CONTENTS President's Column 1 Washington Saga (William L. Larsen) 3 Actions by the Board of Directors on February 10 and 12, 2003 (W. Jackson Williams) 8 Actions by the Board of Directors on February 19, 2003 (William J. Noth) 9 Actions by the Board of Directors on March 13 and 14, 2003 (W. Jackson Williams) 11 National Office News (Kenneth J. Luurs) 13 Officer and Director Candidates Sought 14 Friel Medal Nominations Sought 14 Federal Securities Regulation© (Paul S. Maco) 15 Tax Developments at the Crossroads (John J. Cross III) 17 2003 Fundamentals of Municipal Bond Law Seminar (Erin P. Bartholomy) 27 Lawyer Indemnification of Clients: Ethical Implications 28 James A. Lebenthal to Speak at Kraft Lecture Series 37 Blue Sky Requirements After NSMIA© (Thomas N. Harding) 38 GASB Proposes Technical Bulletin to Improve Disclosures About Derivatives (William L. Hirata) 42 J. Ben Watkins III's Address to American College of Bond Counsel (Excerpted) 44

The Bond Lawyer®: The Journal of the National Association of Bond Lawyers ("NABL") is published on or about March 1, June 1, September 1, and December 1 of each year, for distribution to members and associate members of the Association. Membership information may be obtained by writing to Kenneth J. Luurs, Executive Director, NABL, 250 South Wacker Drive, Suite 1550, Chicago, IL 60606-5886, by calling 312/648-9590, or e-mailing nabl@nabl.org, or at www.nabl.org. ©2003, NABL. Copyright is not claimed for any portion hereof prepared by any official or employee of the United States of America in the course of his or her official duties, nor for articles or other items separately copyrighted by their authors.

THE BOND LAWYER®

° ° The Journal of the National Association of Bond Lawyers Volume 24, No. 2 June 1, 2003

The Bond Lawyer® ©2003 June 1, 2003

National Association of Bond Lawyers Officers and Directors Helen C. Atkeson.................................................................................................................................................................... President Hogan & Hartson L.L.P. Denver, Colorado Linda B. Schakel .......................................................................................................................................................... President-Elect Ballard Spahr Andrews & Ingersoll, LLP Washington, D.C. W. Jackson Williams ............................................................................................................................................................ Secretary Williams & Anderson LLP Little Rock, Arkansas Monty G. Humble .................................................................................................................................................................... Treasurer Vinson & Elkins L.L.P. Dallas, Texas John J. Cross III ........................................................................................................................................................................ Director Hawkins, Delafield & Wood Washington, D.C. Kristin H.R. Franceschi ............................................................................................................................................................Director Piper Rudnick LLP Baltimore, Maryland Meredith L. Hathorn ................................................................................................................................................................. Director Foley & Judell, L.L.P. New Orleans, Louisiana William A. Holby ....................................................................................................................................................................... Director King & Spalding LLP Atlanta, Georgia Carol L. Lew............................................................................................................................................................................... Director Stradling Yocca Carlson & Rauth Newport Beach, California John S. Overdorff .......................................................................................................................................................................Director Greenberg Traurig, LLP Phoenix, Arizona Walter J. St. Onge III ................................................................................................................................................................Director Palmer & Dodge LLP Boston, Massachusetts William J. Noth.......................................................................................................................................................................... Director Ahlers & Cooney, P.C. Immediate Past President Des Moines, Iowa Frederick O. Kiel ................................................................................................................................................... Honorary Director Cincinnati, Ohio Editor of The Bond Lawyer® ° ° Kenneth J. Luurs..................................................................................................................................................... Executive Director Chicago, Illinois Publisher of The Bond Lawyer® William L. Larsen ........................................................................................................................ Director of Governmental Affairs

Because opinions with respect to the interpretation of state and federal laws relating to municipal obligations frequently differ, the National Association of Bond Lawyers ("NABL") has given the authors who contribute to The Bond Lawyer®, and its editor, the opportunity to express their individual legal interpretations, opinions, and positions. These interpretations, opinions, and positions, whether explicit or implicit, are not intended to reflect any position of NABL or the law firms, branches of government, or organizations with which the authors and editor are associated, unless they have been specifically adopted by such organizations. For educational purposes, the authors and editor may employ hyperbole or offer suggested interpretations for the purpose of stimulating discussion. Neither the authors, the editor, nor NABL can take responsibility for the completeness or accuracy of the materials contained herein; readers are encouraged to conduct independent research of original sources of authority. The Bond Lawyer® is not intended to provide legal advice or counsel as to any particular situation. Errors or omissions should be called to the editor's attention: mail to 1095 Nimitzview Drive, Suite 103, Cincinnati, Ohio 45230-4341, or e-mail to fokiel@fuse.net.

The Bond Lawyer® ©2003 June 1, 2003

Washington, D.C.

The Bond Lawyer® ©2003 June 1, 2003

PRESIDENT'S COLUMN In this space, I have previously described NABL's mission and the many ways NABL has served its mem-bers — and the public finance practice generally — by pursuing this mission. Many members consider educa-tion and profes-sional develop-ment as the principal benefits of a NABL mem-bership. In fact, NABL's educational programs, such as the recent Tax and Securities Law Institute and the derivatives teleconference offered last fall, are unparalleled in the depth and relevance of their offerings. Through the years, NABL committees have also produced reports and model documents, such as the recently released 2003 edition of the Model Bond Opinion Report, which have enhanced our level of professionalism in the practice of public finance law. It is not only through these educational programs and other professional tools that NABL has improved, and continues to improve, the state of the public finance practice. As public finance lawyers, we do not practice in a vacuum, and NABL does not exist in a vacuum to serve its members. You are probably aware of the many instances in which NABL has provided valuable comments with regard to regulatory proposals. Beyond these comments in the regulatory arena, NABL has collaborated with other industry groups on numerous projects during the past two decades. Our committees, officers and staff have brought an important perspective and unique resources as they have commented, advised and participated in the initiatives of other groups. NABL projects have also benefited from the input and comment of market participants with different perspectives.

As members of NABL, we indirectly support these efforts, and our practices (and in many cases our clients) have benefited from these collaborative efforts. There are too many examples of past initia -tives and involvements to list in this column. In fact, during this "era of cooperation among the various associations and agencies in the public finance world" referenced by Past President Hobby Presley,* even the ongoing collaborative projects are too numerous to list completely. In any event, a description of just a few current initia -tives may be useful to illustrate my belief that NABL's involvement as a member of the broader municipal finance industry is an important aspect of its mission and brings significant value to its members. One project which comes immediately to mind is the NABL Legislative Proposal for Penalties in Lieu of Bondholder Taxation. The Proposal was released by the NABL Task Force on Alternative Dispute Resolution (the "NABL ADR Task Force") in November of 2001 as an effort to address certain consequences of the expanded IRS audit program. Among other things, the Proposal would eliminate bondholder exposure by making the issuer responsible for any penalties exacted by the IRS for viola tion of the tax law. The Proposal also provides a right of appeal for issuers (which is currently not available), and requires the IRS to establish a range of penalties at levels appropriate to the circumstances, taking into account actions in good faith. The Proposal has stimulated much discussion in the municipal finance industry and among NABL members. Recognizing the value of the NABL Proposal, the Debt Committee of the Government Finance Officers Association ("GFOA") has provided NABL with written comments and agreed to work

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*June 1, 2001, President's Column, The Bond

Lawyer®

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with the NABL ADR Task Force to further develop the Proposal. Two changes key to the GFOA's support of the Proposal are first, to make the Proposal's new scheme elective at the option of an issuer rather than mandatory, and second, to provide more detail on the range of penalties in the legislation, rather than directing the IRS to develop those details. The NABL ADR Task Force is currently revising the Proposal to address the GFOA comments and will continue discussions with the GFOA when a revised Proposal is available for consideration. As more issuers have experience with the IRS audit program, the issuer community may not just support but may actively seek the reform sought to be achieved by the Proposal as revised based on collaboration between NABL and the GFOA. Other NABL projects, such as the 2003 Edition of NABL's Model Bond Opinion Report, have benefited from the input and comments of market participants. The Report, released in February, is designed to keep bond practitioners apprised of general developments in prevailing opinion practice, attempts to clarify what the bond counsel opinion does do (that is, express a professional judgment at a given point in time) and what it does not do (for example, it does not guarantee that a court would agree with the conclusion reached in the opinion or that post-closing events will not occur to change the outcome). In the process of its review and revisions to the Report, the NABL Opinions and Documents Committee solicited and considered the thoughtful input of numerous industry partici-pants. Through this collaborative process, the Committee benefited by understanding many different perspectives, and other industry groups learned more about the Report and the Committee's focus. A similar process is underway with another NABL project. Last fall, NABL formed the Task Force on Rule 2a-7 Documents to address concerns raised about a perceived gap in current municipal market practices. SEC Rule 2a-7 regulates money market funds, which are significant investors in municipal bonds. Money market funds are required by SEC Rule 2a-7 to evaluate securities in their portfolios at the time of acquisition and periodically thereafter for compliance with the Rule. The Task Force

expects to develop (1) a discussion of key issues affecting Rule 2a-7 eligibility, (2) sample language to address these issues, and (3) a model trust indenture illustrating the interaction of provisions addressing these issues. As a part of its process, the Task Force plans to solicit input from different groups represented in municipal finance trans-actions. The collaboration of the Task Force with other industry participants will be a significant step to development of a useful and thoughtful final product. NABL has also participated in the Muni Council since its original gathering during the spring of 2001. As an informal coalition of municipal industry groups, the Muni Council has been focused on collaborative efforts to improve disclosure in the municipal securities market. The predominant focus of the Council to date has been on the inadequacies of the current NRMSIR system for the dissemination of continuing information to the secondary market. Among the complaints are the multiple filings required by issuers, problems with indexing and then locating information once it has been filed, and problems with access by and cost to investors. An initial consensus of the Muni Council last year formed around the recommended use of a generic coversheet to be used with all filings and the use of CUSIP numbers as identifiers for indexing. Early this year, the Muni Council issued an RFP to solicit proposals to develop and operate a new system to supplement the existing NRMSIR system. The new system would establish one location to which issuers could submit all filings (eventually in an electronic format) — referred to as a "central post office." Filings would then be redelivered by the new system to the NRMSIRs and SIDs to satisfy compliance with Rule 15c2-12. One option would be for the new system to serve not only as a central post office but also as a repository and retain and index a copy of each filing, making such filings electronically available directly to investors. Key undecided issues include (1) whether the new system will only be a central post office or also include a repository, (2) how will this new system be funded, (3) who will own, control and/or govern the operations of this system (of course, the Muni Council itself is not a sepa-rate organization), and (4) what contractual

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arrangements will control the development and operation of the new system. NABL is involved in the analysis of some of these open issues. We support the efforts of the Muni Council to develop a market-based (rather than regulatory) solution to the problems with the existing NRMSIR system, thereby facilitating better ongoing communication among market participants. I believe that all participants involved in municipal transactions (including NABL members) will benefit from the work of the Muni Council in attempting to address these existing problems. These are just a few examples of NABL projects involving or including collaboration with others in the municipal marketplace. By this aspect of its mission, NABL performs an important service to the municipal finance industry generally and benefits its members, their practices, and their clients. Helen C. Atkeson May 8, 2003

WASHINGTON SAGA Greetings from Washington. Whether you believe the war in Iraq was the right war for the right reasons, the right war for the wrong reasons, or the wrong war for whatever reasons, the immediate political impact was certain — the remarkable victory achieved by our troops in Iraq vindicated the Bush administration war strategy, reaping greater popularity than ever for President Bush. Democrats, who had begun voicing criticisms of Administration foreign policy during the build-up to the war, now find Mr. Bush practically unassailable in the foreign policy area. The continuing war on terrorism also works to the advantage of the White House because Democrats must be mindful that any criticism is not perceived as unpatriotic. Unless the peace in Iraq goes very badly, a challenge to Bush administration leadership on foreign policy grounds during the 2004 election will be very difficult. Notwithstanding, the lessons of the 1992 election defeat suffered by the first President Bush, who

was also victori-ous in a Middle East war, are not lost on the current Bush administration. Determined not to see history repeat itself, the White House is acutely aware that the Admin-istration’s main point of political vulnerability coming into the next election is the economy, which continues to sputter. This awareness gave special urgency to passing the economic stimulus bill signed by the President just yesterday. The President was quick to capitalize on the positive momentum of a victory in Iraq, crisscrossing the country with a renewed focus on securing passage of his economic stimulus plan. However, it became increasingly clear during Congressional consideration of tax cut legisla tion that the President would not get a $726 billion tax cut in either the form or the amount he proposed back in January. The April House budget resolution called for tax cuts of $550 billion. House Ways and Means Committee Chairman Thomas (R. CA) devised a plan to shift taxation from investment income that was different from the Administration’s, lowering the tax on dividends and capital gains rather than eliminating the tax on corporate dividends to shareholders, as the President had wanted. In the Senate, Republican leaders struggled to accommodate the President’s proposal to eliminate the double taxation of corporate dividends but were handcuffed by their budget reconciliation agreement with key moderate Senators to hold the size of tax cuts to $350 billion. The House passed its tax cut bill on May 9. The Senate followed with its own version on May 15. The centerpiece of the $550 billion House bill provided a reduction to 15 percent of the tax rate on dividends and capital gains made on the sale of property and stocks. In contrast, the smaller $350 billion Senate bill managed in tortuous fashion to

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include truncated versions of many of the major elements of the President’s tax cut proposal, including the elimination (but only through 2006) of the income tax on corporate dividends. With Congress set to leave town for Memorial Day recess, the stage was set last week for intense efforts to reconcile the divergent House and Senate bills. The White House went into a full court press to ensure passage of an economic stimulus bill before recess and assumed a central role in brokering a compromise. At the beginning of the week, the President told bickering Republican leaders from both houses to get a bill accomplished by week’s end. He signaled willingness not only to accept a much smaller tax cut, but also to give up on his cherished goal of eliminating the dividend tax. Vice President Cheney was brought in to smooth tensions among the acrimonious conferees, particularly Ways and Means Chairman Thomas and Finance Chairman Grassley (R. IA), and secure wavering votes in the Senate. Reports surfaced through the week that efforts at compromise might fall short, but in the end, the conferees reached agreement on a $350 billion tax cut package that passed both houses on Friday, May 23. The House vote was 231 to 200, with seven Democrats joining the Republican majority in favor and only one Republican (Leach of Iowa) voting with the rest of the Democrats against. The Senate vote was considerably closer. Vice President Cheney broke the tie 51 to 50, as two Senate Democrats (Nelson of Nebraska and Miller of Georgia) voted with Republicans for, and three Republicans (McCain of Arizona, Snowe of Maine, and Chafee of Rhode Island) voted with Democrats against. The Jobs and Growth Tax Relief Reconciliation Act of 2003 Major highlights of the tax cut bill include: · Acceleration of across-the-board cuts in income tax rates that were scheduled to take effect in 2006; · Reduction of the top rate on dividends and capital gains to 15 percent; for the lowest two brackets, a 5 percent initial rate becomes zero in 2008;

· Child tax credit rises to $1000 in 2003, with varying credit amounts in subsequent years; · Increase in the standard deduction for married couples filing jointly; · Increase to $100,000 in the amount of equipment expenses that small businesses can write off; and · $20 billion in aid to states over two years, including $10 billion for Medicaid assistance. The $350 billion tax cut bill is clearly a retreat from the stimulus package originally sought by the President. Still, it is a massive tax cut containing large elements of what the President wanted. While acknowledging the risks of gambling that a tax cut strategy will cure the nation’s economic woes, Republicans cheer the bill as a victory for the President. This seems a fair assessment. Mr. Bush followed a familiar political game plan to win the second major tax cut of his administration. He staked out the playing field early on the economic stimulus issue, effectively framing the debate not as a question of whether there should be a tax cut, but rather how big a tax cut there should be. He ultimately prevailed in Congress by making strategic concessions on the size of the tax cut and on issues such as elimination of the double taxation of corporate dividends. For the moment at least, Mr. Bush has seized the economic high ground. Passage of the tax cut bill means that stimulus provisions such as accelerated income tax rate cuts and child credit refunds will take effect almost immediately. The President can take credit for any resultant short term economic upswing and reassure the electorate that he is trying his best to jump-start the economy. The President’s philosophy seems to be “better action than inaction,” which may mitigate the fallout if the desired stimulus doesn’t kick in before the election. How did the muni bond sector fare in the tax cut bill? All in all, not badly. As originally proposed, the President’s plan had triggered fears that the elimination of tax on corporate dividends would have a negative impact on the market for tax-exempt bonds and on state and local governments. If enacted, the proposal might have increased competition for municipal bonds vis-à-vis

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corporate stock and lessened demand among corporations for municipal bonds because corporations would not be able to pass interest income from tax-free municipal bonds to shareholders in the form of dividends. These concerns lessened when the House rate-cutting approach to dividend tax relief took a different tack from the President’s plan to eliminate taxation altogether and then when the Senate dropped the potentially harmful excludable dividend account concept. The final bill, expert opinion suggests, will have little impact on municipal bonds. Financially struggling state governments got $20 billion in relief from the tax cut package. Although they certainly would have preferred more money, they fared better under the compromise final bill than they would have under the tax cut bill that passed the House, which offered no relief to state governments. Local governments, however, expressed dismay that the final bill, unlike the Senate approach giving $4 billion to local governments, gave control of the entire relief package to the states. Other municipal bond-related provisions also failed to advance in this tax bill, falling along the wayside either in the Conference Committee considering final tax cut legislation or on the floor of the Senate earlier this month. The Conference Committee rejected a one-year extension of the QZAB program through 2004, as well as a narrowly targeted provision that would have permitted an additional advance refunding of Arkansas school bonds. Both measures had been passed by the Senate. The Committee also declined to adopt a Senate-approved provision backed by The Bond Market Association that would have clarified treatment of synthetic tax-exempt tender option bonds. A proposal to allow states and local governments to do an additional advance refunding was considered and rejected during floor debate on the Senate bill, and never advanced to the Conference Committee. The second advance refunding proposal was similar to S. 271, a bill introduced by Senators Smith (R. OR) and Corzine (D. NJ), and H.R. 1076, introduced by Representative Toomey (R. PA) in the House. The House did not consider a second advance refunding proposal in connection with its tax cut bill. Debt Ceiling Raised

Responding to strong appeals from Treasury, which warned of “unthinkable” consequences if Congress did not act to raise the debt ceiling by the middle of this week, the Senate voted to increase the nation’s debt limit by nearly $1 trillion. The Senate acted shortly after adopting the $350 billion tax cut legislation. The vote put Senate Republicans in a politically awkward spot, which their Republican colleagues in the House had managed to avoid. Thanks to the so-called “Gephardt rule,” when the House approved its budget resolution in April, a bill increasing the debt ceiling was automatically sent to the Senate. This maneuver, which was pioneered by Democrats when they were in the majority, spared House Republicans the need to hold a separate, politically sensitive, vote to approve an increase in the debt ceiling. By waiting until the House left town after approving the tax cut bill, Republicans leaders knew the odds favored obtaining a debt ceiling increase. They also knew the Democrats would make it as politically embarrassing as possible. The Republicans got their increase, but to avoid having to send an amended bill back to the House, they had to vote on the record against Democratic amendments seeking to limit the debt ceiling. How likely is it that Republicans may be reminded again in 2004 that they opposed proposals to extend unemployment benefits and adopt a non-binding resolution opposing any cuts in cost-of-living increases for Social Security benefits? With Congressional passage of the increase in the debt limit, Treasury quickly announced that it would resume the sale of State and Local Government Series (SLGS) obligations by accepting subscriptions for new issues of SLGS effective May 27. SLGS issuance will resume on June 2. NABL Simplification Recommendations to Hill & Top Ten List to Treasury NABL recently sent its recommendations for simplifying the tax-exempt bond provisions of the Internal Revenue Code to members of the House Ways and Means and Senate Finance Committees. We urged Congressional tax-writers to consider the NABL simplification

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recommendations in connection with pending tax legislation as a low-cost and effective means of helping State and local governments cope with the rising cost of maintaining their traditional programs and services to citizens in the face of deficits and declining revenues. NABL's General Tax Committee developed the tax-exempt bond simplification recommendations last year for presentation to the Treasury Department. NABL Board Member John J. Cross III was the principal draftsman. The NABL tax simplification recommendations on tax-exempt bonds can be found on the NABL website. NABL's General Tax Committee also recently submitted to Treasury and IRS its “top ten” recommendations for the 2003-2004 Treasury-IRS priority guidance plan. Topping the NABL recommended list was finalization of proposed regulations, including proposed regulations relating to (a) investment-type property, (b) refundings, (c) hospital acquisitions, and (d) fees for broker’s or similar commissions with respect to guaranteed investment contracts and other types of investments. NABL offered assistance on guidance projects and reiterated that, while NABL supports a vigorous and fair enforcement program, we continue to believe that the proper method of issuing new guidance in the tax-exempt bond area is through the issuance of regulations that provide an opportunity for comment and, where necessary, other published guidance. The NABL priority guidance plan recommendations are also on the NABL website. Muni Council Update NABL has participated in the Muni Council, an informal coalition of a number of industry groups looking into ways to improve secondary market disclosure, since its formation two years ago. Last year, the Muni Council agreed to develop a request for proposals to determine the cost and mechanics of establishing a centralized “post office” where all issuers could file their disclosure documents for electronic distribution to the Nationally Recognized Securities Information Repositories and State Information Depositories. The central post office would also create a filing index, as well as systems for acknowledging receipt of issuer filings and notifying issuers of when disclosure documents are due. The Council

received preliminary indications from the SEC that such a facility could be established and operate without the necessity of a Rule 15c2-12 amend-ment. The Muni Council issued the RFP in late January, also asking respondents to consider the additional step of forming a NRMSIR. In March, the Council met with the ten respondents to the RFP, identifying five of the ten firms as potential providers of a central post office/NRMSIR facility. The Muni Council met again on May 28 to consider structural and funding issues related to forming a central post office/NRMSIR facility. At this meeting, the Council generally agreed that its next step should be to consider formation of an entity separate from the Muni Council to handle contractual and operational arrangements for any central post office/NRMSIR facility that may be formed. This separate entity also would select any outside contractor for providing the central post office/NRMSIR facility. Discussions regarding funding of any facility and any continuing advisory role to be played by the Muni Council are ongoing within the Council. NABL's representatives on the Muni Council are Helen C. Atkeson, NABL President, and Linda B. Schakel, NABL President-Elect. NABL Board member Walter J. St. Onge III and I attend meetings as observers. The Muni Council includes, among other groups, the American Bankers Association, Government Finance Officers Association, Investment Company Institute, National Council of State Housing Agencies, National Federation of Municipal Analysts, and The Bond Market Association. NASACT Meeting on Interim Disclosure The National Association of State Auditors, Comptrollers, and Treasurers recently hosted an informational meeting on issuer disclosure of financial and operational information on a basis more frequent than annually. A diverse group of market participants attended the meeting, including, among others, representatives from government agencies that compile economic data from state and local governments, market analysts, and various issuers. NABL Treasurer Monty G. Humble and I attended for NABL. The meeting featured discussion on interim financial disclosures

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that some market participants, such as the states of Wisconsin and Oregon, currently provide on a voluntary basis, and on the possibility that other issuers might want to consider some form of interim disclosure. While information users such as analysts applauded the concept of more fre-quent disclosure, concerns were raised about whether there was a market demand for interim disclosure; whether many issuers have the resources or the real need to provide such disclosure; and about the importance of distin-guishing between the legal obligation to disclose and voluntary disclosure. The meeting resulted in no consensus or recommendations on the issue of interim disclosure. NASACT plans to prepare a paper summarizing the meeting and the views expressed for participant comment later in the year. Notes on the Regulators William Donaldson continues to draw praise from all quarters with his initial performance as chairman of the SEC. His selection of William McDonough, president of the Federal Reserve Bank of New York, to become Chairman of the Public Company Accounting Oversight Board, showed a deft political touch that seemed to elude his predecessor, Harvey Pitt. There is no doubt, however, that Congress will be watching how Mr. Donaldson handles his formidable task at the SEC, which is described by Senate Banking Committee Chairman Richard Shelby (R. AL) as being no less than “restor[ing] investor confidence to the capital markets.” Of particular interest in coming months will be an SEC initiative announced by Chairman Donaldson to review securities industry self-regulation. Self-regulatory organizations, which have long played a central role in securities market regulation, have come under fire for their failure to prevent Wall Street misconduct. Mark Everson was confirmed by the Senate on May 1 as IRS Commissioner. He has realigned top IRS management structure to separate opera-tional and enforcement oversight. Commissioner Everson created a new deputy commissioner position. Deputy Commissioner Robert Wenzel will supervise IRS service and enforcement activities and Deputy Commissioner John Dalrymple will supervise IRS operations and support. Evelyn Petschek continues as

commissioner of the Tax-Exempt and Government Entities Division. Referring to Revenue Rulings in the corporate reorganization area, IRS Chief Counsel B. John Williams said in an address to the ABA Section of Taxation on May 9 that the guidance is an example of the agency's continuing efforts to issue rulings that will answer questions on a specific issue for a number of taxpayers, rather than providing guidance individual by individual. Maybe some of that guidance will come the way of the tax-exempt bond area. Vicky Tsilas, formerly of Ballard, Spahr, Andrews & Ingersoll, LLP, in Washington, has joined the IRS Chief Counsel’s Office in Washington. Ms. Tsilas was a frequent panelist at NABL seminars, particularly in the ethics area. We wish her well at Chief Counsel. Website/NABLNET Update We encourage you to visit the NABL website at www.nabl.org, where we frequently post legislative, regulatory, and other materials that are substantively pertinent to the bond law practice. Recently, for example, we posted Treasury’s notice that the SLGS window would be reopening this week. We also send members NABLNET Alerts of significant developments. Some recent NABLNET Alerts have included notice of the NABL Tax Committee’s Recommendations for the 2003-2004 Treasury-IRS Priority Guidance Plan, the IRS proposed rules regarding Application of Private Activity Bond Tests to Refunding Issues, and the Proposed GASB Technical Bulletin regarding Derivative Risk Disclosure. Additionally, we sent an Alert to members inviting nominations for NABL Officers and Directors for 2003-2004. If you are not receiving the Alerts and you would like to, please send your e-mail address to GovernmentalAffairs@nabl.org with NABL-NET SUBSCRIBE in the subject line. Also, if you change e-mail addresses, please let us know so we can update our records. As always, we welcome your feedback on the website and on our NABLNET Alerts. Words & Phrases

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I’m still trying to figure out how to use some of my favorite phrases from the war in Iraq in my column. Having heard phrases like “shock and awe,” “embedded,” and “weapons of mass destruction” (familiarly shortened to “WMD”) so much over the last few months, it would be a shame if they just faded away. Let’s see. How to translate these colorful expressions into some-thing meaningful for Washington Saga. Perhaps I could use “shock and awe” to describe the sequential emotional and verbal reactions of my TBL editor — first, his response when I tell him I’ll get my column in on time, followed, some time later, by his response when I miss the deadline again. “Embedded?” Could be a reference to the coal mining provisions of the pending energy bill or to legislation curbing importation of foreign mattresses. “WMD?” Those familiar initials could just as easily stand for “worries of municipal disclosure.” Then again, perhaps not. Bill Larsen Washington, D.C. May 29, 2003 ACTIONS BY THE BOARD OF DIRECTORS ON FEBRUARY 10 AND 12, 2003 The Board of Directors of the Association met on February 10, 2003, by telephone conference call. President Helen C. Atkeson presided. Also present were Linda B. Schakel, President-Elect; W. Jackson Williams, Secretary; Directors John J. Cross III, Kristin H.R. Franceschi; Meredith L. Hathorn, William A. Holby, Carol L. Lew, John S. Overdorff and Walter J. St. Onge III; Immediate Past President William J. Noth; Honorary Director Frederick O. Kiel; Kenneth J. Luurs, Executive Director; William L. Larsen, Director of Governmental Affairs; and J. Foster Clark, Chairman of the Opinions and Documents Committee. Treasurer Monty G. Humble was absent. President Atkeson asked Mr. Clark to present the revised Model Bond Opinion Report to the Board, updated from the draft which had been reviewed by the Board at its January 31, 2003, meeting. During the process of this review,

further revisions were suggested and refinements and modifications to the report were made. Mr. Clark advised that he would prepare a further revised report for the Board's consideration and President Atkeson called for another meeting of the Board on February 12 for final consideration and review of the Report of the Opinions and Documents Committee on the Model Bond Opinions Report. The Board of Directors met again on February 12, by telephone conference call, with the same persons present as were present at the telephone conference call meeting held on February 10, with the following exceptions: Treasurer Monty G. Humble was in attendance for the call, and Director William A. Holby was absent. President Atkeson asked Mr. Clark to review the refinements which he had made to the Report since February 10. Following a thorough review of the Report, upon motion by Treasurer Humble, seconded by Director St. Onge, the Board unanimously resolved that the Board provide to the Committee on Opinions and Documents its final comments on the Model Bond Opinions Report, express its gratitude for their hard work, and request that they prepare the final version for release. Thereafter, the Board discussed mechanics for the rollout of the Report, with highlights scheduled to be reviewed with interested industry groups and the press on February 13 and February 14, as needed, and the Report itself to be released to the members via NABLNET on February 14. W. Jackson Williams Secretary

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ACTIONS BY THE BOARD OF DIRECTORS ON FEBRUARY 19, 2003 The Board of Directors of the Association met on February 19, 2003, in Hollywood, Florida. President Helen C. Atkeson presided. Also present for the meeting were: Linda B. Schakel, President-Elect; Monty G. Humble, Treasurer; Directors John J. Cross III, Kristin H.R. Franceschi, Meredith L. Hathorn, William A. Holby, Carol L. Lew, John S. Overdorff and Walter J. St. Onge, III; Immediate Past President William J. Noth; Honorary Director Frederick O. Kiel; Kenneth J. Luurs, Executive Director; and William L. Larsen, Director of Governmental Affairs. W. Jackson Williams, Secretary, was absent due to illness. Immediate Past President Noth served as Secretary of the meeting. Treasurer's Reports Treasurer Humble presented the fourth quarter and year-end results for 2002, which had previously been provided to the Board. The Association had a strong year-end, he noted, primarily as a result of higher than anticipated royalties from Lexis-Nexis and a reduction in expenses in a number of categories. Investment income, however, was down. At the request of Treasurer Humble, Exec-utive Director Luurs then led a discussion of the proposed 2003 budget. Among other matters, the 2003 budget contemplates a new staff position (Assistant Manager, Education and Meetings) for one-half of the year. The budget also reflects the initial costs associated with the replacement of the Association's financial reporting and membership software. The initial expenditures will relate to the development of a request for proposals and contract development, with which Directors Franceschi and Lew are expected to assist. Specific expenditures will be separately presented to the Board for approval, and are expected to be paid from existing capital reserves. At the conclusion of this punctilious review, it was moved by President-Elect Schakel, seconded by Director Franceschi and unanimously approved, that the matter of the 2003 budget be delegated to the Executive Committee to make the final conforming

changes in accordance with the Board's discussion and thereafter to approve the same. The adopted budget is expected to be provided to the Board at its March meeting. Treasurer Humble then led a discussion of the Associa tion's reserves and the existing investment policy with respect to the same. Treasurer Humble provided the Board with a copy of a letter received from a consultant which has been engaged to assist with the reserve study, suggesting that the Association give consideration to allocating the current reserves among several categories, each having its own purpose and investment strategy. The consultant's recommendations were considered at length, following which Treasurer Humble agreed to present the Board with a report and proposed reserve fund policy for consideration at the March meeting, discussing the purposes of the several internal reserves that could be designated, as well as the range of amounts that could be allocated to each. If the Board determined to proceed in this fashion, he noted, the Association's investment policy would need to be substantially revised. Treasurer Humble also reported on recent changes he and Executive Director Luurs had implemented with respect to the Association's existing investments. Investment income is expected to be flat during 2003. Education Committee Director Hathorn then led the Board in a discussion of a revised form of Educational Program Policy for the Association, to replace the current seminar policy that has been in effect for a number of years. As revised, the policy encompasses the broader scope of the Association's educational efforts and the different factors that bear on the formation and maintenance of educational programs. Following discussion, Director Hathorn agreed to provide the Board with a final form of Educational Program Policy to be considered for approval at the March meeting. Securities Law and Disclosure Committee Director St. Onge and Treasurer Humble then led a discussion of the recent request by Martha

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Haines of the Securities and Exchange Commission for the Association to assist with the development of a more “user-friendly” form of continuing disclosure undertaking. There is a need, it was agreed, to educate issuers on the importance of the post-closing obligations they incur. Although such obligations may include continuing disclosure obligations, tax requirements also are implicated and deserve particular attention. Following discussion, President Atkeson agreed to visit with representatives of the GFOA about this matter and to express the willingness of the Associa tion to participate in such efforts. Opinions and Documents Committee Director Franceschi reported on the public release on February 14, 2003, of the revised Model Bond Opinion Report. J. Foster Clark, Chair of the Opinions and Documents Committee, is expected to address the general session at the inaugural Tax and Securities Law Institute the following day. The Committee was accorded particular thanks for its extensive and thoughtful revision of the report. Meetings With Regulators and Industry Representatives The Board devoted the remainder of the day to separate meetings with Martha Haines (SEC), Steve Watson (Treasury), Ben Watkins (GFOA), former President Hobby Presley (in a discussion relating to the Association's legislative proposal), Hill Feinberg (Chair of the MSRB) and Mr. Watkins (who also serves on the MSRB). William J. Noth Immediate Past President and Secretary of the meeting See you in Chicago? ACTIONS BY THE BOARD OF DIRECTORS ON MARCH 13 AND 14, 2003 The Board of Directors of the Association met on March 13, 2003, in Tucson. President Helen C. Atkeson presided. Also present for the meeting were Linda B. Schakel, President-Elect; W.

Jackson Williams, Secretary; Monty G. Humble, Treasurer; Directors John J. Cross III, Kristin H.R. Franceschi; Meredith L. Hathorn, William A. Holby, Carol L. Lew, Walter J. St. Onge III, John S. Overdorff; Immediate Past President William J. Noth; Honorary Director Frederick O. Kiel; Kenneth J. Luurs, Executive Director; and William L. Larsen, Director of Governmental Affairs. Executive Director’s Report Executive Director Kenneth J. Luurs made the following report to the Board: The membership of the Association remains steady; active members as of the current meeting were 2,999, up from 2,981 the same time last year. He advised that we will proceed with a new application for the Association to become an affiliated member of the American Bar Associ-ation. In connection with membership, Mr. Luurs advised that his staff will make revisions to the membership renewal application form to develop appropriate information to determine the proper classification of membership for the respective members. Upon due consideration, the Board unani-mously voted to reduce the dues for retired members to $50.00 annually. Mr. Luurs reported that the Tax and Securities Law Institute had been well attended, with the expected 300 attendees and 53 faculty members. At Mr. Luurs’ request and after consideration, the Board voted to approve the addition of a staff member to the NABL National Office. This new employee would assist the work of current employees. Report of the Education Committee Director Hathorn, liaison to the Education Committee, provided the Report of the Education Committee to the Board. She led the Board through a discussion of the Association’s Educational Program Policy which had been

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revised to reflect revisions made at the February Board meeting. The Board had a discussion concerning the appropriate policy concerning ownership or license of material submitted for Association publications. The Board asked Director Holby to propose an appropriate policy for the Association and to report his recommenda-tions at the next meeting of the Board. There was also a discussion concerning outlines developed by members for educational panels and the Board granted the Education Committee the right to approve licenses for such outlines on a case-by-case basis. Upon motion by Director Franceschi, seconded by Director Humble, the Educational Program Policy was approved with the changes made to it at this meeting. With regard to the Tax and Securities Law Institute, the Education Committee recommended that the sites for future institutes be Las Vegas in 2004 and San Diego in 2005, and that they be scheduled for dates within the last two weeks of February and the first week of March. Executive Director Luurs was requested to follow through on that basis and to report back to the Education Committee and the Board the arrangements which were possible during those time periods. Bond Attorneys’ Workshop Director Franceschi, Chair of the Bond Attorneys’ Workshop Steering Committee, reported that the Steering Committee met on February 27 and 28 to plan the 2003 Workshop. Director Franceschi said that the 2003 general session would return to its former structure, with no presentation by government speakers. After a general discussion on the subject, the Board determined that with respect to 2003 Bond Attorneys’ Workshop that regulatory persons would be invited, as before, but that one tax enforcement session would be for members only. Director Franceschi was asked to coordinate with Mr. Larsen the invitations to be extended to government participants. Director Franceschi reported that on the Wednesday morning of the 2003 Workshop another Technology Workshop would be held. Report of the Director of

Governmental Affairs Director of Governmental Affairs Williams L. Larsen reported that he had participated and assisted in the introduction of the Model Bond Opinion Report to Federal regulators and to the press. Mr. Larsen reported on various subjects, including the report of the Inspector General of the Treasury and activities of the Muni Council. A Muni Council meeting will be held later in the month to further develop its current goals. Securities Law and Disclosure Committee Director St. Onge, liaison to the Securities Law and Disclosure Committee, led a discussion concerning the appropriate disclosure of derivatives. He reported that most of the public finance associations were currently dealing with this issue and working to develop policies concerning derivatives. Director St. Onge said that he proposes to meet with representatives of GFOA to discuss credit risks of counterparties, basis risks of swaps, termination penalties, and disclosure issues concerning all of these matters. The Board had a general discussion concerning the growing use of derivatives and considered that the Committee’s activities in pursuing a continuing discussion with other public finance associations concerning the utilization of derivatives and disclosure issues was very useful. Visit your Website: www.nabl.org. Rule 2a-7 Task Force Treasurer Humble, liaison to the Rule 2a-7 Task Force, reported that the Task Force proposes to develop a paper which can be presented to other interested groups. To that end he proposes that the Task Force will have a completed report ready for approval at the September meeting of the Board. Legal Assistants Committee Director Franceschi, as liaison to the Legal Assistants Committee, reported that the handbook is in the final stages of completion and will be

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submitted to the Board of Directors at its May meeting for its approval. Director Franceschi discussed the proposed Legal Assistants session to be held during the Fundamentals Seminar. She reported that the first Legal Assistants telephone conferences on tax aspects of public finance were very well received. They were presented by Steve Gerdes in De-cember, 2002, and January, 2003. Other topics are currently being considered for future teleconferences. At the Fundamentals Seminar, there will be a separate session on “closing” which will be offered as a breakout session to both legal assistants and attorneys. Report on Governmental Accounting Standards Advisory Council (GASAC) Director Overdorff, liaison for GASAC activities, reported that the Association's representative, William L. Hirata, is currently attending the initial 2003 GASAC meeting. Mr. Overdorff noted that the GASAC derivative disclosure paper has a working draft due the second quarter of 2003, with a final issue date for the same time. Mr. Overdorff advised that he will promptly get a report of GASAC's current meeting and will distribute any report it provides concerning derivative disclosure. Treasurer’s Report Treasurer Humble reported that following the direction of the Board at its February meeting, the Executive Committee had completed a final review of the 2002-2003 budget and had approved it, with very slight revisions. The budget, as ap-proved, was presented to the Board. Mr. Humble then led the Board through a discussion of a proposed consulting contract to develop specifications for the Association's software needs. The contract proposes approx-imately 200-250 hours of work with a cost to the Association of some $20,000-$30,000, to be performed between the current date and late summer, 2003. The Board requested certain assurances concerning conflicts of interest and confidentiality of the work product. Upon that basis, Mr. Humble moved the approval of the contract, which was seconded by Director St.

Onge and approved unanimously. Mr. Humble will report on the status of the contract and the performance of the consultant at the May Board meeting. Mr. Humble then led the Board through a discussion of the investment consultants’ report, which was very detailed with investment specifics for each fund. Mr. Humble was requested to make the revisions which were discussed at the meeting and to report back to the Board at his next opportunity. Professional Responsibility Committee Director Holby, liaison to the Professional Responsibility Committee, reported that the Committee's paper concerning indemnities proposed to bond counsel was nearing comple tion. There continues to be a discussion concerning the ethical considerations implicit in any such request. Director Holby then led the Board through a discussion of the proposed new edition of The Function and Professional Responsibilities of Bond Counsel. Since the last publication of Function (1995), there have been a new Model Bond Opinion Report, the adoption of the Sarbanes-Oxley legislation, and the work of the ABA Task Force on Professional Responsibility. Mr. Holby was directed to report at the May Board meeting on prospects for the new edition, including the proposed size and makeup of a committee to execute it. Section 103 Editorial Board Director Lew, liaison to the Section 103 Editorial Board, reported that it continues to work on incremental improvements to Federal Taxation of Municipal Bonds and that a schedule had been developed in consultation with the Lexis-Nexis staff for publication of looseleaf supplements and deskbook revisions for 2003. The Board was able to offer a teaching session at the recent Tax and Securities Law Institute on the use of the website and CD-rom products. The Board intends to offer a similar training session at the upcoming Fundamentals Seminar. The Board continues to work on the protocols for weekly or daily updating of the website with the newest Section 103

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primary source materials and hopes to be able to present this product in the near future. W. Jackson Williams Secretary

NATIONAL OFFICE NEWS When I first came to NABL, one of the things I noticed was how much good will exists among members of NABL. When hiring a new meeting planner, I told her one of the things she would enjoy is the good nature of the membership. I am sure she thought I was stretching the truth, but it was not long before I would get regular reports that “these people are really nice.” This did not represent news to me, but it was heartening to hear my opinion validated. In speaking with members, I have often brought this up. Why is it that these folks do so well with the “plays well with others” component of their career? Their answer is that the job requires people with some maturity of judgment and demeanor. There are often complex issues and equally complex personalities involved, requiring patient, thoughtful communicators to get the job done. We are currently approaching NABL’s 25th anniversary. We hope to have a few special events and features during the anniversary year. If you have a few moments, I would love to hear from members as to how NABL has helped you — or a favorite anecdote. NABL has had some great people associated with it over the years. This summer we will bringing many of the Association’s leaders together to further develop some of its history. Look forward to hearing more later in the year. Coming up next is the Bond Attorneys’ Workshop. Kristin Franceschi has been working closely with a great group of people on the Steering Committee to get this program off the ground. A marathon runner and multifaceted

athlete, Kristin is ready for this challenge. Mark your calendars for the September 17-19 event. This follows a very successful Fundamentals Seminar we held in Philadelphia. Kudos to a great faculty and especially to Chuck Shimer who orchestrated this event. We are grateful to Chuck and all of the folks who worked to make this seminar a success. Finally, we have some copies of the reference book for the Fundamentals Seminar and are selling them to members at a discount. Please check out the website at nabl.org if you think you might be interested. Kenneth J. Luurs Executive Director May 8, 2003 See you at the Bond Attorneys' Workshop? OFFICER AND DIRECTOR CANDIDATES SOUGHT Members who wish to be considered for nomination as officers or directors of the

Association, or who wish to propose other members for nomination, are invited to contact 2003 Nominating Committee Chair Immediate Past President William J. Noth, Ahlers & Cooney, P.C., 100 Court Avenue, Suite 600, Des Moines, IA 50309-2231

(e-mail wnoth@ahlerslaw.com). Members may also contact other Committee members: Helen C. Atkeson, Eric E. Ballou, Thomas K. Downs, or Edwin G. Oswald. Submissions should be received by July 15.

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FRIEL MEDAL NOMINATIONS SOUGHT Nominations of recipients of the Associa tion's Bernard P. Friel Medal should be submitted not later than July 1 to Director of Governmental Affairs William L. Larsen, 601 Thirteenth Street, N.W., Suite 800 South, Washington, DC 20005-3875, or by e-mail to wlarsen@nabl.org. The Friel Medal, a high-relief bronze cast of the Association's original seal, may be awarded annually for distinguished service in public finance. Nominees need not be members of the Association, or lawyers, and may not be members of the current Board of Directors. Prior recipients (some posthumous) are Charles P. Carlson (1983), Russell C. Dikeman (1984), Daniel B. Goldberg (1985), Catherine L. Spain (1986), Manly W. Mumford (1987), Huger Sinkler (1987), James W. Perkins (1988), Robert S. Amdursky (1990), Thomas S. Currier (1991), Beryl Anthony, Jr. (1992), Sharon Stanton White (1993), Robert Dean Pope (1994), Joseph H. Johnson, Jr. (1997), Austin V. Koenen (1998), Amy K. Dunbar (1998), Julianna Ebert (1999), Richard H. Nicholls (2000), Robert J. Kutak (2000), and Harold B. Judell (2001). No Friel Medal was awarded in 1989, 1995, 1996, or 2002.

FEDERAL SECURITIES REGULATION© Not one of the five Commissioners of the Securities and Exchange Commission is a holdover from the days of former Chairman Arthur Levitt. All five however have recently received a re-fresher course in one of the focal points of the former Chairman’s tenure: alleged problems in municipal market practices. The appeals of two earlier decisions of administrative law judges have placed the municipal market in front of a Commission otherwise occupied with numerous cases of alleged corporate fraud and broker-analyst misconduct, implementation of a raft of regulation stemming from last summer’s Sarbanes-Oxley Act, and the task of hiring, training, and putting to work hundreds of new attorneys funded by increased appropriations. On April 23, 2003, the Commission heard oral argument in the appeal by Wheat, First Securities, Inc. f/k/a First Union Capital Markets Corporation (“First Union”), a registered broker-dealer that conducted a municipal securities business, and its former assistant vice-president, Teressa L. Cawley, a registered municipal securities principal. As noted by the Commission, an Administrative Law Judge1 previously found that “First Union through Cawley entered into a financial advisory agreement with Broward County, Florida, to assist the County in refunding certain municipal bond issues. As part of the agreement, First Union warranted that it had not retained any person not regularly employed by it to secure the agreement or paid compensation to any person based on the award of the agreement.” The judge “found that this warranty was false, and that First Union and Cawley had paid a South Florida lobbyist to obtain the agreement. Nevertheless, the law judge concluded that the five-year statute of limitations in 28 U.S.C. § 2462 barred the Division of Enforcement’s action for sanctions based on the false warranty.” The judge also found that “First Union and Cawley dealt unfairly and deceptively with the County in connection with two of three refundings by purposely failing to disclose payments made to the lobbyist in closing documents filed with the State.” Cawley was suspended from associa tion with any broker, dealer, or municipal securities dealer for three

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months; First Union and Cawley were ordered to cease and desist for a three-year period from committing or causing violations or future violations of MSRB Rule G-17 and Section 15B(c)(1) of the Securities Exchange Act of 1934; First Union was assessed a civil penalty of $20,000 and Cawley was penalized $15,000. In addition, First Union was ordered to disgorge $114,493.31. Among the issues before the Commission are whether: (1) MSRB Rule G-17 applies to a municipal securities dealer acting as financial advisor to an issuer; (2) scienter is required to establish an MSRB Rule G-17 violation; (3) cease-and-desist and disgorgement orders are “penalties” within the meaning of 28 U.S.C. § 2462, and thus barred by the statute of limitations; (4) the Commission should impose time-limited cease-and-desist orders; and (5) the Commission should order First Union to disgorge its revenues from the refundings, and if so, to what extent.2 Earlier this spring, the Commission issued its opinion in the appeal by the City of Miami, Florida (the “City”) of the decision handed down two years ago by Chief Administrative Law Judge Brenda Murray3 containing findings of fact and conclusions of law, the bottom line of which was that the City had violated the antifraud provisions of federal securities law in certain instances of primary and continuing disclosure. The City appealed. In hearing appeals, the Commission is not bound by the factual findings of the Administrative Law Judge but may make an independent review of the record, except where findings of fact go unchallenged. As explained in the Commission’s decision, however, the Commission “does give ‘considerable weight and deference’ to the trier of fact’s credibility determinations and reject[s] them only where there is substantial evidence for doing so.” In the Matter of The City of Miami, Florida, Release No. 33-8213 (March 21, 2003) (“Miami”). Commissioner Campos did not participate in Miami. The remaining four, including new Chairman Donaldson, issued an opinion brief in comparison to that of Chief Judge Murray, but referencing much of the product of the Levitt years, both regulatory and adjudicatory, ranging from the March 1994 Interpretive Release4 to the initial decision (also by Chief Judge Murray) in

County of Nevada5, and settlements in the County of Nevada6, Maricopa County7, and Orange County, California8, proceedings, as well as decisions of the Supreme Court and Circuit Courts of Appeals interpreting the antifraud provisions. All four participating Commissioners agreed the City “willfully violated Sections 17(a)(1)-(3) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder in connection with the offer and sale of the three bond issues” and “Section 10(b) of the Exchange Act and Rule 10b-5 thereunder in connection with its outstanding bonds.” The Commission begins its analysis and application of law to the facts in Miami by noting: “We have long emphasized the need for adequate disclosure in the sale of municipal securities.” Several disclosures held to be misleading are then considered, including one contained in a footnote to the independent auditor’s report on the City’s financial statements that were used in the City’s 1994 CAFR as well as its Official Statements, and the summary of Miami’s FY 1995 budget, which the Commission calls “the balanced budget summary.” Footnote 9, captioned “Fund Equity,” discussed a deficit of approximately $80 million in the City’s Enterprise and Internal Services Fund, as well as a series of proposals the implementation of which was “expected to strengthen the City’s financial condition.” The problem was, the Commission states, “Note 9…failed to reveal Miami’s cash flow problem and, instead, gave the misleading impression that the City was taking steps that would allow it to finish FY 1995 in a stronger position than FY 1994.” The balanced budget summary, which was contained in three of the City’s official statements, claimed “that the City anticipated receiving $9 million in Crime Bill monies and the $3 million proceeds from the sale of landfill, and represented that the City’s ‘Revenues and Other Financing Sources’ equaled ‘Expenditures and Other Uses.’” However, the facts described in Miami note that on the day before approval of the budget, it was known that at best, the $9 million would not be received until the following fiscal year. The City argued to the Commission that Chief Judge

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Murray had “erred in concluding that the balanced budget summary was a material misrepresentation because the summary ‘reflected historical information.’” The Commission rejects this analysis, differentiating between the “approval of the FY 1995 budget,” which it calls “historical” and the “publication of the budget summary in the Official Statement,” which it calls “misleading.” The Commission rejects the argument that the City relied on its accountants and other professionals to advise it on its disclosure with a misstatement of its own. “Primary responsibility for the accuracy of information filed with the Commission and disseminated among investors rests upon the municipality.” But what “information” was “filed with the Commission” by the City? The Commission adds additional support to its rejection of the City’s argument by citing the oft-quoted statement that issuers of municipal securities “are primarily responsible for the content of their disclosure.” The opinion does not stop there, however. The Commission continues its analysis by stating: “Municipal issuers have an affirmative obligation to know the contents of their securities disclosure documents, including their financial statements,” citing its orders in County of Orange, California , 61 SEC Docket at 501, and County of Nevada, 67 SEC Docket at 259. In a stand-alone paragraph, the Commission states: “Bond insurance did not give Miami license to misrepresent its financial condition or withhold material information from the marketplace.” That bullet-point like statement captures the utility of this Opinion as a summary of current law, particularly for younger bond lawyers who have come to the practice after the 1990s in which many of the more than one hundred enforcement actions for disclosure fraud were brought. The Commission found that “Miami willfully violated Sections 17(a)(1)-(3) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder in connection with the offer and sale of the three bond issues” and further found that “Miami willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder in connection with its outstanding bonds by making materially false and misleading statements and omitting material information in its 1994 CAFR.”

Paul S. Maco Vinson & Elkins, LLP Washington DC May 18, 2003 (Copyright, 2003, by the author)

NOTES

1.In the Matter of WHEAT, FIRST SECU-RITIES, INC. F/K/A FIRST UNION CAPITAL MARKETS CORP.; TERESSA L. CAWLEY, INITIAL DECISION RE-LEASE NO. 155, ADMINISTRATIVE PROCEEDING FILE NOS. 3-9688 AND 3-9794 (December 17, 1999).

2.See SEC Open Meeting Agenda for April 23,

2003, at: http://www.sec.gov/news/ openmeetings/agenda042303.htm.

3.In the Matter of THE CITY OF MIAMI,

FLORIDA, CESAR ODIO AND MANO-HAR SURANA, INITIAL DECISION RELEASE NO. 185, ADMINISTRATIVE PROCEEDING FILE NO. 3-10022 (June 22, 2001).

4.Statement of the Commission Regarding

Disclosure Obligations of Municipal Securities Issuers and Others, Securities Act Rel. No. 7049, 59 FR 12748 (March 17, 1994).

5.Initial Decision Rel. No. 153 (Oct. 29, 1999), 70

SEC Docket 3303. 6.Securities Act Rel. No. 7535 (May 5, 1998). 7.Securities Act Rel. No. 7354 (Oct. 3, 1996). 8.Exchange Act Rel. No. 36761 (Jan. 24, 1996),

61 SEC Docket 487. TAX DEVELOPMENTS AT THE CROSSROADS

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Introduction Shortly before Memorial Day, Congress passed the Jobs and Growth Tax Relief Recon-ciliation Act of 2003 (H.R. 2) to provide $350 billion in tax cuts for economic stimulus purposes. Congressional negotiations over this tax legisla tion set a new high water mark for acrimonious mating rituals. Senator Evan Bayh of Indiana aptly observed that “this tax cut has undergone more makeovers than Madonna.” In a small favor to the tax-exempt bond market, Congress declined to enact President Bush’s original dividends tax exclusion proposal, which had been structured to require that tax-free dividends be paid only from “once-taxed” income. Some experts were concerned that this original proposal could reduce demand for tax-exempt bonds. Other experts thought that this proposal would have a minimal effect on tax-exempt bonds since investors in stocks and bonds generally have different investment goals. The final dividends tax provision lowered the tax rate on most dividends to 15% and should have a less significant impact on the tax-exempt bond market than the original dividends exclusion proposal. In addition, this tax legislation accelerated reductions in Federal marginal income tax rates, which will have a modest negative impact on the value of the Federal interest exemption for tax-exempt bonds. Remember that just because you are not paranoid does not mean that they are not out to get you. Another possible concern for the tax-exempt bond market remains lurking in the shadows. In particular, if President Bush’s less-publicized (and not actively pending) broad proposals to expand the tax-free treatment of retirement savings investments were ever enacted into law, those tax-free investments could infringe significantly on the tax-exempt bond market. This tax column covers selected tax devel-opments during the past two quarters. One notable development was the issuance of Pro-posed Regulations on the treatment of refunding bond issues for private activity bond purposes under Code Section 141. This period also witnessed quite a few IRS Private Letter Rulings, including several notable rulings. In a notable negative Private Letter Ruling, the IRS found that

naming rights caused private business use and that the private business use from the naming rights was required to be measured based on their fair market value under Code Section 141. In a notable positive Private Letter Ruling, the IRS endorsed a time-based allocation of use of a mixed-use facility under Code Section 141. Regulations Proposed Refunding Regulations Introduction. After an unduly long gestation period since the previous 1994 Proposed Regulations, Treasury and the IRS issued another set of Proposed Regulations regarding the treatment of refunding bond issues for private activity bond purposes under Code Section 141 and Prop. Reg. §1.141-13, 68 Fed. Reg. 25845 (May 14, 2003) (the “Proposed Refunding Regulations”). These regula tions are proposed to apply prospectively to tax-exempt bonds sold on or after the date of publication of final regulations in the Federal Register. Public comments are due by August 19, 2003. An IRS public hearing will be held on September 9, 2003. In general, these regulations address how to apply the private activity bond tests to refunding issues. The balance of this section describes certain basic concepts in the Proposed Refunding Regula tions. Background. In general, bonds are governmental bonds (versus private activity bonds) if private business involvement does not exceed the limitations of the two-part private activity bond classification test under Code Section 141(b). Bonds generally are private activity bonds if both: (i) more than 10% of the proceeds are used for private business use (the “private business use test”), and (ii) more than 10% of the debt service is payable from or

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secured by payments or property used for private business use (the “private payments test”). These 10% private business thresholds are reduced to 5% for certain unrelated and disproportionate private business use under Code Section 141(b)(3). Bonds separately are private activity bonds under Code Section 141(c) if more than the lesser of 5% or $5 million of the proceeds are used for private loans. Qualified 501(c)(3) bonds under Code Section 145 are treated in a manner similar to traditional governmental bonds under the 1997 final private activity bond regulations, with appropriate modifications to focus on nonprofit exempt purpose use instead of governmental use and with a reduced 5% nonexempt use limitation. Reg. §1.141-3(g) of the 1997 final Treasury Regulations provides rules on how to measure private business use. In general, the amount of private business use is based on average annual private business use over the entire term of a tax-exempt bond issue. This flexible measure of use over the term of an issue allows an issuer to blend down excess bad private business use in the early years (“front-loaded” bad use) with excess governmental use in later years during the term of a tax-exempt bond issue, or vice-versa (“back-loaded” bad use). Recognizing that private business use is measured over the term of a tax-exempt bond issue, the question addressed in the Proposed Refunding Regulations is how to measure private business use with respect to a refunding issue. One possible approach would be a “fresh-start” method — looking at use prospectively from the issue date of the refunding issue over the term of the refunding issue. Another possible approach would be a “combined issue” method — looking at use over the combined term of the prior issue and the refunding issue as if they were one continuous issue. The Proposed Refunding Regula tions include elements of both methods. On balance, the Proposed Refunding Regulations establish a fairly workable framework. Step-in-the-Shoes Use of Proceeds. The Proposed Refunding Regulations employ a “step-in-the-shoes” accounting method which treats the proceeds of a refunding issue as used to finance

the same expenditures and purpose investments as those financed by the prior issue. Thus, if proceeds of a prior issue were used to buy a school building, the refunding issue would be treated as used to finance that school building. General Rule for Governmental Bonds: Combined Issue Method. The Proposed Re-funding Regulations define “governmental bonds” specially for purposes of certain rules to include both traditional governmental bonds that are not a private activity bonds and also private activity bonds that are qualified 501(c)(3) bonds under Code Section 145 (collectively referred to herein as “governmental bonds”). For a refunding of a prior issue of governmental bonds, the Proposed Refunding Regulations provide a general rule that the amount of private business use of the refunding issue is based on the amount of private business use over a combined measurement period equal roughly to the combined terms of those issues. More precisely, the combined mea-surement period begins on the first day of the measurement period of the prior issue (which is the later of the issue date of the refunded bonds or the placed-in-service date of the financed property) and ends on the last day of the measurement period of the refunding issue (which generally is the final maturity date of the refunded bonds, or if earlier, the end of the reasonably expected economic life of the financed property). The combined issue method can be helpful when a prior issue has excess good governmental use. Here, the excess governmental use from the prior issue can be used to soak up excess private business use above the 10% private business use limitation or other applicable bad use limitation during the term of the refunding issue. This averaging out of bad use may enable a refunding issue to qualify as a governmental bond issue. Optional Fresh-Start Method for Govern-mental Bonds. For a refunding of a prior issue of governmental bonds, subject to one notable condition described below, the Proposed Re-funding Regulations provide an optional alternative rule which gives an issuer the option to use a fresh-start method to measure private business use prospectively over a measurement period equal roughly to the term of the refunding issue (and

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without regard to any private business use that occurred prior to the issue date of the refunding issue). An issuer is eligible to use the fresh-start method for a refunding of a prior issue of governmental bonds only if, based on actual use during the shortened measurement period during which the prior issue was outstanding before the issuance of the refunding issue, the prior bonds complied with the applicable private business use test limitation (i.e., the general 10% permitted private business use limitation, reduced to 5% for unrelated and disproportionate use, and reduced to 5% for qualified 501(c)(3) bonds). This optional fresh-start method raises some practical considerations. In effect, the fresh-start method is unavailable if the prior bonds had front-loaded bad use in excess of the permitted private business use limitation. Also, the requirement that an issuer demonstrate historic actual private business use test compliance to date with respect to the prior issue highlights the need for tax compliance monitoring and recordkeeping for private business use purposes. The initial reaction of Treasury Department officials was that any-thing which heightens attention to monitoring tax compliance may be a good thing. The absence of adequate records on prior issues may make it hard to establish eligibility for the fresh-start method. At the risk of stating the obvious, if governmental bonds can show eligibility for the fresh-start method, it generally should be easier to monitor tax compliance going forward under the fresh-start method than going both forward and backward under the combined issue method. Of course, if a prior issue has excess good governmental use, the combined issue method gives an issuer more flexibility to deploy its excess good use on a prior issue to soak up excess bad use during the term of a refunding issue. Fresh-Start Method for Nongovernmental Bonds. For refundings in which the prior issues are not governmental bonds, the Proposed Refunding Regulations provide that the fresh-start method is used to measure private business use of the refunding issue. This rule is aimed at relatively limited narrow circumstances involving changes of use in connection with refundings. This rule applies when a prior issue of taxable bonds converts to governmental bonds in connection with

a refunding (“bad bonds gone good”). This rule also applies when a prior issue of tax-exempt pri-vate activity bonds converts to governmental bonds in connection with a refunding (“good bonds gone better”). In either event, the fresh-start method will apply to determine whether the refunding issue qualifies as a governmental bond issue. Private Payments Test. The Proposed Refunding Regulations provide rules on how to determine which payments count for purposes of applying the private payments test to refunding issues. The basic approach counts private payments over the same measurement periods as used to measure private business use for the refunding issue. Thus, for a refunding issue in which the combined issue method is used to measure private business use, private payments are counted during the combined measurement period over the combined term of the prior issue and the refunding issue. Similarly, for a refunding issue in which the fresh-start method is used to measure private business use, private payments are counted prospectively during the separate measurement period over the term of the refunding issue. One helpful special rule allows use of the yield on the prior issue to calculate the present value measure of certain private payments made under arrangements not entered into in contemplation of the refunding issue. A safe harbor treats arrangements made more than one year before a refunding as not so contemplated. In a typical high-to-low refunding for interest savings, this special rule is helpful because the use of the higher yield on the prior issue to calculate the present value of private payments will result in a smaller amount of private payments. Multipurpose Issue Allocations. The Pro-posed Refunding Regulations allow an issuer to apply the arbitrage multipurpose allocation rule under Reg. §1.148-9(h) to treat a portion of an issue as a separate issue for certain purposes under Code Section 141. One limitation is that this multipurpose allocation rule cannot be applied unreasonably to achieve more favorable results than could be achieved with actual separate issues. The Proposed Refunding Regulations include an example to illustrate this limitation. The

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example describes a prior issue of governmental bonds which financed one building with 8% private business and another building with 12% private business use. The example indicates that the multipurpose allocation rule cannot be used to subdivide the issue into separate purposes of financing each building if the issuer plans to increase the private business use in the first building from 8% to 10%. Such an allocation would be unreasonable because it would enable the issuer to achieve more than the 10% permitted amount of private business use that would be allowed for two issues that were actually separate. Thus, a multipurpose issue allocation is unreasonable when the separate purposes are interdependent to achieve average private business use in compliance with the private business use limitations. Certain Special Rules for Qualified 501(c)(3) Bonds. The Proposed Refunding Regulations include one special rule for qualified 501(c)(3) bonds to address the case of a change of use from Code Section 501(c)(3) nonprofit exempt use to governmental use in connection with a refunding. In this case, a special rule permits the nonprofit exempt use from the prior issue to be counted as governmental use in applying the combined issue method to the refunding. Another special rule for qualified 501(c)(3) bonds allows proceeds of the prior bonds used to pay bond issuance costs on the prior issue to be treated as qualified use for purposes of the Proposed Refunding Regulations. This special rule helpfully reduces the impact of the annoying existing rule which treats proceeds of qualified 501(c)(3) bonds used to pay bond issuance costs as bad use for purposes of the 95% exempt purpose use requirement. Advance Refundings. The Proposed Re-funding Regulations include some rules on the advance refunding restrictions under Code Section 149(d). One helpful rule appropriately disregards an advance refunding of a taxable bond for pur-poses of the prohibition against advance refundings of private activity bonds. On the other hand, in an odd inconsistency with the overall approach of the Proposed Refunding Regulations, another rule

prohibits an advance refunding in the circumstance in which the refunding issue would be treated as a governmental bond going forward under the fresh-start method. This case (“tax-exempt private activity bonds gone governmental”) seems more like a change of use. There would seem to be no sound tax policy for denying an advance refunding of the now-governmental bonds here. Public Administrative Guidance Section 143: Median Gross Incomes. In IRS Rev. Proc. 2003-29, 2002-20 I.R.B. 1 (May 19, 2003), the IRS provided new figures on U.S. and area median gross incomes for use in applying certain income tests in qualified mortgage bond financings under Code Section 143 (and also mortgage credit certificates). For purposes of the housing cost/income ratio under Code Section 143(f)(5), the U.S. median gross income is $56,500 and the area median gross incomes are those released by HUD on February 20, 2003. These revised figures generally apply to mortgage commitments made beginning February 20, 2003. Section 143: Census Tracts. In IRS Rev. Proc. 2003-15, 2003-4 I.R.B. 321 (January 27, 2003), the IRS listed qualified census tracts for each State and District of Columbia for purposes of certain targeting requirements for qualified mortgage bonds under Code Section 143. Section 146: Volume Cap Population Figures. In IRS Notice 2003-16, 2003-10 I.R.B. 575 (March 10, 2003), the IRS released the applicable resident population figures that apply for purposes of the Code Section 146(j) private activity bond State volume cap for 2003. These figures also apply for purposes of the State low-income housing tax credit cap under Code Section 42. Section 851: RIC Investments in Tax-Exempt Bonds Through Partnerships. In Rev. Proc. 2003-32, 2003-16 I.R.B. 803 (April 21, 2003), the IRS provided that regulated investment companies (“RICs”) that invest in certain partnerships that own tax-exempt bonds will be treated as if they invested directly in the underlying tax-exempt bonds in order to enable them to pay tax-exempt interest dividends under Code Section 852(b)(5). To qualify, RICs must invest in eligible

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partnerships that meet the accounting rules in Rev. Proc. 2002-68, 2002-43 I.R.B. 753. (See the discussion of this prior procedure in the December 1, 2002, issue of The Bond Lawyer®.) Private Administrative Guidance [Note: Private Letter Rulings (“PLRs”) and Technical Advice Memoranda (“TAMs”) are IRS national office final determinations of legal positions in specific cases provided to taxpayers in PLRs and to IRS field agents in TAMs. Field Service Advices (“FSAs”) are non-final determinations from the IRS national office to IRS field agents on case-specific matters during audit case development that may be based on an incomplete review of facts of specific cases.] Section 103: General Political Subdivision. In PLR 200305005 (September 27, 2002), the IRS ruled that an entity associated with a State medical university was a political subdivision under Reg. §1.103-1(b) for Federal income tax purposes because it was a division of a State or local governmental unit that had been delegated the substantial sovereign power of eminent domain. State On-Behalf-Of Issuer. In PLR 200307004 (September 27, 2002), the IRS ruled that a nonprofit local development corporation controlled by a State-controlled authority and by the governor qualified as an entity that could issue tax-exempt bonds on behalf of a State, based on the criteria set forth in IRS Rev. Rul. 57-187, 1957-1 C.B. 65 (relating to the creation of on-behalf-of industrial development bond authorities). Section 141: Private Business Tests Naming Rights. The IRS issued a notable Private Letter Ruling (November 22, 2002) on the private business use treatment of naming rights (the “Naming Rights Ruling” a/k/a the “Blame-it-on-Caprera” ruling named for distinguished NABL member David A. Caprera, who obtained this ruling and graciously made it available). This ruling has yet to be released publicly due to a procedural glitch. In the Naming Rights Ruling, the IRS ruled that a private business’s contract rights associated with naming a convention center

and arena facility caused private business use of the facility because the contract rights conveyed power to control how the facility was used which constituted special legal entitlements to beneficial use of the facility under Reg. §1.141-3(b)(7)(i). Moreover, after a tortured effort to apply the private business use measurement rules under Reg. §1.141-3(g), the IRS determined the amount of private business use from the naming rights based on their fair market value. The Naming Rights Ruling was a “fake” favorable ruling. The ruling concluded favorably that the particular bonds were tax-exempt because the private business use from the naming rights was within the permitted 10% private business limitation. This was a classic case of winning the battle, but losing the war. This ruling dealt a double negative blow. First, for the first time, the IRS ruled that naming rights caused private business use. Second, to compound the pain, the IRS required that the amount of private business use from naming rights be based on fair market value. Admittedly, it comes as no surprise that the IRS found that naming rights caused private business use under the broad private business use standards set forth in 1997 final private activity bond regulations. Still, it is unfortunate that the IRS declined to pursue a potentially favorable analysis that would treat naming rights as separate intangible properties that are neither financed with the tax-exempt bond financing of facilities nor used other than incidentally. A public guidance project on naming rights would seem appropriate to examine this naming rights issue more thor-oughly with a full opportunity for public input. Time-Based Allocation of Use in Mixed Use Facility. Notably, in PLR 200304015 (October 18, 2002), the IRS ruled that an issuer could apply a time-based allocation method to allocate the use of a mixed use arena between qualified governmental use and Code Section 501(c)(3) exempt purpose use and nonqualified private business use. The financing plan envisioned tax-exempt bond financing for the qualified portion of the facility and taxable financing for the nonqualified portion. The IRS found that the time-based allocation method was a reasonable method for allocating use, which took into account the

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proportionate benefits to be derived by the various users of the facilities. The time-based allocation method involved an allocation of use based on expected percentages of time of use as a per-centage of total actual use over the term of the tax-exempt bonds. One simplifying aspect of the facts presented was that the parties represented that their respective percentages of time of use would remain substantially the same over time. Shifting percentages of use over time would be much more complex. This ruling also involved some interesting allocations of use of common areas. This ruling may be a precursor of things to come — hopefully soon — in the form of long-awaited regulations on mixed use accounting rules for private activity bond purposes under Code Section 141. Port Dredging and Relocation Costs. In PLR 200250004 (August 23, 2002), the IRS ruled that, notwithstanding that a particular harbor channel was used mainly by private business shippers, the use of tax-exempt bonds to finance costs of dredging the harbor would not cause private business use under Code Section 141 because the harbor was available for general public use and met the general public use exception to private business use under Reg. §1.141-3(c). In addition, in PLR 200250004, the IRS also ruled that the use of tax-exempt bonds to finance the costs of relocating a private business from a particular location to accomplish a governmental purpose would not cause private business use under Code Section 141. Governmental Instrumentalities. In several rulings, the IRS found that the activities of various entities did not involve private business use under Code Section 141 because the entities were “instrumentalities” of governmental units under the governmental person definition set forth in Reg. §1.141-1(b) and the instrumentality factors set forth in IRS Rev. Rul. 57-128, 1957-1 C.B. 311. These rulings included PLR 200301008 (September 13, 2002) (power purchaser instrumentality), PLR 200306001 (October 24, 2002) (electric transmission service instrumentality), and PLR 200314024 (December 31, 2002) (convention center authority instrumentality).

Change of Use of Bonds Issued Before 1997 Regulations. In PLR 200250031 (Sep-tember 10, 2002), the IRS ruled favorably that the change of use remedies set forth in now-obsolete Rev. Proc. 93-17, 1993-1 C.B. 507, could be used by analogy to cure a change of use to protect the tax-exempt status of the interest on affected bonds issued before the May 16, 1997 effective date of the 1997 final private activity bond regulations. (See the more detailed discussion of this topic in the March 1, 2001, issue of The Bond Lawyer®.) Federal Governmental Contracts. In PLR 200309003 (October 22, 2002), the IRS ruled that certain science-oriented contracts with Federal governmental agencies (which Federal agencies would be treated like private businesses for Code Section 141 purposes) caused no private business use of tax-exempt bond-financed office facilities under Code Section 141. The facts indicated that payments under these Federal contracts were expected to be the primary revenues from the financed facilities. The facts further showed that the facilities were not specially tailored to the needs of the Federal agencies and could be used alternatively by the governmental entity for its own purposes. The IRS found that, while the Federal contracts gave the Federal agencies certain legal rights, those rights were not facility-specific and did not constitute special legal entitlements to the tax-exempt bond financed facilities under Reg. §1.141-3(b)(7)(i). The IRS further found that the Federal agencies did not receive special economic benefits from the tax-exempt bond financed facilities under Reg. §1.141-3(b)(7)(ii). This favorable ruling has a certain flavor of the old adage about paying no attention to the elephant in the living room. In PLR 200309003, the IRS further ruled that the payments made by the Federal agencies under the contracts did not constitute an impermissible Federal guarantee of the tax-exempt bonds under Code Section 149(b) because the economic substance involved no transfer of credit risk to the Federal Government to pay debt service on the tax-exempt bonds. Any crumb of guidance on the Federal guarantee prohibition is always welcome. Section 142: Exempt Facility Bonds

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Multifamily Housing Qualified Project Period. In PLR 200306003 (October 2, 2003), the IRS considered a 1986 Tax Act transition rule current refunding of bonds issued under Section 103(b)(4)(A) of the Internal Revenue Code of 1954, as amended (the “1954 Code”), which financed a multifamily residential rental housing project. The facts showed that the defined “qualified project period” for the low-income set-aside restrictions had expired for the prior bonds before the refunding bonds were issued. The refunding bonds extended the maturity of the prior bonds. The basic tax issue raised in the ruling was whether the gap in the continuous satisfaction of the low-income set-aside requirement between the end of the qualified project period for the prior bonds and the beginning of an extended qualified project period for the refunding bonds due to the maturity extension affected compliance. In PLR 200306003, the IRS ruled favorably that such gap was not fatal and that the refunding bonds would satisfy the qualified project period requirement if the low-income set-aside requirement were satisfied continuously from the issue date of the refunding for a period which, when added to the qualified project period covered by the prior bonds, would satisfy the extended qualified project period for the refunding bonds. Section 143: Qualified Mortgage Bonds Ginnie Mae Guarantee Fees. In significant technical advice from the IRS national office to the field, via TAM 200315004 (December 6, 2002), the IRS advised that the portion of a single-family mortgagor’s loan payments used to pay Ginnie Mae guarantee fees on Ginnie Mae mortgage-backed securities which secure tax-exempt qualified mortgage bonds under Code Section 143 are required to be taken into account as part of the permitted mortgage loan yield or effective interest rate on mortgage loans under Code Section 143(g). That Code section limits the effective interest rate on the mortgage loans to no more than one and one-eighth percent (1.125%) above the yield on the tax-exempt bonds. The Ginnie Mae guarantee fees were in the amount of six basis points (.06%) of the outstanding principal amount of the mortgage loans. TAM 200315004 resolved in a manner adverse to the issuer the question of whether these Ginnie Mae guarantee

fees could be recovered in addition to and outside the permitted 1.125% loan yield spread in a manner analogous to the treatment of fees for individual FHA private mortgage insurance or must be recovered within and as part of that permitted loan spread in a manner analogous to “pool mortgage insurance” referenced in the legislative history. This is a significant ruling. It is unclear whether the IRS plans to apply this position retroactively on audits or only prospectively. Average Area Purchase Price Data. In PLR 200248011 (August 22, 2002), the IRS ruled that an issuer could use its own more accurate and comprehensive data to establish average area purchase prices under Code Section 143(e) in lieu of the data used for the safe harbor set forth in IRS Rev. Proc. 94-55, 1994-2 C.B. 716. Section 145: Qualified 501(c)(3) Bonds Partnership Aggregate Versus Entity. In PLR 200313007 (December 17, 2002), the IRS addressed whether a partnership’s use of tax-exempt bond financed property would give rise to any nonexempt use under Code Section 145. The facts indicated that the only partners in the partnerships were Code Section 501(c)(3) nonprofit exempt organizations. The IRS determined that it would further the purposes of Code Section 145 to disregard the partnership as an entity (which otherwise would cause bad use) and to “look through” the partnership as an aggregate of its Code Section 501(c)(3) nonprofit exempt organization partners. In PLR 200313007, the IRS ruled favorably that the described partnership use would cause no nonexempt use under Code Section 145. Section 146: Volume Cap Late Carryforward Elections. In PLR 200248003 (August 12, 2002), PLR 200248004 (August 12, 2002), and PLR 200314005 (December 10, 2002), the IRS permitted issuers to make late carryforward elections under Code Section 146(f) in various dog-ate-my-homework circumstances in which issuers acted reasonably and in good faith. Section 148: Arbitrage

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Gross-Proceeds-Spent-First Accounting Method. In PLR 200248002 (July 31, 2002), the IRS helpfully ruled that an issuer could employ a gross-proceeds-spent-first accounting method, retroactively no less, to spend tax-exempt bond proceeds to enable it to meet the two-year construction spending exception to arbitrage rebate. This ruling may represent a sighting of a kinder and gentler IRS. Long-Term Working Capital Bonds. The IRS issued two Private Letter Rulings on tax-exempt long-term working capital financings. In PLR 200252001 (May 15, 2002), the IRS addressed a long-term working capital financing in a fairly weird context. The facts involved a refunding of some prior capital appreciation bonds and a proposal to issue long-term working capital bonds to pay interest on the refunding bonds. In PLR 200252001, the IRS ruled that, among other things, the long-term working capital bonds would not overburden the tax-exempt market under the general arbitrage anti-abuse rule because the issuer would retire them “if and to the extent that, in the exercise of the issuer’s prudent judgment, the issuer’s funds exceed the amounts reasonably necessary to satisfy its anticipated business needs.” This quoted standard appears to be similar to a corporate accumulated earnings tax standard. The reasonable business needs standard articulated in PLR 200252001 holds some possible potential for a more flexible approach to long-term working capital financings. It remains to be seen whether the IRS will adopt this seemingly flexible standard more broadly to test long-term working capital financings for arbitrage purposes. To date, the most developed arbitrage analysis of long-term working capital financings remains that set forth in PLR 9424043, which emphasized an ongoing tax compliance mechanism to monitor surplus available funds above the permitted 5% reasonable working capital reserve and to apply such surpluses to address the burden on the tax-exempt market. In addition, in PLR 200306004 (October 16, 2002), the IRS ruled very narrowly that, based on all the facts and circumstances of a financing associated with the September 11, 2001, terrorist

attack on New York City (thinly disguised as the “Occurrence” in the ruling), certain tax-exempt long-term working capital bonds would not be outstanding longer than necessary to accomplish the governmental purposes of the bond issue for purposes of Code Section 148. In reaching its favorable conclusion, the IRS stressed its reliance on “the sudden and extraordinary nature of the Occurrence, the size of the expenditures rela tive to the City’s operating budget, and the financial distress that the City has experienced and reasonably expects to continue experiencing as a direct result of the Occurrence.” This ruling appears to be so narrow that it likely will be of very limited use by analogy in analyzing other long-term working capital financings. Section 149: Advance Refundings Separate Issue Treatment in Pooled Bond Issue. In PLR 200315012 (December 19, 2002), the IRS ruled favorably that, based on Reg. 1.149(d)-1(d)(1), an issuer could use the arbitrage multipurpose rule under Reg. §1.148-9(h) to treat the advance refunding portion of a pooled governmental bond issue as a separate issue for purposes of the advance refunding restrictions under Code Section 149(d). Cases Section 141: Wastewater Pipeline. In City of Santa Rosa v. Commissioner, 120 T.C. No. 12 (May 13, 2003), the U.S. Tax Court held that proposed tax-exempt bonds to be issued by a city to finance a pipeline facility to dispose of wastewater from the city’s sewage system to a geyser did not involve more than 10% private business use under Code Section 141 in cir-cumstances in which a private company had rights to use certain capacity amounts of the wastewater received at the end of the pipeline to produce electricity. The court found that the private business did not use the pipeline in any quantifiable amount. In its private business use analysis (versus private payments analysis), the court emphasized that, since the private company paid nothing for the wastewater, the absence of payments suggested a very limited amount of private business use. Interestingly, this focus suggests that payments for private business use or the fair market value of private business use may

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be particularly relevant in determining the amount of private business use. In the Santa Rosa case, the issuer argued that the only purpose for the construction of the pipeline facility was to carry out the governmental purpose of sewage disposal. The city argued, alternatively, that the pipeline facility was a water output facility that should be analyzed under the special tax rules for output facilities and that, under those special rules, the arrangement did not pass on any substantial burden of paying debt service to the private company. The IRS argued that the facility caused private business use under general 1997 private activity bond regula tions because it either provided special legal entitlements involving priority rights to the capacity of the facility to the private business or special economic benefits to the private company. The IRS also argued that the pipeline facility was not an output facility. This case included a lot of discussion and analysis about how to apply the private business use test and the private payments test, including a fair dose of murky analysis with unclear precedential impact. The court made a number of interesting subsidiary conclusions. The court found that the pipeline facility met the general public use exception to the private business use test based on general public use by the city’s sewer system ratepayers. The court appeared to find that the pipeline facility was not an output facility. The court found that the pipeline facility was not used simultaneously by the city and the private company. Instead, the court found that the company’s use was mainly of the wastewater instead of the pipeline, was incidental, was not simultaneous, and commenced only at the point-of-delivery connection at the end of the pipeline. If the court’s reasoning here were taken to its logical extreme, it could eliminate a lot of private business use in the output area. Overall, the main point of the Santa Rosa case is that it was an issuer victory. We applaud our two NABL members David L. Miller and David A. Walton for this victory. This case shows that at least two tax lawyers in the tax-exempt bond area have actually set foot in a courtroom and that a rare tax-exempt bond case has found a remedy in a judicial forum.

John J. Cross III Hawkins, Delafield & Wood jcross@hdw.com Guidance through May 23, 2003

2003 FUNDAMENTALS OF MUNICIPAL BOND LAW SEMINAR The 2003 Fundamentals of Municipal Bond Law Seminar was held at the Loew’s Philadelphia Hotel in the heart of Philadelphia, April 23 through 25, under the leadership of Chairman Charles P. Shimer of Troutman Sanders LLP, Richmond, Virginia. The seminar opened on Wednesday afternoon with Chuck Shimer presenting a brief overview of the structure of the seminar and a welcome to Philadelphia. NABL President-Elect Linda B. Schakel of Ballard Spahr Andrews & Ingersoll, LLP, followed Chuck’s welcome by highlighting for the nearly 400 seminar attendees the many benefits of membership and involvement in NABL for those who practice municipal finance law. Following Linda’s remarks, Eric Ballou (Christian & Barton LLP), Leslie Lava (Law Offices of Leslie M. Lava), and J. Douglas Rollow (Ballard Spahr Andrews & Ingersoll, LLP) treated all of the attendees to a three-hour session, with the first 90 minutes devoted to Basic Structure and Documentation and the second 90 minutes covering Financial Aspects of a Bond Transaction. This dynamic, interactive session provided an important foundation for the General Sessions to follow. Immediately following Wednesday’s session, all attendees and faculty were invited to attend a reception held in the Loew’s Hotel. The reception was very well-attended and included complimen-tary beverages and excellent appetizers. The fullest day of the seminar began early Thursday morning with a presentation and overview of NABL’s Federal Taxation of Municipal Bonds treatise, with emphasis on its

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web interface and CD-ROM research training. The attendees were then divided into three groups and rotated through four General Sessions, conducted all day on Thursday and focusing on General Tax, Securities, State Law, and Roles of Counsel and Ethical Issues in Municipal Finance. The 2003 seminar introduced the new format of four 90-minute General Sessions with one session entirely devoted to ethics and professional responsibility; past seminars had presented three two-hour sessions, one of which combined ethical issues with the state law presentation. Due to this new format, the written materials and presenta-tions for the General Sessions were significantly revised from those used at prior Fundamentals seminars. Twenty-four NABL members volun-teered their time and efforts to plan and participate as faculty for the General Session panels which are the backbone of Fundamentals. All attendees were invited to lunch on Thursday at the Loew’s Hotel where W. Mark Scott, Director for Tax-Exempt Bonds, Tax-Exempt and Government Entities Division, Internal Revenue Service, spoke about the goals and hot areas of focus for his group at the IRS. On Thursday evening the faculty enjoyed a reception hosted at the Philadelphia offices of Ballard Spahr Andrews & Ingersoll, LLP, followed by a lively dinner at Tangerine, one of Philadelphia’s hot spots. Seminar attendees took advantage of their free evening on Thursday to check out the sights and great dining Philadelphia has to offer. With the basic topics concluded, the seminar continued on Friday with the break-out sessions. In all, fourteen separate topics were offered at break-out sessions, with attendees given the opportunity to attend four of these smaller, and more detailed, sessions. The topics covered a wide variety of areas, with emphasis on tax (Arbi-trage, Advanced Tax Topics, Private Activity Bonds, Refunding/Reissuance), introductions to specific types of private activity bonds (Qualified 501(c)(3) Bonds, Single Family/Multifamily Housing Bonds, Qualified Small Issue & Exempt Facility Bonds), structuring issues (Credit Enhancement, Introduction to Basic Derivatives), disclosure and related underwriters’ counsel issues (Underwriters’ Counsel) and ethical considerations (Opinions, Engagement Letters). In addition, two break-out sessions were provided for legal

assistants (the Closing and Understanding a Bond Financing). Each of the twenty-two break-out sessions designed primarily for lawyers was staffed by two faculty members, and the three sessions targeted for legal assistants used four faculty members each. The 2003 Fundamentals Seminar concluded on Friday afternoon in time for all involved to return home or proceed with their weekend plans in Philadelphia and on the East Coast. The success of this year's Fundamentals Seminar was based on the hard work and cooperation of the 28 NABL members who volun-teered their time to prepare the sessions and to spend three days teaching these varied topics, and on the enthusiastic participation of the seminar attendees. Congratulations and a thank you to Chuck Shimer, all faculty, the wonderful NABL staff and, of course, the approximately 400 attendees for making the 2003 Fundamentals Seminar a success. Next year’s Fundamentals Seminar will be held in late April in Chicago. Preparations are already underway. Please contact me if you are interested in participating as a faculty Coming up: Bond Attorneys' Workshop September 17, 18 and 19 Chicago member next year, and make sure to encourage lawyers with whom you work to take advantage of this very useful and popular seminar. Erin P. Bartholomy Vice-Chair, 2003 Fundamentals of Municipal Bond Law Seminar

LAWYER INDEMNIFICATION OF CLIENTS: ETHICAL IMPLICATIONS

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Background In recent years, governmental bodies have been increasingly aggressive in the institution of policies requiring indemnification from third party providers of goods and services. These policies have extended to professional service providers, including law firms. Such indemnification requests pose a number of difficult issues for bond counsel. For example, should a lawyer agree to be bound by an indemnification clause that may be unenforceable under applicable case law in the state? Can an individual lawyer bind his or her firm to indemnify a third party client (in some states, such an agreement would not likely be considered to be within the scope of the mutual agency of the partnership, and thus might only bind the individual lawyer, not his firm)? Also, will the lawyer’s malpractice insurance coverage extend to claims made under such indemnification clauses? Even if the lawyer’s current year claims made policy would cover (or is endorsed to cover) the indemnity, will the coverage still be available in future years when the indemnity may be the subject of a claim? These issues must be carefully considered by lawyers before agreeing to be bound by any such indemnification covenants. In addition, the execution of an indemnification contract presents ethical dilemmas that must be evaluated under the applicable rules in effect in the practitioner’s jurisdic tion. The following article, which has been prepared by NABL’s Committee on Professional Responsibility under the leadership of Chairman Buddy Downs, uses a hypothetical to assist in the identification and analysis of a variety of issues under the Model Rules. (Please review the list of definitions at the conclusion of this arti-cle.) Hypothetical The State of Denial (the State) adopts new statutes (the Law) relating to purchasing products and services, including professional services. The Department of Purchasing for the State (the Department) is charged with implementing the Law. The Department recently purchased defective equipment for State-run mental institutions which precipitated a serious scandal and enormous potential liability. The attorney for the Department therefore suggests that all future

providers of products and services indemnify the State for any and all direct or indirect damages resulting from any failure of a product or service. Meanwhile, the Governor of the State has issued an executive order requiring all State bond issuers to consider the use of historically underutilized professionals in all bond issues, including, for lawyers, in co-counsel roles. A request for proposals (RFP) is issued by the Department in September, two months before a gubernatorial election, for law firms to serve as bond or co-bond counsel on an $800,000,000 multi-family housing pool issue. The RFP requires the following indemnification: The successful legal firm shall be

solely responsible for and shall keep, save, and hold harmless the State and its employees from and against any and all claims, demands, suits, actions, recoveries, injuries, judgments, and cost and expenses in connection therewith on account of the loss of life, property, or injury or damage to the person, body, or property of any person, agency, corporation, or govern-ment entity, which shall arise from or result directly or indirectly from the work and/or materials supplied by or arising out of the perfor-mance of this contract. The legal firm's liability under this contract shall continue after the termination of the contract with respect to any liability, loss, expense, or damage resulting from acts occurring prior to termination. This indemnifica-tion obligation is not limited by, but is in addition to, the insurance obligation contained in this agree-ment.

The Department, acting through its director and its attorney, will make the selection. The issuer of the bonds being indemnified is a board consisting of the incumbent Governor running for reelection, the State Treasurer (the Governor's election opponent), and the Secretary of State (the

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Board). The Treasurer and the Secretary of State are in a different party than the Governor, as is the Board's counsel, the Attorney General. Smith & Jones (S & J) is a 300 partner law firm in the State with a long history of serving as bond counsel. It has a long, successful history but is currently facing a difficult financial situation. S & J has recently released 20 partners and closed 2 offices. In addition, S & J is under investigation by the Securities and Exchange Commission for participation in securities fraud. S & J's insurer reports it does not cover this type of indemnification provision. An S & J partner (X) is on the Governor's campaign committee. Johnson & Davis (J & D) is a two person law firm founded this year by a former Mayor and a State Representative. Both members of the firm are distinguished practitioners, although neither has performed any legal work with respect to a bond issue. Both J and D recently joined NABL and attended the Fundamentals Seminar. The new firm, which has not yet procured malpractice insurance, will qualify as “historically underuti-lized” under the Governor's recent executive order. D is the Governor's campaign treasurer. Both S & J and J & D also do employment law and litigation work for the State and the Department. J & D serves as special counsel to the Governor to advise her as to the duties of the Board. The State uses the Model Rules. Analysis of Hypothetical Under the Model Rules Introduction The Model Rules are rules of reason. They contain more "mays" than "shalls."1 This is particularly true in the case of the transactional lawyer, like bond counsel, because the facts vary from situation to situation, as do types of transactional practices and custom and practice in various jurisdictions. Therefore, there may be no correct answer to the ethical dilemmas posed by the Hypothetical. Absent clear delineations of right or wrong, the intention here is simply to raise the issues that are most often identified and briefly

discuss them. Others may find additional issues under the Model Rules, or the ethical rules in their own jurisdiction,2 or may discount some of the issues raised here. Because the legal profession is self-policing in most respects, that is the way it should be. S & J's Perspective X, the senior bond partner at S & J who is in charge of the proposal, assigns it to an associate who brings the indemnification language to X's attention. This is the first time that X has seen this language and he is taken aback. X immediately follows firm policy and refers the language to Y, the firm's risk management attorney. Y is a litigator and needs to work closely with X and other bond and transactional lawyers who better understand the context of their practice. In fact, the firm has established an intake committee, including bond and transactional lawyers, for that reason. X's initial thought is that requiring indem-nification is a really stupid idea. He wants to call his friend, the Governor, and tell him that their relationship and the rela tionship of his firm with the State over many years, should preclude this type of overreaching on behalf of the Department.3 He believes that is it inappropriate to try to make lawyers guarantors of legal outcomes and would cite Opinions4 for that proposition. In addition, X feels that it is particularly inconsistent with the Governor's policy to encourage historically underutilized law firm participation because of X’s experience that such firms may not have either an appropriate depth of experience in such matters or an appropriate level of capitalization or malpractice coverage to support such participation. It would seem to be perfectly appropriate for X to have this discussion with some representative of the State in his role as Advisor under Model Rule 2.1.5 Y advises X that she has no problem with some type of communication in this context but wonders how the communication should take place. X simply wants to pick up the phone and call the Governor. However, Y points out several other possibilities, both as to practical and ethical matters, including communicating with the attorney

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for the Department, the Director of the Department, the Attorney General as counsel to the Board (that is also S & J's bond counsel client on a number of other ongoing transactions and has been an historical client), or the Board itself. X is appalled by the notion of discussing the issue with these other players, partially for political reasons. X is particularly appalled when Y suggests the possibility that the communication has to be at a public meeting of the Board.6 Y also points out to X that the Model Rules on conflicts are based on the premise that the general reason conflicts arise has to do with balancing the lawyer's self interests against the interest of the client.7 She points out that this communication in itself could create a conflict since it is not in the best interest of S & J to indemnify the State while it is arguably in the best interest of the State to be indemnified.8 In addition, any negotia tion of the precise language of the indemnification (which X and Y both feel could be vastly improved to protect the State's interest as to professional services)9 also raises conflicts issues because any change to the language urged by S & J to reduce or limit the liability of S & J could be viewed as creating a conflict. X counters that both the Department and the Board are represented by counsel and that the engagement letter for this transaction could be carefully crafted to show that advice to those entities on this subject was not part of S & J's role as bond counsel.10 Y acknowledges the logic of that position and the recent position of many bond lawyers that many ills can be cured by engagement letters. However, Y also points out that the course of conduct between their firm and the State might lead the average judge, jury or "reasonable person" to find that type of disclaimer innocuous. Y also points out to X that such limiting language is certainly not in the proposed (unchangeable) purchase agreement forwarded by the State.11 Y also points out the firm's self interest in not indemnifying the State as a general matter, and particularly at this time because of the Firm's financial situation and potential liability in the securities lawsuit. X is horrified at Y's suggestion that there can be no meaningful communication with the client, taking into consideration when, to whom, and how to disclose this information, without discussing the possibility that the indemnifi-

cation is illusory. Y further points out the various ethical rules and commentary involving truthfulness in representations and responsibilities to be straightforward.12 According to X, these are the issues raised even if the firm were not currently facing these hardships since S & J could not begin to perform on the indemnification even as to the measure of damages related to an erroneous tax-exempt opinion let alone the damages related to an erroneous validity opinion.13 Y further raises ethical issues involved with partnering with J & D in responding to the RFP. Y questions the wisdom of J & D's indemnifying anyone for a transaction this large in an area as complex as multi-family housing14 and asks X whether he has any duty to raise the issue with the State.15 J & D's Perspective J & D has an immediate practical and political response to the indemnification provisions. Both J and D are very cognizant of their potential individual liability and of the disincentive this provision creates for historically underutilized law firms. D decides to consult with a former Supreme Court justice (A) who teaches legal ethics and who has mentored D over the years. Like X, D wants to call the Governor and also wants to talk to the Attorney General and the Board. A's first reaction is that it would be misconduct per se under Model Rule 8.4 for J & D to indemnify anyone on a deal this big without full disclosure. A suggests that it would arguably be "dishonest, deceitful, fraudulent and misleading" to let any of the interested parties to the transaction believe this indemnification was realistic.16 A raises the same questions that Y raised as to the challenges in indemnifying clients, or their authorized representatives, and communicating with governmental bodies.17 A also points out the potential conflict between J & D's interest and the interest of the Governor and the Board.18 A asks D about J & D's experience in this area and wonders how, and to whom, its experience needs to be disclosed.19 He further

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asks D if he is ready to publicly disclose his firm and personal finances with regard to J & D's ability to perform the indemnification.20 A raises a further question as to whether the level of J & D's malpractice coverage must be disclosed and to whom. D suggests that the same public policy concerns that prompted the Executive Order should lead the State not to require indemnification from firms like J & D. A again raises the obvious self interest J & D has in that result and the difficult ethical issues raised in communicating that conflict to governmental entities. When D counters that question with the assertion that the Governor will surely waive any conflict, A meticulously points out: (1) the difficulty of getting informed consent from a client in a case this complex;21 (2) the potential for misidentifying the client here and the need to correctly identify the client to get a consent;22 (3) the possibility that the conflicts issues must also be public ly aired; and, (4) that there is no rule in the State as to whether governmental bodies may waive conflicts.23 Committee on Professional Responsibility DEFINITIONS Engagements - National Association of Bond Lawyers' Committee on Professional Responsibil-ity, Model Engagement Letters (1998 Edition). Function - National Association of Bond Lawyers' Committee on Professional Respon-sibility, The Function and Professional Re-sponsibilities of Bond Counsel, Second Edition (1995 Edition). Model Rule - One of the Model Rules. Model Rules — American Bar Associa tion's Model Rules of Professional Conduct (2000). Opinions - National Association of Bond Lawyers' Committee on Opinions and Documents, Model Bond Opinion Project (2003 Edition).

Rules - ABA Model Rules of Professional Conduct (2000). Selection - National Association of Bond Lawyers' Special Committee on the Selection and Evaluation of Bond Counsel, Selection and Evaluation of Bond Counsel (1998 Edition). Standards - National Association of Bond Lawyers' Special Committee on Standards of Practice, Standards of Practice (1989 Edition). NOTES 1. See Model Rules, preamble. 2. The ethical rules vary among jurisdictions.

Some states still have rules based on the older Model Code of Professional Responsibility. See Function, iii; see also The Law of Lawyering: A Handbook on the Model Rules of Professional Conduct (2nd Ed.), by Geoffrey Hazard, Jr., and W. William Hodes, "Appendix 4: State Varia tions."

3. The terms upon which representation is

undertaken may exclude specific objectives or means. Such limitations may exclude objectives or means that the lawyer regards as repugnant or imprudent. Model Rules R. 1.2 cmt 4.

4. Because the conclusions expressed in bond

opinions are prominently disclosed in the offering documents, bond counsel may require that the offering documents also disclose that bond opinions are not guarantees of the conclusions stated therein or of the factual premises on which they are based, either by including the form of the opinion in the offering documents, with all relevant limitations stated in the opinion, or by including in the offering document an explicit description of what a legal opinion is and is not. This would be consistent with the general statement often included in offering documents to the effect that opinions or estimates in the documents "are intended only as such and not as representations of fact." Such a statement as to bond counsel's opinion and other opinions would effectively inform prospective investors

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that bond opinions are not warranties of results. One form of such a statement that is sometimes used in offering documents reads as follows:

The legal opinions to be delivered

concurrently with the delivery of the bonds express the professional judgment of the attorneys rendering the opinions as to the legal issues expressly addressed therein. By rendering a legal opinion, the opinion giver does not become an insurer or guarantor of the result indicated by that ex-pression of professional judgment, or of the transaction on which the opinion is rendered, or of the future performance of parties to the transaction. Nor does the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of the transac-tion.

Opinions, 32. Furthermore, there is a residual risk that the

"unreasonable" could occur since an opinion is not a guaranty, but merely a lawyer's informed judgment as to a specific question of law. Legal Opinions to Third Parties: An Easier Path, 34 Bus. Law. 1891, 1896 (1979) (illus-trative corporate opinion).

5. In representing a client, a lawyer shall

exercise independent professional judgment and render candid advice. In rendering advice, a lawyer may refer not only to law but to other considerations such as moral, economic, social and political factors, that may be relevant to the client's situation. Model Rules R. 2.1. A client is entitled to straightforward advice expressing the lawyer's honest assessment. Legal advice often involves unpleasant facts and alternatives that a client may be disinclined to confront. In presenting advice, a lawyer endeavors to sustain the client's morale and may put advice in as acceptable a form as honesty permits. However, a lawyer should not be deterred from giving candid advice by the prospect that

the advice will be unpalatable to the client. Advice couched in narrowly legal terms may be of little value to a client, especially where practical considerations, such as cost or effects on other people, are predominant. Purely technical legal advice, therefore, can sometimes be inadequate. It is proper for a lawyer to refer to relevant moral and ethical considerations in giving advice. Although a lawyer is not a moral advisor as such, moral and ethical considerations impinge upon most legal questions and may decisively influence how the law will be applied. Model Rules R. 2.1 cmt 1-2; see Function, 26-27. As advisor, a lawyer provides a client with an informed understanding of the client's legal rights and obligations and explains their practical implications. Model Rules, preamble.

6. (a) A lawyer shall keep a client reasonably

informed about the status of a matter and promptly comply with reasonable requests for information; (b) A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation. Model Rules R. 1.4. …When the client is an organization or group, it is often impossible or inappropriate to inform every one of its members about its legal affairs; ordinarily, the lawyer should ad-dress communications to the appropriate officials of the organization. Model Rules R. 1.4 cmt 3. A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents. Model Rules R. 1.13.

The duty defined in this Rule applies to

governmental organizations. However, when the client is a governmental organization, a different balance may be appropriate between maintaining confidentiality and assuring that the wrongful official act is prevented or rectified, for public business is involved. In addition, duties of lawyers employed by the government or lawyers in military service may be defined by statutes and regulation. There-fore, defining precisely the identity of the client and prescribing the resulting obligations of such lawyers may be more difficult in the government context. Although in some circumstances the client may be a specific

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agency, it is generally the government as a whole. For example, if the action or failure to act involves the head of a bureau, either the department of which the bureau is a part or the government as a whole may be the client for purpose of this Rule. Moreover, in a matter involving the conduct of government officials, a government lawyer may have authority to question such conduct more extensively than that of a lawyer for a private organization in similar circumstances. This Rule does not limit that authority. Model Rules R. 1.13 cmt 6. For a useful discussion of issues relating to privilege, conflicts and organization hierarchy and the governmental client, see "Representing the Government – Who is My Client Anyway," Bench and Bar (Minnesota Bar Association), December 1994. Another useful source is Disclosure Roles of Counsel in State and Local Government Securities Offerings, a joint publication of the National Association of Bond Lawyers and the American Bar Association (2nd Ed. 1994).

7. In the nature of law practice, however,

conflicting responsibilities are encountered. Virtually all difficult ethical problems arise from conflict between a lawyer's responsi-bilities to clients, to the legal system and to the lawyer's own interest in remaining an upright person while earning a satisfactory living. The Model Rules prescribe terms for resolving such conflicts. Within the framework of these Rules, many difficult issues of professional discretion can arise. Such issues must be resolved through the exercise of sensitive professional and moral judgment guided by the basic principles underlying the Rules. Model Rules, preamble.

8. (a) A lawyer shall not represent a client if the

representation of that client will be directly adverse to another client, unless: (1) the lawyer reasonably believes the representation will not adversely affect the relationship with the other client; and (2) each client consents after consultation. (b) A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interests, unless: (1) the lawyer reasonably believes the

representation will not be adversely affected; and (2) the client consents after consultation. When representation of multiple clients in a single matter is undertaken, the consultation shall include explanation of the implications of the common representation and the advantages and risks involved. Model Rules R. 1.7 (emphasis added). The lawyer's own interests should not be permitted to have an adverse effect on representation of a client. For example, a lawyer's need for income should not lead the lawyer to undertake matters that cannot be handled competently and at a reasonable fee. . . . If the probity of a lawyer's own conduct in a transaction is in serious question, it may be difficult or impossible for the lawyer to give a client detached advice. A lawyer may not allow related business interests to affect representation, for example, by referring clients to an enterprise in which the lawyer has an undisclosed interest. Model Rules R. 1.7 cmt 6. X makes the obvious point that every engagement raises the issue and, while Y acknowledges that observation, Y wonders whether this indemnification provision deviates so much from the bond custom and practice that the potential conflict rises to a higher level than a normal bond counsel engagement.

9. X and Y both feel that the indemnification

language may not actually cover the Board or its individual members since they are not technically the "State and its employees." They also believe it could be more clearly written to cover malpractice or provide strict liability as to the bond opinion to protect the interests of the indemnitee. X tells Y that it is not in the scope of S & J's engagement as bond counsel to advise about the efficacy of this language. Y reminds X that S & J advises bond clients all the time about indemnity language in bond purchase agreements and conduit borrower documents. Y also points out that the State, the Board, the Department, and the Governor, respectively, in different contexts, might reasonably assume S & J is its or her lawyer and expect that advice. See Function, 9-14. Otherwise, doubt as to the matter might arise and courts might infer that bond counsel has a client rela tionship with any party who reasonably supposed itself to be a

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client. Such inference after the fact of the existence of an unintended attorney-client relationship is fraught with danger to the lawyer who may unwittingly have had a potential conflict of interest and who may have expanded the number of persons who would have standing to maintain a malpractice action. Similarly, an after-the-fact inference of a broader range of responsibilities than was intended might result in a finding of unperformed duties with the consequent liabilities. See also the further discussion of these matters with respect to Model Rule 1.2 ("Scope of Representation"), Model Rule 1.5 ("Fees"), and Model Rule 1.7 ("Conflict of interest: General Rule").

10. See Function, 16-17; see also Engagements

generally. 11. Y also points out S & J's obvious conflict in

seeking to limit its liability from the De-partment's purchase agreement's broad scope to the "standard" bond engagement letter's narrow scope and the communication issues that raises. See n.8.

12. While no single rule may be dispositive with

these facts according to Y, she reiterates her earlier point (see n.6) about keeping the client reasonably informed and the Model Rule commentary that "A lawyer may not withhold information to serve the lawyer's own interest or convenience." Model Rules R.1.4 cmt 4. She wonders how S & J's responsibilities to the recipient of the bond opinion might be impacted by the indemnification; whether it will be disclosed; and, whether it might be relied upon. See Model Rules R. 2.3 and Function, 27-29. Y points out Model Rule 4.1 on Truthfulness in Statements to Others and wonders which governmental entity deserves to be informed about the efficacy of the proposed indemnification or whether any discussion of the provision with an entity or individual that S & J ultimately determines is not a client (such as, "well S & J is indemnifying us") raises issues under this Model Rule or Model Rule 1.2 which precludes S & J from

assisting a bond client (once identified) "to engage . . . in conduct the lawyer knows is . . . fraudulent." X wonders whether this indemnification provision is that material to the bond transaction but Y again points out the various communication issues and the language of Model Rule 1.2 (d) and (e) as to the lawyers' "discussion" or "consultation" with the client and the Comment that says "a lawyer should not participate in a sham transaction." X and Y agree that these various rules, and the discussion of bond counsel's role in Function, makes them nervous about failure to disclose the inability of S & J to meaningfully indemnify even if it probably is not (or may not be) material.

13. The potential liability for the loss of the tax

exemption appears to Y to involve the interest differential while the potential invalidity damages appear to include all debt service. In the context of these discussions, Y learns that X feels "pretty comfortable" with the validity opinion despite a statutory ambiguity. After reading the "standard" for bond opinions in Opinions (“Bond counsel may render an ‘unqualified’ opinion regarding the validity and tax exemption of bonds if it is firmly convinced (also characterized as having a ‘high degree of confidence’) that, under the law in effect on the date of the opinion, the highest court of the relevant jurisdic-tion, acting reasonably and properly briefed on the issues, would reach the legal conclusions stated in the opin-ion.”), Y cynically observes that she prefers a negligence standard and that is another reason to resist the indem-nification.

14. See Model Rules R. 1.1; see also Function,

15-16, and Standards generally. 15. Y wonders whether X should advise any of

the entities involved under Model Rule 2.1 (see n.7) as to the general lack of experience of J & D in this area. Accord-ing to Model Rule 1.1, "a lawyer shall provide competent representation to a

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client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation." See Function, 15-16. Y also expresses skepticism about J & D's real ability to indemnify. However, according to Model Rule 1.1 cmt 1, competent representation can also be provided through the association of a lawyer of established competence in the field in question. This is true so long as the association is disclosed to the appropriate party. D can also point out that issuers have been creating opportu-nities for historically underutilized law firms by using those firms as co-counsel on certain deals. See Selection, 20-24. The question of competent representation may also raise issues regarding the reporting of professional misconduct. See also Model Rules R. 8.3 and 8.4.

16. See Model Rules R. 8.4(c). 17. See n.7. 18. Here J & D may have to disclose conflicts

between J & D as special counsel to the Governor, in a highly charged political environment, and the Board with its partisan makeup. A wonders whether J & D can share confidential discussions with the Governor about this, or any other matter, with the Attorney General, or the Board (perhaps at a public meeting) under the confidentiality rules. See Model Rules R. 1.6.

19. See n.17. See also "Lawyer Proliferation in

Public Finance Transactions" in Standards. A also points out Model Rule 1.16 for D's consideration as to declining representation (i.e., not responding to the RFP) if "the representation will result in violation of the rules of professional conduct or other law." A suggests that D carefully consider the wisdom of accepting an engagement with financial risks that might later justify termination of J & D because "the representation [could] result in an unreasonable financial burden on the lawyer or has been rendered unrea-

sonably difficult by the client." Model Rules R. 1.16(b)(5).

20. See n.12. 21. A client may consent to representation

notwithstanding a conflict. However, as indicated in paragraph (a)(1) with respect to representation directly adverse to a client, and paragraph (b)(1) with respect to material limitations on representation of a client, when a disinterested lawyer would conclude that the client should not agree to the representation under the circumstances, the lawyer involved cannot properly ask for such agreement or provide representation on the basis of the client's consent. When more than one client is involved, the question of conflict must be resolved as to each client. More-over, there may be circumstances where it is impossible to make the disclosure necessary to obtain consent. Model Rules R. 1.7 cmt 5; see n.8.

22. See Engagements, 8. 23. One further special concern for public finance

lawyers in the analysis of conflicts of interest relates to the obtaining of consent of a governmental entity client. Some jurisdictions do not permit such consent. See, e.g., New Jersey Rule of Professional Conduct 1.7(b)(2), amended from the Model Rule to add, "except that a public entity cannot consent to any such representation;" In Re Opinion 452 of the Advisory Committee on Professional Ethics, 432 S.E.2d 55 (W. Va. 1992). Until a few years ago, that was the position taken by the New York State Bar Association Committee on Professional Ethics. See Opinion No. 580 (March 30, 1987), and Opinion No. 629 (March 23, 1992), which reversed Opinion No. 580, for excellent general discussions of this issue, and a useful survey of state rules on this point. New York has not adopted the Model Rules. Like New York, the ABA has also changed its view over the years. In 1929, it issued Formal Ethics Opinion 16 in which it concluded that a public body

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could not consent, but by 1962 in Informal Ethics Opinion 518 (and now in Rule 1.11(a)), it had endorsed the view that public bodies can consent to and waive conflicts. Also recognizing the ability of a public body to consent are, e.g., City of Cleveland v. Cleveland Elec. Illu-minating Co., 440 F. Supp. 193 (N. D. Ohio, 1976), affirmed by 573 F.2d 1310 (6th Cir. 1977), cert denied, 435 U.S. 996 (1978), and Black v. State of Missouri, 492 F. Supp. 848 (W. D. Mo. 1980). Some of the courts upholding govern-mental ability to consent have, however, noted the particular context or have exam-ined the reasonableness of the consent in making those rulings. Function, 23.

JAMES A. LEBENTHAL TO SPEAK AT KRAFT LECTURE SERIES James A. Lebenthal, Chairman-Emeritus of Lebenthal, will be the speaker at the 2003 Kraft Lecture on Thursday, September 18, 2003, at 7:00 p.m., at the Adams Ballroom, Palmer House Hilton, Chicago. The annual Kraft Lecture is presented by the American College of Bond Counsel. Jim Lebenthal is a leader in the public finance community. In 1986, he was the spokesman for the Public Securities Associa tion (now The Bond Market Association) in its campaign, “Built By Bonds,” to acquaint the general public with the importance of tax-exempt municipal bonds. His topic will be “Confessions of a Municipal Bond Salesman.” The inaugural Kraft Lecture was delivered in 2002 by J. Ben Watkins III, Director of the Division of Bond Finance of the State of Florida. Excerpts from Mr. Watkins' address appear infra. The 2003 Lecture will be presented during the annual Bond Attorneys' Workshop. All Workshop attendees and members of the public are cordially invited to attend the 2003 Lecture. There is no admission charge.

Are you interested in serving on one of the Association's committees? Contact Executive Director Ken Luurs at 312/648-9560 or kluurs@nabl.org.

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BLUE SKY REQUIREMENTS AFTER NSMIA© Editor's Note: The following speech was delivered by Thomas N. Harding, Of Counsel, Pugh, Jones & Johnson, P.C., Chicago, on April 10, 2003, at John L. Kraft's 2003 Bond Attorneys Spring Workshop held in Palm Beach, Florida. Jack Kraft has asked me to discuss state blue sky law requirements after federal pre-emption, that is, after the adoption of the National Securities Markets Improvement Act of 1996, also known as NSMIA. The main points that I want to make are: 1. NSMIA has reconfigured the way that state blue sky laws are applied, but state blue sky laws have by no means gone away. 2. Because of NSMIA, a blue sky practitioner must now understand the exemptions from federal registration under the Securities Act of 1933 in order to make sense of state blue sky laws. 3. Both before and after NSMIA, failure to comply with state blue sky requirements can still get an underwriter into trouble and a blue sky memorandum continues to be a road map for staying out of that kind of trouble. First, some history. NSMIA re-wrote Section 18 of the Securities Act of 1933. Before NSMIA, Section 18 of the Securities Act of 1933 provided in a single sentence that nothing contained in the Securities Act shall affect (that is, pre-empt) the jurisdiction of any state securities commission over any security or person.1 After NSMIA, Section 18 is now significantly longer and provides for an elaborate and partial, but not complete, pre-emption of state blue sky laws.

The heart of NSMIA is the concept of the covered security. Subject to certain exceptions, Sections 18(a)(1) through (3) provide that: 1.no state blue sky law may require

registration of a “covered security;” 2.no state blue sky law may impose conditions

on the use of any offering document, such as an official statement, for a “covered security;” and

3.no state blue sky law may impose merit

conditions on the offering of a covered security.2

So what is a covered security? There are two sources of covered security status for municipal securities. The first one is that under Section 18(b)(4)(C), a municipal security is a covered security if it is exempt from registration under Section 3(a) of the Securities Act of 1933, except that it is not a covered security if it is offered or sold in the state in which the issuer is located. This is the Section 3(a)(2) exemption.3 The second one is that under Section 18(b)(4)(D), a municipal security is a covered security if it is exempt from registration under SEC rules or regulations issued under section 4(2) of the Securities Act of 1933, i.e., Rule 506 of SEC Regulation D.4 Rule 506 provides a “safe harbor” private placement exemption from federal registration. There are two things to remember about Rule 506. Rule 506 is very rarely applicable to issues of municipal securities, but when it applies, covered security status is conferred both on out-of-state and in-state issuers. This is the Rule 506 exemption. Virtually all municipal bonds qualify as covered securities because they are exempt from registration under Section 3(a)(2) of the Securities Act of 1933. Section 3(a)(2) provides the following three sources of exemption from registration for municipal securities:5

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First, Section 3(a)(2) provides an exemption for any security issued or guaranteed by a state or political subdivision. These securities include traditional, governmental purpose bonds and notes such as general obligation bonds and water and sewer revenue bonds, as well as single family mortgage revenue bonds, multi-family housing revenue bonds, student loan bonds, redevelopment bonds and 501(c)(3) bonds. It is important to remember that these bonds qualify for this exemption regardless of whether the interest is excludable from gross income for federal income tax purposes. Second, Section 3(a)(2) provides an exemption from registration for any industrial development bond issued to finance manufacturing facilities or certain types of “exempt activities” (for example, airports, docks and wharves, and mass commuting facilities), provided that the interest thereon is excludable from gross income. Third, Section 3(a)(2) provides an exemption from registration for any security “guaranteed by a bank,” that is, a municipal security secured by a letter of credit issued by a state or national bank or by a qualifying domestic branch of a foreign bank in an available amount equal to the full principal amount of the municipal security plus accrued interest. SEC Release 33-6661 gives guidance on how to determine if the domestic branch of a for-eign bank qualifies as a bank under Section 3(a)(2). This exemption is available regardless of whether the interest on the related municipal security is excludable from gross income. Now let's look at an example of how Rule 506 could become applicable. The taxable tail of an IDB issued for manufacturing facilities would not be exempt from registration under Section 3(a)(2) because the interest is includable in gross income. Thus, the alternatives on the federal front would be either registration or an exemption based on a private placement, relying either on the general principles of the Ralston Purina case or the safe harbor provisions of Rule 506. Usually, however, registration and private placement are avoided by securing the bonds with a letter of credit that results in an exemption under Section 3(a)(2) for securities guaranteed by a bank.

So far, by way of summary, we know that, subject to certain exceptions, under Sections 18(a)(1) through (3) a state can't impose regis-tration or merit conditions on covered securities and can't dictate the content of official statements for covered securities, and virtually all municipal bonds qualify as covered securities because they are exempt from registration under one of the three clauses contained in Section 3(a)(2) of the Securities Act.

So what are the major exceptions? The first, and probably the most important, exception relates to municipal securities that are covered securities under the Section 3(a)(2) exemption: namely, a municipal security is not a covered security if it is offered or sold in the state in which the issuer is located. For example, the Minnesota blue sky law requires the registration of IDBs, so notwithstanding NSMIA, a City of Minneapolis tax-exempt IDB is not exempt from registration if it is offered and sold to residents of Minnesota. On the other hand, a City of Chicago tax-exempt IDB that is offered and sold to residents of Minnesota is exempt from registration. Second, pursuant to Section 18(c)(2)(A), notwithstanding covered security status a state may impose notice filing requirements on covered securities issued by out-of-state issuers. And, as you will see in a minute, several states, including Minnesota, have done just that with the result that Minnesota requires a notice filing for the City of Chicago tax-exempt IDB that is offered and sold to Minnesota residents. Third, pursuant to Section 18(c)(3), a state securities commission may suspend the offer or sale of securities within its boundaries for failure to submit any notice filing or pay any fee required by state law. That is, failure to comply with a NSMIA-based notice filing or filing fee can result in a cease and desist order. Fourth, pursuant to Section 18(c)(1), state securities commissions retain jurisdiction to investi-gate and bring enforcement actions for fraud and deceit and unlawful conduct by any broker or

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dealer, in connection with securities and securities transactions. What are the major effects of NSMIA? Before NSMIA, registration was required for certain types of conduit bonds that were offered or sold in thirteen states (namely, Arizona, Iowa, Maine, Minnesota, Montana, New Hampshire, New Mexico, North Dakota, Rhode Island, South Dakota, Vermont, Washington and Wisconsin), unless they were sold to specified institutional investors in an “exempt transaction.” The conduit bonds in question were typically described in the state blue sky laws as obligations payable from payments made by a “nongovernmental industrial or commercial enterprise” or as obligations characterized as “industrial revenue bonds.” After NSMIA, registration still applies to these types of bonds if they are issued by issuers located in these thirteen states and sold to residents of these states (for example, the City of Minneapolis IDB that is offered to Minnesota residents). On the other hand, after NSMIA, provided that these conduit bonds qualify as covered securities under one of the three clauses of Section 3(a)(2) of Securities Act and provided that they are issued by out-of-state issuers, these conduit bonds may be offered in these thirteen states without registration. However, after NSMIA, notice filing requirements have been imposed by 8 of these thirteen states (namely, Arizona, Minnesota, New Hampshire, New Mexico, North Dakota, South Dakota, Washington and Wisconsin) on these types of bonds when they are issued by out-of-state issuers. The filing requirements imposed by these 8 states include the payment of filing fees, some of which are fixed and some of which vary with the principal amount of bonds being offered in the state. The filing fees can range from $100 to well over $1,000. The filing requirements of New Hampshire, South Dakota and Washington require the filing of a consent to service of process, in addition to the payment of a filing fee. Here's another example. Before NSMIA, various states imposed conditions for exemption from registration. In Florida, the condition for revenue bonds was that the official statement was required to disclose prior defaults of the issuer. Wisconsin imposed on issuers of general obligation

debt a requirement that their financial statements be prepared in accordance with generally accepted accounting principles or rules of the Wisconsin Department of Financial Institutions. After NSMIA, provided that the municipal securities in question qualify as covered securities under Section 3(a)(2) of the Securities Act, these requirements no longer apply to out-of-state issuers, but they still apply to issuers located within the respective boundaries of these states. In the area of offering documents, before NSMIA, New Hampshire required a specified legend for offering documents and Pennsylvania imposed certain restrictions on the use of financial forecasts. After NSMIA, these requirements still apply to issuers located within the respective boundaries of these states. However, provided that the municipal securities in question qualify as covered securities under Section 3(a)(2) of the Securities Act, these requirements no longer apply to out-of-state issuers. What does this mean to you, the practitioner? To start with, you can't disregard your “old” or pre-NSMIA knowledge of state blue sky law requirements. There are two reasons for this. First, for municipal securities that are covered securities under Section 3(a)(2), a state's registration, official statement and merit condition requirements still apply to issuers located within the state's boundaries. Second, your knowledge of pre-NSMIA state blue sky requirements may be useful in dealing with out-of-state issuers. Remember that you have four choices for compliance under a state blue sky law: registration or an “exempt securities” exemption or an “exempt transactions” exemption or a NSMIA conferred exemption with an applicable notice filing, if any. Suppose you are dealing with conduit bonds that are subject to a notice filing because the bonds are covered securi-ties. A close examination of state law may reveal that the bonds also qualify for an exemption from registration, which means that you can ignore the NSMIA-based notice filing requirement. The second effect of NSMIA on the blue sky practitioner is that now one needs to know the

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specific source of the federal exemption from registration in order to do blue sky analysis, namely, the exemptions available under Section 3(a)(2) of the Securities Act of 1933, the SEC Release concerning domestic branches of foreign banks, and Rule 506. This is relevant because not all municipal securities are covered securities, and covered security status under Section 3(a)(2) does not include the issuer's state. So, in conclusion, what did NSMIA do to state blue sky laws? Think of it this way: Everything's the same but it's different. NSMIA did not do away with state blue sky laws. For municipal securities that derive their covered security status under Section 3(a)(2) of the Securities Act of 1933, each state's registra-tion, official statement and merit condition requirements still apply to issuers located within its boundaries when those issuers offer their securities to that state's residents. Out-of-state issuers have been excused from these requirements, but many states have imposed notice filing requirements on obligations of out-of-state issuers. For the practitioner, knowledge of each state's pre-NSMIA blue sky requirements continues to be relevant in analyzing the requirements of the state in which the issuer is located and may provide a basis for avoiding an expensive notice filing for an out-of-state issuer. My own experience has been that my before- and after-NSMIA blue sky memoranda haven't changed much. In the exempt securities section, my blue sky memoranda still list, among other things, jurisdictions where action needs to be taken, typically, notice filings. Since not all under-writers are licensed to sell in all jurisdictions, in the exempt transactions section my blue sky memo-randa still contain 17 or so pages describing, state by state, the institutional investors to whom sales may be made by unlicensed sellers. State blue sky law requirements have been reconfigured by NSMIA but they have not gone away. NSMIA has not changed the fact that our underwriter clients can get into trouble by failing to comply with state blue sky requirements, and a

blue sky memorandum continues to be an underwriter's road map for staying out of that kind of trouble. NOTES 1. Prior to NSMIA, Section 18 of the Securities Act of 1933, as amended, provided: Nothing in this title shall affect the jurisdic tion of the securities commission (or any agency of office performing like functions) of any State or Territory of the United States, or the District of Columbia, over any security or person. 2. Section 18(a) of the Securities Act of 1933, as amended (the “Securities Act”) provides, in part: (a) SCOPE OF EXEMPTION—Except as otherwise provided in this section, no law, rule, regulation, or order, or other administrative action of any State or any political subdivision thereof— (1) requiring, or with respect to, registration or

qualification of securities, or registration or qualification of securities transactions, shall directly or indirectly apply to a security that—

(A) is a covered security; or (B) will be a covered security upon completion

of the transaction; (2) shall directly or indirectly prohibit, limit, or

impose any conditions upon the use of— (A) with respect to a covered security

described in subsection (b), any offering document that is prepared by or on behalf of the issuer... or

(3) shall directly or indirectly prohibit, limit, or

impose conditions, based on the merits of such offering or issuer, upon the offer or sale of any security described in paragraph (1).

3. Section 18(b)(4)(C) of the Securities Act provides: (4) EXEMPTION IN CONNECTION WITH CERTAIN EXEMPT OFFERINGS--A security is a covered security with respect to a transaction

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that is exempt from registration under this title pursuant to... (C) section 3(a), other than the offer or sale of

a security that is exempt from such registration pursuant to paragraph (4), (10), or (11) of such section, except that a municipal security that is exempt from such registration pursuant to paragraph (2) of such section is not a covered security with respect to the offer or sale of such security in the State in which the issuer of such security is located; or

4. Section 18(b)(4)(D) of the Securities Act provides: (4) EXEMPTION IN CONNECTION WITH CERTAIN EXEMPT OFFERINGS--A security is a covered security with respect to a transaction that is exempt from registration under this title pursuant to... (D) Commission rules or regulations issued

under section 4(2), except that this sub-paragraph does not prohibit a State from imposing notice filing requirements that are substantially similar to those required by rule or regulation under section 4(2) that are in effect on September 1, 1996.

5. Section 3(a)(2) of the Securities Act provides several exemptions from registration, including the following: any security issued or guaranteed by the United States or any territory thereof, or by the District of Columbia, or by any State of the United States, or by any political subdivision of a State or territory, or by any public instrumentality of one or more States or territories, or... any security issued or guaranteed by any bank or... any security which is an industrial devel-opment bond (as defined in section 103(c)(2) of the Internal Revenue Code of 1954 [26 USCS § 103(c)(2)]) the interest on which is excludable from gross income under section 103(a)(1) of such Code [26 USCS § 103(a)(1)] if, by reason of the application of paragraph (4) or (6) of section

103(c) of such Code [26 USCS § 103(c)(4) or (6)] (determined as if paragraphs (4)(A), (5), and (7) were not included in such section 103(c)) [26 USCS § 103(c)], paragraph (1) of such section 103(c) [26 USCS § 103(c)(1)] does not apply to such security... Copyright 2003 by Thomas N. Harding GASB PROPOSES TECHNICAL BULLETIN TO IMPROVE DISCLOSURES ABOUT DERIVATIVES Editor's Note: The author, William L. Hirata, of Parker, Poe, Adams & Bernstein L.L.P., Charlotte, N.C., is the Association's current representative to the Governmental Accounting Standards Advisory Council. On April 2, 2003, the Governmental Ac-counting Standards Board (“GASB”) released for public comments a proposed Technical Bulletin (“TB”), “Disclosure Requirements for Derivatives Not Presented at Fair Market Value on the Statement of Net Assets.” The comment deadline for this proposed Technical Bulletin ended on May 16, 2003, and if the proposed TB is then approved by GASB, it is expected that the final form of the proposed TB will be issued in the third quarter of 2003, effective for financial statements for periods ending after June 15, 2003. In commenting on why GASB believes this issue is so important, GASB Project Manager Randal J. Finden remarked, “The market for derivative instruments has recently exploded for state and local governments as current financing needs have changed in connection with a more constrained budgetary environment. Some derivative contracts may pose substantial risks, and we want to help governments better disclose those risks in their financial statements.” Technical Bulletin 94-1 Superseded The proposed TB will supersede TB 94-1, “Disclosures about Derivatives and Similar Debt

The Bond Lawyer® ©2003 41 June 1, 2003

and Investment Transactions,” and clarifies guid-ance on derivative disclosures pending results of an ongoing GASB project on reporting and measurement of derivatives and hedging activities. Governments would be required to disclose in their financial statements a derivative’s objective, as well as its terms, fair value and associated risks (e.g., credit risk, interest rate risk, basis risk, termination risk, rollover risk and market access risk). This decision to revise TB 94-1 was made by GASB at its December, 2002, meeting. Although the timetable for issuing TB 94-1 is short and the effective date creates a short transition period, GASB staff believes that the effective date “is justified (a) by the significance of the derivative disclosures, (b) because, to a limited extent, the requirements of [the TB] are a clarification of existing requirements, and (c) by research that indicates that fair values are routinely estimated by derivative dealers.” NABL Response An ad hoc group consisting of NABL Board members and members of NABL’s Securities Law and Disclosure Committee discussed the proposed TB and determined that NABL’s response would be primarily to monitor comments received by GASB on the proposed TB and to alert its membership to the proposed TB. Consequently, on April 30, 2003, a NABLNET Alert was sent to all NABL members advising them that the proposed TB was available on the NABL web site and of the due date for comments. What is a Technical Bulletin? TBs are issued to provide guidance for applying GASB Statements of Governmental Accounting Standards, GASB Statements of Governmental Accounting Concepts and Inter-pretations of these Statements, and also for resolving accounting issues not directly addressed by these Statements and Interpretations. Unlike Statements and Interpretations, TBs may be issued at any time at the discretion of GASB and with or without the appointment of task forces, research, notice, public hearings or public exposure. TBs generally are used to provide guidance if an

accounting or reporting problem can be resolved within the following guidelines: 1. The guidance is not expected to cause a

major change in accounting practice for a significant number of entities.

2. The administrative cost involved in

implementing the guidance is not expected to be significant to most affected entities.

3. The guidance does not conflict with a

broad fundamental principle or create a novel accounting practice

If any one of these guidelines is not met, then a GASB Statement or Interpretation is considered to be the more appropriate means of resolving the issue. Are you on-line for NABLNET Alerts?

The Bond Lawyer® ©2003 42 June 1, 2003

FASB Statement No. 149 On April 30, 2003, the Financial Accounting Standards Board (“FASB”) issued Statement No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This State-ment amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The Statement is effective for contracts entered into or modified after June 30, 2003 (with certain exceptions), and for hedging relationships designated after June 30, 2003. Summary Many NABL members have been involved in advising their clients with respect to derivative contracts and may be asked to assist clients concerning FASB Statement No. 149 and the proposed supersession of TB 94-1. Additional information concerning derivatives beyond that set forth in a client’s financial statements may be determined to be material and may require greater disclosure in an offering document. William L. Hirata May 12, 2003 J. BEN WATKINS III'S ADDRESS TO AMERICAN COLLEGE OF BOND COUNSEL (EXCERPTED) Editor's Note: The following excerpts are from the address by J. Ben Watkins III — the inau-gural Kraft Lecture — on September 19, 2002, to the American College of Bond Counsel. Mr. Watkins is the Director of the State of Florida's Division of Bond Finance. m m Everyone is aware of the disruption the IRS audit enforcement program causes in the market-place when bonds come under audit. In the variable rate mode, the interest rate automatically adjusts to a near taxable equivalent. In the fixed

rate bond market, investors suffer frozen liquidity, the inability to trade those securities. If they can sell, it’s at a diminished price. This has been documented anecdotally by a study by The Bond Market Association. The existing system of enforcement is very cumbersome and inefficient. We have had a lot of success working with NABL and with Hobby Presley, in particular. NABL has come out with a legislative proposal. We at GFOA have responded, saying that there is enough merit in the idea of changing the existing regulatory system to explore the proposal. We are going to form a joint task force to see if we can come together, address the difficult issues, develop a consensus and move forward with that initiative. The two issues that are most troublesome for issuers are, first, we would like to be more specific on the penalty regime and not just leave it up to the Internal Revenue Service to develop the companion regulations to go along with the legislation. We want to know more specifically what the penalties would be, and take a hand in designing more specifically what those intermediate sanctions might be. Second, we would like it to be elective and not mandatory. An election at the time that we are under audit, once we have the facts in front of us, would enable us to make an educated decision about whether or not to assume sole responsibility for all the alleged tax law violation. These are the two fundamental difficult challenges that we need to address, and I’m optimistic we can come to a consensus. Recent events in the financial markets and how they affect the role of bond lawyers is what I would like to talk about and emphasize. It hits things at a pretty high level, so bear with me if you will. The recent chain of events are what I generally refer to as corporate malfeasance, and they fall into three different categories: accounting irregularities, like Enron and WorldCom; conflicts of interest, like those at Merrill Lynch which were uncovered by the New York Attorney General Elliott Spitzer and the SEC’s investigation of Solomon Smith Barney credit analysts making recommendations to advance lucrative investment banking business at the expense of customers and irregularities; and excesses in executive compensation.

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When we look at the impact of these matters, they cut across the board. The impact, in some way, shape or form, will be felt in the municipal finance industry. For example, in the race for Florida Attorney General, the campaign ads for my former classmate, then Senate Minority Leader, call for a law that accountants and corporate executives who commit fraud will not just have to pay fines — they’ll have to do jail time. Add onto that the President Bush’s support for tougher penalties for white-collar crimes and personal responsibility for corporate executives. And lastly, Congress, seizing on the popularity of the initiative of criminal prosecution of corporate executives, has adopted tough new penalties in the Oxley bill. So you ask yourself, “Well, what effect does this have on municipal finance?” In my opinion, the corporate scandals will change standards by which business decisions will be judged — much in the same way as Watergate changed the standards for public scrutiny of public officials. This notion that private corporate decisions are beyond public scrutiny is no longer going to hold. There is going to be much more transparency demanded within the corporate boardroom. Boards of directors are going to have to recognize the change and fulfill their fiduciary responsibility to shareholders by exercising independent review and judgments. No longer are they going to be able to merely rubber stamp what management has submitted to them. Large institutional investors on the equity side have gained mo-mentum in pushing for changes in corporate governance requiring more independence on boards of directors. Public pension funds, including CALPERS in California, Teachers Retirement in New York, and the Florida Retirement System, have adopted investor protection principles to clarify and separate these conflicts of interest that take place within the corporate world. Regulatory bodies, including the New York Stock Exchange and the National Association of Securities Dealers, have ongoing initiatives to ferret out conflicts of interest between analysts in the equity world and investment banking activities of broker dealers. m m So you are sitting there, saying, “What does all this have to do with the municipal industry?” In

my judgment, it is the notion that independence is an important principle to the integrity of the securities market, including the municipal securities market. Bond lawyers and the role that they play in our market embody this notion of independence and objectivity in reviewing the transactions and rendering the opinions that are necessary for our market to operate. Let us evaluate the impact of these events and see what lessons we might learn about your role as Bond Counsel. The changing complexities of the financial markets and the multitude of products that now exist — swaps, caps, collars, floors, you name it — and the structure of the transactions and the complicated nature of emerging transactions, from housing bonds, to pooled loan programs, to tobacco securitizations, create a lot of uncertainty about who you are, what you do and, most fundamentally, whom you represent. Jack Kraft wrote a very interesting article that recently was published in The Bond Buyer about “Who is the Bond Counsel Client, The Mystery.” I think it reflects a lot of the uncertainty and a lot of the difficulty that you all are placed in and face each and every day, and how important that role is to our market. The next thing I want to do is take a look at the accounting profession as an example of what can happen if professionals do not take a broader view of their responsibility to the public in protecting the integrity of the securities market. Anderson, the largest accounting firm in the world, vaporized in a matter of months. It’s absolutely shocking. I didn’t know it could ever happen. In less than a year — gone, doesn’t exist. Accountants are supposed to be independent. It’s in the name of the profession, independent certified public accountants. The public believes, and rightfully so, that the professional standards require independence and objectivity. Investors rely on accountants as the watchdogs for the industry. Client pressures and demands to use aggressive accounting practices are the root of a lot of the problems that have been caused. In Enron, Anderson was not independent. It helped design and employ off balance sheet partnerships, which, although in technical compliance with the rules and accounting standards, at the end of the day served to obfuscate the whole picture of what was really going on. The client keeps moving the

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line out farther and farther. In most cases, it’s done not with malicious intent, but in retrospect it doesn’t pass the test of public scrutiny. I’m sure in this situation they were pushed by their clients. They did it once, it was okay. They did it again; they did it again, no problem, but at the end of the day when you piled it all up, it became a particu-larly egregious situation. In WorldCom, again pressure of the clients to employ aggressive accounting tactics or practices by capitalizing expenses also led to another debacle and at least a part of the failure in both of these instances, in both Enron and WorldCom, can be attributed to not emphasizing for the accountants, at Anderson, in particular, the broader responsibility to both the public and to the integrity of the securities markets. There are a lot of similarities between accountants and bond lawyers in the roles they play. They are both in a position of public trust and, therefore, have a broader duty. They are both subject to client pressures, by underwriters, issuers and conduit issuers, in particular. The unqualified opinion that you render is the gold standard by which we all operate. It is similar to an accountant’s opinion in that there is an awful lot going on behind the simplicity of the language in the opinion that you all render. Lastly, the opinion plays a critical role in our market because third parties and investors are relying on it. So, in conclusion, bond lawyers are in the very difficult position of having to balance competing interests of client demands and compensation versus protecting investors and the integrity of the securities market. The lessons that can be learned — independence and objective judgments — are essential. Do not let pressures from clients and competitive pressures of your businesses overcome your good legal judgment. Sometimes it’s in everyone’s best interest in a transaction just to say no and to walk away from the transaction and the associated fees. The decisions that you make must be capable of withstanding public scrutiny, because one thing is certain, they will be judged with 20/20 hindsight. And lastly, mentor young lawyers and cultivate an atmosphere of doing the right thing to insure the long-term quality of the profession. The Bond Counsel community in general and you all, in

particular, have done a phenomenal job in protecting our markets from bad transactions and from the disastrous consequences that can occur when people don’t pay attention to their broader responsibilities. I expect that this will continue. We must avoid any crisis that might precipitate additional governmental intervention in our markets. I believe there are valuable lessons to be learned from the corporate debacles and the consequences to the accounting profession. These lessons reinforce the principles that you have used to govern your practices. m m

NABL has a JOB BANK for members and public sector lawyers seeking employment opportunities with private law firms. Contact Executive Director Ken Luurs at 312/648-9590 or e-mail kluurs@nabl.org.

The Bond Lawyer® ©2003 45 June 1, 2003

LEGAL ASSISTANTS' CORNER TAX-EXEMPT MUNICIPAL BONDS REPORTING REQUIREMENTS Any tax-ex-empt financing requires numerous steps to cause the bonds not only to be issued on a tax-exempt basis, but also to main-tain that status throughout the duration of the issue. The Inter-nal Revenue Code (“Code”) estab-lishes reporting requirements for all issuers of tax-exempt state and local governmental obligations to provide proper notice to the Internal Revenue Service (“IRS”). A simple fact that must be learned early when involved with municipal bond law is that bonds issued as tax-exempt must have the appropriate form timely filed with the IRS. Legal assistants, under the direct supervision of the attorney, may be utilized in this necessary filing, thus eliminating a great deal of preliminary work for the attorney who will eventually finalize and approve the form. In order for the legal assistant to assist the attorney, she or he must acquire a background knowledge of current rules and the proper IRS forms to be used for various tax-exempt issues. The legal assistant may assist in collection of the correct information for the specific bond issue and the monitoring of filing deadlines. This background work is important in assisting in preparation of the form and the successful reporting with the IRS. Some knowledge as to the types of bonds described under the various sections of the Code is helpful for the legal assistant in order to become familiar with the specific rules applicable to the types of bonds. Many legal assistants may not be involved with all types of IRS forms. However, it is always a good idea to be generally informed as to the forms required by certain bond issues. Before spending too much time in gathering information for a particular form, a preliminary

review by the supervising attorney is always a good practice. The primary forms used in reporting tax-exempt obligations are as follows: 1.8038 - Information Return for Tax-Exempt

Private Activity Issues – used by issuers of tax-exempt private

activity obligations as defined in instructions (includes qualified mortgage bonds, 501(c)(3), exempt facility, etc.);

2.8038-G - Information Return for Tax-Ex-

empt Governmental Obligations – used for all governmental tax-exempt

obligations with an issue price of $100,000 or more; and

3.8038-GC - Information Return for Small

Tax-Exempt Governmental Bond Issues, Leases, and Installment Sales

– used for governmental tax-exempt obligations with an issue price under $100,000.

The forms include instructions providing guidance in filling out the form and what type of information must be provided. When preparing any form, an important rule of thumb is to take ample time to review all instructions and be aware of all requirements. For example, a schedule must be prepared and attached to a Form 8038 relating to a 501(c)(3) bond, a requirement discussed in the instructions. Forms are only as good as the information which they contain and just filling out every space does not insure that a proper reporting has been made to the IRS. One of the basic ways the legal assistant can provide support is to collect the correct information to complete the IRS form. The information required to complete the IRS form will be found in the documents prepared in connection with the bond issue. One document which contains much of the data is the tax certificate or similar document. In a tax-exempt issue, the tax certificate sets forth the facts and reasonable expectations relating to the bond issue at the time of closing and may identify the various

[Mendenhall photo]

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types of proceeds of the issue, the use of proceeds (e.g., for refunding or new money purposes, the amount of issuance costs and deposit to a debt service reserve fund), the arbitrage yield, the weighted average maturity, information relative to the TEFRA hearing and notice, and expected time period to fully expend proceeds. Information about volume cap in connection with private activity bonds subject to that requirement of Section 146 of the Code is also often found in the tax certificate. Certain volume cap-related materi-als must be sent with the form to the IRS. The tax certificate may also provide infor-mation for reporting certain other less common situations, as follows: 1.8038-T - Arbitrage Rebate and Penalty in

Lieu of Arbitrage Rebate – used by issuers of tax-exempt

obligations to pay any yield reduction payments in accordance with Sec. 1.148-5(c) of the Code

– used by issuers of tax-exempt obligations to pay the arbitrage rebate to the Treasury under Section 143(g)(3), Sec. 148(f), or corresponding provisions of the 1954 Code

– used by issuers of tax-exempt obligations to pay penalties in connection with rebate.

2.8038-R - Request for Recovery of Over-

payment Under Arbitrage Rebate Provi-sions

– used by issuers of tax-exempt obligations to request a refund of amounts paid under form 8038-T.

Forms 8038-T and 8038-R differ from the other reporting forms described above, as their primary purpose is to report the information needed to monitor compliance with arbitrage rebate require-ments and they are filed at specific intervals throughout the duration of the bond issue. The legal assistant many times will not be involved with the filing of these forms as they are not filings that occur in connection with the post-closing proce-dures, but should be aware of what information is required by each form and the reasons for the necessity of their filing.

The IRS changes the various forms from time to time, so it would be very helpful to your supervising attorney to check for the release of new forms from time to time. Forms can be found at the IRS website at www.irs.gov. In a tax-exempt bond issue, the reporting requirements are extremely important. The legal assistant, providing data retrieval, knowledge of forms and rules as well as the actual filing of the forms, is able to assist the bond lawyer in order to insure that all IRS regula tions are satisfied and monitored, thus insuring continuation of the tax-exempt status of the bonds. Nancy Mendenhall Committee on Legal Assistants May 9, 2003 VOICE FROM THE PAST Chapter 27 The 1970s now look like those interesting times in which an apocryphal Chinese curse would doom its victim to live. One of those times, for bond lawyers at least, was when uncertainty enveloped the constitutionality of the financing of public schools. When the system of public schools in the United States was established, the country was primarily rural, and wealth was largely represented by ownership of farmland. Thus the wealth and population were more or less evenly spread over the populated areas of the country. With industrialization, wealth came to be represented primarily by ownership of industry and commerce. It became concentrated in areas that did not necessarily coincide with those into which the urbanizing population moved. Some of the districts into which States were divided grew richer than others, partly because of the industries which located in some districts but not others, and partly because of the varying degrees of private wealth of the citizens who lived in and moved into the various districts. Rich districts could easily pay the costs of excellent education for the children in them while others could barely afford modest education. While the various States adopted mea-

The Bond Lawyer® ©2003 47 June 1, 2003

sures to help assuage the hardships of the poorer districts, the spending per student from district to district was far from uniform. It was believed by many that a majority of the inhabitants of the richer districts were of European descent and that those of the poorer districts were of African or Latin American descent. There was considerable feeling that the latter were being denied equal protection of the laws in violation of the Fourteenth Amendment to the U.S. Constitution and various similar State constitutional provisions. The California Supreme Court sub-scribed to this view in Serrano v. Priest, 5 Cal. 3d 584, 487 P.2d 1241 (1971), and held that the then current system of financing public education in that State violated both Federal and State constitutions. This was followed by San Antonio Independent School District et al. v. Rodriguez et al., 337 F. Supp. 280, in which a three-judge Federal District Court for the Western District of Texas held the Texas school finance system unconstitutional under the Equal Protection Clause of the Fourteenth Amendment. This holding was appealed to the U.S. Supreme Court. One unintended consequence of the litigation was the difficulty that bond counsel had giving clean opinions on school bond issues. Litigation of this sort sprouted up in various States. In some States, school bonds simply could not be approved with unqualified opinions. In others it was common for bond counsel’s opinion to refer to Rodriguez or Serrano or both, and to state that the laws governing the particular bonds being ap-proved were not then subject to such litigation. Bond counsel filed a brief amicus curiae with the Supreme Court; the names of those signing the brief were Joseph R. Cortese, Joseph Guandolo, Bryce Huguenin, Manly W. Mumford, Joseph H. Johnson, Jr., Joseph Rudd, Fred H. Rosenfeld, Herschel H. Friday, George Herrington, Harry T. Ice, Cornelius W. Grafton, Fred G. Benton, Jr., Eugene E. Huppenbauer, Jr., Harold B. Judell, Robert B. Fizzell, John B. Dawson, George J. Fagin, Howard A. Rankin, Huger Sinkler, Robert W. Spence, Hobby H. McCall, James R. Ellis, and William J. Kiernan, Jr. It looked a little like a list of the bond counsel members of the Section of Local Government Law of the American Bar Association with a few names added.

I still recall a couple of experiences. One occurred when this ABA Section held its annual meeting; the Serrano and Rodriguez litigation was a major subject of the program. On the program were people representing the issuers of bonds, and also a law professor who was one of the driv-ing forces behind the initia tion of the litigation. In the course of discussion in the hallway before the formal presentations, he expressed shock and dismay when he was told that the force he had helped to set in motion with good intentions was seriously interfering with the financing of schools for rich and poor alike. Another experience was when Charles James, Sr., of the investment banking firm of Refsnes, Ely, Beck & Co. of Phoenix, asked if I could find a way to get the bonds of an Arizona school district past the legal obstacle of such litigation then pending in that State. It happened that AMBAC, the first of the municipal bond insurance companies, was just getting started then in Milwaukee. I suggested talking to Frank Carr, the founder, to see if his firm would write insurance to cover the legal problem. Charley flew to Chicago, and he and I took the train up to Milwaukee on a bitterly cold day. As he had not needed a hat in Phoenix, he didn’t think to bring one to Chicago and Milwaukee. His bald head turned bright red in the near-zero air as we walked to and from train stations; I kept glancing at it to make sure no white spots appeared. Both of us had met Frank as a senior officer with John Nuveen & Company in Chicago before he founded AMBAC. He greeted us warmly and listened at some length as we explained the nature of the litigation and sug-gested that the real risk to the bondholders was small, whatever the courts might hold, and that insurance was the way to deal with that risk. Our view was that if the current school financing system was held void, the bonds would

[Mumford photo]

The Bond Lawyer® ©2003 48 June 1, 2003

nevertheless be legal obligations that, if they could not be paid by ad valorem taxes on property in the issuing district, would have to be paid some other way. He listened carefully and politely, and agreed with our suggestion that bond insurance would cover the possibility of illegality of source of payment of the bonds. But when the part about not getting a clean legal opinion came up, he balked. I could not blame him much; just as it was Charley’s and my job to try to convince him, it was his job to say no. Arizona school districts had to get along without bond issues for a while. The Rodriguez case was argued before the U.S. Supreme Court October 12, 1972, and decided March 21, 1973. In San Antonio School District v. Rodriguez, 411 U.S. 1, a five-to-four majority determined that the school district method of financing public education did not violate the Equal Protection Clause. The majority opinion by Justice Powell pointed out: Indeed, there is reason to believe that the

poorest families are not necessarily clustered in the poorest property districts. A recent and exhaustive study of school districts in Connecticut concluded that "[i]t is clearly incorrect . . . to contend that the `poor' live in `poor' districts . . . . Thus, the major factual assumption of Serrano - that the educational financing system discriminates against the `poor' - is simply false in Connecticut." Defining "poor" families as those below the Bureau of the Census "poverty level," the Connecticut study found, not surprisingly, that the poor were clustered around commercial and industrial areas - those same areas that provide the most attractive sources of property tax income for school districts. Whether a similar pattern would be discovered in Texas is not known, but there is no basis on the record in this case for assuming that the poorest people - defined by reference to any level of abso-lute impecunity - are concentrated in the poorest districts.

There is still plenty of disparity among districts in the amounts spent per student and there are many efforts to relieve it. Good sources of information can be found at

<http://www.nces.ed.gov/edfin/litigation/> and at <http://www.coe.ilstu.edu/boxscore. htm>. So far as I know, these more recent efforts no longer prevent bond lawyers from giving clean opinions on school bonds. Manly W. Mumford Are you interested in serving on one of the Association's committees? Contact Executive Director Ken Luurs at 312/648-9560 or e-mail kluurs@nabl.org.

The Bond Lawyer® ©2003 49 June 1, 2003

DISTINGUISHED SERVICE AWARD NOMINATIONS SOUGHT Nominations of recipients of the Associa tion's Distinguished Service Award should be submitted not later than July 1 to Director of Governmental Affairs William L. Larsen, 601 Thirteenth Street, N.W., Suite 800 South, Washington, DC 20005-3875, or by e-mail to wlarsen@nabl.org. The Award, first presented to Frederick O. Kiel in 2002, is for the purpose of recognizing extraordi-nary individual service provided to the Association over an extended period of time, and may be awarded periodically by the Board of Directors in its discretion. QUARTERLY LIMERICKS I There was a bond lawyer from Kent Who fished right through Easter and Lent; At the end of the line, With a bit of a whine, He hauled up a catfish, quite spent. II There was a bond lawyer from Frisco Who covered his body in Crisco®: Slid hither and yon, In a bit of a con (He was taking a bit of a risk-o). Orin Macgruder QUARTERLY NON-LIMERICKS I The SEC settles down like an eagle — Jaws gaping, claws grasping (well, more like a beagle) — The new brooms sweep clean, and gather up dust: Levitt's leavings, or whittlings, or mayhap just rust.

II In Silicon Valley, Red ink's aflow: Heads on the block, boys, Eating them crows. Crows, they love sunshine; Wall Street loves "do." Now and forever, Silicon blew. Will it come back, boys (Baby, who knew)? We're on your back, toys, We're loyal and true. Loyal and true, girls, Bluer than blue; Money comes back now, Or goes up the flue.

EDITOR'S NOTES For the first time in many a quarter, this num-ber of The Bond Lawyer® has been delivered to you via first class mail. The Associa tion had experimented with a cheaper mailing method, but found that many or most members had to wait too long to get The Bond Lawyer®. I hope you value this service enhancement as much as I do. As this is written, Spring in Ohio has Sprung, except for those pesky moles (still blessedly buried). Daffodils, chionodoxa, snowdrops, and forsythia assault the senses, and potholes beg repair. First responders train, Federal dollars are nowhere in sight, and previously unemployed

[Kiel photo]

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worthies extend mirrors under vehicles at the airport. What more could one want? We are pleased to include in this issue excerpts from Ben Watkins' September 19, 2002, speech to members of the American College of Bond Counsel. We would have done so sooner, but they arrived here in late March. We hope to publish more timely the remarks of the redoubtable James Lebenthal to the same group, scheduled for September 18 (announcement supra), again timed to coincide with the Bond Attorneys' Workshop; the ACBC welcomes Association members to attend upon Mr. Lebenthal's remarks. As the work product of the Committee on Professional Responsibility demonstrates — and you have to love those endnotes, worthy of any law review — indemnification demands are a practice, professional, and ethical minefield. Even a less complex hypothetical than that posited by the Committee would lead the prudent practitioner to conclude — in my humble opinion — that that way lies trouble. We'll await the conclusion of the first suit upon an indemnity to find out how much. On the practical front, perhaps beyond the purview of the article, an indemnity may well cause indemnifying bond counsel to take positions more conservative than the facts or the law would warrant, to reduce bond counsel's exposure at the arguable expense of the issuer. On the profes-sional side, is it appropriate to indemnify only those clients that ask for indemnity, whilst withholding indemnity to those clients that haven't even thought about whether indemnity would be advantageous to them? The witty and gifted Ellen Goodman, Associate Editor of The Boston Globe, recently wrote a column about Gulf War II reportage — and the reportage of prior wars — that concluded by saying, "We are all embedded now." She is right, in the sense that we could partake of the cable channels' saturation coverage if we chose to do so, but she's wrong, in the sense that (unlike those of the truly embedded reporters in the field) our lives are not in jeopardy. But by a process of free association, Ms. Goodman's column got me thinking about the relationship between bond lawyers and their

clients. Putting to one side the (humble opinion, here, again) execrable RFP process, of which your humble has never partaken, the very best bond lawyers embed themselves with their clients. They cultivate long-term relationships, and relish them. They spend time in the field. They subscribe to the daily or weekly newspapers that report on the doings of their clients, and they read them, so as to try to avoid surprises. ("Come, now, counsel; the problem before the court was front page news in the Village of Glutz!") In truth, I do all of the above as to most of my clients, and wish I had the time to do it for all of them. This derivatives stuff may start to get interesting, both from practice and disclosure standpoints. See Bill Hirata's article, supra. When one Alabama county has $3 billion of swaps exposure, folks in New York might want to listen up. As a country lawyer whose clients have never swapped and all of the members of whose city councils might never be led to understand fully the theory and mechanics of a swap, let alone be able to explain it to their constituents, I wonder whether the benefits of these arcane deals exceed their risks. There are counterparty risks, market risks, legal risks, and political risks, and I may not have covered all of the risk bases. Do you go to bed at night knowing that your client (not the finance director, but the city council) understands the swap deal it has just blessed? Perhaps not. Summer is now hard upon us, but — the war notwithstanding — it brings not the semi-custom-ary surcease. These magnetic interest rates, reflecting investors' flights to safety, seem addictive to our clients, and are tolerated by a market in fear of putting money into the next Enron, or Global Crossing, or Broadwing, or Tyco. Should we root for more scandals? (I didn't say that.) See you in Chicago?

MEMBERSHIP SERVICES Education Program The Association conducts seminars and workshops dealing with matters of interest to the bond law community. Still ahead in 2003:

¨September 17, 18 and 19: Bond Attorne ys' 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 prac-titioners. For more information, call or e-mail Executive Director Kenneth J. Luurs at 312/648-9590 or kluurs@nabl.org. Law Reform: Committee Participation Through its Committees on 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 regula tions, 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 Associa tion also works closely with public interest groups and industry organizations on matters of mutual interest. Office of Governmental Affairs In Washington, Director of Governmental Affairs William L. Larsen represents the Association in federal regula tory 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 inform and educate Congress and federal regulatory agencies about public finance issues. Members may contact the Director at 202/682-1498 (e-mail wlarsen@nabl.org), or at 601 Thirteenth Street, N.W., Suite 800 South, Washington, DC 20005-3875, to discuss legislative and regulatory issues, request copies of current public finance proposals before Congress or regulatory agen-cies, and obtain NABL comments on proposed securities and tax regulations. He also maintains — via NABLNET Alerts — e-mail contact with members on timely issues. Other Membership Services and Benefits § Subscription to The Bond Lawyer® ; § The Association's renowned website: www.nabl.org; §Preferential admission to the Association's educational programs at substantially reduced rates

and reduced air fares; §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 LexisNexis); Blue Sky Regulation of Municipal Securities; and seminar course books;

§Free access to the Association's Job Bank through which members can receive job listings and

firms can seek members interested in employment opportunities; §No charge for placement in The Bond Lawyer® of brief notices of employment opportunities

available or sought;