NABL submitted comments to the IRS on its guidelines for...

Documents

Transcript of The Bond Lawyer - NABL · 2009. 9. 15. · NABL submitted comments to the IRS on its guidelines for...