The Twenty-Second Bond Attorneys' Workshop 12

CONTENTS

President Conner's Remarks 1The Nineteenth Annual Meeting 6The New Directors 8Past President Ebert's Remarks 9The Twenty-Second Bond Attorneys' Workshop 12Actions by the Board of Directors

on September 24, 1997 (Susan Weeks) 14Actions by the Board of Directors

on September 25, 1997 (Howard Zucker) 15Actions by the Board of Directors

on November 6 and 7, 1997 (Howard Zucker) 17Washington Saga (Amy K. Dunbar) 18Committee on Securities Law and Disclosure Files Comments

on Proposed MSRB Rule on Selection of Underwriter's Counsel 21Shared Tax Observations (Sharon Stanton White) 24Invitation for Comments on NYC Bar's Proposed Pay-to-Play Rule 28The ABA Task Force on Lawyer Contributions:

A Preview of the Issues (Fredric A. Weber) 33Exposure Draft: Joint Recommendations for Communicating

With the Beneficial Owners of Defaulted Municipal Securities 43Ethical and Malpractice Implications of Representing the Client

in an IRS Audit Where Your Firm Did the Underlying Work(William Freivogel) 51

Liabilities and Professional Responsibilities 52Proposed Amendments to Chapter 9 May Be Unnecessary

and Could Be Counter-Productive (James E. Spiotto) 70Legal Assistants' Corner (Ann L. Atkinson) 80Software Review: Federal Taxation of Municipal Bonds

(Richard H. Nicholls) 81Voice from the Past (Manly W. Mumford) 83Bond Dogs 84Remembering Barry Mann (Henry S. (Hank) Klaiman) 86Editor's Notes 87Quarterly Limericks 88

Volume 18, No. 4 December 1, 1997

The Quarterly Newsletter 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, fordistribution by first class mail solely to members and associate members of the Association. Membership information may be obtained by writing to Patricia F. Appelhans,Executive Director, NABL, 1761 S. Naperville Road, Suite 105, Wheaton, Illinois 60187, or by calling 630/690-1135. ©NABL, 1997.

The Quarterly Newsletter December 1, 1997

Because opinions with respect to the interpretation of state and federal laws relating to municipal obligations frequentlydiffer, the National Association of Bond Lawyers ("NABL") has given the authors who contribute to The QuarterlyNewsletter, and its editor, the opportunity to express their individual legal interpretations, opinions, and positions. Theseinterpretations, opinions, and positions, whether explicit or implicit, are not intended to reflect any position of NABL or thelaw firms, branches of government, or organizations with which the authors and editor are associated, unless they have beenspecifically adopted by such organizations. For educational purposes, the authors and editor may employ hyperbole or offersuggested interpretations for the purpose of stimulating discussion. Neither the authors, the editor, or NABL can takeresponsibility as to the completeness and accuracy of the materials contained herein; accordingly, readers are encouragedto conduct independent research of original sources of authority. The Quarterly Newsletter is not intended to provide legaladvice or counsel as to any particular situation. Errors or omissions should be called to the editor's attention.

National Association of Bond LawyersOfficers and Directors

William H. Conner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PresidentSquire, Sanders & Dempsey L.L.P.Cleveland, OhioFloyd C. Newton III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . President-ElectKing & SpaldingAtlanta, GeorgiaHoward Zucker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SecretaryHawkins, Delafield & WoodNew York, New YorkJeannette M. Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TreasurerLeBoeuf, Lamb, Greene & MacRae, L.L.P.New York, New YorkRobert W. Buck . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DirectorPalmer & Dodge LLPBoston, MassachusettsJ. Hobson Presley, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DirectorMaynard, Cooper & Gale, P.C.Birmingham, AlabamaPamela S. Robertson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DirectorEdwards & AngellProvidence, Rhode IslandLisa P. Soeder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DirectorNixon, Hargrave, Devans & Doyle LLPHartford, ConnecticutCarolyn Truesdell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DirectorVinson & Elkins L.L.P.Houston, TexasDavid A. Walton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DirectorJones HallSan Francisco, CaliforniaMary Jo White . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DirectorLong Aldridge & Norman, LLPWashington, D.C.Julianna Ebert . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DirectorQuarles & Brady Immediate Past PresidentMilwaukee, WisconsinFrederick O. Kiel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Honorary DirectorCincinnati, Ohio Editor of The Quarterly Newsletter

NNNPatricia F. Appelhans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive DirectorWheaton, IllinoisAmy K. Dunbar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Director of Governmental AffairsWashington, D.C.

The Quarterly Newsletter December 1, 1997

PRESIDENT CONNER'S REMARKS

Editor's Note: The following remarks were deliv-ered by President William H. Conner at the an-nual meeting of the Association on September 24,1997.

Ladies and gentlemen, I am privileged andhonored to have this opportunity to serve as Presi-dent of your Association over the next twelvemonths. I follow a very distinguished line ofhardworking, extremely capable, highly dedicatedand motivated individuals who have served aspresident of the Association. I will aspire toemulate them and their accomplishments, with thehope that this time next year, you will concludethat I have succeeded and was worthy of the honorof leading this Association.

As my first official act as President, I wouldlike to thank Julie Ebert for her tireless, energeticand capable service as President these past twelvemonths. Congratulations and thanks, Julie, for ajob very well done. Please join me in giving Juliea rousing hand.

When I first began preparation of these re-marks, I went back and reread the speeches mypredecessors had made upon assuming the presi-dency, looking for themes and ideas. What do yousay in the precious few minutes at the end of theannual meeting that concludes the first day of thisreturn of bond lawyers to Capistrano and thecommencement of the cocktail and dinner hour?I am sure many in this room, and certainly all ofthose absent members busy networking elsewhere,would cheer if I followed the example WallyMcBride set two years ago of delivering no re-marks whatever on this occasion. Wally's decisioncame after a tense 90 minutes of the first and onlycontested election — but not coincidentally thebest attended annual meeting — in NABL history.Fortunately for the Association, but unfortunatelyfor you, no such act of leadership is called fortonight.

One of the most striking things about readingthe remarks of past presidents was to be remindedonce again of the developments that concerned usin years past:

• The newly enacted Tax Reform Act of1986, the ink on which was barely dry bythe date of the 1986 Workshop and annualmeeting: how would we cope with thatmassive reform legislation thatfundamentally altered the tax laws appli-cable to tax-exempt bonds and introducedrebate to all of public finance?

• The collapse of WPPSS, the investigationsthat followed and the rising pressure onthe SEC and Congress to do somethingabout secondary market disclosure in thecontext of governmental bonds

• The rise in litigation involving bond law-yers

• The constitutional limits of Congress'power to restrict the federal tax exemptionof State and local governmental obliga-tions

• The increasing politicization in the selec-tion of bond counsel

• The commencement of an active auditprogram by the Internal Revenue Serviceto enforce the tax-exempt bond provisionsof the Internal Revenue Code

• The advent of secondary market disclosurefor state and local government obligations

• And, of course, political contributions, ofwhich I will say more later.

All of these concerns seemed so daunting at thetime. But the world did not end over any of them.The public finance industry survived these con-cerns and today remains healthy and vital to thehealth and well-being of state and local govern-ments. If there is a lesson in this recent history, itis that nothing stays the same for very long.Change is the norm. The challenge for all of usand for NABL is to master that change — toconstructively guide and influence that inexorablechange as much as we can so that the publicfinance industry remains healthy and vibrant andthe role of bond counsel remains essential,challenging and intellectually stimulating.

The Quarterly Newsletter 2 December 1, 1997

One of the issues from the past remains very In the three and a half years since the adoptionmuch with us. Four years ago, the issue of politi- of the NABL Statement, the issue has not beencal contributions by bond lawyers first surfaced. resolved. In fact, the rhetoric surrounding pay-to-President Neil Arkuss characterized the contro- play has steadily increased and, of late, has becomeversy over political contributions in 1993 as "the quite shrill. This is due almost entirely to themost prominent apple" of the apples and oranges narrowly focused crusade of Arthur Levitt, the— thus mixing apples and oranges as Neil occa- chairman of the Securities and Exchange Commis-sionally does. He meant of course that the issue of sion, to effectively prohibit political contributionspolitical contributions by public finance lawyers by municipal finance lawyers. Of late, the presswas then the most prominent among the apples and has joined the fray with a steady stream of articlesoranges on the tree that were ready to drop in our and editorials, all of which accept as fact that thecollective lap. Neil did not equivocate on the practice of making political contributions solely tomatter in his annual meeting remarks: "The use of get business exists in the bond counsel industry andpolitical contributions to obtain underwriting, bond all of which call on lawyers, the SEC, state barcounsel or other professional engagements from associations and/or the ABA to take affirmativestate and local governments is an abuse. The steps to end the practice.integrity of the government process and the inter-ests of taxpayers and ratepayers demand that it bedealt with."

The NABL Board under Neil's leadership did this land that it exists, particularly among munici-what it could. A task force on political contribu- pal finance lawyers. That perception, that appear-tions was established under the leadership of ance of impropriety, by itself is enough to compelHoward Zucker, who tonight begins yet another the legal profession in general and municipalyear of service to the Association as Secretary. finance lawyers in particular to try to come to gripsSome of the best and brightest in our profession with the matter and deal with it effectively.served on that task force. Three months later, afterintensive discussion and deliberation, the task forcesubmitted its report to the Board. That reportbecame the foundation for the "Statement ofProfessional Principles with Respect to PoliticalContributions" adopted by the Board in February,1994. With that statement, NABL became the firstpublic finance group to take a position on what hascome to be known as "pay-to-play."

The key point of the NABL Statement was as dump." I did not make these up. All of thesefollows: "No lawyer should make any Political terms have appeared in media reports over the lastContribution for the purpose of retaining or obtain- six months characterizing the legal practice ining municipal finance engagements," either directly municipal finance. How does it feel to have la-or indirectly. Further, bond counsel should be bored in the vineyards thinking you are making fineselected on the basis of their professional quali- wine, only to be told by the media that you arefications and expertise. The Statement noted the wallowing in a "cesspool of corruption," an "au-integral role that lawyers play in the political thentic garbage dump?" It's not good!process and stated that municipal finance lawyersshould not be penalized in their right, in commonwith other individuals, to make contributions toindividual political candidates. And finally, theStatement endorsed meaningful disclosure ofpolitical contributions by lawyers.

It is no longer relevant to question whetherpay-to-play in fact exists in the legal profession.There is clearly a widespread perception across

While the widespread perception that pay-to-play exists is not confined to municipal financeprofessionals, you would not realize that fromreading the media reports and the editorials aboutpay-to-play. Bond lawyers are always mentioned.Often they are the only professionals mentioned.The words are harsh — "sleazy practice," "sleazepit," "racket," "corrupt," "commercial bribery,""cesspool of corruption," "authentic garbage

Some have accused NABL of "behaving like aflock of ostrich[es];" of failing to exert aggressiveleadership; of whining instead of leading thecrusade. But NABL is limited in what it can do.NABL is a voluntary trade association whosepurpose is to educate, advise and comment onmatters affecting state and local obligations. It is


not a regulatory agency with the power and author- parties that seem to wind up supporting candidates.ity to make rules binding on lawyers or even bond The New York Times in April ran a lengthy story onlawyers. NABL can do little more than try to the continued high level of indirect giving byinfluence events when the right path is clear and investment bankers, taking full advantage of thesubject to little debate. It can hardly take an loopholes in G-37. There have been stories onaggressive position on an issue over which its contributions by "consultants" retained to drum upmembers are hopelessly divided and as to which business, prompting a proposed new rule by thethe right path is far from clear. MSRB to close that loophole. Recently, stories

Part of the problem is that the term "pay-to-play" is a clever and catchy pejorative term that isapplied to conduct that is not so easily classified.Without question, making political contributionsfor the purpose of obtaining or retaining govern-ment work is wrong and probably unlawful in all50 states. It does not follow, however, that allpolitical contributions by bond lawyers are for thepurpose of obtaining or retaining government workand therefore must be per se wrong and unlawful.Yet that is essentially what Chairman Levitt and thechorus echoing his views have charged. Focusingon the bond lawyers is like shining the flashlight atthe tail of the dog rather than at its head to see if itis snarling.

The root of the problem is not the lawyers, butthat government officials must run for office. Thatis expensive and is becoming more so, it seems,with each election. In short, it takes money to runfor office. Lots of it! Politicians can hardly befaulted for trying to raise money from whomeverthey can, whether they be lawyers, bankers, doc-tors, engineers, Buddhist nuns, Taiwanese orwhatever. They are merely following the advice ofF. Scott Fitzgerald: "Don't marry for money. Gowhere the money is and marry for love."

The perception of pay-to-play originates not somuch with the contributors as with the habitelected officials seem to have of awardinggovernment work to their contributors. What canbe done about that? The MSRB's much heraldedRule G-37 is widely trumpeted as havingeffectively banned pay-to-play among municipalsecurities dealers. Rule G-37 generally prohibitsdealers from engaging in municipal securitiesbusiness with an issuer within two years after anycontribution to an elected official of such issuer bythe dealer or any municipal finance professionalassociated with that dealer. But has it? Scarcely aweek goes by that the media does not report a storyon soft dollar contributions by dealers to political

have appeared suggesting a link between politicalcontributions and the retention of money managersto invest the billions socked away in public pensionfunds.

And the perception of pay-to-play amonglawyers is certainly not confined to bond lawyers.Two weeks ago, USA Today carried an editorialcolumn describing the fact that the handful ofprivate attorneys hired by the states to negotiate amassive settlement with the tobacco industry forwhat are potentially enormous contingency fees arelargely the same attorneys who bankrolled statepolitical campaigns of the officials who retainedthem. I could go on and on.

All of this would seem to suggest to any saneobserver that the way we finance politicalcampaigns is the root of the problem and thatbroad-based campaign reform to deal with theperceived link between political contributions andthe awarding of government business to those whocontribute is needed. Sane perhaps — but notrealistic. One can easily surmise from watchingCongress and state legislatures kick around thefootball of campaign reform that the objective ofsuch efforts is not so much to score points, but tokeep the ball in motion so as to be able to say thatthe problem is being addressed. Broadbasedcampaign reform is not likely to happen in ourlifetimes, for a very obvious reason. Legislatorswho must raise large sums of money to campaignfor office are understandably loath to enacteffective restrictions on the flow of campaigncontributions.

Ah, but the legal profession cannot just sit backand do nothing, since awarding government con-tracts to campaign contributors at least gives theappearance of impropriety, even though it may beperfectly legal and not the least bit corrupt. Theappearance of impropriety must be avoided bylawyers, according to the ethical rules that governus all. And, of course, SEC Chairman Levitt is


determined to do something about the matter Pursuant to that direction, ABA Presidentinsofar as municipal bond lawyers are concerned. Jerome Shestack has formed a twelve-memberNot the legal profession as a whole mind you; not task force that holds its first meeting next week.industry, commerce or the professions as a whole. Former President Julie Ebert has been asked toJust municipal finance professionals, since only serve on that task force and she has agreed to dothey affect the "market" over which the SEC stands so, along with two other public finance lawyers,as guardian. one of whom served on the NABL political contri-

When NABL adopted its Statement on Politi-cal Contributions in 1994, it pledged to participatewith issuers, broker-dealer associations and otherorganizations to pursue certain areas for furtheraction in the context of political contributions.NABL recognized then what Chairman Levittrecently observed: "the only way to end pay-to-playis through collective action." Perhaps, the oppor-tunity for collective action has arrived. On August6, the American Bar Association House of Dele-gates overwhelmingly approved Revised Resolu-tion 10D. That Resolution, first, "condemns theconduct of lawyers making political campaigncontributions to, and soliciting political campaigncontributions for, public officials in return forbeing considered eligible by public agencies to per-form professional services, including municipalfinance engagements;" second, calls on bar associ-ations, lawyer disciplinary agencies and the judi-ciary to enforce applicable ethical rules to prohibitthis conduct; third, condemns the conduct ofpublic officials considering as eligible for engage-ment only those lawyers who make political cam-paign contributions to, or solicit political campaigncontributions for, public officials; and fourth, callsupon legislative bodies, judicial rule-makingagencies, bar associations, lawyer disciplinaryagencies and public agencies to enact or adopt andenforce laws, rules and regulations that will dis-courage the conduct condemned in the Resolution.The NABL Board supported Revised Resolution Fortunately, no other bar association in the10D since it was essentially the same as the NABL country has supported the City Bar proposal and aStatement, broadened as it should be to include all number of associations have rejected it. Bondlawyers. lawyers must not be sacrificed on the altar of pay-

Revised Resolution 10D calls upon the presi-dent of the ABA to appoint a task force to reviewthe issues related to political campaign contribu-tions by lawyers, consider effective solutionsthereto, and submit recommendations to the ABAHouse of Delegates for consideration at its August1998 meeting.

butions task force in 1993/1994. It is an awesomeresponsibility that the task force undertakes, and adaunting task for Julie and the other municipalfinance professionals on the task force. Once thedeep complexities of the political contributionsproblem have been fully explored and are com-pletely understood, the temptation among lawyerprofessionals outside municipal finance may be tooffer up restrictions solely on bond lawyers as asacrificial lamb, in the hope and expectation thatChairman Levitt will be satisfied and content todeclare victory in his campaign to end pay-to-playamong bond lawyers and will move on to otherregulatory matters. We have already seen anexample of that temptation. A committee of theNew York City Bar Association, apparently lackinga single bond lawyer among its members, hasproposed for adoption in New York State a rulethat would prohibit law firms from doing financework for governments if the firm or any memberor employee thereof has contributed, directly orindirectly, within the prior two years to an electedofficial in a position to influence the award of thatwork. One cannot help but wonder if that proposalmay have been motivated less by the moralistichigh ground it claims than by the desire to nip thekudzu vine banning political contributions by alllawyers before it spreads out of control. The CityBar proposal is to be considered by the New YorkAdministrative Board of the Courts on October 7.

to-play. If political contributions are a problem forthe legal profession, it is a problem among alllawyers, not just bond lawyers. Hopefully, theABA task force will prove to be an enlightenedgroup that fully understands the reality of politicalcontributions, but is nonetheless capable of craftinga broad solution that deals fairly with the problemof pay-to-play and the appearance of improprietyamong the legal profession as a whole and not just


one small segment thereof: a solution that, if it with the tax laws, the disclosure obligations andmust prohibit doing business with governments to the myriad other puzzles that we must solve daily.whose elected officials you have contributed, as Those who would legislate and regulate us all toothe New York City Bar Association has proposed, often lack that experience and the sobering educa-applies across the board to all lawyers and to all tion that it provides. If we do not participate in thework involving governments, not just bond lawyers efforts of your Association to deal with the issuesand not just municipal finance work. Any solution affecting public finance, we risk the enactment ofthat focuses alone on bond lawyers, and not on the changes that, however well-intentioned, couldlegal profession as a whole, is patently unfair and fundamentally alter our role as bond counsel. Getis likely to produce only one certain result: the involved!separation of bond lawyers from their multi-prac-tice firms into numerous bond law boutiques.

The issue of pay-to-play is a serious one. Asthe work of the task force proceeds, those presentand former NABL board members who have beenclosely involved in NABL's deliberations con-cerning pay-to-play over the past four or five yearsare being asked to assist Julie in any way she findshelpful. I am sure that she would welcome yourthoughts and ideas on this subject as well. Ignor-ing the problem, however, is not an idea she wouldwelcome. The profession must confront pay-to-play in all its ramifications and either find aneffective broad-based solution or recognize thatpay-to-play is something that the legal professioncannot deal with on its own and try to refocus thedebate toward broad-based campaign financereform.

What can we as lawyers do? We must all getinvolved in the debate, not just on pay-to-play buton the other issues of the day that confront theAssociation and its members. In short, more of usmust volunteer to participate in the work of theAssociation and its committees as they work tocarry out the Association's principal goal — toeducate its members and contribute to the well-being of the public finance industry. I ask you togive something back to that unique niche of thelegal profession called bond counsel. You can dothat by volunteering to serve on a committee of theAssociation and by getting involved in committeeprojects. Yes, I know, in this day and age in whichwe are all expected to do more with less, of pres-sure to increase chargeable hours and attract newclients, who has time to get involved? We musttake the time. We simply must not neglect ourprofession or our unique corner of it. We haveexperience in the real world of public finance —we know what it is like in the trenches, dealing

Thank you for your patience, and good eve-ning. This meeting is adjourned.

TRY IT: www.nabl.org


THE NINETEENTH ANNUAL MEETING

The Nineteenth Annual Meeting of the Na-tional Association of Bond Lawyers was called toorder by President Julianna Ebert at 5:40 p.m.,Central Daylight Time, on September 24, 1997, atthe Downtown Marriott Hotel, in Chicago. Inattendance were all officers and members of theBoard of Directors of the Association, ExecutiveDirector Patricia F. Appelhans, Director ofGovernmental Affairs Amy K. Dunbar and ap-proximately 80 other members of the Association.

President Ebert announced that the first orderof business was a report from Treasurer Floyd C.Newton III. Treasurer Newton announced that thefinancial condition of the Association is sound,noting that the membership of the Association isexpected to reach 3,000 by year-end and that BondAttorneys' Workshop registrations exceed 1,000.Treasurer Newton also said that the Associationcurrently has a fund balance approximately equalto one year's expenses, and that the Board ofDirectors has decided not to raise dues in 1998 butwill continue to monitor seminar expenses in orderto maintain adequate reserves.

President Ebert thanked Treasurer Newton forhis report and spoke about those members, direc-tors, officers and other volunteers as well as thestaff of the Association who had made significantcontributions to the Association during the prioryear. She gave special thanks to NABL’s Commit-tee Chairs and Vice-Chairs and praised their effortsin the past year. Ms. Ebert's remarks are printedinfra.

President Ebert then introduced ImmediatePast President William H. McBride, Chair of the JOB BANK1997 Nominating Committee, who remindedmembers that, in accordance with Article VII ofthe By-Laws of the Association, the NominatingCommittee consisted of five persons, a majority ofwhom were not current directors or officers ofNABL. Mr. McBride then presented the report ofthe 1997 Nominating Committee as previouslycirculated to the membership. He also stated that,pursuant to the By-Laws, because no member ofthe Association had indicated an intention to makeany other nominations, no other nominations

would be accepted. Accordingly, the nominationsof the Nominating Committee were presented foradoption. Upon motion of Immediate Past Presi-dent McBride, seconded by Samuel C. Stone, thenominees of the Nominating Committee wereapproved by unanimous vote of the memberspresent and voting at the meeting and, thereupon,Floyd C. Newton III became President-Elect,Jeannette M. Bond became Treasurer, HowardZucker became Secretary, Carolyn Truesdell andMary Jo White became members of the Board ofDirectors for terms expiring in 2000, and David A.Walton became a member of the Board of Direc-tors for a term expiring in 1998. It was noted thatWilliam H. Conner became President automaticallyupon the election of a new President-Elect and thatJ. Hobson Presley, Jr., would become a member ofthe Board of Directors by virtue of his being thenext Chair of the Bond Attorneys’ Workshop.Julianna Ebert, as Immediate Past President, willcontinue as a director pursuant to Section 5.02 ofthe By-Laws.

President Conner then addressed the mem-bership. His remarks are printed supra.

The meeting was adjourned by PresidentConner at 6:25 p.m., Central Daylight Time.

Susan Weeks

Secretary

NABL

has a

for members and public sector lawyersseeking employment opportunities

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THE NEW DIRECTORS

Carolyn Truesdell, a partner in the PublicFinance Section of Vinson & Elkins, L.L.P., Hous-ton, was elected a director of the Association for aterm expiring in 2000. Ms. Truesdell has served asa faculty member for the Fundamentals of Munici-pal Bond Law Seminar for the past five years, andfrom 1986-1988. She has served on the SteeringCommittee for the Bond Attorneys’ Workshop andcurrently serves on the Model Indenture Commit-tee as well as on The Quarterly Newsletter Edito-rial Board.

Ms. Truesdell attended Stanford University andgraduated in 1961 from Case Western ReserveUniversity with a B.A., and from the University ofHouston with a J.D., magna cum laude, in 1975.There she was selected to be a member of theOrder of the Barons. Ms. Truesdell joined Vinson& Elkins after serving as a law clerk to Judge JohnR. Brown, then Chief Judge of the United StatesCourt of Appeals for the Fifth Circuit. Ms.Truesdell practices primarily in the areas ofhousing and industrial development finance asbond counsel, and also represents trustees incorporate and tax-exempt financings.

Mary Jo White, a partner in the firm of Long,Aldridge & Norman, Washington, D.C., waselected a director of the Association for a termexpiring in 2000. She has practiced in publicfinance since 1984. Ms. White has served as bondor underwriter’s counsel in more than 250financings, aggregating approximately $5 billion inprincipal amount. These transactions includegeneral obligation and revenue bond issues, waterand sewer financings, tax increment financings,pooled financings, municipal lease and leasepurchase transactions, credit-enhanced issues and"multi-modal" bond transactions. She has been afrequent lecturer on public finance matters, and isa recognized national expert on disclosure matters.Ms. White has served on the Steering Committeeof the Bond Attorneys’ Workshop and as Chair ofthe Fundamentals of Municipal Bond LawSeminar. She was an Adjunct Professor, Collegeof William and Mary, Marshall Wythe School ofLaw, for the Spring, 1995 term, and created andtaught a course entitled "Municipal Finance andUrban and Economic Development."

From August 1995 to March 1997, Ms. Whitewas an Attorney Fellow, Office of MunicipalSecurities, at the United States Securities andExchange Commission, where she was involved inthe SEC’s activities in all areas of the municipalsecurities industry. While at the SEC, Ms. Whiteworked with the Division of Enforcement onmunicipal securities enforcement matters; theDivisions of Corporation Finance and MarketRegulation on no-action and exemptive reliefunder the federal securities laws; and with theChairman on his prudent investment of publicfunds initiatives. She was appointed the"municipal ombudsman," which involved workingwith the municipal issuer community as well asother municipal market participants.

Ms. White earned her undergraduate degreefrom the University of North Carolina and her lawdegree from the College of William and Mary,where she was a member of the Order of Coif andthe Business Editor of the William and Mary LawReview.

David A. Walton, of Jones Hall, A Profes-sional Law Corporation, San Francisco, waselected a director of the Association for a termexpiring in 1998. He provides tax support and actsas special counsel in the firm's municipal financepractice. In 1989, after five years in private lawpractice, Mr. Walton joined the Internal RevenueService in Washington, D.C., as Counsel to theAssistant Chief Counsel (Domestic) - FinancialInstitutions and Products, specializing in tax-exempt finance and financial products. In June,1990, Mr. Walton joined the United StatesTreasury Department where he served as anAttorney-Advisor in the Office of Tax Policy, alsospecializing in tax-exempt finance.

In 1980, Mr. Walton received a B.S. degree inaccounting from Brigham Young University(summa cum laude) and a J.D. degree, in 1983,from the University of California Hastings Collegeof Law (cum laude). Mr. Walton is licensed as anon-practicing CPA, is a member of the AmericanBar Association - Tax-Exempt Finance Section,and was a member of the Anthony Commission onPublic Finance. During the past three years, Mr.Walton has served as Chair of the Association'sArbitrage and Rebate Committee. From 1993


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through 1996, Mr. Walton served as a member ofthe Steering Committee of the Bond Attorneys’Workshop. He was a member of the EditorialAdvisory Board of the Public Finance Advisorduring the period of that periodical’s publication,and is currently a member of the EditorialAdvisory Board of the Municipal Finance Journal.

J. Hobson Presley, Jr., a partner withMaynard, Cooper & Gale, P.C., Birmingham,Alabama, has been elected Chair of the BondAttorneys’ Workshop, and will serve as a memberof the Board of Directors during his term asWorkshop Chair. He had previously been amember of the Steering Committee of the BondAttorneys’ Workshop for nine years, and served asSecond Vice-Chair and First Vice-Chair of thatCommittee during the past two years.

In 1972, Mr. Presley received his B.A., magnacum laude, from Birmingham Southern College.In 1975, he received his law degree fromVanderbilt University, where he was Order of theCoif, Student Writing Editor for the VanderbiltLaw Review and a Patrick Wilson Scholar in Law.Mr. Presley has practiced in the area of publicfinance for twenty-one years, and is a frequentspeaker and writer on various aspects of publicfinance.

PAST PRESIDENT EBERT'SREMARKS

Editor's Note: The following remarks weredelivered by outgoing President Julianna Ebert atthe annual meeting of the Association onSeptember 24, 1997.

I am delighted to report that thanks to theefforts of a great number of capable and caringvolunteers, this has been a very productive year forNABL. I am deeply grateful to all of you whohave contributed to the Association's efforts thisyear, and I urge you to continue your commitmentinto the future. While I have tried to thank manyof the active volunteers in The QuarterlyNewsletter, I did want to make a special note ofsome of the contributions again this evening.

The Opinions Committee has revised anddistributed the Model Bond Opinion Report.Special thanks go to Chair and Vice-Chair MichaelBudin and Ed Lucas, Board Advisor HowardZucker, and committee members for all of theirhard work on this project.

The Enforcement Subcommittee of theSecurities Law and Disclosure Committee underthe leadership of John McNally produced athorough discussion and analysis of recent SECenforcement actions which is included in yourworkshop materials. The BondholderCommunication Subcommittee led by MontyHumble is continuing its work to produce amemorandum describing "Recommended Stan-dards for Communicating with the BeneficialOwners of Defaulted Municipal Securities." TheSecurities Law and Disclosure Committee isalso working to finalize comments to be submittedto the MSRB regarding its recently proposed ruleamendments. My special thanks to Chair andVice-Chair Bill Nelson and Walt St. Onge forleading this Committee and overseeing its projectsand to John McNally, Monty Humble, Mary JoWhite, Board Advisor Jack Gardner and the otherswho made significant contributions.

The Professional Responsibility Committeehas worked tirelessly on revisions to the ModelEngagement Letters. An exposure draft of thegovernment obligations letter was published in theJune edition of The Quarterly Newsletter. Thanks


to active committee members Roy Koegen,Meredith Hathorn, and Mary Anne Braymer, andBoard Advisor Bob Buck for their diligence andpatience in the drafting process. We are lookingforward to the participation of additionalvolunteers and completion of that project in themonths ahead. In addition, the Committee isworking on a revision to the Selection andEvaluation of Bond Counsel and the Role andResponsibilities of Bond Counsel pamphlet. Thework of this committee is extremely valuable, notonly for our members, but for the public whichsometimes misunderstands the function andprofessional responsibilities of bond counsel.

The Section 103 Editorial Board, LindaD'Onofrio, Cliff Gerber, and Kristin Franceschi,not only oversaw revisions and updates to theFederal Taxation of Municipal Bonds, but alsowas instrumental in urging Aspen to produce theCD Rom version which was introduced today. TheEditorial Board worked painstakingly to assure thecontinued high quality of this publication. Ourthanks to them. Thanks, too, to Treasurer FloydNewton, who worked closely with Linda toestablish a better business relationship with Aspen.

Charlie Henck served as Chair, Bill Gehrig asVice-Chair, and Pam Robertson as Board Advisorto the Education Committee which wasresponsible for the production of NABL's threeannual seminars. The reviews this year for allthree seminars were overwhelmingly positive.Charlie and Bill, the seminar chairs and Board, reviewed proofs of each edition; and toAssociation staff did an outstanding job. Our Ric Weber and George Campbell who stood by tothanks to John Cross and Patti Wu, Chair and review any cases requesting or needing amicusVice-Chair of the Tax Seminar; Lauren Mackand Eric Ballou, Chair and Vice-Chair ofFundamentals; and Doug Rollow and MitchRapaport, Chair and Vice-Chair of the Wash-ington Seminar. The expertise and preparation ofthe volunteer faculty, too numerous to mention inthese remarks, are always a key to the success ofthe seminars, and I thank them all.

And as evidenced by the crowds at theregistration desk today, Gigi Benjamin and herVice-Chairs and Steering Committee haveproduced yet another successful Bond Attorneys'Workshop.

The Tax Committees — Arbitrage andRebate (Dave Walton, Chair and Jeremy Spector,Vice-Chair) and General Tax (John Cross, Chairand Larry Carlile, Vice-Chair) — continued anumber of projects, including commenting onproposed regulations on arbitrage restrictions, onRevenue Procedure 96-41 and on the finalregulations on the private activity bond tests. David and John particularly, but also the othermembers of and contributors to those twocommittees and their Board Advisors, Lisa Soederand Jeannette Bond, deserve the warm thanks ofall of us for their efforts. Thanks, too, toPresident-Elect Bill Conner who testified inWashington earlier this year on yield-burningissues.

The Legal Assistants Committee haspublished its "Statement on the Utilization of LegalAssistants in the Public Finance Practice," andcontinues its work on a Legal Assistant'sHandbook. Their efforts have been headed-up byAnn Atkinson, Chair, and Michelle Kelly, nowretired Vice-Chair, with the able assistance ofBoard Advisor Gigi Benjamin. My thanks also toMorrie Knopf and Charles Waters who are leadingthe Form Indenture Committee of theAssociation with the active participation ofImmediate Past President Wally McBride. Thisproject is anticipated to be completed next year.

Thanks are also due to Joe Johnson, DeanPope, Carolyn Truesdell, and Scott Lilienthal,who, as The Quarterly Newsletter Editorial

briefs from the Association. Jim Spiotto and PeterKornman were enlisted to assist with anybankruptcy issues.

Many of the Committee projects and publi-cations were included in editions of The QuarterlyNewsletter this year. I am grateful to HonoraryDirector Fred Kiel for his work as editor of theNewsletter and on other Association publications.He deserves much praise for his efforts on ourbehalf and congratulations on completing 15 yearsas our editor.


increase professionalism in the municipal financeI would also like to mention the non-Board

members of the Nominating Committee whoprepared the slate of officers and directors that wewill vote on tonight. Helen Atkeson, LindaD'Onofrio, and Bill Nelson were instrumental inthe selections. I believe their thoughtful consid-eration and recommendations will strengthen theBoard and the Association in the future.

the profession and for the clients we serve.Bill Conner was a great help during the year as

President-Elect, and I leave confident that we are As you know, much of this criticism focusesin good hands for next year. Bill, Floyd Newton on the question of political contributions by bondand Susan Weeks, as members of the ExecutiveCommittee, were reliable and thoughtful advisorsthroughout the year.

The loyalty and hard work of Pat Appelhansand her staff in the National office has beenoutstanding. Amy Dunbar in the Washingtonoffice continues to provide us with an essentialWashington perspective and presence. My thanksto both Pat and Amy for all of their efforts thisyear.

Throughout the year, the members of theBoard of Directors have been attentive, con-cerned, dedicated, supportive, and hardworking.My warm thanks to all of you. You are anincredible group of people who have made my jobmuch easier . . . and sometimes even fun! Thankyou for all you have done. I would like to singleout the three retiring Directors, Susan Weeks, JackGardner, and Wally McBride who providedespecially valuable comments and did major workon a number of projects for the Association, notonly during their terms on the Board, but prior toserving on the Board. They have provided manyworthwhile contributions to the Association, and Iknow that they will continue to do so. PastPresidents including Drew Kintzinger, Neil Arkuss,Jane Dickey, and Ric Weber have offered guidanceand encouragement throughout the year.

As busy and productive as the past year hasbeen, it has not been without its challenges. Inspite of the outstanding projects, publications andprograms produced by the remarkably talented anddedicated member volunteers I have justmentioned — projects, publications and programsintended to educate ourselves and others and to

industry — and in spite of the daily efforts of ourmembers to live up to the high standards expectedof bond counsel — there are those who questionthe professionalism and criticize the leadershipefforts of municipal bond lawyers generally and theAssociation specifically. I am disheartened by thisunfair and uninformed criticism. Members of ourAssociation do a tremendous amount of good for

lawyers. In earlier publications (Selection andEvaluation of Bond Counsel (1988)) and(Standards of Practice (1989)), NABL hasadopted affirmative statements regarding thestandards to be followed in selecting lawyers inmunicipal finance transactions. In 1994, theNABL Board of Directors adopted a specificpolicy (Statement of Professional Principles withRespect to Political Contributions) stating thatbond counsel should be selected on the basis ofprofessional qualifications, condemning themaking of political contributions for the purpose ofobtaining or retaining municipal financeengagements, endorsing a role for meaningfuldisclosure, and offering to work with other groupsaddressing the issue.

We now have that opportunity. IncomingABA President Jerome Shestack has appointed aTask Force and included three bond lawyersamong its twelve members — David Cardwell,Jack Williams and me. I am confident that themembers of the Task Force will thoughtfullyconsider all of the issues raised by politicalcontributions by lawyers in crafting recommen-dations to be submitted to the ABA House ofDelegates at its meeting in August, 1998. It is achallenging assignment, and I welcome yourthoughts and suggestions.

As a final thought, I would like to thank mypartners and all the attorneys and staff at Quarles &Brady. During the time I have been activelyinvolved with the Association, they have beenencouraging and understanding. They haveenabled me to maintain my bond practice whileserving the Association. I appreciate all of thesupport they provided me.


It has been a privilege and an honor to serveyou and the Association over the past year. I lookforward to working with you in the years ahead.Thank you.

[3×5 photo #6]

Bond Attorneys' Workshop ChairVirginia D. Benjamin

Leads off the General Session

THE TWENTY-SECONDBOND ATTORNEYS' WORKSHOP

This year's edition of the Bond Attorneys'Workshop, attended by about one thousand of us(September 24-26), was absolutely scintillating.Hall talk and serious post-mortems tell us that thepanels' faculty members were almost universallywell-prepared, well-spoken, inventive, andreceptive to the life-and-death quaeres posed byattendees. There were the usual scaryadmonitions, and war stories (what does it meanwhen an SEC official nods her head?), but only afew tears.

At the Thursday luncheon, the Association'sBernard P. Friel Medal was presented by formerPresident Harold B. Judell to Joseph H. Johnson,Jr., of Lange, Simpson, Robinson & Somerville,Birmingham, Alabama. Mr. Johnson is a chartermember of the Association with a long history ofservice to the organization. He has served asChairman of its Special Committee on Standardsof Practice (1986-1988), primary author of thatCommittee's reports entitled "The Question ofLawyer Competence and Professionalism" and"Lawyer Proliferation in Public FinanceTransactions," Vice-Chairman of the Committeeon Opinions (1984-1985), member of its Board ofDirectors (1985-1990), Secretary (1986-1987),President-Elect (1987-1988), and President (1988-1989). He currently serves as a member of theEditorial Board of The Quarterly Newsletter.

The Carlson Prize of the Association wasconferred by former Executive Director Rita J.Carlson upon John M. McNally, of Hawkins,Delafield & Wood, Washington, D.C., for his "DueDiligence in the Context of Municipal SecuritiesUnderwritings," which appeared in the March 1,1997, edition of The Quarterly Newsletter.

After the luncheon, attendees were vocifer-ously regaled by members of the song-and-dancetroupe Capitol Steps, who made good musical funof any number of Washingtonians of both parties.We were astonished to see President William H.Conner and 1997-1998 Bond Attorneys' WorkshopCommittee Chair J. Hobson Presley, Jr., on stagefor the troupe's finale.


[3.1×3 photo #10 - needs cropping]

Joseph H. Johnson, Jr., is Presented withthe Bernard P. Friel Medal by Harold B. Judell

On Thursday morn, the inimitable Charles P.Carlson (co-founder of the Bond Attorneys'Workshop) expostulated on state law develop-ments during the year past, while former presidentRobert Dean Pope sketched out and editorializedupon securities law and lore, and former presidentRichard Chirls lectured on tax law happenings andnon-happenings.

As the co-founder with Chuck, your editor,confessing a certain pride in co-founderhood, iscompelled to conclude that this Bond Attorneys'Workshop was one of the best ever. Notable wasthe proliferation of Federal Express boxes by thehundreds, wherein we could send home our ten-pound bound volumes with no risk of shoulderitis.Notable also were the NABL staff's heroic effortsto deliver (or post) zillions of telephone and faxmessages. Virginia D. Benjamin, the Chair, andExecutive Director Patricia F. Appelhans and herstaff did themselves (and the Association) proud.

[3.1×3 photo #3 - needs cropping]

John M. McNally is Presented withThe Carlson Prize by Rita J. Carlson

Next year, the Palmer House, a Hilton hotel.The folks from the Palmer House handed out about1,000 tote bags to Bond Attorneys' Workshopattendees. (The Ernst & Young people had thepunchbowl full of golf balls.) Other exhibitorswere Bond Case Briefs, The Bond Buyer, Spec-trum Printing (which prints The QuarterlyNewsletter and the Bond Attorneys' Workshopbook), Aspen Law & Business, FSA, the SanDiego Convention and Visitors Bureau in con-junction with Loews Coronado Bay Hotel, whereatthe Tax Seminar will be held next February, andThomson Financial Publishing, which brings us theRed Book.

Some of us toured the Palmer House onSeptember 25, and were treated to high ceilings,spacious vistas, and innumerable portraits of the(very) late Mrs. Palmer. The original PalmerHouse burned in the great Chicago Fire (1871)thirteen days after it was constructed. Mr. Palmerraised $11 million, pretty much on his signature, torebuild. The second incarnation dates in part from1872, with more recent additions, all elegant orfaux-elegant. The staff is wonderful. We thinkyou'll like it. Parenthetically, the first BondAttorneys' Workshops were held at another Hilton,the one near O'Hare.

[3×5 photo #21]


New Bond Attorneys' Workshop ChairJ. Hobson Presley, Jr.,

Addresses the Thursday Luncheon

ACTIONS BY THEBOARD OF DIRECTORSON SEPTEMBER 24, 1997

The Board of Directors met at the DowntownMarriott Hotel, in Chicago, on September 24,1997. President Julianna Ebert presided. Alsopresent were William H. Conner, President-Elect;Floyd C. Newton III, Treasurer; Susan Weeks,Secretary; Directors Virginia D. Benjamin,Jeannette M. Bond, Robert W. Buck, John M.Gardner, Pamela S. Robertson and Lisa P. Soeder;William H. McBride, Immediate Past President;Honorary Director Frederick O. Kiel; Patricia F.Appelhans, Executive Director; and Amy K.Dunbar, Director of Governmental Affairs.

Report of Treasurer

Treasurer Newton provided an overview of theAssociation's financial results as of August 31,1997, noting that Bond Attorneys' Workshop

revenues and membership dues exceed budgetprojections and that overall expenses are in linewith the 1997 budget. Treasurer Newtonconcluded that the financial position of theAssociation is sound.

Committee Reports

President Ebert then called for Committeereports by Board members.

1. Securities Law and Disclosure

(A) MSRB Rule Comments - DirectorGardner described the progress of the SecuritiesLaw and Disclosure Committee in draftingcomments on the MSRB's recently-proposed ruleamendments relating to the underwriting processand advised that the scope of the comments hadbeen narrowed to the selection of underwriter'scounsel. Following a discussion of the contents ofthe Committee's proposed letter in which Boardmembers offered comments and suggestions,Director Gardner advised the Board of theCommittee's plans to promptly file a revised letterwith the MSRB.

(B) Bondholder Notification - Director ofGovernmental Affairs Dunbar described revisionsto the structure and format of the "best practices"memorandum on bondholder notification. Ms.Dunbar indicated that the memorandum would besubmitted to the respective organizationsparticipating in this project as an exposure draftfollowing additional formatting revisions, editingand resolution of certain differences of opinion.[The exposure draft is printed infra.]

2. Professional Responsibility - Boardmembers offered Director Buck specific commentson the form of governmental bond engagementletter and general guidance on the form of conduitbond engagement letter. President Ebertrecommended that the Committee enlist additionalmembers to provide input on the conduit letter,and Treasurer Newton suggested that theCommittee consider whether additionalcommentary or alternative language should bedeveloped to reflect the situation in which theconduit borrower rather than the issuer is the clientof bond counsel.


Secretary Weeks then briefed the Board on theformation of a sub-committee to update Selectionand Evaluation of Bond Counsel and the proposed Director of Governmental Affairs Dunbar thentime schedule for this project. President Ebert also gave her report, briefing the Board on (i) an SECreminded Director Buck of the need to update The settlement with Smith Barney in a Dade County,Roles and Responsibilities of Bond Counsel. Florida, derivatives case, (ii) the effort to develop

3. Section 103 Editorial Board - TreasurerNewton described the progress of Aspen, Inc., indeveloping a CD-ROM product relating to FederalTaxation of Municipal Bonds and indicated thatAspen would demonstrate this product at thetechnology session of the Bond Attorneys'Workshop.

4. Education - Upon motion of ImmediatePast President McBride, seconded by DirectorBond, the Board approved the appointment ofLinda Schakel as Vice-Chair of the Tax Seminar.

5. Form Indenture - Immediate Past Presi-dent McBride sought the Board's input on theoutline draft of alternative positions accompanyingthe form indenture before the Board and indicatedthat this material would be discussed at the BondAttorneys' Workshop.

Pay-to-Play Task Force

President Ebert updated the Board on thecomposition of the pay-to-play task force ap-pointed by ABA President Jerome Shestack inaccordance with Resolution 10-B approved by theABA at its August meeting in San Francisco.Board members concurred in President Ebert'sview that she is serving on the task force as therepresentative of NABL, and President Ebertencouraged Board members to provide her inputand guidance. A motion was made by DirectorGardner, seconded by Secretary Weeks andunanimously approved, that the Associationreimburse the expenses of President Ebert inconnection with her service on the task force.

Report of Executive Director

President Ebert then called on ExecutiveDirector Appelhans to give her report, whichincluded an update on membership figures, BondAttorneys' Workshop registrations and exhibitorrevenues. Executive Director Appelhans advisedBoard members that 1998 dues notices would bemailed on October 1, 1997.

Report of Director of Governmental Affairs

a draft joint statement on IRS arbitrageenforcement proposed by certain industry andpublic interest groups, (iii) the status of thereserved portions of the private activity bondregulations, and (iv) a mid-October report of theBankruptcy Commission.

Susan Weeks

Secretary

ACTIONS BY THE BOARD OF DIRECTORS ON SEPTEMBER 25, 1997

The Board of Directors met at 7:30 a.m. onSeptember 25, 1997, at the Downtown ChicagoMarriott, in Chicago. President William H. Connerpresided. Also present were: Floyd C. Newton III,President-Elect; Jeannette M. Bond, Treasurer;Howard Zucker, Secretary; Directors J. HobsonPresley, Jr., Robert W. Buck, Lisa P. Soeder,Pamela S. Robertson, David A. Walton, CarolynTruesdell, and Mary Jo White; Immediate PastPresident, Julianna Ebert; Honorary DirectorFrederick O. Kiel; Patricia F. Appelhans,Executive Director; and Amy K. Dunbar, Directorof Governmental Affairs.

On motion by Treasurer Bond, seconded byDirector Robertson, the Board unanimously votedto appoint Kenneth R. Artin of Cobb, Cole & Bell,Maitland, Florida, to the GovernmentalAccounting Standards Board Advisory Council.

Following a discussion of President Conner'srecommendations for Chair and Vice-Chair andBoard Advisor for each of the Association'sCommittees, it was moved by Honorary DirectorKiel, seconded by Treasurer Bond andunanimously approved that those persons named


below be appointed to serve as Chair, Vice-Chair, Kristin H.R. FranceschiBoard Advisor or Members, as the case may be, of Valerie Pearsall Robertsthe respective Committees, as follows: Advisor Jeannette M. Bond

Amicus Review The Quarterly Newsletter Committee Chair Fredric A. Weber Members Joseph H. Johnson, Jr. Vice-Chair George E. Campbell Scott R. Lilienthal Advisor Howard Zucker Robert Dean Pope

Arbitrage and Rebate Chair Perry E. Israel Vice-Chair Jeremy A. Spector Advisor Lisa P. Soeder

Bankruptcy Chair James E. Spiotto Harris Bank as a depositary of Association funds, Vice-Chair S. Frank D'Ercole and authorizing the President, Treasurer and Advisor Carolyn Truesdell Executive Director to sign checks and withdraw

Education Chair William L. Gehrig Vice-Chair Lauren K. Mack Advisor Floyd C. Newton III

Form Indenture Chair Morris E. Knopf Committee Chairs would soon need to furnish their Vice-Chair Charles H. Waters, Jr. budgets to Treasurer Bond for inclusion in the Advisor Carolyn Truesdell preliminary 1998 budget.

General Tax Matters Chair John J. Cross, III Vice-Chair Larry L. Carlile Howard Zucker Advisor David A. Walton

Legal Assistants Chair Ann L. Atkinson Vice-Chair Susan M. Parker Advisor J. Hobson Presley, Jr.

Opinions Chair Edwin F. Lucas, III Vice-Chair Virginia D. Benjamin Advisor Pamela S. Robertson

Professional Responsibility Chair Roy J. Koegen Vice-Chair Mae Nan Ellingson Advisor Robert W. Buck

Securities Law and Disclosure Chair William L. Nelson Vice-Chair Walter J. St. Onge III Advisor Mary Jo White

Section 103 Editorial Board Members Clifford M. Gerber

Karen S. Neal Advisor J u l i a n n a E b e r t

Executive Director Appelhans submitted to theBoard for its approval a resolution designating

funds. Upon the motion of Director Truesdell,seconded by Director Presley, the Boardunanimously approved the adoption thereof.

President Conner then reviewed the scheduleof events for the upcoming year and noted that

Secretary


ACTIONS BY THE BOARD OF DIRECTORS ON NOVEMBER 6 AND 7, 1997

The Board of Directors of the Association metin Savannah, Georgia, on November 6 and 7,1997. President William H. Conner presided.Also present were: Floyd C. Newton III,President-Elect; Howard Zucker, Secretary;Jeannette M. Bond, Treasurer; Directors J.Hobson Presley, Jr., Robert W. Buck, Pamela S.Robertson, Lisa P. Soeder, David A. Walton,Carolyn Truesdell, and Mary Jo White; ImmediatePast President Julianna Ebert; Honorary DirectorFrederick O. Kiel; Patricia F. Appelhans,Executive Director; and Amy K. Dunbar, Directorof Governmental Affairs.

Model Engagement Letters

The President and Director Buck reviewed thehistory of the Model Engagement Letters project,and there ensued a discussion concerning theorganization of the document. The Presidentrequested all Board member comments be sent toDirector Buck and Professional ResponsibilityCommittee Chair Roy J. Koegen prior toDecember 1, 1997. Director Buck expressed hisexpectation of having a revised draft by theFebruary, 1998, Board meeting.

Report of The Treasurer

The President then called on Treasurer Bond togive her financial report, whereupon she providedan overview of the Association's financial results asof October 31, 1997, noting that revenues andexpenses are in line with the 1997 budget. TheTreasurer and Executive Director Appelhans willreview the postage budget and recommend whichAssociation publications and mailings can beshipped at "bulk rate." Director Truesdellrequested that a balance sheet be included in futurefinancial statements.

The Board agreed to hold advertising rates forThe Quarterly Newsletter for 1998 at 1997 levels.Executive Director Appelhans will handleadvertising marketing from the national office.

Upon motion by the Secretary, seconded by thePresident-Elect, the Board voted unanimously to

establish the following seminar registration fees for1998:

Non-Seminar Member Member

Tax $420 $580Fundamentals $395 $545Washington $410 $580 *Bond Attorneys' Workshop $415 $585

* Also, a special rate of $450 forgovernment employees or non-practicing academics

Upon motion by the Treasurer, seconded byDirector Soeder, the preliminary 1998 budget wasapproved unanimously by the Board, with certainadjustments discussed by the Board; the ExecutiveDirector and the Treasurer are to revise itaccordingly and send it to Board members forcomments, with final approval of the changesdelegated to the Executive Committee.

Pay-to-Play

Immediate Past President Ebert will circulatecertain pay-to-play materials which she hasreceived. Upon motion by the Immediate PastPresident, seconded by Director Robertson, theBoard unanimously approved a resolutionauthorizing the President, in his discretion, toexpend an amount not to exceed $3,000 on a jointNABL/ABA Section of State and LocalGovernment Law newsletter on the pay-to-playissue. The Immediate Past President will alsospeak to former Association President Fredric A.Weber about preparing an article about the pay-to-play issue for inclusion in The QuarterlyNewsletter [infra] and, with member input,drafting Association comments on the NYC Bar'sProposed Pay-to-Play Rule.

Committee Reports

The President called for Committee reports.

1. Bankruptcy — Director of GovernmentalAffairs Dunbar gave a report concerning therecently released report of the National BankruptcyCommission. There was discussion of themunicipal portions of the report and discussion ofwhen, if at all, the Association should comment.


The Secretary observed that this would be an project is being led by former Director Susanappropriate topic for the Washington Seminar. Weeks. Director Buck related that Ms. Weeks

2. Arbitrage and Rebate — Director Soeder ledthis discussion. It was decided to ask thisCommittee and the General Tax Matters Com- 8. Education — The Board approved themittee to work together on certain projects, selection of G. Mark Mamatov, of Bass, Berry &especially giving issuers the right to appeal Sims, PLC, Knoxville, as Vice-Chair of thetechnical advice memoranda, creating an articu- Fundamentals Seminar.lated standard for the issuance of TAMs, devel-oping an alternative dispute resolution process,creating something like a "tax matters partner"concept for tax-exempt debt so that the issuer orconduit borrower will have the right to representthe bondholders, and developing rules relating toasset hedges. It was also decided that on the issueof yield burning, the Association would continue toprovide technical advice but not take a leadingrole.

3. General Tax Matters — Director Walton ledthis discussion. (See also paragraph immediatelyabove.) The Committee is on the lookout for theoutput regulations and expects to provide input assoon as they are released. There was alsodiscussion about two recent private letter rulingsconcerning "residential rental property."

4. Securities Law and Disclosure — DirectorWhite led this discussion. The Board had before itthe bondholder notification report as to whichcomments are due by December 10. It wasdecided to try to update the Association's 15c2-12book in combination with the EnforcementSubcommittee Report and to establish an editorialboard therefor.

5. Section 103 Editorial Board — TreasurerBond acknowledged the very good work done byformer Section 103 Editorial Board Chair Linda L.D'Onofrio in having prepared and distributed theerrata sheets for the most recent edition.

6. Opinions — Director Robertson stated that sheexpected the Committee to have an exposure draftof a model underwriter's counsel opinion report forthe February, 1998, Board meeting but that theBoard would likely not act on a proposed draftprior to the Spring meeting.

7. Professional Responsibility — Director Buckupdated the Board on the status of the revision ofSelection and Evaluation of Bond Counsel. That

suggests the Association's work product be sharedwith GFOA.

Report of the Director of Governmental Affairs

The Director of Governmental Affairs briefedthe Board on, among other things, the followingmatters: the Output Facility Regulations, ListServeand Web Page issues, $150 Million Cap issues, andcooperation with ALAS.

Report of the Executive Director

The Executive Director briefed the Board onthe following matters, among others: membership(3,016 as compared to last year's 2,961); duesinvoicing and renewals; Bond Attorneys'Workshop (958 attendees); 1998 Tax Seminarplanning; and scheduled Fundamentals Seminarand Washington Seminar meetings.

Howard Zucker

Secretary


WASHINGTON SAGA

Congress has left town, but not without doingsome damage on its way to adjournment. SenatorMurkowski introduced S.1483 and S.1513,identical bills required by parliamentary floorprocedure, relating to the tax treatment of bondsused to finance electric output facilities. Itseffective date is November 8, 1997, for sales ofoutput affected by the amendments of the bill.Sharon White has provided analysis of the bill inher “Shared Tax Observations” column herein. Ifyou would like copies of either the bills or thereport she refers to, please contact our office. It isfair to say that our world is a little safer now thatCongress is gone. If Treasury decides to issue theoutput regulations in the face of the implicit threatsprovided by the Joint Committee Report andSenator Murkowski’s legislation, it will be easierfor them to do so with Congress not in session.That being said, it was certainly intended that theReport and the legislation discourage the Treasuryfrom releasing the long-awaited regulations.Unfortunately, it appears that we have reverted tothe era when members of Congress, knowing thatbond counsel may be discouraged from renderingclean opinions on transactions, use immediateeffective dates to try to block the issuance ofbonds.

$150 Million Cap on 501(c)(3) Bonds

Now that the cap on the issuance of new bondsfor new capital expenditures for non-hospital501(c)(3) bonds has been lifted, interpretivequestions are arising. The Joint Committee onTaxation will be providing a “Blue Book” on thelegislation enacted this summer and we can expectthat there may be interpretive guidance therein.NABL will be working with other members of thepublic finance and 501(c)(3) community to seekappropriate guidance from Treasury, the IRS, andthe Joint Committee. You should feel free tocontact John Cross, Larry Carlile, or me with yourconcerns or post them in the Tax Law section ofthe NABL web page.

NABL Web Page

The web subcommittee of the EducationCommittee is working on redesigning the web pageto make it more user-friendly and to provide more

useful content. We will also be developing anexpanded use of e-mail that will in some waysreplace the public chat groups on the page. Wewill be sending you information about this inDecember. We hope to be able to provide moretimely and substantive information to NABLmembers in this fashion. You should be thinkingabout how much or little you would like to bereceiving from NABL via e-mail, e.g., mailings,legislative alerts, etc.

1998

I expect 1998 to be a very busy year inWashington. In an election year, members will belooking to “bring home the bacon” to prove totheir constituents that they should be reelected.The first order of business will be to restructure theIRS. This is bound to have some impact on thebond community, although most of what isimmediately being described does not affect us. Iexpect the focus to broaden some next year,especially if tax restructuring becomes a genuineissue prior to enactment of the IRS restructuringlegislation. There are signs that the White Housemay be interested in engaging in a dialogue withCongress about fundamental tax law changes. I’mnot holding my breath that any real structuralchanges can be enacted since there are so manyplayers with such differing views on the answers.However, in true Clinton fashion, it appears that


Try NABL's home page on the Web:www.nabl.org

the White House may be planning to co-opt bonds by private entities for infrastructure projects.another Republican agenda item. Also, the National Bankruptcy Commission has re-

More importantly for the bond community, Iexpect there to be a genuine effort to enactlegislation to increase the private activity bondvolume cap. I think we have finally reached thecritical mass required to develop the political clout The other major area of action next year willto achieve an effort of that sort. The public interest be enforcement by the IRS and SEC. We cangroups laid the ground work this year with the expect to see both agencies bringing forth actionsintroduction by Mrs. Kennelly (D-CT) and Mr. in yield burning and other areas. The SEC usuallyHoughton (R-NY) of H.R. 979 and by Mr. takes up to two years to bring a case and they areD’Amato (R-NY) and Mr. Breaux (D-LA) of approaching that timeframe. The public interestS.1251. These identical bills would immediately groups continue to press the Administration andreturn the state volume caps to the greater of $75 Treasury for relief from the tenets of Rev. Proc.per capita or $250,000,000 and provide an annual 96-41, so some response from the Treasury iscost-of-living adjustment. You can find these bills expected in 1998.through links generated in the State and GeneralLaw Section of our web page, or directly throughthe Government Printing Office’s Access web site(www.access. gpo.gov/congress). You can alsocall our office for copies.

Next year I would expect that there will be working Monday through Thursday, being flexiblesignificant effort made to enlist as many cospon- for Friday events. Laura Butera, my assistant, willsors for these bills as possible, so that when the tax be available on Fridays. She handles requests forbill is put together there will be adequate support legislation, documents, and web postings, so don’tto include the volume cap increase. The be reluctant to call. We wish you Happy HolidaysRepublicans have said that they want to pursue a and a wonderful 1998. Stay tuned for more newstax bill that will do away with the estate tax and from the Nation’s Capitol . . .marriage penalty, and restructure the IRS. Thiswill provide the vehicle for a larger expecteddebate over whether Congress should be spendingthe anticipated budget surplus or buying down thenational debt. Once the level of the surplus isestablished, the debate will be framed. Because itis an election year, unless they end up with a veryclean, minimalist bill, we can expect items likevolume cap increase to have an opportunity to beenacted.

The other issues on which we can expect to seeaction next year are electric utility restructuringand reauthorization of the Intermodal SurfaceTransportation Efficiency Act (ISTEA). Each ofthese will potentially have bond-related provisions.As mentioned above, once Congress and theAdministration determine and then coalesce behindtheir respective policies in energy restructuring, theimpact on tax-exempt finance will be clearer.ISTEA reauthorization probably will contain somedemonstration programs permitting the issuance of

leased its report to Congress and next year will beconsidering bankruptcy reform. Look at JimSpiotto’s column herein for a full description of thereport's proposals in the Chapter 9 arena.

I hope 1998 will be a happy and healthy yearfor you. Thanks to the NABL Board’s willingnessto be family friendly, I am looking forward toworking a four-day week so I can spend a littlemore time with my daughter, Emily. I will be

Amy K. Dunbar

Director of Governmental Affairs

November 14, 1997


COMMITTEE ON SECURITIESLAW AND DISCLOSURE FILESCOMMENTS ON PROPOSEDMSRB RULE ON SELECTION OFUNDERWRITER'S COUNSEL

Editor's Note: The following comment letter wasfiled by the Association's Committee on SecuritiesLaw and Disclosure on October 2, 1997.

Ernesto A. LanzaAssistant General CounselMunicipal Securities Rulemaking Board1150 18th Street, N.W.Suite 400Washington, D.C. 20036

Municipal Securities Rulemaking BoardRequest for Comment on Board

"Review of Underwriting Process"

Dear Mr. Lanza:

This letter is submitted on behalf of the Com-mittee on Securities Law and Disclosure of theNational Association of Bond Lawyers ("NABL")in response to the request of the MunicipalSecurities Rulemaking Board (the "MSRB" or the"Board") for comments on its "Review ofUnderwriting Process," published on May 20, 1997(the "Review").

NABL was incorporated as an Illinois non-profit corporation on February 5, 1979, for thepurposes of educating its members and others inthe law relating to state and municipal bonds andother obligations, providing a forum for theexchange of ideas as to law and practice, im-proving the state of the art in this field of law,providing advice and comment at the federal, stateand local levels with respect to existing orproposed legislation, regulations, rulings and otheractions affecting state and municipal obligations,and providing advice and comment with regard tostate and municipal obligations in proceedingsbefore courts and administrative bodies throughbriefs and memoranda as a friend of the court oragency. Currently, NABL has approximately3,000 members who actively participate in someaspect of public or private municipal financepractice. They include bond counsel, underwriter's

counsel, municipal attorneys, issuer's counsel,corporate counsel, trustee's counsel, and defensecounsel in securities and tax-related proceedings.

We share the view of the Chairman of theBoard, Roger G. Hayes, that ". . . all of us -- under-writers, issuers, counsel, and financial advisors --have a responsibility to see that the underwriting ofa new issue is efficient and above reproach." We1

applaud the Board's commitment to ". . .strengthen further the integrity of the process andprotect investors." We share the Board's concernabout the integrity of the municipal securitiesunderwriting process and therefore we are pleasedto respond to your request for comments on theReview specifically with respect to issuer selectionof underwriter's counsel and disclosure regardingsuch selection. As discussed below, we believethat there is sufficient existing guidance regardingselection of underwriter's counsel and that this isnot an appropriate matter for rulemaking.

We believe that the starting point for anydiscussion regarding selection of counsel isrecognition of the importance of participation bycompetent counsel. The American Bar Associa-tion has spoken on competency of counsel in itsModel Rules of Professional Conduct. ModelRule 1.1 provides that "[a] lawyer shall providecompetent representation to a client. Competentrepresentation requires the legal knowledge, skill,thoroughness, and preparation reasonablynecessary for the representation."2

NABL has long endorsed the need forcompetent and qualified attorneys in the variouscounsel roles in municipal securities transactions.The role of bond counsel developed over 100 yearsago as a result of investor concerns. As NABL haspreviously stated, "[t]he premise underlying [thebond counsel] arrangement was that bond counselwould . . . exercise objectivity and acquire theexpertise required to provide assurance of thevalidity of the bonds. . . . [The opinion of bondcounsel] ordinarily is required by both issuers andinvestors." NABL has stated in its Selection and3

Evaluation of Bond Counsel that "[o]ne of theprimary criteria in evaluating prospective bondcounsel who have been recommended,interviewed, or who have applied is the level ofexpertise of the firm and of the individual lawyers


under consideration for a particular engagement." is not satisfied with the competence or objectivity4

The same criteria apply to selection of other of its counsel relies on the assistance of thatattorneys for the transaction, including counsel at its own peril."underwriter's counsel. The selection of, andparticipation by, competent counsel in a transactionis essential to the integrity of the municipalsecurities underwriting process.

The role of underwriter's counsel is of greatimportance in the securities underwriting process.NABL has addressed previously the question ofissuer involvement in the selection of underwriter'scounsel in a project jointly sponsored by theAmerican Bar Association and NABL as well as5

by NABL in its comments on proposed MSRB ruleG-38. On the one hand, issuer selection of6

underwriter's counsel has been perceived as acontroversial practice among many lawyers andunderwriters. "Some feel this practice raises manyquestions about the client orientation of suchcounsel. If counsel are selected by the issuer, dotheir loyalties lie in representing the best interestsof the underwriter or the issuer? . . . On the otherhand, proponents of the practice suggest that theissuer who chooses underwriter's counsel based ontheir long-term working relationship is providingthe underwriter with counsel already familiar withthe issuer and its financing practices. Counsel willknow where the key issues lie, saving time andmoney in the process."7

Even if the issuer selects or directs theselection of underwriter's counsel, counsel has anethical duty and responsibility to its client, theunderwriter. Counsel must first determine that it8

is competent to accept the representation. Second,it must evaluate its responsibilities, including clientloyalty, to determine if there are any conflicts withregard to its representation of the underwriter and comments to the Board. NABL is committed toprior client relationships with the issuer. working with the Board and others to strengthenTherefore, "[r]egardless of who selected the further the integrity of the municipal securitiesunderwriter's counsel, it is the responsibility of underwriting process and to protect investors. Weunderwriter's counsel to assist the underwriter in believe, however, that there is sufficient existingconducting its review to confirm that the disclosure guidance regarding the selection of underwriter'sdocument accurately reflects the terms of the trans- counsel and the disclosure of such selection, whenaction and describes the issuer's financial condition appropriate. While we are supportive ofin a fashion that neither misstates nor omits rulemaking that provides useful guidance andmaterial information. In the case of an underwriter direction, that effectively improves the municipalwho is represented by issuer-selected counsel, the securities underwriting process and that protectsunderwriter's responsibilities do not change based investors, we believe that this is an area that is noton who selected its counsel. An underwriter who appropriate for rulemaking by the Board.

9

Whether the counsel selection process isrelevant and material to investors and thereforeshould be disclosed is a separate question. TheSecurities and Exchange Commission has statedthat disclosure of certain relationships may beappropriate and "[i]f, for example, the issuer . . .selects. . .counsel. . .who has a direct or indirect. ..financial or business relationship or arrangementwith persons connected with the offering process,that relationship arrangement may be material."10

All disclosure determinations are dependent onevaluation of the facts and circumstances of theparticular transaction and the parties thereto.Questions regarding disclosure of relationshipscontinue to be appropriately evaluated based ontheir materiality, and therefore [are] not appro-priate for rulemaking.

In conclusion, we believe that any action takenby the Board as a result of the Review shouldrecognize that issuer's designation of underwriter'scounsel need not lead to the determination thatcounsel does not and cannot represent theunderwriter. Regardless of who "hires" or"designates" the underwriter's counsel, the lawyermust determine that he/she is competent to serveas counsel to the underwriter and must declarehis/her loyalties to the underwriter as the client.Furthermore, ethics issues must be aired, and boththe underwriter and the counsel must be confidentthat, in fact, the counsel represents the under-writer. Finally, such designation may or may not11

be material to investors.

We appreciate the opportunity to provide our


Very truly yours, SEC Rel. No. 35-23122; November 17, 1983.

William L. Nelson, Chair

Ad hoc Drafting Committee: Amy K. Dunbar,Julianna Ebert, John M. Gardner, Andrew R. Kint-zinger, Floyd C. Newton III, John Overdorff,Walter J. St. Onge, Mary Jo White, and HowardZucker.

1 Letter of Chairman Roger G. Hayes, MSRBReports, Volume 17, Number 2, June 1997.

2 Model Rules of Professional Conduct,American Bar Association, 1992.

3 The Function and Professional Responsibili-ties of Bond Counsel, National Association ofBond Lawyers 1995, Second Edition, pgs. 1-2.

4 Selection and Evaluation of Bond Counsel,National Association of Bond Lawyers, 1988,pg. 12.

5 Disclosure Roles of Counsel in State andLocal Government Securities Offerings,Section of Urban, State and Local GovernmentLaw, American Bar Association, SecondEdition, 1994.

6 ". . . with the SEC's vocal promotion ofcompetitive sales and the increased attention todisclosure, many issuers have designatedunderwriter's counsel in order to have suchparticipation when it will be most valuable . .. . Such designation of underwriter's counselby utilities has been standard in the publicutilities securities market for some time andhas developed in shelf-offerings under SECRule 415." NABL Letter to Mark McNair, Es-quire, Assistant General Counsel, MSRB,dated May 31, 1996, relating to draft MSRBrule G-38. In 1983 in adopting the final rulesregarding shelf registration, the SEC stated thatissuer designation of underwriter's counsel is ".. . a sound practice because it provides for duediligence investigations to be performedcontinually throughout the effectiveness of theshelf registration statement. Designation ofunderwriters' counsel facilitates continuousdue diligence by ensuring on-going access to

the registrant on the underwriters' behalf."

7 Disclosure Roles of Counsel at 19.

8 In this regard, it should be noted that the factthat the federal securities laws were designedto protect the investing public does not imposeon underwriter's counsel any disclosureresponsibilities to the bondholder; under-writer's counsel assumes only the duty toprotect its own clients. See Abell v. PotomacInsurance Company, 858 F.2d 1104, 1125-26(5th Cir. 1988).

9 Disclosure Roles of Counsel at 19-20.

10 SEC Release No. 34-33741 (March 17, 1994).NABL recently addressed this issue in itscomment letter on proposed rule G-38. SeeNABL Letter to Mark McNair, Esquire, Assis-tant General Counsel, MSRB, dated May 31,1996. In this letter, NABL acknowledged theposition of the SEC regarding the possibleneed to disclose information about selection ofunderwriter's counsel if it is determined to bematerial to investors.

11 NABL is engaged in an ongoing projectregarding the evaluation, selection and engage-ment of counsel and has undertaken athorough review and revision of its ModelEngagement Letter project. An ExposureDraft of the letter is printed in the NABLQuarterly Newsletter [sic], Vol. 18, No. 2,June 1, 1997. While this Model EngagementLetter is drafted for bond counsel engage-ments, a model letter for use in underwriter'scounsel engagements is underway and thefundamental conflicts analysis is the same: alawyer cannot represent a client under the rulesof ethics unless he/she has determined thathe/she is competent to represent the client, thateither no conflict exists, or if one exists that thelawyer's judgment will not be impaired by thenature of the conflict, and that the clients, bothcurrent and former, if necessary, have con-sented.

SHARED TAX OBSERVATIONS


The last quarter was marked by a paucity of airport otherwise satisfying the private business userulings in general, but an abundance of conver- test are private activity bonds.sation regarding both open access plans for utilitiesand the IRS program for audits of tax-exemptbonds. First, the rulings.

Private Letter Rulings and TechnicalAdvice Memorandum

Residential Rental Facilities. Private letterruling 9740007 (June 27, 1997) holds that, for thepurpose of qualified 501(c)(3) private activitybonds, an assisted living care facility “does notprovide residential rental property for family The ruling also recites that the charge isunits.” Thus, qualified 501(c)(3) bonds may be imposed on “limited members of the public for theissued for such a facility without compliance with privilege of using [the airport facilities] or [is] athe requirements of Code section 145(d)(2). (That charge for services rendered to limited members ofCode section generally prohibits the issuance of the public who use the Project.” The importancequalified 501(c)(3) bonds for residential rental of this statement should be discounted, however,property for family units unless the first use of the since many generally applicable taxes (such asproperty is pursuant to the bonds being issued, or hotel taxes) are also arguably imposed on limitedthe property is substantially rehabilitated, or there members of the public for the privilege of usingis compliance with requirements for “qualified” facilities (such as hotels) or for services renderedresidential rental projects). to limited members of the public (such as hotel

The ruling states that the focus of the legis-lative history and regulations relating to Codesection 142(d) (private activity bonds for resi-dential rental property) “is whether the institutioninvolved is providing residences for individuals, ascompared to bed-spaces in a health care facility.”The ruling describes the “common qualities” ofhealth care facilities and provides a detaileddescription of the assisted living care facility beingfinanced.

While the ruling is generally favorable forthose interested in issuing qualified 501(c)(3)bonds for assisted living care facilities (withoutnecessity of assuring new construction, rehabili-tation or low income units), the flipside of theruling is that it raises questions regarding theissuance of qualified multifamily housing privateactivity bonds for assisted living care facilities.

The ruling should be viewed as mandatoryreading for anyone considering financing of livingfacilities for the elderly.

Airports. Private letter ruling 9735018 (May29, 1997) holds that a passenger facility chargesatisfies the private payment or security test and,therefore, bonds issued to finance a municipal

At first blush, the ruling seems unfair sincegenerally applicable taxes do not satisfy the privatepayment or security test and since passengerfacility charges certainly seem to be amounts paidby the public generally. The real thrust of theruling, however, is that even though the chargesare generally applicable, they are not exactedpursuant to the exercise of the taxing power ofStates or political subdivisions.

guests).


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The ruling is notable for emphasizing the im-portance of the State law underpinning of a federaltax law rule in the tax-exempt bond area.

Distinction Among Governmental Entities.Three rulings emphasize the status of the entity inquestion as a political subdivision, an instru-mentality or an “on-behalf-of” issuer. The mostinteresting of these is private letter ruling 9741013(July 9, 1997). This ruling concludes (basedlargely on Revenue Ruling 57-128) that“academies” created under State law by schooldistricts, community colleges, or State universitiesare instrumentalities of the State. Based upon thisconclusion, the ruling holds that use of proceeds bythe academies will not satisfy the private businesstests or the private loan financing test.

The private business use test is not satisfiedbecause the trade or business of an instrumentalityis that of a governmental unit and the trade orbusiness of a governmental unit is not privatebusiness use. Similarly, the private loan financingtest is not satisfied because that test relates only toloans to persons other than governmental units,and since academies are instrumentalities ofgovernmental units, there are no loans to non-governmental units.

Private letter ruling 9736005 (May 29, 1997)pertains to a traditional “on-behalf-of” financingwhere bonds were issued on behalf of a city by anonprofit corporation to finance facilities leased toa company, where (before the bonds were paid infull) the company declared bankruptcy and failedto pay property taxes and, also, the city discoveredenvironmental problems with the facilities, andwhere the city refused to accept a gift of thefacilities upon payment in full of the bonds untilthe environmental problems were corrected andthe property taxes were paid.

The ruling holds that the requirement ofRevenue Ruling 63-20 that the governmental unitobtain full legal title upon payment of bonds wasnot violated because the city would in fact receivefull legal title upon correction of the environmentalproblems and payment of the taxes. The delay inobtaining title does not cause interest on the bondsto be taxable.

The ruling is conclusive and provides littlereasoning, but it may have been argued thatRevenue Ruling 63-20 (and Revenue Procedure82-26) require “unencumbered” fee title to vest inthe relevant political subdivision upon payment ofthe bonds in full and that the environmentalproblems and property taxes were “encumbranc-es.” Whatever the reasoning or lack thereof, it isnice to know that tax-exemption does not requirea city to be lumbered with a white elephant.

The third ruling (actually technical advicememorandum 9730001, dated March 7, 1997) ismore limited in scope than those above. It holdsthat, notwithstanding a complex amendment ofauthorizing legislation and a health authority’scorporate documents to rearrange who appointswhom to the board of directors, the authoritycontinued its status as a political subdivision.

Management contracts. In what is perhaps thefirst ruling issued since the management contractrules were revisited by the final private activitybond regulations, private letter ruling 9740015(July 2, 1997) holds that an operating contract witha nonprofit corporation relating to a nuclearpowered, electric generating facility owned by twocities and two power utilities does not causeprivate business use. The property to be operatedwas “public utility property” and the onlycompensation to be paid to the operator was thereimbursement of actual and direct expenses andreasonable overhead expenses.

The ruling emphasizes that the operatingagreement imposed “reasonable limitations on [theoperating company's] reimbursable costs whiledescribing the reimbursable costs in sufficientlygeneral terms so as to be consistent with thecomplex undertaking of operating a nuclear powerfacility.” The ruling also places importance on thefact that the cities would reimburse on a “fullypass-through basis corresponding with, but neverexceeding, their respective undivided ownershipinterests” in the financed facilities.

Open Access

If you have been out of the country, you willperhaps not have heard of the controversysurrounding the effect of open access plans on thefinances of investor-owned and governmentally-


owned utilities, but otherwise news of the (though its intent may have been limited tocontroversy has been difficult to avoid. The governmental bonds). Because the bill’s languageTreasury Department has, of course, for almost a is similar to, but not identical with, provisions ofyear indicated that the second half of the private Code section 142(f)(4) permitting certainactivity bonds regulations, including those on furnishers to elect to terminate tax-exempt privateoutput facilities, will be issued “soon.” And many activity bonds, the bill (if enacted in its presentindividual Senators and Congressmen appear to be form) is likely to cause interpretation difficulties.keenly aware of the stakes involved (though others That, however, is undoubtedly the least of ourmay have been out of the country). problems.

Murkowski Bill. As we go to press, Congress Joint Committee Report. On October 20,will momentarily adjourn. Last Saturday, in the 1997, pursuant to the request of Senator Mur-midst of a heated controversy regarding “fast kowski, the Joint Committee on Taxation issued atrack” trade agreement approval, Senator report (No. JCS 20-79) describing Federal incomeMurkowski, Chairman of the Senate Committee on tax provisions relating to the electric powerEnergy and Natural Resources, introduced a bill industry in general. Part IIA1 (Present Law)relating to tax-exempt bonds for electric output describes present federal tax law relating to tax-facilities. Although the bill would apply to sales of exempt governmental and private activity bondsoutput after November 8, 1997, Senator for electric facilities. For those not familiar withMurkowski has stated that the proposal is intended tax-exempt bonds, the description may be a littleto be a starting point for Congressional discussion muddy, but for those familiar with such bonds, thenext year. description is an adequate recital of existing law.

The bill contains two parts. In the first part, it Part IIA2 of the report describes open accessenacts (but with different wording and some proposals and sets forth seven examples illustratingmodification) the 1986 Tax Act conference report how participation by local government in openprovisions regarding exclusion from private access plans will cause interest on governmentalbusiness use of insignificant electricity exchanges and private activity bonds issued to finance electricand swaps (H. Conf. Rpt. No. 99-841, page II- generation, transmission and distribution facilities690). to become retroactively taxable. Although the

In the second part, the bill provides a proce-dure by which issuers may participate in openaccess plans without adversely affecting the tax-exemption of outstanding bonds. This procedurerequires (among other matters) that if an entityelects to participate in an open access plan(defined), then outstanding bonds must beredeemed within six months of their earliest calldate. This redemption provision applies to alloutstanding bonds for all “output facilities”(including, apparently, generation and distribution,as well as transmission, facilities). The bill,however, distinguishes between bonds issuedbefore December 1, 1997, and those issued afterthat date. For bonds issued on or after December1, 1997, the required redemption need not occuruntil the date 10 years after the date of enactment(unless the issuer provides for an earlier call date).

The second part of the bill does not distinguish trips” may be likely; improper depreciation deduc-between governmental and private activity bonds tions have been discovered among conduit

facts described in the examples are those whichhave been (or with open access plans, will be)commonly confronted, the conclusions are notidentical to conclusions in some of the rulings inthe area. Rather than clarifying a difficult area, theexamples have created controversy.

IRS Audit Program

As with open access plans, IRS audit of tax-exempt bonds continues in the news. Among otherrumors, the following may be of interest: thesmall issue IDB audit program has been a trainingground for agents before the audit program moveson to other types of tax-exempt bonds; eventhough in its infancy, the closing agreementprogram has generated significant revenues to thefederal government (should this be relevant?);agents are extremely reluctant to identify theparticular question being audited and so “fishing


borrowers, but admittedly these do not relate totax-exemption of the interest on the bonds; andthe issues on audits have been “simple to resolve.”

The key disturbing concept, however, relates tothe lack of an appellate process. As long as thereis no possibility of an independent review and, inrecognition that a technical advice memorandum isjust that (technical advice by the IRS nationaloffice to the IRS agent in the field), there is anincreasing concern among bond counsel andspecial tax counsel that there is no forum forobjective consideration of troublesome taxquestions relating to a particular bond issue.

Harbor Bancorp

A petition for writ of certiorari has been filedwith the U.S. Supreme Court for review of thejudgment rendered by the Ninth Circuit in HarborBancorp & Subsidiaries, et al. v. Comm'r ofInternal Revenue, 115 F.3d 722 (1997). Thepetition contains an excellent summary of the taxissues involved asserting (i) the Ninth Circuit’sholding disregards the economic substance of theclosing and is inconsistent with applicable Treasuryregulations providing that bonds are issued whenthe issuer physically exchanges them for the under-writer’s check; (ii) the Ninth Circuit erroneouslyconstrued ambiguous provisions of the rebaterequirement to strip bonds of their tax-exemptstatus when the proceeds are misappropriated andinvested by the wrongdoers in unauthorizedinvestments in violation of the financing docu-ments; and (iii) the Ninth Circuit accordedunwarranted deference to the Tax Court and theCommissioner and its resulting misapplication ofthe Code will establish an adverse precedent forthe tax treatment of municipal bond issues.

Among other matters, the petition asserts, “The[lower] court's rationale could invalidate-- or atleast cast a shadow upon -- billions of dollarsworth of municipal bonds, as any closingconducted without cash, or at least a cashier'scheck, would seem to be in jeopardy under theNinth Circuit’s theory.” A caution for us all.

Sharon Stanton White

November 11, 1997

INVITATION FOR COMMENTSON NYC BAR'S PROPOSEDPAY-TO-PLAY RULE

Reproduced below is the full text of theProposed New York Court Rule crafted by TheAssociation of the Bar of The City of New York("NYC Bar Proposal") to effectively ban politicalcontributions by lawyers in firms seeking mu-nicipal finance work. The NYC Bar Proposal wasoriginally submitted for consideration to the Houseof Delegates of the American Bar Association("ABA") at its August 1997 meeting in SanFrancisco. After it became clear that the NYC BarProposal would not enjoy favorable support amongthe delegates, the ABA's Section Officers'Conference worked out a compromise proposalwhich was passed by the House of Delegates. Thecompromise resolution – Revised 10D (publishedin the September 1997 edition of The QuarterlyNewsletter) – among other things, condemns theconduct of lawyers (not just municipal financelawyers) making political campaign contributionsto public officials in return for being consideredeligible by public agencies to perform professionalservices and calls upon the President of the ABAto appoint a task force to review the issues in-volved and submit recommendations thereon forconsideration by the House of Delegates at itsAugust 1998 meeting. Notwithstanding theappointment of that task force (of which formerPresident Julie Ebert is a member), The Associ-ation of the Bar of The City of New York hasproposed that the NYC Bar Proposal be adopted asa rule by the New York State Unified CourtSystem. The Administrative Board of the Courtsof the State of New York is seeking publiccomment on that proposal by February 13, 1998.

NABL's Board of Directors is very concernedwith the NYC Bar Proposal and its narrow focuson municipal finance lawyers rather than onpolitical contributions by all lawyers or on the needfor broad-based campaign finance reform. Thetemptation to single out only bond lawyers forreform – already evidenced in the NYC BarProposal, crafted by a special committee of the Barthat contained no practicing municipal financelawyers – looms large. The implications of the


NYC Bar Proposal are serious and severe. Forthat reason, NABL has asked its Amicus ReviewCommittee, led by former President Fredric Weberand George Campbell, to propose comments forsubmission to the New York Office of CourtAdministration by the February 13, 1998, deadline.An article prepared by Mr. Weber on the politicalcontributions issue appears elsewhere in thisedition of The Quarterly Newsletter. (The viewsexpressed by Mr. Weber in his article are his ownand do not necessarily represent the views of theAssociation. The position of the Association onthe subject is set forth in a Statement ofProfessional Principles with Respect to PoliticalContributions adopted by the Board of Directors inFebruary, 1994, reprinted in the November 1994and June 1997 editions of The Quarterly News-letter, and briefly described in Mr. Weber's article.)

Members are urged to study the NYC BarProposal and the points raised in Mr. Weber'sarticle. We would very much like to hear theviews of members on the subject, particularly thosemembers who practice in New York or have NewYork offices. Send your comments to Mr. Weberat Fulbright & Jaworski L.L.P., 1301 McKinney,Suite 5100, Houston, Texas 77010-3095 (Fax 713-651-5105; e-mail: fweber @fulbright.com), witha copy to Executive Director Pat Appelhans at theNational Office in Wheaton. Please do so by theend of the year so that member views can be takeninto account in the Association's comment letter.In particular, please consider the following ques-tions:

1. Should action by the AdministrativeBoard of the New York Courts on the NYCBar Proposal be taken now or deferred untilthe ABA task force has reported its recom-mendations?

2. Should the NYC Bar Proposal'seffective ban on lawyer contributions beextended to all similarly situated lawyers, if itis adopted? If so, whom do you consider to besimilarly situated: other lawyers engaged bygovernment? lawyers representing privateinterests before government, e.g., lobbyists,land use lawyers, etc.? contributors to judicialcandidates from whom they receive courtappointments, or before whom they appear?

3. Should any type of effective ban onpolitical contributions by lawyers be adopted?If so, what type?

4. In any effective ban on politicalcontributions, should contributions by all firmlawyers, or only firm lawyers seeking govern-ment engagements and firm management, dis-qualify a firm from accepting a governmentengagement?

5. Should contributions to a political partydisqualify a firm from accepting a governmentengagement?

6. In lieu of an effective ban on lawyerpolitical contributions, should other remedialaction be considered? If so, what action? Iseffective disclosure of political contributions aproper remedial action? Should disclosurerequire grouping contributors by employ-er/firm?

The Board of Directors earnestly solicits your inputon this very important subject, the sooner, thebetter. Thanks.

PROPOSED NEW YORK COURT RULE

The Chief Administrative Judge of the Courts,upon consultation with and approval of theAdministrative Board of the Courts, adopts thefollowing Rule applicable to lawyers whoundertake government finance engagements.

1. Purpose and Intent

The purpose and intent of this Rule are to ensurethat the high standards of integrity of the legalprofession are maintained, to prevent fraudulent,corrupt and manipulative acts and practices orthe appearance thereof, to promote justice andequitable principles, and to protect the publicinterest by prohibiting lawyers from undertakinggovernment finance engagements where a lawyerhas made or solicited certain politicalcontributions to government officials who mayissue, authorize the issuance of or appointpersons with the power to issue or to authorizethe issuance of government securities. There is afundamental public interest in assuring thatpolitical contributions are not made by lawyers


or solicited by government officials under incurred by a successful candidate forcircumstances where it might reasonably appear State or local office. A Politicalthat such contributions represent consideration Contribution to a political party, afor the award of a government finance committee or one of the officers thereof,engagement. This Rule promotes that public is deemed to constitute a Politicalinterest. Contribution of that size to each and

2. Definitions

[“]Government Finance Engagement” shallmean an engagement as bond counsel, issuer’scounsel, underwriter’s counsel, or any other legalengagement in connection with the offering ofmunicipal securities, defined as offerings ofsecurities of the State or any of its politicalsubdivisions, agencies or instrumentalities.

“Issuer” shall mean: (i) the governmentissuer specified in Section 3(a)(29) of theSecurities Exchange Act of 1934 (the“Act”); and (ii) any public or non-for-profit [sic] entity controlled by oraffiliated with the State or any politicalsubdivision agency or instrumentalitythereof which issues or guaranties [sic]municipal securities.

“Official of an Issuer” shall mean any personwho was, at the time of the contribution,an incumbent in, or candidate for,elective office of the Issuer (includingany election committee for such person)which office is directly or indirectlyresponsible for or authorized, under anyprovision of law, including withoutlimitation by means of the power toappoint some or all of the members ofthe Issuer, or otherwise, to retain legalservices in connection with aGovernment Finance Engagement.

“Political Contribution” shall mean any gift,subscription, loan, advance, or deposit ofmoney made, directly or indirectly, to anOfficial of an Issuer or to a political partyor committee of the State or politicalsubdivision, agency or instrumentalitythereof (i) for the purpose of influencingany election for federal, State, or localoffice, (ii) for payment of debt incurredin connection with such election, or (iii)for transition or inaugural expenses

every elected official of that party at thelevel of the party organization receivingthe contribution (e.g. contributions to aState political party count as a PoliticalContribution of that amount to each stateofficial of that party.)

“Political Solicitation” shall mean asolicitation directed to any person orentity resulting in a Political Contributionto an Official of an Issuer.

3. Prohibitions On Certain Government FinanceEngagements

(a) No lawyer shall undertake aGovernment Finance Engagementawarded by an Official of an Issuerwithin two years after making either aPolitical Contribution or a PoliticalSolicitation; provided, however, that thisRule shall not prohibit a lawyer fromundertaking a Government FinanceEngagement with a particular Official ofan Issuer if:

(i) (A) the only PoliticalContribution made by the lawyerto that Official of an Issuerwithin the previous two yearswas (I) for a position for whichthe lawyer was entitled to voteand (II) not in excess of $250.00for each stage of the electoralcampaign (i.e. primary andgeneral election) and (B) thelawyer did not make any politicalcontribution in excess of $1,000to any political party orcommittee of the State or of anypolitical subdivision, agency orinstrumentality thereof; or

(ii) the only Political Solicitationmade by the lawyer on behalfof that Official of an Issuer


or any political party or that lawyer is admitted to practice incommittee of the State or of New York) shall also be prohibited fromany political subdivision, undertaking a Government Financeagency or instrumentality Engagement, provided, however:thereof, was for PoliticalContributions made withinthe previous two years for anOfficial of an Issuer forwhom the lawyer wasentitled to vote, no PoliticalContribution solicited was inexcess of $100.00 to theOfficial of an Issuer for eachcomplete electoral campaign(primary and general electioncombined), and theaggregate of all PoliticalContributions solicited in anysuch campaign within theprevious two years did notexceed $2,500.

Legal resident aliens are, for purposes of thisRule, deemed to be “entitled to vote” for thoseofficials that a citizen with the same residencewould be entitled to vote.

(b) Notwithstanding subsection (a),any lawyer who is personally involved inthe undertaking of Government FinanceEngagements who solicits PoliticalContributions in any amount at therequest of an Official of an Issuer or oneof the Official’s subordinates, isprohibited from undertaking aGovernment Finance Engagementawarded by that Official of an Issuer fora period of two years. For purposes ofdetermining the precise period ofprohibition under the Rule, the bar runsfrom the date of the prohibited PoliticalContribution or Political Solicitation, andthe relevant date of a GovernmentFinance Engagement is measured as theday the bond purchase, underwriting orsimilar agreement is executed.

(c) To the extent that a lawyer isprohibited from undertaking aGovernment Finance Engagement byoperation of this Rule, the law firmemploying such lawyer (whether or not

(iii) no law firm shall beprohibited from undertaking aGovernment Finance Engagementwhere a lawyer made or solicited aPolitical Contribution for an Officialof an Issuer prior to joining such lawfirm;

(ii) the law firm with which a lawyer isemployed shall not be held to have violated thisprovision in the event that all four of thefollowing conditions are met:

(A) prior to the time thecontributions which wouldotherwise have resulted inthe law firm being prohibitedfrom undertaking aGovernment FinanceEngagement were made, thelaw firm had developed andinstituted proceduresreasonably designed in goodfaith to ensure compliancewith this Rule;

(B) prior to or at the time thecontributions which wouldotherwise have resulted inthe law firm being prohibitedfrom undertaking aGovernment FinanceEngagement were made, thelaw firm’s management hadno actual knowledge of thecontribution(s);

(C) the law firm has taken allavailable steps to cause theperson or persons involved inmaking the contribution(s)which would otherwise haveresulted in such prohibitionto obtain a return of thecontribution(s); and


(D) the law firm has taken suchother remedial orpreventive measures, asmay be appropriateunder the circumstances.

(d) If a law firm or a political actioncommittee controlled by a law firm itselfmakes a Political Contribution or aPolitical Solicitation that would operateto prohibit a lawyer from undertakingcertain Government FinanceEngagements, the law firm is likewiseprohibited from undertaking suchGovernment Finance Engagements forthe same two year period that would beapplicable to lawyer prohibited throughoperation of the Rule [sic].

4. Stays and Other Relief

Each Appellate Division shall have thepower to stay application of the Rule’stwo year disqualification of a law firmbased on a showing that the prohibitedPolitical Contribution or PoliticalSolicitation was made by a partner oremployee contrary to the firm’s writtenpolicies and without knowledge of thefirm and that the law firm has taken suchappropriate remedial or preventivemeasures to rescind the PoliticalContribution or Solicitation and toprevent its reoccurrence.

5. Application

This Rule shall apply to any PoliticalContribution or Political Solicitationmade by a lawyer on or after_____________, 1997.

Have you tried the "NABLnet" page?www.nabl.org


THE ABA TASK FORCE ONLAWYER CONTRIBUTIONS:A Preview of the Issues

At its annual meeting in August, the ABAHouse of Delegates condemned so-called "pay-to-play" conduct by lawyers engaged to representgovernmental units. It also called for theappointment of a task force to review the issuesrelated to such conduct (as well as judicialcontributions) and to recommend any remedialactions that may be warranted. In response, ABAPresident Shestack appointed an impressive taskforce. It is led by Ford Motor Company GeneralCounsel Jack Martin and includes NABLImmediate Past President Julie Ebert and NABLmember Jack Williams as well as former U.S.Senator Howard Baker and former CIA and FBIDirector William Webster.

The task force now faces a daunting task: todetermine whether current lawyer contributionconduct warrants remedial action and, if so, todetermine what remedial action should beundertaken. The task force is expected to make itsrecommendations by the end of May, so they maybe considered at the ABA Annual Meeting inAugust, 1998. If the task force recommends, andthe ABA House of Delegates approves, changes inthe ABA Model Rules of Professional Conduct,each state's rulemaking authority would then becalled upon to consider similar changes to its owndisciplinary rules.

The task force undoubtedly will consider fivekey questions: (1) Which lawyer contributionsshould be addressed? (2) Why are some lawyercontributions considered bad? (3) How can theirbad effects be prevented? (4) Will preventivemeasures produce their own bad effects? (5) Doesthe "illness" justify the "cure?" Beforerecommending or criticizing possible ABArecommendations, all lawyers (and all staterulemaking authorities) should consider the samequestions.

Which Lawyer Contributions Should be Addressed?

The task force is charged with (1) reviewingissues related to campaign contributions made orsolicited by lawyers, including municipal bond

lawyers, and (2) recommending necessary ordesirable changes in laws, rules, or proceduresrelated to "pay-to-play" conduct and judicialcontributions by lawyers who appear before therecipient.

Although the task force is not required torecommend changes outside the areas of "pay-to-play" and judicial contributions, it is clearly free todo so, since it is charged with reviewing lawyercontribution issues generally. If itsrecommendations are to be comprehensive andnondiscriminatory, the task force should consideronly recommendations that address contributionsby all lawyers who may benefit from politicalinfluence in their professional practices.

"Pay-to-Play." The task force has been askedto review "pay-to-play" conduct involving lawyers."Pay-to-play" conduct occurs when a governmentofficial demands a contribution to the official'spolitical campaign as a condition to considering thecontributor for an engagement by the official'sgovernmental unit, or when a lawyer or law firmmakes a political contribution to become eligiblefor an engagement from the governmental unit.Broadly defined, "pay-to-play" conduct includescontributions made by lawyers to judicialcandidates to become eligible for courtappointments.

"Pay-to-play" does not mean soliciting oroffering a contribution in return for an engage-ment. Such conduct would constitute criminalbribery in most jurisdictions and be proscribed byexisting rules, e.g., ABA Model Rule 7.2(c), whichprohibits a lawyer from giving "anything of valueto a person for recommending the lawyer'sservices." Rather, "pay-to-play" focuses oncontributions that make a lawyer or firm eligiblefor, but do not assure, a governmental engagement.

By reviewing "pay-to-play" conduct amonglawyers generally, the task force will encountermost legal practice areas. State and localgovernments engage outside counsel in a multitudeof practice areas for a variety of tasks. Forexample, in addition to municipal bond lawyers,they hire litigators to secure public rights-of-wayby eminent domain or to defend tort actions,employee benefits lawyers to structure qualifiedpublic employee retirement systems, intellectual


property lawyers to secure the benefits of research lawyers representing private interests couldat state universities, labor lawyers to defend undermine confidence in government and the legalemployment rights actions and to assist in profession as much as judicial contributions, if thecollective bargaining with organized government public thought that governmental decisions wereemployees, health care lawyers to enforce influenced by the contributions. If contributions bypayments to public hospitals through Medicare, lawyers engaged by governmental units are viewedand trust and estate lawyers to secure bequests to as improper, can contributions by lawyersthe governmental unit under contested wills, representing private interests before governmentamong others. be viewed by the public in any better light?

Contributions to Judicial Candidates. Inaddition to "pay-to-play" conduct, the task forcehas been asked to review lawyer contributions tojudicial candidates before whom the lawyersappear. Contributions to judges before whomcontributors appear, but from whom they do notseek court appointments, are qualitatively differentthan "pay-to-play" contributions. They do notaffect the public procurement process, but theymay compromise the fairness, or perceivedfairness, of judicial decisions affecting third partiesand therefore may undermine public confidence inthe justice system and the bar. Lawyers have aspecial obligation to support the integrity of thejustice system. It is in their best interests tosupport measures that increase public confidencein the bar.

Other Lawyer Contributions. In addition to"pay-to-play" conduct and judicial contributions,the task force should also review contributions bylawyers who can use political influence to affectgovernmental decisions in other ways in theirpractices, e.g., to secure favorable results for theirclients in legislative or administrative proceedingsor in discretionary executive decisions.

Contributions by lawyers who represent privateinterests before governmental units are virtuallyindistinguishable from judicial contributions bylawyers who appear before, but do not seekappointments from, judges, except that they affectnon-judicial governmental decisions rather thanjudicial ones. Many such governmental decisionsare made by elected officials or political appointeesby means of quasi-judicial administrative hearingsand therefore closely resemble judicial decisions.Others are more subjective, but no less important,than judicial decisions. Indeed, they more oftenaffect the general public interest than do judicialdecisions. Accordingly, political contributions by

If the task force interprets its charge to includeexamining contributions by lawyers who representprivate interests before public governmental units(as it should), it would review contributions by,among others, real estate lawyers who appearbefore zoning boards, administrative lawpractitioners who represent clients in regulatoryproceedings, and lawyers who lobby governmentalunits on behalf of private interests. In addition, byinterpreting its charge to include suchcontributions, the task force would review lawyercontributions made in federal races as well as stateand local races.

Why are Some Lawyer ContributionsConsidered Bad?

To identify the proper scope of its review andto determine whether remedial measures arewarranted, the task force must understand exactlywhy some lawyer contributions can have adversesocial consequences. Before considering a "cure,"the task force must understand the "illness."

Not all lawyer contributions have adversesocial consequences. Of those that do, not alltypes of contributions have the same conse-quences. For example, contributions by lawyersengaged by governments and contributions bylawyers engaged by private interests have differentsocial consequences, as do judicial contributions.Accordingly, different measures may be requiredto mitigate the adverse effects of different types ofcontributions. Each type, and its consequences,must be separately understood to identify effectiveremedial measures.

While a particular remedial measure may miti-gate some adverse effects, it may exacerbate otheradverse effects and, accordingly, do more harmthan good. In that case, the effect to be mitigatedmust be understood and measured to determinewhether the "illness" warrants that "cure."


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Political contributions made by lawyers can the will of the electorate, as evidenced by the manyproduce the following adverse social effects, recent term limit proposals.among others, if the lawyers can profit frompolitical influence in their practice:

Diversion of Public Assets. If a government contributions when they make decisions in theirofficial demands campaign contributions from official capacities, it is reasonable to believe that,lawyers as a condition to being considered for a at least in some instances, their decisions may begovernmental engagement, and the lawyer motivated in part by their personal interest ratherultimately engaged to do the work charges a higher than solely by the public good and, consequently,fee to recoup the expense of the contribution, then that their decisions may less often serve the publicthe overall effect is to divert public assets (those interest. If a government official is tempted toused to pay the fee increase) to private purposes engage a less qualified firm or to favor private(the official's reelection efforts). This effect could interests in circumstances that are not justified byresult from political contributions by lawyers the merits, or if a judge is tempted to favor anseeking governmental engagements (including undeserving litigant, the public interest will suffer.judicial appointments). A similar diversion of This adverse effect--distortion of governmentalpublic assets could occur when lawyers use decisions--is common to all lawyer contributionspolitical influence to benefit private interests whom described above and, accordingly, warrants broadthey represent before governmental units, e.g., in task force review of all contributions by lawyerssecuring a franchise or government contract on who can benefit from political influence in theirterms less favorable to the governmental unit than practices.those otherwise obtainable. On the other hand, nodiversion of public assets occurs when lawyerscontribute to the campaigns of judges beforewhom they appear. Accordingly, to preventpossible diversions of public assets for private useonly, the task force should focus on contributionsby lawyers who can use political influence to affectgovernmental decisions (including those made bythe federal government) or to secure judicialappointments. Judicial contributions by lawyerswho do not seek judicial appointments do notappear to involve a diversion of public assets.

Power of Incumbents. If incumbent govern-ment officials are permitted to require campaigncontributions as a condition to considering firmsfor governmental engagements, then incumbents(who have power to direct engagements) will havefar greater means of raising contributions thanchallengers (who have only the prospect ofobtaining such powers). The same result couldoccur if judges give more deference to contributingtrial lawyers or if government officials providemore access to contributing lobbyists.Accordingly, incumbents are advantaged by alllawyer contributions that the task force couldreview. Permitting incumbents to be advantagedin this way is unfair and arguably inconsistent with

Effect on Governmental Decisions. Ifgovernment officials are tempted by political

A word of caution is appropriate, however. Inthe area of governmental engagements, politicallyinfluential firms are not necessarily inferior firms.They are often well-qualified to represent


governmental units. The quality of governmental public confidence than lawyer practicescounsel in general might not be improved, and themselves. Accordingly, the public interest maycould actually suffer, as a consequence of remedial be best served by toning down public rhetoric onaction, e.g., if more governmental units award this issue.)legal engagements through competitive bidding, assome effectively do now, to avoid the impact ofpolitical influence. Consequently, eliminatingpolitical influence from government procurementof lawyers will not necessarily improveprocurement choices.

compensation for lawyers' services, and it will beConfidence in Government and the Bar. Ifthe public believes that government engagementsare being allocated, or that other governmentaldecisions are being made, or that trials are beingdecided, on the basis of political patronage, thenpublic confidence in government and the justicesystem is apt to be undermined. If the affectedengagements are as bond counsel for offerings ofmunicipal securities, then the investing public maybe less confident that competent, unbiased counselhas been engaged and, theoretically, could demandgreater interest as compensation for higherperceived risk. Undermined public confidencecould result from every lawyer contributiondescribed above. Accordingly, this potentialconsequence would warrant broad task forcereview of lawyer contributions.

It should be noted, however, that even thefederal court that upheld Municipal SecuritiesRulemaking Board (MSRB) Rule G-37, whicheffectively limits political contributions bymunicipal securities dealers, expressed doubt thatinvestors are harmed by political contributions orby any role that they may play in selectionprocesses. See Blount v. SEC, 61 F.3d 938 (D.C.Cir. 1995), cert. denied, 116 S. Ct. 1351 (1996).Nevertheless, a perception of harm and its possibleconsequences cannot be ruled out.

Ironically, this consequence of lawyercontributions--loss of confidence in governmentand the justice system--may be exacerbated byremedial measures that require public disclosure ofpolitical contributions, but do not effectively banthem, if required disclosure leaves an inaccurateimpression of lawyer conduct. (Similarly,continued calls for action by government and barofficials may leave an inaccurate impression ofwidespread abuses and thus do more to undermine

Confidence in Lawyers. Besides under-mining public confidence in government, lawyercontributions could undermine public confidencein or respect for the legal profession as a whole. Ifconfidence in or respect for lawyers is undermined,the public may be less inclined to utilize or pay fair

more difficult to protect lawyers' interests in thepolitical arena. Accordingly, this potentialconsequence warrants broad task force review ofall contributions by lawyers who can profit frompolitical influence in their practice. On the otherhand, any remedial measure that effectively banslawyer contributions would almost certainly reducelawyers' influence in the legislative and rule-making processes to the detriment of theprofession and, arguably, society in general.

How Can Bad Effects from Lawyer Contributions be Prevented;Will Preventive Measures ProduceTheir Own Bad Effects?

Several remedial measures have been sug-gested by various groups and almost certainly willbe considered by the task force. Others are worthconsidering, too. Possible remedial measuresdiffer in the effects that they seek to prevent, intheir likely effectiveness in addressing thoseeffects, and in the unintended consequences thatthey are likely to produce.

Banning Objectionable Lawyer Contribu-tions. The task force could recommend aneffective ban on lawyer contributions. The bancould extend to contributions by lawyers whoreceive government engagements or judicialappointments from those to whom they havecontributed, or who appear before judges to whomthey have contributed, or who represent privateinterests in dealings with government officials towhom they have contributed. The ban couldextend only to contributions by the lawyersinvolved or could extend as well to contributionsby all lawyers at, or by all partners or shareholdersof, the affected firm.


One of the proposals that the task force will Admittedly, such a rule would most effectivelyconsider is a narrowly focused disciplinary rule address all objectionable consequences of lawyeroriginally proposed by The Association of the Bar contributions (although press reports suggest thatof the City of New York more than two years ago the MSRB effective ban on political contributions,that is now being considered by the Administrative applicable to investment bankers, is being widelyBoard of the Courts in the State of New York. In circumvented, and the growing number of MSRBgeneral, the proposed rule would prohibit lawyers interpretations suggest that an effective ban isand law firms from being engaged by the State or difficult to apply in practice). However, anany of its political subdivisions, agencies, or effective ban on lawyer contributions wouldinstrumentalities in connection with the offering of necessarily result in ancillary and unintendedmunicipal securities, if (1) the firm or any of its consequences that may be as objectionable as thoselawyers contributed or loaned money in the believed to result from the contributionspreceding two years to an incumbent or candidate themselves.for a government office that is responsible for orauthorized to retain legal services and thecontribution or loan was made for purposes ofinfluencing an election, paying campaign debt, ordefraying transition or inaugural expenses, either !! Loss of Constitutional Rights: A ban woulddirectly or by contributing to a political party, or force lawyers to make a real Hobson's choice:(2) a lawyer involved in the engagement has (1) discontinue or curtail their professionalsolicited such contributions or loans from third practices or existing client relationships or (2)parties at the request of such a government official surrender a portion of their constitutionallyin the preceding two years. Only de minimis protected rights. If a ban were to extend tocontributions to candidates for whom lawyers may lawyers who associate with other lawyersvote are excepted. This proposed rule is similar to whose contributions are banned, as the CityMSRB Rule G-37, which implements a similar ban Bar proposal would, then such lawyers wouldon public finance engagements by municipal face an even harsher choice: surrender asecurities dealers, except that, under the proposed portion of their constitutionally protected rightsrule, contributions by any firm lawyer (whether or or disassociate with a firm that maintains annot involved in public finance) as well as contri- affected legal practice area. Participating inbutions to political parties would disqualify the the political process is a fundamental right offirm. citizenship. An effective ban on lawyer

In calling for creation of the task force, theABA House of Delegates directed it to reviewpolitical contributions by all lawyers who seek orobtain government engagements, not merelymunicipal bond lawyers. The resolution followeda recommendation by the ABA Section Officers'Conference, which strongly criticized the City Barproposal for targeting only one group of affectedlawyers. It is therefore unlikely that the task forcewill propose, or that the ABA would recommend,a rule (like the City Bar proposal) that is limited tomunicipal bond lawyers. However, it couldconsider extending such a proposal to all lawyerswho obtain governmental engagements or whosepractices otherwise can profit from politicalinfluence.

Among objectionable ancillary consequencesof an effective ban on lawyer contributions are thefollowing:

contributions would prevent lawyers fromparticipating as fully as other citizens. Even ifsuch a measure could be constitutionallyimplemented, which is open to doubt, it shouldbe considered only as a last resort and only ifit is applied equally to all lawyers who benefitprofessionally from political influence, if notall citizens. Permitting de minimis personalcontributions would reduce, but would noteliminate, this serious adverse consequence.

!! Adequacy of Counsel: If lawyers whorepresent governmental units were to beprohibited from making political contributions,but other lawyers were not, many of the bestand brightest lawyers would choose not torepresent governmental units. Young lawyerswould avoid specialties that necessarily involverepresentation of or practice before


governmental units, e.g., municipal bond, land decades. Their progress has resulted in partuse, regulatory, and lobbying practices or firms from affirmative action programs and in partwhich have any such practice. In addition, if from growing political influence, in addition toonly contributions by those representing increases in the number of women andgovernmental units were banned, many large minority practitioners. Affirmative actionfirms would discontinue their representation of programs are now threatened by courtgovernmental units to preserve political decisions and state and local initiatives. Ifinfluence that they exercise on behalf of their political influence is curtailed by an effectiveprivate clients' interests. In that event, some ban on campaign contributions and women-specialties like municipal finance might be and minority-owned firms find it difficult topracticed only in boutiques with limited tax continue their progress in securing governmentand securities law perspective and expertise to engagements, society will suffer, and the taskoffer governmental clients. Over time, force's efforts will be criticized by women andgovernmental units might lose access to the minorities as a white male effort to continuebest outside counsel to serve their needs or at engagements that previously had been secured,the very least be much more limited in their but are now threatened, by political influence.choice of counsel.

!! Loss of Lawyer Influence: In judicial racesand often in other races, lawyers are the bestinformed and, in most cases, the bestmotivated participants in the political process.If judicial candidates are effectively barredfrom raising contributions from lawyers, theywill be forced to rely more heavily oncontributions from existing or prospectivelitigants. Does anyone believe that fairerjudicial races will result? Moreover, if lawyersare prohibited from making politicalcontributions, but other professionals andcitizens are not, lawyers as a whole would loseboth business and influence on society. Privateinterests would look more often to planners,accountants, lay lobbyists, and others to serveneeds that are now served by lawyers, but arebest served by those with political access andcredibility. Lawyers as a whole would be leftwith less political influence with which tosafeguard the role of the profession. Althoughlawyers now are among the best informed andprogressive participants in the politicalprocess, their influence compared to lessinformed and less progressive participantswould be weakened. These consequenceswould be bad for the profession and bad forgovernment.

!! Effect on Women and Minorities: Gov-ernment engagements have been one of theareas in which women- and minority-ownedfirms have made the most progress in recent

In lieu of effectively banning all lawyer contri-butions, or all contributions above de minimisamounts, the task force could recommendeffectively banning only lawyer contributions thatare made in amounts or to candidates that cannotbe readily explained by the lawyer's legitimateinterest in the race in question. That approachwould focus on those contributions that may ad-versely affect confidence in government and theprofession, while leaving lawyers free to exercisethe full measure of their constitutionally protectedrights for legitimate purposes. On the other hand,such an approach would permit local firmcontributions and therefore likely would do little toeradicate the influence of lawyer contributions ongovernment decisions, other than to localize it.Furthermore, such an approach would be difficultto implement, because it would be difficult toestablish when a contribution is justified bylegitimate interests.

Disclosing Political Contributions. In lieu ofbanning political contributions, the task force couldrecommend that lawyer contributions be publiclydisclosed (where they are not currently disclosedpursuant to state or local law), so that mediascrutiny and the force of public opinion canprevent lawyer contributions from unduly affectinggovernment decisions.

Disclosure is a core tenant of NABL'sStatement of Professional Principles with Respectto Political Contributions, adopted in 1994. TheStatement provides that no lawyer should make apolitical contribution for the purpose of retaining


or obtaining a municipal finance engagement. In or totaled by law firm, both the public andaddition, to adopt the Statement, a law firm must political candidates may infer that theeither (1) determine that existing campaign finance contributions were coordinated by the firmlaws in applicable jurisdictions make adequate when, in fact, they probably were not. Bydisclosure of campaign contributions or (2) file creating an impression of coordination,annual reports of its lawyers' contributions with an disclosing lawyer contributions in this wayappropriate repository, e.g., the MSRB, or make could actually increase firm influence oversuch a report available for public review on its government decisions, rather than reduce it. Inpremises. (An adopting firm could determine that addition, such disclosure could create a greaterapplicable campaign finance laws provide public impression of impropriety than the factsadequate disclosure if they require that the name of may justify and than now prevails. Thesea contributor and the amount of his or her results would exacerbate, rather than mitigate,contribution be disclosed, even though the one of the principal objections to lawyercontributor's employer need not be disclosed. contributions: that they undermine publicSuch a determination would avoid the adverse confidence in government, the justice system,ancillary consequences of disclosure discussed and the bar.below.)

The theory behind disclosing contributions isthat, by exposing them to public scrutiny, lawyerswill be dissuaded from making contributions inamounts or to candidates that cannot be easilyexplained, and government officials will bereluctant to base decisions on contributions, all forfear of adverse publicity. However, disclosure byitself might not be enough to prevent lawyercontributions from affecting government decisions.Disclosure also could lead to a number of adverseancillary consequences, depending on thedisclosure required, including the following:

!! False Impressions: Depending on howlawyer contributions are disclosed, disclosurecould create a public impression that they havea sinister intent, or that they affect governmentdecisions, when very often they in fact do not.For example, if the best lawyers for anengagement are employed by a politicallyactive firm, the public could infer that theywere chosen due to political influence when, infact, they may have been chosen solely onmerit. If disclosure is required in offeringdocuments for municipal securities, investorsmay wrongly infer that they adversely impactan investment in the securities, since only Practices. The task force could invite the ABA toinformation material to an investment in recommend changes to model governmentsecurities is required to be included in an procurement laws, such as those developed by theoffering document for unregistered securities ABA Section on State and Local Government Lawunder federal securities laws. Similarly, if some years ago, in order to immunize lawyercontributions by individual lawyers are procurement processes (and judicial appointments)identified by name of employer or are grouped from political influence to the greatest extent

!! Chilling Effect: If lawyers know that theircontributions will be attributed to their firm indisclosure reports, they may feel less free tocontribute to challengers or to candidates lesspopular with firm clients, or firms may betempted to regulate their lawyers' contributionsto avoid adverse effects on business.Consequently, disclosing lawyer contributionsby firm ironically could lead to an increase infirm direction over lawyer contributions,which, in turn, could make the public's worstfears about lawyer contributions self-fulfilling.In some states, candidates must disclose thenames of contributors and the amounts thatthey contributed, but not the identity of theiremployers. Such a disclosure regime wouldavoid most adverse consequences of disclo-sure, but would require more legwork byreporters to have its intended effect.

These criticisms would not apply to the NABLStatement of Professional Principles, if anadopting firm chose the first disclosure alternativeand, accordingly, did not report "unbundled"contributions in a "bundled" manner.

Improving Government Procurement


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possible. Such changes could, for example,require that governments announce specific criteriaby which applicants will be judged, direct civilservice staff to rate and rank applicants accordingto the criteria, and make specific disclosure ofcampaign contributions if an elected official orbody chooses a lawyer who does not receive thehighest ranking. The changes might berecommended alone or in combination with anappropriate disclosure regime. To encourageenactment and implementation of the changes, thetask force also could recommend that staterulemaking bodies promulgate an effective ban onlawyer contributions, unless the changes inprocurement practices (and any required changesin disclosure) are adopted.

Changing procurement practices would not bea complete fix. Doing so would not address theobjectionable effects of lawyer contributions tojudges before whom the lawyers practice or togovernment officials before whom they representprivate interests. In addition, changingprocurement practices could result in an importantancillary, even more adverse, consequence unless

changes to procurement practices are carefullydeveloped and managed: it could accelerate themisguided trend toward engaging counsel on a"low bid" basis. See NABL, Selection andEvaluation of Bond Counsel (1988).

Lawyer Certification. To assure that lawyercontributions do not induce governmental units toengage incompetent counsel, the task force couldrecommend that state bars certify lawyers whorepresent governmental units and prohibitrepresentation by uncertified lawyers. Such ameasure would duplicate, but be stronger than,existing disciplinary rules which prohibit lawyersfrom taking on matters that they are not competentto handle. It would not, however, prevent lessqualified, but nevertheless competent, firms frombeing engaged. Such a measure would make it lesslikely that lawyer contributions will underminepublic confidence in government and the bar, butwould do so less effectively than other measures.

Reliance on Existing Law. The task forcecould also recommend increased enforcement ofexisting laws and disciplinary rules that limit theimpact of political contributions, rather thanpromulgation of new rules.

In O'Hare Truck Service, Inc. v. City ofNorthlake, 116 S.Ct. 2353 (1996), the UnitedStates Supreme Court effectively concluded that

governmental units may not cancel or withholdgovernment contracts due to the contractor'spolitical activity or speech. In that case, theincumbent mayor of an Illinois municipalityterminated a company's inclusion in a list ofmunicipally approved towing companies shortlyafter the company refused the mayor's request fora political contribution and, instead, contributed tothe mayor's opponent. Both lower courts hadconcluded that the company failed to state a claimentitling it to relief. The Supreme Court reversedand remanded, stating that governmental units maynot retaliate against the exercise of constitutionallyprotected rights of free speech and association andthat the towing company stated a claim against themunicipality under the First Amendment to theUnited States Constitution. Although the court didnot address possible claims by unsuccessfulapplicants for engagements, it is likely that thesame principles would apply.


Under O'Hare Truck Service, a government Under the ABA Model Rules, a lawyer mayofficial would violate a lawyer's First Amendment not share fees with a nonlawyer, ABA Modelrights if the official denied the lawyer an Rule 5.4, nor (with minor exceptions) may aopportunity to be considered for a governmental lawyer give anything of value to a person forengagement, or denied an engagement, due to recommending the lawyer's services, ABA Modelpolitical contributions made or withheld by the Rule 7.2(c). Moreover, a lawyer is guilty oflawyer. Accordingly, viewed from a government professional misconduct if the lawyer commits aofficial's standpoint, "pay-to-play" conduct is criminal act (e.g., bribery) that "reflects adverselyunconstitutional, because it results in governmental on the lawyer's honesty, trustworthiness or fitnessabridgment of constitutionally protected rights of as a lawyer," engages in "conduct that is prejudicialfree speech and free association. To prevent to the administration of justice," or states orgovernment officials from unconstitutionally implies "an ability to influence improperly aabridging free speech, should state rulemaking government agency or official." ABA Modelbodies be asked to further curtail the same Rule 8.4; see also In re Glover-Towne, 626 A2dconstitutionally protected rights by adopting 1387 (D.C. 1993) (automatic disbarment foreffective bans on lawyer contributions? Isn't that bribery). These rules limit the use of campaignlike prescribing amputation to prevent future contributions to secure governmental engagements.hangnails?

as effective as other remedial measures, but mayThe ABA Model Rules of ProfessionalConduct also prohibit many objectionable conse-quences of "pay-to-play" conduct and, arguably,the conduct itself. Lawyers are required to"provide competent representation," and they maynot accept representation that they cannotcompetently handle. ABA Model Rule 1.1.Accordingly, the ABA Model Rules prohibitacceptance of government engagements bypolitically connected, but incompetent, counsel.

Under the ABA Model Rules, a lawyer maynot represent a client if the representation may bematerially limited by the lawyer's own interests,unless the lawyer reasonably believes that therewill be no adverse effect and the client consentsafter consultation. ABA Model Rule 1.7. Inrepresenting a client, a lawyer must "exerciseindependent professional judgment and rendercandid advice." ABA Model Rule 2.1. If a lawyeris engaged to represent a governmentalorganization and learns that one of its officialsintends to take illegal action that may be imputedto the organization (e.g., failing to disclose materialfacts in an offering of securities), the lawyer must"proceed as is reasonably necessary in the bestinterests of the organization." ABA ModelRule 1.13. Among other things, these rulesprevent political connections from prejudicing alawyer's diligent representation of governmentalunits.

Enforcing existing laws and rules might not be

be worth trying before resorting to measures thatwould themselves produce adverse consequences.The Supreme Court's O'Hare Truck Servicedecision only recently extended to governmentcontractors the constitutional protectionspreviously afforded to government employees. Itshould be given a chance to work.

Is the "Cure" Worse than the "Illness?"

Although the ABA House of Delegatesappropriately condemned "pay-to-play" conduct,neither the ABA nor critics of "pay-to-play"conduct have quantified the extent to which "pay-to-play" and similar conduct occurs. As notedabove, most remedial measures would necessarilyproduce ancillary adverse consequences to thepublic and the bar as a whole.

If "pay-to-play" and similar conduct ispervasive, and if proposed remedial measures donot themselves produce significant adverse conse-quences, remedial measures should enjoy wide-spread support in the ABA and among all lawyers.Under such circumstances, the bar and the publicwould have too much at stake to defer action. Onthe other hand, if "pay-to-play" conduct isinfrequent or seldom harms the public interest, andif proposed remedial measures themselves wouldproduce substantial adverse consequences to thebar and the public, remedial action should be ruled


out. In these circumstances, the relative severity of evaluation of these issues and to recommendthe "illness" would not warrant the "cure." remedial action only as and if warranted. On the

In view of the foregoing, before recom-mending remedial action, it would seem incumbenton the task force either (1) to document theprevalence of "pay-to-play" and similar objec-tionable conduct to assure that it is sufficientlyprevalent to warrant remedial action and to justifythe adverse ancillary consequences that may followor (2) to recommend that each state do so beforeconsidering any remedial action that may berecommended by the task force.

Either (1) there are vast regional differences inthe prevalence of "pay-to-play" conduct or (2) thepress accounts of "pay-to-play" conduct (andunsubstantiated allegations of government and CityBar personnel) are greatly exaggerated. In many(and perhaps most) areas, lawyers generallycontribute to local government candidates only inthe localities where they reside and practice; theircontributions are commensurate with their interestin the community; and the governmental unitsgoverning their communities engage lawyerswhom objective observers would agree are well-qualified to serve the communities' interests. Insuch areas, there is no reason to impose remedialmeasures affecting government procurement,especially if the remedial measures themselvescould produce adverse ancillary consequences.Unless it is established that "pay-to-play" conductis national in scope, there would appear to be noreason to recommend national remedial measures.Accordingly, the task force should avoid a "onesize fits all" approach.

This is an admittedly thorny issue. There mayor may not be a sufficiently pervasive problem towarrant remedial measures. Even if there is, theremay be no good solution to the problem. In thatcase, the task force will have the unenviable job ofrecommending a bad solution that is better than theothers. Whatever the outcome, the task force'swork will be easier, and the bar is more likely toaccept its recommendations, if all lawyersacknowledge both the evils of "pay-to-play" andsimilar conduct and also the adverse consequencesof possible remedial measures. Lawyers in gener-al, and public finance lawyers in particular, shouldtrust the task force to make an honest, informed

other hand, once its recommendations are made,all lawyers should evaluate them critically. Thereis too much at stake to do otherwise.

Fredric A. WeberFulbright & Jaworski L.L.P.

EXPOSURE DRAFT: JOINT RECOMMENDATIONS FOR COMMUNICATING WITHTHE BENEFICIAL OWNERS OF DEFAULTED MUNICIPAL SECURITIES

Introduction

This paper has been prepared by a workinggroup composed of representatives of the NationalAssociation of Bond Lawyers; The Bond MarketAssociation; the American Bankers Association;1

the Government Finance Officers Association; theNational Association of State Auditors,Comptrollers and Treasurers; and the NationalFederation of Municipal Analysts. In addition,2

this paper has been reviewed by representatives ofThe Depository Trust Company (commonly knownas DTC), who have provided information to theworking group regarding the operations andpurposes of DTC. The working group has been3

meeting informally, beginning in 1994, to discussways to facilitate the process of communicatingwith the beneficial owners of defaulted municipal4

securities.5

The participating groups believe that if therecommendations proposed herein are consistentlyfollowed, beneficial owners of defaulted municipalsecurities will receive notices from issuers and6 7

others on a timely basis. Following these8

recommendations will preserve for all of thegroups involved in the municipal market thebenefits of the book-entry system.

These uniform practices are intended to setforth procedures that will assist issuers and their


representatives in contacting beneficial owners of are permitted to treat the registered holder as thedefaulted securities to transmit and obtain legal owner of the securities for most purposes.important and time-sensitive information. Theyare not intended to create any new substantivedisclosure obligations, nor are they intended tocreate new obligations for nominees to review,disclose, and/or transmit any notices which theymay receive through any Nationally RecognizedMunicipal Securities Information Repository("NRMSIR"), State Information Depository("SID"), or the DTC computerized Legal NoticeSystem (the "LENS" system). The procedures9

provide for issuer control of the communicationprocess; recommendations for format and10

identifying information to be included in notices;the payment of reasonable expenses by the issuer,as is the practice in the private sector; and theprovision of additional copies of notices by theissuer for retransmission. Also included are Recommended Uniform Practicesrecommendations that market participants whoserve as nominees respond to issuer requests forinformation about bondholders and/or retransmitinformation from issuers to beneficial owners in atimely fashion.

Background

In the 15-year period since the effectiveelimination of bearer bonds from municipalfinance, the municipal bond industry has also11

virtually eliminated direct holding and physicaldelivery of new municipal securities issues. Thishas been accomplished largely through the use ofimmobilized certificates registered in the names ofsecurities depositories. The largest of the12

depositories is DTC.

As a result of the relatively recent developmentof the DTC book-entry system, not all of theconsequences of the book-entry system have beenaddressed in a systematic way by marketparticipants. For example, most indentures and13

resolutions relating to municipal securities stillcontain elaborate provisions relating to theregistration of ownership of securities, the transferof ownership, giving notice to registered securityholders, and voting by registered holders that donot take into account in any meaningful way theexistence of the DTC book-entry system. Under14

most legal documents related to municipalsecurities, notices are only required to be given tothe registered holder, and the registrar and issuer

15

The lack of extensive experience in dealingwith the book-entry system results in a dearth ofcustoms and practices dictating the proper actionsto be taken by market participants to assure thatimportant notices intended for the beneficialowners of securities held through the book-entrysystem are actually received by the intendedrecipients. Further, the absence of uniformpractice in this area has produced the anomalousresult that potential purchasers of securities --non-owners -- may be more likely to receiveinformation regarding defaulted municipalsecurities than the average beneficial owner of an16

issue who holds through a nominee. The purposeof this paper is to address some of these issues.

General

The participating groups believe that therecommended uniform practices set forth beloware appropriate to improve the handling of noticesrelated to defaulted municipal securities. Theserecommended uniform practices have beenprepared after extensive discussions that exploredthe importance of communications related todefaulted municipal securities as well as theoperational constraints affecting firms responsiblefor transmitting notices to beneficial owners. It isbelieved that most of these recommended uniformpractices are usually implemented by many marketparticipants with respect to defaulted municipalsecurities; however, it is the belief of theparticipating groups that consistent application ofthese recommendations by all market participantswill assure that beneficial owners receive noticesrelated to defaulted municipal securities, whichwill benefit all market participants. These recom-mendations should be implemented with respect toall defaulted municipal securities, but it may bepractical to implement some of the recom-mendations only with respect to municipalsecurities issued under documents that areamended or originally prepared after the date ofthis paper. 17

Issuer Practices


Dealing with municipal securities that are held to the registrar for purposes of also receiving directexclusively through the book-entry system requires mailings of notices from the registrar. Bondsome specific changes to the documentation documents should also explicitly require that therelated to the securities. In particular, the form of any notice with respect to the securitiesprovisions of the issuer's bond documents related follow that set forth below.to security holder notice should direct the registrar,acting as agent for the issuer, to:18

(i) request as promptly as possible asecurities position listing ("SPL")from DTC's Proxy Department19

as of the record date for mailing20

of the security holder notice;

(ii) mail copies of the notice in theformat recommended below toeach of the DTC participants listedon the SPL, and to each othernominee identified to the issuer;

(iii) request from each nominee otherthan DTC an undertaking to re-transmit the notice to all personsfor which it serves as nominee,including nonobjecting beneficialowners, or such an undertaking21

with respect to objectingbeneficial owners and a list of allnonobjecting beneficial owners;22

(iv) provide an undertaking of theissuer to pay to the nominee otherthan DTC the reasonable costs of23

transmitting the notice to personsfor whom the participant acts asnominee, including the nonob-jecting beneficial owners if thenominee has notified the registrarthat it will mail the notice tononobjecting beneficial owners inlieu of providing the listingrequested by the registrar;

(v) provide to each nominee otherthan DTC the requested numberof copies of each notice forretransmission; and

(vi) mail directly to each beneficialowner identified to the issuer orregistrar.24

Issuers' bond documents should permitindividual beneficial owners to identify themselves

Notice Format and Transmission25

The form of any notice with respect todefaulted municipal securities should prominentlyinclude in the title:

(i) the complete title of the securities,

(ii) the complete name of the issuerand of any conduit borrower,

(iii) the entire nine-digit CUSIPnumber for each affected matu-rity,26

(iv) the record date, if any, for thenotice, and

(v) a title or reference line that pro-vides a comprehensive summaryof the subject of the notice,including a statement that thenotice relates to defaulted mu-nicipal securities, in no more than500 characters.

The bond documents should specify the noticeaddress for DTC. Issuers are strongly en-27

couraged to provide machine-readable copies of28

notices as well as paper copies to DTC's ProxyDepartment in order to facilitate retransmission ofnotices. The participating groups believe thatfollowing the recommended form for notice andtransmission practices for all notices to the extentfeasible, whether or not so provided in the bonddocuments (in many cases bond documents willpre-date these recommendations), will facilitatetheir handling by DTC. In addition, even if filingof the notice with the NRMSIRs and SID is notrequired under Rule 15c2-12, the participatinggroups strongly recommend that issuers file noticeswith respect to defaulted municipal securities withthe NRMSIRs and the relevant SID, if any.

Disclosure Regarding Notice Transmission

Issuers also should consider adding to thesection of an official statement that containsdisclosure regarding the book-entry registration


system a discussion of steps that beneficial owners (ii) retransmit to the appropriatecan take to augment their receipt of notices related parties such notices or commu-to the municipal securities. nications immediately upon29

While these changes to the legal documen-tation (or the implementation, to the extentfeasible, of similar procedures in the case ofsecurity issues already outstanding) should help toassure that the notices reach the DTC participantsand beneficial owners without imposing unreason-able cost burdens on the participants or DTC, theability of the issuer or the registrar to further affectthe notice delivery process is very limited.

Nominee Practices

Firms that hold nominee positions in30

municipal securities should make reasonableefforts, upon receipt of an undertaking forreimbursement of reasonable costs, to transmitnotices related to those municipal securities to theperson for whom the nominee firm holds, whetherthat is another brokerage or bank, a mutual fund,or an individual owner. Nominees should make31

known the name and contact information of the32 33

person in their organization to whom noticesconcerning municipal securities should be directed.Persons who are designated by nominees to serveas contacts should have adequate training andresources available to them to assure that noticesthat are received can be promptly retransmitted to34

the person for whose benefit the nominee serves asthe registered holder of the securities. In addition,reasonable assistance must be provided toregistrars and issuers who are seeking to contactthe beneficial owners of their security issues. Thatassistance includes responding promptly torequests for nonobjecting beneficial owner lists,35

and to requests for information concerning thenumbers of copies of notices to be provided to thenominee for remailing to the objecting beneficialowners by the nominee. The participating groupsstrongly recommend that nominees, wherever theymay be in the chain of title of a security, uponreceipt of reasonable assurance of reimbursementfor their costs, either36

(i) provide a list of nonobjecting beneficialowners to the issuer or registrar, andretransmit the furnished notices to theobjecting beneficial owners, or

receipt.

Conclusion

The participating groups believe that issuersand nominees can improve the notice distributionprocess by adhering to these recommendations.The recommendations set forth in this paper willassist market participants in communicatinginformation to beneficial owners regardingdefaulted municipal securities.

October 22, 1997

1 Formerly known as PSA The Bond MarketTrade Association.

2 These groups are referred to hereafter as the"participating groups."

3 For a thorough description of DTC and its role,see Appendix A.

4 As used in this paper, the term "default" isunderstood to include failure to pay amounts duewith respect to securities when due, as well as anyevent or condition that is defined in the documentsrelated to the securities as an event of default or anevent or condition that with giving of notice orpassage of time would constitute an event ofdefault under the documents, and also includesmaterial breaches of material covenants indocuments that do not explicitly contain definitionsof "default" or "event of default."

5 The initial impetus for these meetings arose outof the bond defaults resulting from the insolvencyof Executive Life Insurance Company of LosAngeles. That situation persuaded several of thegroups involved that because of the relative rarityof municipal security defaults, a number of marketparticipants had not fully considered and addressedthe changes needed in the process ofcommunicating with beneficial owners of a widelydispersed defaulted municipal security issue that isheld through the book-entry system.


6 Although it is expected that these practices will Preliminary Report on the Practice of Recordingapply to all notices from issuers, registrars, paying the Ownership of Securities in the Records of theagents, or trustees that relate to defaulted Issuers in Other Than the Name of the Beneficialmunicipal securities, the common types of notices Owner of Such Securities (1975)). The book-entrywould be the initial notice that a default has system began to develop in corporate finance in theoccurred, notices ordered to be sent to beneficial last 30 years, and became widespread in municipalowners as a result of court proceedings, finance in the last 15 years.solicitations of consents, or votes in favor of plansof reorganization and similar workout efforts, andnotices detailing developments in the case,including bond calls and tenders.

7 As used herein, "issuer" is intended to includeobligated persons within the meaning of Rule15c2-12 with respect to the issue, as well as theconduit issuer of the issue. In this paper,references to Rules, unless otherwise indicated, arerules of the Securities and Exchange Commission(the "SEC") adopted under the SecuritiesExchange Act of 1934, as amended (the"Exchange Act"). §17 CFR §240.1 et seq.

8 While the focus of this paper is notices relatedto defaulted municipal securities, the recommen-dations may be utilized for any type of notice tobeneficial owners holding through the book-entrysystem.

9 See Appendix A for a description of the LENS NRMSIRs relating to the recommended securities.system.

10 Issuer control is, of course, subject to the example, that it could be inappropriate to expectobligations of the issuer under the securities laws service providers to undertake additional re-and to the obligations of the trustee under the bond sponsibilities and provide additional services thatdocuments or common law doctrines such as the may not have been contemplated at the time thatprudent person rule. the compensation that the service provider would

11 Section 149(a) of the Internal Revenue Codeof 1986, as amended, provides that most bearerbonds issued after December 31, 1982 are nottax-exempt. 18 While not directly applicable, the Rules

12 The securities depositories comprise a nationalsystem of clearing agencies mandated by Congressin Section 17A of the Exchange Act, and theRules.

13 Trust indentures have been in use in Americanfinance since the early days of the railroad systemin the United States. (Rodgers, The CorporateTrust Indenture Project, 20 Bus. Law. 551(1965)). Provisions related to ownership andnotices have developed by trial and error over thatperiod of approximately 170 years. (SEC,

14 See, e.g., American Bar Foundation, ModelDebenture Indenture Provisions, All RegisteredIssues, 1967.

15 Problems associated with these provisions haveresulted in some voluntary changes, such asprovisions in some resolutions and indenturespermitting beneficial owners to request that noticesbe sent directly to them, and for the clearingcorporations to receive copies of notices inadvance of the general mailing date. Exchange ActRelease No. 34-23856 (December 3, 1986) 51F.R. 44398 (December 9, 1986).

16 Under Rule 15c2-12, broker dealers may notmake recommendations to their customersregarding the purchase or sale of a municipalsecurity that is subject to the Rule unless they haveestablished procedures to receive prompt notice ofmaterial event notices that have been sent to the

17 The participating groups recognize, for

receive for its services was determined, absent asupplemental undertaking from the issuer to payfor the additional services.

regulating the transmission of corporate proxystatements under Section 14 of the Exchange Actform the conceptual basis for many of therecommendations in this paragraph. Under thoseRules, only the issuer is entitled to receive certaininformation related to the nominees' beneficialowners. The participating groups have inten-tionally attempted to streamline the proceduresrecommended here while preserving similarconcepts.


19 It is currently the practice of DTC to respond proposed date for mailing of the notice whereto requests for SPLs within two business days. possible. The response from the nominee holder inThe participating groups believe that this is an clause (iii) should be provided within 7 businessappropriate response time. days following the request if the request is properly

20 It is not currently a common practice toestablish a record date for notices other thannotices of redemption or relating to voting ofsecurities. The participating groups have sug-gested that the adoption of uniform record datesfor various other types of notices would facilitatethe processing of those notices. To the extent thatrecord dates are not established for notices,nominees such as DTC cannot identify which of 25 The recommendations with respect to thethe entities holding through them held positions in format of notices should be followed in all cases,securities affected by notices. Issuers should also unless a conflicting format is required by existingestablish a formal release date for mailing of legal requirements.notices in order to facilitate uniformity ofdisclosure of material information.

correctly identify beneficial owners of the affected21 Non-objecting beneficial owners are thosepersons for whom the participant acts as nomineewho have not objected to the disclosure of theirnames and security positions under Rule 14b-1.Beneficial owners who have indicated that they doobject to disclosure are considered to be objectingbeneficial owners under this Rule.

22 The participating groups believe that the optionof turning over the nonobjecting beneficial ownerlist should be retained because it gives the issuerthe opportunity to exercise greater control overcosts and the process of distributing notices tothose owners. In addition, identification of at leastsome of the owners may facilitate development ofa dialogue between the issuer of the defaultedsecurities and the beneficial owners, which isgenerally of benefit.

23 It is anticipated that reasonable costs would notin any case be higher than the costs permitted withrespect to mailings under Rule 14a-13(a)(5).Issuers should recognize that a nominee may holda security on behalf of other nominees, which willresult in additional communication costs and makeadherence to these recommendations moreimportant.

24 Response times should be reasonable in lightof the circumstances. For example, by analogy toRule 14a-13, the initial inquiry from the issuershould allow 20 business days before the

transmitted by the issuer. The issuer should takethe actions referenced in clause (v) within 5business days following the receipt of the responsefrom the nominee and should mail to nonobjectingbeneficial owners on the later of the date originallyset for mailing or the fifth business day after theissuer is provided with a list identifying thenonobjecting beneficial owner.

26 If the full nine-digit CUSIP numbers are notprovided, nominee holders cannot be expected to

securities.

27 As of October 1997, DTC's Proxy Departmentaddress is: The Depository Trust Company, ProxyDepartment, 7 Hanover Square, 23rd Floor, NewYork, NY 10004-2579; Telephone (212)709-6870, Telecopy (212) 709-6896. DTCexpects to relocate its Proxy Department to 55Water Street, 50th Floor, New York, NY10041-0099, later in 1997.

28 "Machine-readable," for these purposes, meansfiled to a diskette in ASCII format.

29 The participating groups understand that DTCis also considering, at the request of theparticipating groups, language similar to thefollowing for the form of recommended disclosurethat it provides to issuers for use in preparingofficial statements: "Prospective purchasers of thesecurities should be aware of steps that they cantake to augment the transmission of notices ofsignificant events with respect to the securities,such as redemptions, tenders, defaults andproposed amendments to the security documents.In order to be assured of receiving notice,beneficial owners of the securities may wish toascertain that the nominee who holds the securitiesfor their benefit has agreed to obtain and transmitnotices to the beneficial owners, or in thealternative, beneficial owners may wish to providetheir names and addresses to the registrar and


request that copies of notices be provided directly issuers and their agents on request, and via theto them." LENS system.

30 There may be multiple nominee holders of the APPENDIX Asame security position; e.g., DTC may be anominee holder for a bank or broker participant,which is a nominee holder for a clearing broker,which is the nominee for another broker, which inturn holds as nominee for a mutual fund, whichholds for a beneficial owner. Therecommendations set forth in this section areapplicable to each nominee, except to the extentthat special procedures apply to DTC, such as theuse of the LENS system in lieu of retransmission ofnotices.

31 "Nominee" here means the business orga-nization that is holding a position in a security onbehalf of another person or entity.

32 "Making known" includes providing the securities brokers and dealers, banks, trustinformation to DTC's Proxy Department for each companies, and clearing corporations.street name used by the nominee or making theinformation available to directory services such asThe Bond Buyer's Municipal Marketplace (the"Red Book").

33 Contact information should include name of an issue in the name of the nominee of DTC, and notindividual who is responsible for processing to permit others to become registered holders ofnotices related to defaulted securities, telephone the securities. DTC then maintains records of thenumber, telecopy number, and delivery address for participants for whom it holds the securities thatovernight delivery service. The nominee may are registered in the name of its nominee. Thechoose to act through an agent as many firms do participants in turn typically hold most of theirfor processing of proxy materials; however, con- positions as nominees for others, including bothtact information with respect to the agent should other firms (which may hold as nominees for stillstill be made available. others) and individual account customers of the

34 "Promptly" is a relative term that will varydepending upon the context, but retransmission As a result of this system, most of those whowithin five business days should be reasonable and participate in the municipal market experienceattainable. See Rule 14b-1(b)(2). significant benefits. Issuers of municipal securities

35 Under the recommendations contained in thispaper, the nominee has the option, upon receipt ofassurance of reimbursement of reasonable costs, ofresponding either by providing the list ofnonobjecting beneficial owners to the issuer orregistrar and undertaking to retransmit thefurnished notices to objecting beneficial owners, or Registrars and corporate trustees are able toby providing an undertaking to retransmit the substantially reduce the costs associated withfurnished notices to all appropriate parties. providing their services as a result of the elimi-

36 It is understood that DTC as a nominee willfulfill this recommendation by providing SPLs to

THE DEPOSITORY TRUST COMPANY

DTC is a limited-purpose trust companyorganized under New York banking law, and actsas a clearing corporation for trades in the securitiesindustry. It was originally organized in the late37

1960s to address the back office crisis in paperwork related to the booming stock market. It is38

owned by the New York Stock Exchange, Inc., theAmerican Stock Exchange, Inc., the NationalAssociation of Securities Dealers, Inc., and itsother participants and supported by fees charged toparticipants for its services provided to issuers andparticipants. The participants in DTC are firmsinvolved in the securities industry, such as

Under the DTC book-entry system forsecurities, which is used for both municipal andother securities, an issuer of securities directs theregistrar for the security issue to register the entire

39

participant.

no longer incur the substantial costs associatedwith printing municipal securities certificates,transportation of securities to the point of initialdelivery, and charges from the registrar associatedwith transfers involving physical certificatesevidencing security ownership.

nation of handling of physical certificates,reductions in the costs of maintaining records of


ownership of securities, and reductions in the costs order paper copies of all notices, or of only thoseof making payments and sending notices with notices that they desire.respect to securities.

Municipal securities dealers are able to offertheir account customers better, faster servicethrough the use of the DTC book-entry systemsince physical certificates are not required fortrades to be completed, and payments are receivedin a more uniform manner and can be credited toaccounts more rapidly.

Investors in municipal securities are able toreduce the costs of custody arrangements forsecurity holdings, to trade more easily, to receivepayment for the principal or redemption price oftheir securities without being required to surrender,at remote places of payment, physical certificatesevidencing securities, and to avoid delays inpayment resulting from failure to receive notices ofredemption. In addition, all who participate in thesystem benefit from reduced risks related to loss,destruction, theft, and counterfeiting of certificates.

DTC is essentially an industry-owned coop-erative, which was created to perform specific,narrowly defined activities. DTC serves as theregistered holder of over 1.07 million municipalsecurity issues, with new issues being added at therate of approximately 120,000 issues per year.40

As a result, DTC receives a substantial volume ofnotices daily related to the municipal securitiesheld by it.

In order to enable DTC participants to becomeaware of the contents of notices received by DTC,and to immediately request copies of notices, theLENS system was developed by DTC. This41

system is an electronic system, approved by theSEC, which communicates over DTC'slong-established "PTS" computer linkage with itsparticipants and contains a listing of identifyinginformation regarding each notice received byDTC. CUSIP numbers of the securities to which42

the notice relates are indicated. The listing onlyreproduces the title or reference line of the notice,and is limited to 504 characters. The LENS43

system enables the DTC participant to query thesystem to determine whether the DTC participantheld a position in the security as of the record datefor the notice input by the participant if the noticeindicates a record date. The participants can44

37 It was granted temporary registration as aclearing agency under Section 17A of the Ex-change Act on December 1, 1975, and fullregistration in Release No. 34-20221, September23, 1983.

38 SEC, Study of Unsafe and Unsound Practicesof Brokers and Dealers, H.R. Doc. No. 231, 92ndCong., 1st Sess. 13 (1971).

39 The registered holder reflected on the regis-tration books maintained by the registrar isgenerally CEDE & Co., which is a nominee namefor DTC.

40 Over $1.6 trillion in principal amount ofmunicipal securities, representing over 95% indollar value of all outstanding municipal securities,was held by DTC as of August 31, 1997.

41 Even if physical sorting and distribution ofnotices that are received by DTC were practical,other problems would be presented, such aschanges in beneficial ownership occurring on therecords of DTC between the record date for thenotice and the date that the notice was received byDTC, as well as the omission of record dates frommany notices. It would not be practical for DTC tophotocopy and distribute to the over 1,240 directand indirect DTC participants all of the noticesreceived daily, nor would it be practical to sort thenotices by hand and photocopy and distribute toparticipants having positions in each security, espe-cially given the difficulty under current practices indetermining which securities are affected by somenotices and which DTC participants are interestedparties.

42 If the full nine-digit CUSIP number is providedon the notice by the originator of the notice, it isincluded on the LENS system. If the full nine-digitCUSIP number is not included by the originator,then DTC currently attempts on a best-efforts basis


[@BOND ad]

(consistent with sound business judgment) todetermine a correct CUSIP number for the issuer(the first six digits of the CUSIP number), but notthe particular issue or maturity, and (if the six-digitnumber is determined) to include that number withthe notice information on the LENS system. DTCis not able to indicate the last three digits ofmissing CUSIP numbers, and may determine tocease its efforts to determine the initial six digits ofCUSIP numbers in the future due to inherentambiguities. Accordingly, issuers who do notinclude full nine-digit CUSIP numbers on noticesrisk placement of the notices on the LENS systemwithout any CUSIP numbers.

43 The participating groups understand that DTCis exploring enhancements to make the LENSsystem more open, but even those enhancementswill require the changes to the form and content ofnotices recommended here.

44 This feature is only available if the fullnine-digit CUSIP number is provided on thenotice, and its usefulness is maximized if the titleof the notice specifies a record date.

ETHICAL AND MALPRACTICEIMPLICATIONS OF REPRESENTING THE CLIENT IN AN IRS AUDITWHERE YOUR FIRM DID THE UNDERLYING WORK

The Attorneys’ Liability Assurance Society(“ALAS”) insures just over three hundred largelaw firms for malpractice. The insureds own thecompany. Since its formation in 1979, ALAS hasbeen committed to loss prevention. Currently, theLoss Prevention Department consists of sixlawyers, all formerly partners in Member Firms.

Why is ALAS interested in NABL activities? Ifthe list of new issues (including the naming of“opinion counsel”) in The Bond Buyer is anyindication, ALAS Member Firms participate inapproximately 45% of all tax-exempt financingsoccurring in the United States.

This past September, ALAS Loss Preventionpersonnel were privileged to participate in NABL’sBond Attorneys’ Workshop. Portions of ourwritten material are reproduced in this edition ofThe Quarterly Newsletter. ALAS rarely shares itsresources with non-members; however the ALASBoard felt that, given NABL’s commitment to thegreater good of the bar, as well as the quality of itsprograms, ALAS would, if invited, contribute tothat effort.

What did we learn at the Workshop? One thingwas that the IRS is consciously targeting bondlawyers as part of its tax-exempt audit efforts. Webelieve that this focus is largely wrong-headed, andany cases that result will be defended vigorouslyconsistent with the best interests of the firminvolved.

Surprisingly, IRS personnel did pick up on anissue that also concerns ALAS. That has to dowith law firms’ representing participants inconnection with audits that arise out of transactionsin which those very law firms did the underlyinglegal work.

As a result of the Workshop dialogue on thatissue, ALAS sent a Loss Prevention E-mail Hotlinemessage to its Member Firms. Evidently, aMember Firm provided that message to The Bond


Buyer because much of it was repeated in that that the client hire independent counsel to evaluatepublication’s October 6, 1997 issue. The gist of your firm’s continuing involvement, consult inthat message follows. house counsel, or, perhaps, stay involved to

Representing a participant in a dispute arisingout of a transaction in which your law firm did theunderlying legal work may, or may not, create aconflict of interest. It is important to know thedifference.

However, many good bond lawyers lacksufficient grounding in the ethics rules to know thedifference, and that is why such situations shouldbe called to the attention of those in the firm whoknow the nuances of the ethics rules. In ALASfirms, that is frequently the Loss PreventionPartner—a position all Member Firms are requiredto have. In other firms it might be a member of theEthics Committee.

What this person may advise will depend uponthe circumstances. If it is clear that the IRS isfocusing on client conduct that occurred well afterthe law firm’s involvement, the advice may be toproceed full speed ahead. In such situations, itmay not even be necessary to consult with theclient. (Of course, if the facts change, the conflictsissue will need to be revisited.)

On the other extreme, the IRS may focus onaspects of the transaction for which the law firmwas substantially responsible. In that situation theLoss Prevention Partner may conclude that youmust turn down the subsequent representationbecause not even client consent could cure theconflict.

There is a middle ground—two, actually. Themore benign is the situation where you are surethat your firm’s conduct was in no way responsiblefor the problem, but that a bad result may create amisunderstanding. There you may need to discussthe matter fully with the client and get the client’swritten consent to proceed.

More serious is the situation where you havereservations about whether to proceed, but theclient, fully informed, wants you to stay in thematter. The situation is fraught with the potentialfor misunderstanding and later recriminations, ifthings go badly. In that situation the LossPrevention Partner may require that you suggest

monitor, or supervise, your firm’s work. Again,written consent of the client should be obtained,especially if the client decides not to consult “waiv-er” counsel.

ALAS is aware of multi-million dollarmalpractice settlements arising out of just suchsituations. In each of these cases, the partnerinvolved did not appreciate the nuances of theethics rules and failed to seek help from those whocould. The ultimate result was a bad one, and theunhappy client claimed the lawyer orchestrated therepresentation in a way to protect his law firm tothe disadvantage of the client.

William FreivogelSenior Vice President - Loss PreventionAttorneys’ Liability Assurance Society, Inc., A Risk Retention Group

LIABILITIES AND PROFESSIONAL RESPONSIBILITIES

Editor's Note: The following articles are ex-cerpted from the materials on Liabilities andProfessional Responsibilities of Bond Lawyers inthe 1997 Bond Attorneys' Workshop textbook, atpages 531-606. Additional excerpts will beincluded in the March 1 edition of The QuarterlyNewsletter. Materials not reprinted are availablein the Workshop textbook.

LIABILITIESAND

PROFESSIONAL RESPONSIBILITIESOF BOND LAWYERS:

AN OVERVIEW

ByWilliam Freivogel,

Senior Vice President


and Deputy Loss Prevention Counsel, both against ALAS Member Firms and againstand other law firms. We believe the summaries of

Karen K. Phillips, claims against bond lawyers that appear throughoutAssociate Loss Prevention Counsel this paper to be the most instructive materials

Attorneys’ Liability Assurance Society available.

I. INTRODUCTION.

The “shot across the bow” for bond lawyers as tothe liability potential of their practice wassettlement of the WPPSS litigation in 1987-88.One law firm, a bond law boutique in New YorkCity, paid $500,000; it had no malpracticeinsurance. A Seattle law firm that did haveinsurance paid $7.25 million. The Bond Buyer,September 8, 1992.

The mounting litigation against bond lawyershas, since the WPPSS settlements, taken adirection not suggested by those cases. TheWPPSS cases concerned allegedly incorrect legalopinions (see the cases numbered 9 and 10 inAppendix E [not included here; see Bond Attor-neys' Workshop textbook] immediately followingthis paper). While allegedly defective legalopinions and other acts of alleged negligencecontinue to form the basis for cases against bondlawyers, the most serious trends track two majorcauses of losses in the transactional practicegenerally: the dishonest client, and conflicts ofinterest. Those are the two areas that we willemphasis in the following materials. What we willnot discuss is a third area that also accounts forsome loss - simple negligence. The reason we willnot discuss simple mistakes is that most bondlawyers are members of the National Associationof Bond Lawyers (“NABL”), and a significantnumber of those lawyers are active in, or attend,NABL functions. Our experience is that NABL isvirtually unequaled in the quality of its educationalprograms. We could add little to that effort.Moreover, the causes of loss from simple mistakesfollow no pattern. We would not know how bestto spend our time (and your time) in discussingthem.

As Loss Prevention Counsel for the Attorneys’Liability Assurance Society (“ALAS”), we counselour Member Firms on a daily basis. We read allavailable literature on the causes of claims againstlawyers. By far, the most valuable resource wehave is the ability to study the claims themselves -

A special word about the claim descrip-tions that follow. With a few prominentexceptions we have not identified whichdo, and which do not, involve ALASMember Firms. Many of the facts havebeen changed to hinder identification ofthe firms involved. All the informationwas gleaned from press accounts or frompublicly filed court pleadings. And,importantly, we express no view as to themerits of any claim. Indeed, in mostcases we believe the claim was unfoundedand involved overreaching plaintiffs’lawyers, or overworked judges who toofrequently cannot or will not grantsummary relief where it is warranted.

Immediately following this Introduction is aGlossary of many of the terms and publicationsthat we mention later in this paper and in the Ap-pendices. The Appendices contain a number ofrelevant parts of ALAS publications. We willexplain that relevance at the appropriate places thatfollow.

II. GLOSSARY.

(a) “ABA [Formal] [Informal] Opinion” meansa Formal or Informal (as the case may be)Opinion of the American Bar AssociationStanding Committee on Ethics and Profes-sional Responsibility.

(b) “ABA Task Force” means the Conflicts ofInterest Task Force of the American BarAssociation Section of Business Law. TheABA Task Force has published a memoran-dum and related forms at Conflicts of Inter-est Issues, 50 Bus. Law 1381 (1995). Thefollowing materials, where appropriate, willrefer to pertinent parts of that publication.

(c) “Bond Counsel” means the lawyer whoopines on the validity and tax aspects of abond transaction.


some relevant data: since we have been keeping(d) “Bond Lawyer” means bond counsel, coun-sel to the issuer, counsel to the conduitborrower, counsel to the underwriter, coun-sel to the credit enhancer, or counsel toanyone else in a tax-exempt financing.

(e) “DR” means a Disciplinary Rule of theAmerican Bar Association Model Code ofProfessional Responsibility (1969).

(f) “Geo. J. Legal Ethics” means The George-town Journal of Legal Ethics, a quarterlypublication of the Georgetown UniversityLaw Center.

(g) “Hazard and Hodes” means Hazard andHodes, The Law of Lawyering: A Handbookon the Model Rules of Professional Conduct(2d ed. 1990) (including 1997 Supp.).

(h) “Journal” means the ALAS Loss PreventionJournal.

(i) “Law. Man. Prof. Conduct” means theABA/BNA Lawyers’ Manual on Profes-sional Conduct.

(j) “Manual” means the 1997 edition of theALAS Loss Prevention Manual.

(k) “Model Rule(s)” means the American BarAssociation Model Rules of ProfessionalConduct.

(l) “NABL” means the National Association ofBond Lawyers.

(m) “Participant” means bond issuer, under-writer, advisor, conduit borrower or creditenhancer.

(n) “Restatement” means The American LawInstitute Restatement of the Law GoverningLawyers, the development of which isongoing. Although not final, the contents ofits various drafts have been cited innumerous state and federal court opinions.

(o) “Wolfram” means Modern Legal Ethics(1986), authored by Professor Charles W.Wolfram of Cornell Law School. (ProfessorWolfram is preparing a second edition forpublication in 1997 or 1998.)

III. THE DISHONEST ORINCOMPETENT PARTICIPANT.

The claims summaries that follow will be the mosteloquent statement of what can happen to counselwhen a participant behaves inappropriately. First,

track, about twenty-five cases against law firmshave been settled for $20 million or more each. Ofthose cases, at least twenty contained allegations ofclient dishonesty. In a number of those cases theclient went to jail.

Next, we refer you to Brian Redding’s articlethat appeared in the May 1996 Journal. Relevantparts of it appear at Appendix A following. Itdeals with lawyer liability in the real estatepractice. All of the concepts he discusses in thearticle are equally applicable to the bond practice.Note particularly his discussion of dishonest clientsin the “Aiding and Abetting” section.

A. The Bond Claims InvolvingAllegations of Client Misconduct.

By far the largest group of bond claims ALAShas received involve allegedly dishonest partici-pants. In other words, the claim alleges that one ormore participants fraudulently misrepresented orfailed to disclose material facts in connection withthe bond issue, and that one or more law firmsaided and abetted, or otherwise assisted, thatconduct. More than 90% of all bond claimsreceived by ALAS include this type of allegation.Frequently, it is alleged that the misrepresentationor omission was made in the official disclosurestatement accompanying the issue. But we havealso seen claims alleging that the misrepresentationwas


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made in other marketing documents or even orally Further, the plaintiffs alleged that the prisons failedover the telephone. to comply with fundamental requirements for

Case 1: Several county government agenciesissued $100 million in mortgage revenue bonds tofinance the construction of five private prisons.The law firm represented the underwriter inconnection with the issue. A year after the prisonswere constructed, all except one remained empty.The state subsequently condemned the facilitiesand purchased them at less than half of their bondvalue.

The municipal bond funds that purchased thebonds sued the developer and the law firm. The Case 2: In the mid-1980's, various land-suit alleged that the law firm had sent a letter to owners in a planned development area realized thatprospective investors that falsely assured them that for their planned development to be successful,a ready market existed for the prisons. The suit there would have to be major improvements inalso alleged that the official statement contained transportation access to the area. Thus, theymaterial omissions and misrepresentations. organized a Public Improvement Corporation (theSpecifically, the plaintiffs claimed that the official “PIC”) to fund the construction of a thirty-milestatement failed to mention that the developer had roadway linking their planned development to anumerous unsatisfied judgments against it, major metropolitan area.including a judgment for defrauding an investor.

maximum security prisons. Allegedly, one of thepartners in the law firm was aware of a court orderthat imposed requirements that would preclude useof the prisons by most of their target market, butthe partner failed to advise the plaintiffs of thoserequirements.

At trial, the jury found against the law firm andindicated that damages ranged from $20 million to$70 million. The case was thereafter settled for anamount in the millions of dollars.

In 1986, the PIC issued nearly $100 million intax free municipal bonds for the purpose ofconstructing the roadway. In 1987, the PICrefinanced the 1986 bonds by a second bondissue. The bond documents obligated borrow-ers to repay the bonds from assessments leviedagainst their property and created liens on theirland. The bond liens contained a reallocationclause which required unpaid amounts duefrom defaulting property owners to bereallocated to non-defaulting property owners.The law firm acted as bond counsel, counselfor the developer, counsel for the propertyowners’ association, and counsel for certainlandowners.

Certain owners of the property encum-bered by the liens sued the law firm, as well asothers, claiming that the firm failed to discloseto them the existence of or explain the effect ofthe reallocation clause. They further allegedthat the law firm did not advise them theyneeded a legal opinion on the financial docu-ments until one day before closing, so that theywere forced to hire that firm. Finally, theplaintiffs alleged that the law firm had an attor-ney-client relationship with each of thelandowners who were members of the


property association, because the firm had no longer be tax exempt. A class action complaintrepresented the association. The complaint stated was filed against bond counsel and others involvedthat as a result of this conduct, defendants were with the bond issue alleging that the re-marketingliable for negligent misrepresentation, fraudulent memo issued when the bonds were re-marketedconcealment, securities violations, and RICO contained misrepresentations and omissions ofviolations. material facts. The complaint asserts that the

The complaint sought damages for the declinein the value of plaintiffs’ land due to the increasedassessments. This case was ultimately settled formore than $5 million.

Case 3: A law firm served as bond counselfor a bond issue that was part of twenty-oneseparate bond issues generated by public agenciesand municipalities over a five-year period for thepurpose of acquiring nursing home facilities. Thepurchasers of the bonds sued all counsel, includingthe law firm in question, as well as the promoters,the underwriters, the underwriters’ counsel, andthe accounting firm alleging that the bonds wereissued as part of an elaborate Ponzi scheme. Thecomplaint alleged that the Ponzi scheme generatedlarge fees for the defendants in violation ofsecurities fraud, mail fraud, wire fraud and civilracketeering laws. The complaint sought damagesof nearly $100 million, which was the amountplaintiffs had paid for the bonds.

Specifically, the claim against the law firm inquestion alleged that the firm had reviewed thedisclosure documents that omitted certain materialfacts: 1) the funds from the various bond issuescould be commingled as part of the alleged Ponzischeme; 2) prior projects were not meeting thefeasibility studies’ projections; and 3) certainadverse information regarding the promoters’backgrounds. Allegedly, funds from the projectswere commingled to cover cash flow problems andworking capital shortages relative to one projectwith funds from another.

The defendants in total settled for approxi-mately $20 million, although the law firm inquestion was responsible for only a small portionof that settlement.

Case 4: A city issued $335 million of revenuebonds to finance a plant for handling solid waste.Bond counsel issued an opinion that the bondswere tax exempt and not arbitrage bonds. Severalyears later the IRS demanded that the city rebatearbitrage profits of $30 million or the bonds would

memo failed to disclose: 1) that if the bonds werenot properly offered and sold prior to the deadline,their tax status would be doubtful; and 2) that therewere substantial questions regarding the economicfeasibility of the plant. The case is pending.

Case 5: Bond counsel also acted as special taxcounsel in connection with the issuance of multi-family housing mortgage bonds. Sometime afterthe issuance, the IRS advised the issuer that thebonds were not tax exempt. The issuer then suedbond counsel alleging that the firm failed to reportcertain facts when the bonds were re-marketed andseeking a declaration that if the bonds are held tobe taxable, the defendants be obligated for anydeficiency on the bonds. A partner in the firm haspled guilty to a felony, admitting he failed to reportcertain facts with respect to the bond issue. Thecase is pending.

Case 6: A water and sanitation districtdefaulted on certain municipal bonds it had issued.The bondholders sued the underwriter. Theunderwriter cross claimed against bond counsel,alleging that the official statement containedmaterial misrepresentations. The case is pending.

Case 7: A law firm was counsel to anoperating authority involved in a $5 millionindustrial development bond issue to finance awaste disposal facility. The project was nevercompleted. The claim against the law firm relatesto alleged misrepresentations in the offeringmaterials concerning the viability of the technologyand the tax status of the bonds.

Case 8: This potential suit involves securitiesthat were certificates of participation in subleasepayments to be made by a city to a bank as trusteefor the bondholders. Bond counsel also acted ascounsel to the underwriter. A developer leased theland and then subleased it to the city. Ultimatelycity officials reneged and refused to levy taxesnecessary to cover the lease payments, and a short-fall in those payments resulted. So far, the bank


has sued the city; the bondholders have sued thecity and the bank.

Case 9: The plaintiffs in this pending casepurchased securities in the form of certificates ofparticipation that assigned to them the right toreceive payments on a lease for a communitycollege. The plaintiffs sued bond counsel andothers alleging defendants misrepresented andfailed to disclose material facts regarding thevalidity of the lease and the security for thepayment of principal and interest on the certifi-cates.

Case 10: This case involves a class actionbrought on behalf of all persons who purchasedindustrial revenue bonds issued to finance a healthcare facility that were declared in default. The lawfirm in question served as counsel to the ownerand as co-counsel to the authority that issued thebonds. The complaint alleges that: 1) thedefendants entered into a conspiracy tofraudulently induce the plaintiff class to purchasethe bonds; 2) the prospectus contained materialmisrepresentations and omissions regarding theeconomic viability of the facility; and 3) the lawfirm gave a false opinion that the prospectus wasaccurate. The case against the law firm was settledfor approximately $2 million.

Case 11 - Orange County: This is such animportant matter and has received so muchpublicity, we will not attempt to disguise it. In1994, Orange County, California filed for Chapter9 bankruptcy protection—the largest municipalbankruptcy in history. Not long afterwards,Orange County sued its brokerage firm, Merrill,Lynch & Co., Inc. and its outside auditor, KPMGPeat Marwick.

In June 1996 the County added its lawyers tothe list of those it seeks to hold responsible for itsfinancial debacle. It sued its outside law firmalleging there was a “pervasive and systemicfailure” to protect the County from a riskyinvestment strategy. The complaint seeks morethan $500 million in damages against the law firm.The firm served as bond counsel for $1.3 billion inbond sales for Orange County for approximatelyhalf a year in 1994.

The complaint centers around allegations thatit was the role of counsel to structure the County’sinternal financing arrangements. It alleges that thelaw firm provided incompetent services and falseand misleading information to the County inconnection with its function as bond counsel. Inparticular, the complaint alleges that the law firmknew that the County Treasurer was engaging infinancial transactions that could cause the Countycatastrophic losses, but the firm failed to disclosethis risk to the County Board. Because of themisconduct of County officials, the Countypurportedly incurred large and high-riskobligations that it could not discharge that resultedin losses of approximately $1.8 billion in themarket value of its investment portfolio. TheCounty alleges that the law firm is responsible for$500 million of this loss.

The defendant law firm is not an ALASMember. Nevertheless, Orange County’s com-plaint contains a number of allegations, each ofwhich, standing alone, could only be characterizedas our worst nightmare:

1. Orange County seeks certification of aclass of the law firm partners as defen-dants, “[i]n order for a judgment to beexecuted against the personal assets of thepartners.” Complaint, paragraph 8.

2. Paragraph 145 of the Complaint allegesthat if the law firm had acted responsibly,the notes in question would never havebeen issued, and the law firm would nothave been paid. Paragraph 146 goes on toallege that full disclosure would have dis-credited the public officials who hired thelaw firm and would have reduced thelikelihood that the County would havehired the firm on future matters. Finally,paragraph 120 alleges that the law firmpartner involved contributed to thereelection campaign of one of these publicofficials.

3. At paragraph 181 of the Complaint, and atother places, the County contends that thelaw firm lawyers should have told theCounty Board about the officials’misconduct. This has a disquietingresemblance to the allegations of the


Resolution Trust Corporation that law excess jury verdict that some partners are simplyfirms representing failing thrifts had a duty not emotionally equipped to handle.to go above the heads of the managerswho hired them and report certaininstances of alleged management miscon-duct to the institutions’ boards ofdirectors. See “Preventing MalpracticeClaims in the Financial Institutions Prac-tice,” at page 9 of the September 1992edition of the Journal.

4. The Complaint cleverly tracks the evolu- burning or had strong reason to suspect it wastion of disclosure language in the various going on? What about counsel for the issuer whodrafts of the official statements. For knew some underwriters were overcharging for theexample, paragraph 163 says in part: securities, but failed to take steps to protect the

163. . . .The sentence “From time totime, the County Investment Pool hasand may also enter various reverserepurchase agreements which areessentially leverage instruments” waschanged to this:

From time to time, a significantportion of these securities arepledged with respect to reverserepurchase agreements authorizedby law.

5. The Complaint includes in the body ofparagraph 129 a photocopy of the lawyer’snotes of a meeting, part of which say, “Ifi[nterest] rates go up 300 bp pts [basispoints] DISASTER.”

B. Other Forms of Wrongdoing.

We have discussed at length alleged fraudulentnondisclosure. What about other forms ofparticipant wrongdoing such as bid rigging, yield-burning, and kickbacks? Our experience tells usthat (1) where this type of conduct appears, (2)someone claims economic loss in the transaction,(3) and one or more law firms were present andarguably should have known of the conduct, thelaw firms’ liability insurance policies will be tootempting a target for plaintiffs’ lawyers to resist.Most law firms doing bond work have highdeductibles, and the size of the transaction mayexceed the firm’s coverage. Thus, even in the caseof the most groundless of claims, the firm willspend a lot of its own money extricating itself,while along the way there will be a fear of an

For example, take the IRS’ recent Rev. Proc.96-41, dealing with yield-burning. Municipalitiesmust make certain payments to the IRS to avoidhaving issues declared taxable. Are they not likely,then, to seek relief from the underwriters whoovercharged them in the first place? See Wall St.J., July 25, 1996. What about the law firm for theunderwriter that arguably knew about the yield-

issuer? What if the bonds are declared taxable?Will the bondholders sit still for that, or will theygo looking for deep pockets?

C. The Whistle-Blowing Issue.

The issue of when counsel may or mustdisclose to others a client’s plan to commit a crimeor fraud is extraordinarily complex - principallybecause the states’ ethics rules are so different.Given the same set of facts, in some jurisdictionsthe lawyer’s lips are sealed, in other jurisdictionsthe lawyer is permitted (but not required) to blowthe whistle, and in a few other jurisdictions thelawyer must disclose the client’s plans. To seewhat the state of affairs is in your jurisdiction, seethe state-by-state chart that appears at Appendix Cfollowing [not included here; see Bond Attorneys'Workshop textbook].

D. Who Is the Client?

This issue is, of course, important in allegedconflict of interest situations, and we will discussit in the following section on conflicts. But it canalso be important in the context of the dishonestparticipant. Take the following example:Underwriter asks Lawyer to be bond counsel. Forwhatever reason, Underwriter has separatecounsel, and the Issuer has separate counsel. Noone discusses with Lawyer who the Lawyer'sclient(s) will be. It turns out that Underwriter isengaged in a fraud, and both the Issuer and thepurchasers claim they were harmed. BecauseLawyer was brought into the transaction byUnderwriter, everybody claims that Lawyerrepresented Underwriter and aided and abettedUnderwriter's fraud. Worse yet, Issuer claims that


Lawyer also represented Issuer. That means, We believe that law firms should haveaccording to Issuer, that Lawyer should have vigorous new matter screening proceduresdisclosed to Issuer what Lawyer knew about requiring some sort of second-partner review of allUnderwriter's fraud so that Issuer could have killed new clients and new matters for existing clients.the deal. This is particularly true for securities matters and

Change the facts. The public officials wereengaged in a fraud, and Underwriter and pur-chasers are claiming they were harmed. Because Identify your client. On the importance ofLawyer was to be paid out of the bond proceeds, doing that in the context of client fraud see part Deverybody now claims Lawyer was representing immediately above. Also, see the materials onIssuer and aided and abetted the public officials' engagement letters at Section V following.misconduct. And, of course, Underwriter willclaim that Lawyer was also representing Under-writer. That means that Lawyer had a duty todisclose early on what Lawyer knew about thepublic officials’ misconduct.

Recall the discussion above about disclosure ofthe client’s plan to commit a fraud. Whether theincipient wrongdoer is in fact a client may bedeterminative as to what the lawyer’s duties ofdisclosure (or nondisclosure) are. Brian Reddingdiscusses the need to identify with precision who isand who is not the client in his article at AppendixA following. We will discuss the importance ofthis in the following section on conflicts of interest.

E. The Lessons.

Know your client. If you do not trust yourclient to do the right thing in connection with abond transaction, you have a potentially bigproblem (see Cases 1-11 above). If the client isnew to you, check him/her/it out. A spottybackground may not require you to decline therepresentation, but knowing about it may causeyou to take special precautions during therepresentation. For example, the first time theclient threatens not to make disclosures that youthink are necessary, you will know your firstsuspicions about the client were at least partiallytrue and that you must “woodshed” the client intodoing the right thing or withdraw before thedamage is done. (This is one place where thewhistle-blowing issues discussed at C. above mayarise.) If you are a member of ALAS and wantguidance on how to check out a prospective newclient, go to one of the Loss Prevention Partners inyour firm. That person will have our Manual andother materials on new matter intake. If the two ofyou want additional help, call one of us.

other matters where other peoples’ money will beinvolved.

IV. CONFLICTS OF INTEREST

This is the most rapidly growing important causeof loss to large law firms. While litigation conflictshave been a source of problems, the transactionalpractice is where the big conflict-of-interest claimsand losses are occurring. We have collected atAppendix B [not included here; see BondAttorneys' Workshop textbook] following a widevariety of matters in which an alleged conflict ofinterest resulted in a huge loss. Again, see BrianRedding’s article on losses in the real estatepractice at Appendix A following. Conflicts are aserious problem in that practice, and the sameprinciples apply to the bond practice.

A. The Conflict of Interest Claims

Case 12: American Medical Corporation(“American Medical”) owns and operates for-profit hospitals. In 1990, it decided to form a new,not-for-profit company, Hospitals, Inc., to buy twoof its hospitals and used an outside law firm toform Hospitals, Inc. After Hospitals, Inc. wasformed, it utilized the proceeds from the sale of anissue of tax-exempt, state-insured bonds to buy thetwo hospitals from American Medical. The samefirm originally engaged by American Medical toform Hospitals, Inc. represented Hospitals, Inc. inconnection with the bond issue and the acquisitionof the two hospitals. As part of that transaction,the law firm helped perform for Hospitals, Inc. thedue diligence to determine whether the acquisitionwas prudent for Hospitals, Inc., and the firmsubsequently issued its routine opinion as counselto Hospitals, Inc., the borrower, in connection withthe closing of the bond issue.

Subsequently, the acquisition proved unprof-itable. Hospitals, Inc. defaulted on the bonds and


shortly thereafter filed for bankruptcy. The state with state aid. As a result of its misinterpretation,agency insuring the bonds then sued the law firm the law firm allegedly incorrectly advised theas well as the investment banker involved in the municipality as to the method of computing thebond issue on behalf of Hospitals, Inc. alleging, additional state funding that could be expected ifamong other things, negligence and fraudulent bonds were issued to cover an existing deficit. Themisrepresentation and breach of fiduciary duty. municipality alleged that it relied on this advice andNotwithstanding the fact that American Medical included in its budget more state revenue than washad been represented by independent counsel prior actually received. The third count of the complaintto and throughout the sale transaction, the suit alleged the firm was negligent in drafting the ballotalleged that the firm had a conflict of interest proposal language.because it had originally been engaged byAmerican Medical to form Hospitals, Inc. and laterrepresented Hospitals, Inc. in the bond-financedacquisition of two of American Medical’s hos-pitals. The state claimed that Hospitals, Inc. hadpaid American Medical significantly more than thetwo hospitals were actually worth. The state seeksto recover the amount the bankruptcy trustee saysis the difference between the state bond guaranteeand what the hospitals were actually worth—pluspunitive damages. Even though discovery hassubsequently demonstrated otherwise, the stateasserts that its loan committee was reassured bythe law firm that the sale was an arm’s-lengthtransaction.

This claim has not been resolved. Discovery bythe defendant law firm indicates no basis for thestate’s claims of conflict of interest and misuse ofconfidential information, but the defense and itsaccompanying expense and disruption continues.

Case 13: In 1990 a law firm was retained asbond counsel for a municipality that issuedapproximately $50 million in general obligation,unlimited tax bonds. The law firm allegedlyparticipated in marketing the bonds, drafting theballot proposition, creating the bond structure, anddeveloping the financial structure for themunicipality.

The municipality sued the law firm allegingthat the firm had a conflict of interest because inaddition to serving as bond counsel, the firm hadalso served as counsel for the underwriter and forthe purchaser of the bonds without the consent ofthe municipality. This conflict of interest allegedlyresulted in higher costs for the municipality whilebenefitting the underwriter and purchaser.

The complaint also included a count allegingthat the firm had misinterpreted a statute dealing


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This case went to trial, and a jury found the bonds and then represented the bank in its litigationfirm negligent on all three counts of the complaint with the bondholders. The complaint alleged thatand awarded damages of several million on each in the litigation the firm failed to advise orcount. The law firm appealed. With respect to the inaccurately advised the bank of the basis of itsclaim alleging a conflict of interest, the appellate liability, the risk of exposure, and the law firm’scourt ordered judgment notwithstanding the potential liability for any damages. Also, a partnerverdict for defendant finding that the plaintiff failed of the law firm was to be a material witness in theto establish causation between the conflict and the litigation. In addition to the conflict of interestalleged harm. The court also reversed the claims, the complaint alleged malpractice, breachjudgments on the other two counts because the of fiduciary duty and breach of contract intrial court failed to include standard jury connection with the law firm’s duties as counselinstructions regarding comparative negligence. for the trustee to the bonds.The plaintiffs have sought leave to appeal to thestate supreme court, but the supreme court has notyet decided whether it will take the appeal.

Case 14: A law firm represented a bank thatwas acting as one of several corporate trustees for although no lawyer has apparently been sued.certain industrial revenue bond issues, the Mark Ferber, then with Lazard Freres & Co., hadproceeds of which were used for the purchase and a retainer agreement with Merrill Lynch that paiddevelopment of a nonprofit medical facility. A him $1 million per year. At the same time Ferberclass action law suit was filed by the bondholders was a financial adviser to several large municipalagainst numerous defendants including the bank. bond issuers. He steered about $12 million in feesThe law firm represented the bank in the litigation, to Merrill Lynch during the period of the retainerwhich the bank settled for $1.5 million. The bank agreement. He did not disclose the retainer agree-then sued the law firm alleging it had an inherent ment to his municipal clients. On August 9, 1996,conflict of interest, in that it had represented the in federal court in Boston, Ferber was found guiltybank in connection with its duties as trustee to the of 58 of 61 counts of fraud and corruption. On

The claim was settled for approximately $1.5million.

Case 15 – Ferber: Here is one that showshow serious a conflict of interest can become,


December 19, 1996, U. S. District Judge William We commend to anyone doing bond work theYoung sentenced Ferber to 33 months in federal excellent 1995 NABL paper, “The Function andprison and ordered him to pay $1 million in fines. Professional Responsibilities of Bond Counsel.”In a separate settlement agreement with the SEC Its emphasis on the need to identify who is andregarding related civil charges, Ferber agreed to who is not the client and other aspects of bondpay an additional penalty of $650,000 and was lawyer conflicts is truly useful and timely.barred from the securities business. It is note-worthy that during Ferber’s sentencing, JudgeYoung lashed out against the municipal bondlawyers who worked on the deals involved, stating:

“I sat and heard the most sorrowful andevasive explications and excuses for legaladvice (during the trial) in regard to [what]must be disclosed, ... If that sorry lot ofmunicipal bond attorneys don’t understandit, let me spell it out: it is required thatevery potential conflict of interest be dis-closed in writing and in detail.”

The Bond Buyer, December 20, 1996.

Case 2: See the description of Case 2 atSection III above. While the case involved anunworthy client, several of the allegations dweltupon the law firm’s multiple representation andhow that allegedly contributed to the plaintiffs’losses.

Case 11 – Orange County: The principalfocus of the complaint, as described in Section IIIabove, is the misconduct of County officials, thelaw firm’s role in assisting that conduct, and thelaw firm’s failure to tell the County Board aboutthat conduct. However, the County’s lawyers havedone something that we see more and morefrequently. They have pleaded that the law firmhad an economic incentive to do this—that it hada conflict of interest. First, they wanted to close thedeal so that they could be paid. Second, they didnot want to be a part of exposing the corrupt offi-cials by insisting upon full disclosure of theiractivities. Stated another way, the law firm wantedto continue to get business from those officials. Asshown in Section B.1 of Appendix B following,concerning the consequences of conflicts, and inBrian Redding’s paper at Appendix A following,these types of conflict allegations provide a kind ofcolor to malpractice cases that simply makes juriessee red.

B. Resources on Conflicts of Interest.

We also call your attention to the followingdocuments, which have been lifted from the 1997ALAS Loss Prevention Manual and appear atAppendix B following:

B.1. “Consequences of Conflicts.” Thissection was discussed earlier in thispaper.

B.2. “Representing Adverse Parties inUnrelated Matters.” Increasingly,Member Firms are asking large clientson one-shot transactions to agree thatthe Firm may oppose the client onunrelated matters. Form language isincluded.

B.3. “Lawyer as Intermediary - JointConfidences Problem.” What happenswhen the lawyer learns somethingconfidential from one joint client thatwould be relevant to the other? This isa crucial issue in multiple represen-tations. We state in this paper and willurge again in the section onengagement letters that the lawyerhave a written agreement of the partieson what the lawyer should, or shouldnot, do in that situation.

B.4.&B.5. “Partnership Issues” and “Conflicts

Issues Peculiar to Close Corpora-tions.” A bond transaction mayinvolve a participant that is either alimited partnership or a close corpo-ration. These two papers discussconflicts issues that frequently arisewith such entities.

B.6. “Duties to Directors, Officers andEmployees of Corporate Client.”Bond lawyers deal closely with publicofficials. These people may need anoccasional reminder as to who is theclient - particularly when what they


want to do may not be in the best Wolfram recognizes that some conflicts are toointerests of their employer. See the basic to be consentable, he does not mention bonddiscussions of Orange County above. transactions. There is another important

B.7. “State Governments.” Can a law firmrepresent one branch of state gov-ernment while simultaneouslyrepresenting a private client againstanother branch of state government?There is very little law on this, but itmay be an important subject for bondlawyers. We think those few author-ities that we know of, and have citedin this paper, lead to the reasonableconclusion that a law firm mayrepresent one part of the state and op-pose another part on unrelated mat-ters.

C. The Ethics Opinions.

Most bond lawyers know about Iowa SupremeCourt, Board of Ethics and Conduct, FormalEthics Opinion 95-20, dated February 22, 1996. Itsays that one lawyer in an Iowa law firm may notbe “bond counsel” in a “negotiated issuer debtfinancing” if (a) another lawyer in the firm iscurrently representing the underwriter in anunrelated matter, or (b) if no one in the firm iscurrently representing the underwriter, but theunderwriter is a regular client of the firm. Theopinion seems to say that bond counsel is, bydefinition, counsel for the issuer. It then says thatthe interests of the issuer and underwriter in anegotiated transaction are so adverse that consentwill not cure the conflict. It cites only Wolfram atpages 340 and 341. It cites no court or ethicsopinion with a similar view of bond transactions.Wolfram does not mention bond transactions anddoes not cite anything having to do with suchtransactions.

We have a problem with the Iowa opinion ontwo levels. First, it makes the sweeping assertionthat “bond counsel” is a fortiori issuer’s counsel.Our understanding is that while that is frequentlythe case, it may not always be the case. The IowaBoard cites nothing for its statement.

The second problem is that we believe that theconflict ought to be consentable, even if bondcounsel is also counsel for the issuer. While

distinction. Iowa still has a version of the old ABAModel Code of Professional Responsibility; theIowa opinion cites DR 5-105 of that Code.Wolfram says that Rule 1.7 of the newer ABAModel Rules of Professional Conduct, thecounterpart to DR 5-105, is, on its face, moredisposed to consentability. The vast majority ofstates have adopted a version of the new ModelRules. While we do not agree with the Iowaopinion on DR 5-105, the situation in the ModelRule states should, in any event, be morefavorable.

One other state ethics opinion dealing withbond transactions specifically is Oregon State BarAssociation, Board of Governors, Formal Opinion1991-37, dated July 1991. There the issue waswhether a lawyer could represent both the issuerand underwriter in the same transaction.Ostensibly, the answer is “no”; however, theopinion confuses the issue by quoting from thatpart of DR 5-105 that deals with the circumstancesunder which a party may consent to the conflict.Oregon’s rules, like Iowa’s, are also based on theold ABA Model Code. Thus, whatever, [sic] theBoard meant, the rules in Model Rule states maybe somewhat more liberal - at least under Wol-fram’s analysis, discussed just above.

D. The Lessons.

(Introductory Note: We are about to statesome principles that are going to give some of youheartburn. It may be the nature of the practice inyour geographical area. It may be the nature of theclients you represent or the participants that youfrequently meet in deals. If you were to start doingeverything we recommend immediately, you mayalarm some people and, perhaps, lose some goodclients. So, go slow if you must. But, understandhow rapidly the liability atmosphere isdeteriorating, and how gleeful plaintiffs’ lawyersare when they find some sort of conflict of interestin failed or distressed business transactions. At aminimum, when confronted with a multiplerepresentation, consult with your firm’s LossPrevention Partner, or Ethics Committee Chair, to


identify ways to minimize your exposure withoutalienating anyone unnecessarily.)

Principle No. 1: Identify who is, and who isnot, the client in writing, and see that allparticipants get that writing. The offeringdocument is one good place to do this. Or, put itin the engagement letter and distribute a copy to allparticipants. (On that last point, see the discussionof engagement letters that follows.) A widelydistributed writing may prevent someone, who youthought was not a client, from claiming that yourepresented her/him/it and that you did not lookout for their interests because you were favoringsome other client in the transaction. We see thatclaim all the time in the transactional practice -even where it was clear that the claimant had othercounsel in the transaction. If, acting as bondcounsel, you do not specify any client, you willleave yourself open to the claim by any and allparticipants that you represented one, several, orall of them. Thus, you may have duties of care anddisclosure duties to more participants than yourealized.

Principle No. 2: If you must represent morethan one participant in a transaction (and youfrequently will), make full disclosure of themultiple representation in writing, explain thepotential conflicts, and obtain the consent of eachof the clients.

Principle No. 3: In a multiple representa-tion[,] provide in writing what your withdrawalobligations are in the event that a conflict arises.

Principle No. 4: In a multiple representa-tion[,] provide in writing what happens if yougain a confidence from one client that would berelevant to another. Dealing with confidences ina multiple representation has become a seriousproblem. The law is not clear on the lawyer’sdisclosure (or non-disclosure) obligation. See theALAS paper at Appendix B.3. [not included here;see Bond Attorneys' Workshop textbook]following. All agree that providing the answer upfront in writing is far superior to trying to figure itout when the problem occurs.

V. ENGAGEMENT LETTERS.

A NABL committee is nearing the end of a projectto furnish [revised] form engagement letters forbond transactions. An exposure draft of one suchform and annotations appeared in the June 1, 1997,issue of the NABL Quarterly Newsletter [sic]. Thedraft letter form is missing provisions dealing withconflict of interest issues, including multiplerepresentations. The committee and the NABLBoard of Directors are working together toproduce those provisions. Nevertheless, what thecommittee and Board have done to date isexcellent.

Annotation B to the exposure draft states inpart as follows:

At the time of bond counsel’s submissionof the [engagement] letter to the engagingparty, consideration should be given tosending a memorandum to other knownparties to the transaction communicatingthat the Issuer is bond counsel’s client. . ..

That is very important. ALAS has had todefend numerous serious claims involvingtransactions in which a party claimed that the lawfirm represented it, when the law firm’sunderstanding was that its only client was someoneelse. See the references to “I-am-not-your-lawyer”letters in the article that follows at Appendix A.

VI. CLEANING UP THE MESS:CAN YOU DO IT?

ALAS’ claims are revealing a new and potentiallyvery serious problem. Brian Redding discussesthis problem in some detail in an article appearingbelow at Appendix F. It has to do with whether alaw firm should handle a dispute for a client if thedispute arises out of an underlying transaction thatthe law firm handled for that same client. If yourfirm is in a Model Rule state, the relevant rule is1.7(b). In states with the older Model Code, seeDR 5-101.

In the bond practice it would go something likethis: Your law firm represented the issuer in a tax-exempt financing and acted as bond counsel. Thefirm issued a clean opinion that the bonds weretax-exempt. The IRS is conducting an audit of thetransaction and has indicated that it intends todeclare the bonds taxable. The IRS has offered to


enter into a closing agreement with the issuer. Theissuer wants to contest the determination and asksyour firm to handle the dispute with the IRS.

Suppose you take on the matter, and the resultis a bad one. Will the issuer turn on your law firmand claim that your firm skewed the defense tomake it appear that it was the issuer’s conduct, andnot the law firm’s, that resulted in the unfavorableoutcome? This is not a hypothetical risk. ALASis defending claims like this in other transactionalcontexts, as this is being written. At least one suchcase has been settled for an amount in the millionsof dollars.

Do not take on a representation that arises outof an underlying transaction in which your firmparticipated without discussing it with your firm’sloss prevention partner or a member of the firm’sethics committee. As Brian Redding points out inthe Appendix F article, this new representationmay or may not be risky or unethical. Forexample, if the IRS claim arises solely out ofconduct of the issuer or others that occurred longafter your firm’s involvement ended, the risks may,indeed, be minimal.

If, on the other hand, the IRS claim arises outof the structure of the deal, and if your firmworked closely with the issuer and underwriter onthat very structure, your loss prevention partner orethics committee may conclude that your firmcannot handle the subsequent matter under anycircumstances.

A third result is that the question is a close one,and you should advise the client of all the issuesraised by your subsequent involvement, and obtainthe client’s informed, written consent. In somecases, it may be necessary for the client to consultwith independent counsel on the propriety of yourfirm’s continued involvement, before it signs sucha consent.

Like most other lawyers in the firm, bondlawyers are rarely equipped to conduct this analysisby themselves. First, they may not have adequateknowledge about how the conflict rules work.Secondly, they may lack sufficient objectivity toevaluate their own conduct. In short, get help fromthose in the firm who are qualified to give it.

APPENDIX A

Lawyer Liability in Large FirmReal Estate Practice

by Brian J. Redding

[Revised from the May 1996 issue ofthe ALAS Loss Prevention Journal]

Introduction

In January of 1996 I spoke to a bar associationcommittee about lawyer liability in real estatepractice. In preparation for that speech, I reviewedall of ALAS’ real estate claims involving incurredloss (i.e., claims having amounts paid or reserved).In addition, two of ALAS’ claims counsel (MarkGralen and Dan Goldman) identified for me anumber of additional matters that, although notclassified as “real estate” claims, neverthelessinvolved lawyering related to a real estate project.When these additional claims are taken intoaccount, the total incurred loss on “real estate-related” matters jumps dramatically from below$50 million to substantially more than $100million. If “real estate” is defined to include allrepresentations related to real estate, it is my opin-ion that large law firm real estate practice, whichoften involves representation of developers andcreation of investment vehicles, including limitedpartnerships, is a practice area carrying significantmalpractice risks. Those risks, while varied, fallinto several categories, which are discussed below.

Aiding and Abetting

We have discussed previously in this Journal whatI have dubbed the “Model Big Money ALASCase”—i.e., a recurring factual scenario thatcharacterizes many of the claims that result insubstantial incurred loss to ALAS. See, e.g., theSeptember 1993 issue of this Journal, p. 8. Thismodel case involves a business transaction inwhich the ALAS lawyer represents one of theparties to the transaction. The client is sued forwrongdoing—fraud, misrepresentation, breach offiduciary obligation, etc. The lawyer is then suedfor “aiding and abetting” the client’swrongdoing—i.e., she papered the deal and did notdisclose the client’s alleged misconduct. This“Model Big Money ALAS Case” comes in manyforms—securities transactions, loan transactions,sale of business, purchase of business, asset


transfers, etc. One of the most frequent settings for lawyer” letter written to others in the transactionthis type of claim, however, is the major real estate would have greatly aided the defense of thetransaction. Real estate developments frequently malpractice claim.involve big-money, high-risk transactionsundertaken by high-flying entrepreneurs, not givento crossing the t’s on disclosure and other legalniceties. That is, as a group real estateentrepreneurs contain more than their fair share of“unworthy clients,” to use a phrase coined by oneof my colleagues.

Obviously, ALAS firms can’t cease doing real under Model Rule 1.7(b)) that caused it to “pull itsestate work, just because some developers are punches” in structuring the deal. Sometimes ourhigh-risk clients. ALAS firms can, however, lawyer has made oral disclosures, and obtainedrecognize the kind of risks raised by representation oral consent to the representation. However, aof such clients, and subject them to closer than dispute arises as to what was said, and thenormal scrutiny in the new business intake process. adequacy of the conflicts waiver required by theThey can also educate young lawyers about the ethics rules. The lack of written disclosure andrisks associated with this type of representation and waivers, again, makes defense of the malpracticeencourage all firm lawyers to be sensitive to red claim far more difficult than it might otherwiseflags—possible indicators of improper disclosure have been.or similar client wrongdoing.

Conflicts of Interest

In recent years, the severity of many of ALAS’ bigmoney claims has been exacerbated by conflict ofinterest problems. That has been particularly trueof our significant real estate-related claims.Frequently, in a real estate transaction[,] an ALASlawyer serves two functions. First, she representsa party to the transaction. In that capacity, shelawyers in favor of her client, and against others inthe transaction. In drafting the agreements govern-ing the deal she attempts to advantage her client,thereby potentially causing disadvantage to others.Often, however, she does more. Frequently, theALAS lawyer is the most experienced, or bestknown, lawyer in the deal, or comes from the bestknown firm. Sometimes, she represents the deepestpocket client, as well. Those factors lead to theALAS lawyer being asked to take on lawyeringtasks that benefit the group, as a whole. If the dealcraters, and others suffer serious economic harm,such activities can lead to a claim that the ALASlawyer was a “lawyer for the deal”—i.e., sherepresented all, or at least many, of theparticipants, and in doing so violated the conflict ofinterest provisions of the applicable rules ofprofessional conduct. Often, there is no letterdefining precisely what entity the lawyerrepresents. In many cases, an “I’m not your

Another conflict problem that sometimescauses claims is the situation where a lawyerrepresents A in a real estate transaction with B,when B is a significant client of the firm on othermatters. After A suffers what it believes iseconomic harm, it files a malpractice suit allegingthat its law firm had a conflict of interest (e.g.,

We’ll repeat here the conflict of interest advicewe’ve historically given on this subject (see theSeptember 1994 issue of this Journal, p. 3, for asomewhat more extensive discussion of thissubject).

1. At the outset of a representation, forceyourself to decide precisely which client(s) you willrepresent in the transaction. If that discussionrequires waivers, get them in writing. Consult yourfirm’s ethics committee or loss prevention partneras to the form of the necessary disclosure andconsent.

2. Tell everyone in sight (not just your“client”). That is, advise all participants in thetransaction, so that others that you don’t believeare your clients cannot claim that they relied onyou to represent their interests. (For a form of “I’mnot your lawyer” letter in a real estate context, seeTab III.A., p. 53 of the 1997 ALAS LossPrevention Manual.)

3. Explain to everyone what your rolemeans—e.g., that non-clients can’t rely on you toprotect their interests in preparing drafts ofdocuments, and, if they want legal representation,they will have to obtain it from another law firm. Ifyou are going to represent multiple clients, treat therepresentation as a joint representation controlled


1. ALAS’ loss prevention counsel are sometimesasked if a firm should represent both sides of atransaction, with consent from each client. Irecommend against that course of action. See e.g.,Baldasarre v. Butler, 625 A.2d 458 (N.J. 1993)(discussed in the May 1993 issue of this Journal atp. 12), which held that in New Jersey representingtwo clients having adverse interests in the samecommercial real estate deal was a per se violationof the ethics rules (subjecting the lawyer tomalpractice liability), even though both clients hadconsented to the dual representation. The NewJersey Supreme Court held the conflict to benon-consentable.

by Model Rule 2.2 (whether or not you have that pliance with the ethics rules, e.g., Model Rulerule in your jurisdiction). That is, make clear to 1.8(a).your multiple clients that if a conflict developsbetween them and they can’t resolve it, you’ll haveto withdraw. Also, deal expressly in youragreement with the sharing of material confidentialinformation. I suggest you agree that all materialinformation, from whatever source, will be sharedwith all of the joint clients.

lawyer also explain in the waiver letter any respect4. Put it in writing!

4 (a). Put it in writing!

4 (b). Put it in writing!

If it’s not in writing, the agreement ispotentially subject to the kind of factual disputethat precludes summary judgment. Having theagreement in writing is no guarantee of summaryjudgment, but you’re far better off than with anoral agreement.

Unless you have spent the time looking atmalpractice claims that those of us at ALAS have,it is difficult to appreciate how significant conflictsof interest are, in terms of the hierarchy ofmalpractice problems facing large law firms. Ibelieve that conflicts rate right at the top of the list,and that the only way to deal with them is carefulscrutiny of the problem, particularly (but notexclusively) at the client intake stage. That isparticularly true in real estate deals, which ofteninvolve transactions between persons or entitiesthat have worked together before and haveprevious relationships with your firm.1

Investing in Client’s Deals

In the early 1990s ALAS’ Loss Prevention Counselwrote and spoke frequently about the dangers ofclient-related entrepreneurial activities, includinginvesting in clients’ deals. (See the September1993 issue of this Journal, p. 8.) In recent years I,at least, have failed to emphasize that message tothe extent I had previously. This year, I’ve turnedup the volume on that message, in part becausewe’ve seen recently a number of troublesomeclaims involving this kind of activity. Several ofthose claims involve lawyers investing in real estatedeals with a client. Part of the problem is thatlawyers who engage in business dealings withclients frequently fail to “dot the i’s” on com-

Model Rule 1.8(a) prohibits a lawyer fromentering into a business transaction with a clientunless the terms are “fair and reasonable” to theclient, are fully disclosed and transmitted “inwriting” to the client in a “manner which can bereasonably understood by the client,” and the client“consents in writing.” Caution dictates that the

in which the lawyer’s interest may differ from theclient’s interest.

ALAS has long advised that ALAS Membersadopt a policy requiring that any investment in aclient’s deal be approved by the firm’smanagement committee. I have often suggestedthat, in addition, a member of the firm’s ethicscommittee (or the firm’s loss prevention partner)be required to approve the form of the “1.8 letter.”My experience has been that if the ethicscommittee doesn’t draft the Rule 1.8 letter, itfrequently won’t pass muster, if scrutinized by anunforgiving judge or ethics committee. See, e.g.,Avianca, Inc. v. Harrison, 1995 U.S. App. LEXIS30863 (D.C. Cir. 1995) (discussed in the January1996 issue of this Journal at p. 21). In Avianca thecourt held that failure to comply with the literalrequirements of Rule 1.8 created a rebuttablepresumption of malpractice, and the lawyer’sestate was required to disgorge to the client anyprofits from the transaction. Under Avianca, andsimilar holdings, the plaintiff’s “expert” in the


malpractice case may be allowed to pontificatefrom the witness stand about your violation of theethics rules, merely because you failed to focus onthe technical requirements of Rule 1.8.

[Note: For purposes of this paper, we have garden variety errors. In large projects, theomitted a section of this article entitled “Garden- potential for serious economic harm from suchVariety Negligence.”] errors is, obviously, significant. We can’t tell you

how to prevent such errors except to suggest that

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Conclusion

Large firm real estate practice presents two majorrisk areas. First, as in all complex areas of largefirm practice, there are plenty of opportunities for

the time-tested methods of double-checking,supervision of associates, etc., are more importantthan ever.

The second area of concern, liability foralleged conflicts and aiding and abetting clientwrongdoing, is essentially the same concern facedby many transactional lawyers. However, thespeculative nature of many real estate deals,combined with the nature of the clients that areinvolved in real estate development and thecomplex and multiple groupings of entities andindividuals involved, make complex real estatework more dangerous than most practice areas, inmy view. The potential for “lawyer for the deal”claims, or representations “adverse” to persons orentities that are clients of the firm on unrelatedmatters[,] is greater than in some othertransactional areas. The loss prevention solutionsto these problems are easy to identify, but difficultto execute. The solutions are: 1) rigorous newbusiness screening procedures to identify high-riskclients; and 2) effective conflict of interesthandling, both at the outset of a matter, and as itdevelops (and new parties enter the fray or thenature of the transaction changes). Detaileddiscussion of these areas is beyond the purview ofthis article. (For an extended discussion of each,see Tabs III.A. and III.B. of the 1997 ALAS LossPrevention Manual.) Suffice it to say that any realestate lawyer who needs to brush up on thesefundamental aspects of loss prevention should talkwith the loss prevention partner of her firm. Thatconversation will be a lot more pleasant if donenow, rather than after a claim situation has arisen.

* * *

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APPENDIX F

Litigating Matters Arising from Your Firm’sTransaction Work

by Brian J. Redding the lawsuit. Second, analyze whether there are

[To be published in the September 1997ALAS Loss Prevention Journal.]

A new species of conflict of interest problem isappearing in ALAS claims. The problem is onethat many lawyers, (even very good lawyers) tendto overlook when beginning a litigationrepresentation. The situation is a common one.Your firm has done transactional work for a client.Someone suffers economic harm as a result ofmatters related to the transaction and sues theclient. The client asks your firm to represent themin the transaction. This common occurrence can’tbe a problem, can it? Unfortunately, the answer isthat sometimes it can create potential problems andoften creates conflict issues that require review andresolution. Failure to deal with these issues cancreate hindsight-based malpractice claims.

What is the Problem?

The problem is that, depending on circumstances,it is possible that the conduct of the litigation maygenerate situations where the law firm’s interestmay differ from the client’s interest. If so, aconflict under Rule 1.7(b) of the ABA ModelRules of Professional Conduct, or D.R. 5-101(A)of the Model Code of Professional Responsibility,may exist. There are two factors that need to beassessed in analyzing these matters. First, is therea nonfrivolous claim that the litigation claim arose,in whole or in part, because of deficient legal workby the firm’s transactional lawyers? Second, arethere strategically diverse ways in which the casemight be litigated, and, if so, is there a possibilitythat the law firm’s tactical decisions could (at leasttheoretically) be influenced by its own economicinterest? That is, is there a possibility that the lawfirm could skew the defense so as to minimize thelikelihood that its transactional partner’s conductmight be found to be a cause of the client’s loss[?]

Does every case arising out of a law firm’stransactional work create a conflict requiringdisclosure of the “conflict issue” to the client, andconsent by the client? We believe not. However,

some do. Indeed if the conflict is very serious, theconflict may be nonconsentable. How do you tell?

First, analyze the possibility that legally defi-cient transactional work contributed materially to

potentially divergent legal strategies for handlingthe litigation so that the potential exists for thefirm’s own interests to interfere with the legaljudgment of the litigators handling the matter. Ifany claim of transactional malpractice would bewholly frivolous, or if there does not appear to beany way the litigator’s judgment could possibly beaffected, there probably is not even a duty to raisethe conflict issue. If, on the other hand, someclaim could be raised that the transactionallawyer’s work was deficient and variable strategicdecisions are likely to exist, disclosure of the issuesshould be made to the client, and a waiverobtained. At some point along the spectrum fromthe claim of malpractice being frivolous to theclaim being a slam-dunk malpractice claim theserious but consentable conflict turns into anonconsentable conflict. Where you cross the lineis sometimes difficult to assess.

The Lawyer as Witness Problem

One problem that must always be addressed inlitigation arising out of a firm’s transactional workis the lawyer as witness problem. In Model Codestates, D.R. 5-102(A) generally prohibits the entirefirm from participating at trial if a lawyer “learns orit is obvious that he or a lawyer in his firm ought tobe called as a witness on behalf of his client.” InModel Rules states the blanket prohibition appliesonly to the lawyer-witness, and not to otherlawyers in her firm. See Model Rule 3.7(b). Becareful, however. While Rule 3.7(b) removes theModel Code’s automatic disqualification of thewhole firm, this provision is limited. It specificallyallows another lawyer from the lawyer-witnessesfirm to serve “unless precluded from doing so byRule 1.7 or 1.9.” Thus, where a conflict betweenthe firm’s position and the client’s is sufficientlyserious, Rule 1.7 may require the firm to withdraw.What kind of conflict might require that result?Suppose the lawyer-witness will contradict theclient’s president on a key evidentiary point,potentially exposing the client to punitive damagesif the lawyer-witness is believed. That is asituation that normally would create a serious


conflict for the trial lawyer. Even when the malpractice or breach of fiduciary obligationpossible conflict is not so serious, it may require claims against lawyers, are likely to increase indisclosure and consent. In very close future years. Dealing actively with potentialconsentability cases, it may be desirable for the problems of this type, by involving the firm’s Lossclient to have consent counsel. Prevention Partner or ethics committee in the

Suggestions for Dealing with Potential “Prior Work” Conflicts

What is the best way to deal with “prior work”conflicts? We have several suggestions for you.

a. When the issue arises, consult your firm’sLoss Prevention Partner, or a member of thefirm’s ethics committee. We believe that theanalysis of whether a conflict exists, and, if so,whether the conflict is consentable, is betterdone by a neutral person (used to doing con-flict analysis) than by the lawyers working onthe matter.

b. If consent is required, full disclosure shouldbe made. Again, the loss prevention partnershould approve the form of the disclosureletter.

c. As with all ethics committee or loss preven-tion matters, if the Loss Prevention Partner orethics committee member recommends disclo-sure and consent, require that all firm lawyersfollow that advice, or appeal to the ethicscommittee, or management committee.

d. If there is a serious question on consentabil-ity, suggest that the client consult separatecounsel (“consent counsel”). Consent counselmay, and often should, be in-house counsel.The legal test for consentability in many juris-dictions is whether neutral lawyer wouldadvise the client to consent. Obviously,evidence that a neutral lawyer did advise thefirm to consent is solid evidence supportingconsentability.

Following these suggestions is no guaranteethat you’ll avoid “prior work” conflict claims.They will, however, deter some claims and willmake others easier to defend.

Conclusion

ALAS has had several “prior work” claimsasserted against Member Firms in recent years.One such claim resulted in a significant recentsettlement. Such claims, like most other types of

conflict assessment and resolution process, is thebest way to avoid trouble. As always, if, ALASloss prevention counsel can help, don’t hesitate tocall us.

PROPOSED AMENDMENTS TO CHAPTER 9 MAY BE UNNECESSARY AND COULD BE COUNTER-PRODUCTIVE

On October 20, 1997, the nine memberNational Bankruptcy Review Commission (the“Commission”) presented its long awaitedrecommendations regarding possible changes to1

the United States Bankruptcy Code. Included in2

the Report are proposed changes to existingmunicipal bankruptcy law that, while superficiallyattractive to municipal finance practitioners, couldrender Chapter 9 unworkable. The mostcontroversial of the recommended revisions is thesuggestion to give preferential treatment to alltax-exempt municipal securities so that theinvestors holding them would continue to be paidduring a municipal bankruptcy proceeding. Thiselevation of all municipal debt to protected statusarguably fails to take into account the actualunderstanding of the municipal finance market andthe competing interests that play a role in munici-pal governance. Indeed, while the proposedmodifications set forth in the Report may appear tobe advantageous to holders of municipal debtobligations, the changes actually are a stepbackward in the effort to provide troubledmunicipalities with a real way (as a last resort) towork out their problems.

I. THE EXISTING MUNICIPAL BANK-RUPTCY LAW IS GROUNDED IN THE

REALITIES OF THE PROBLEMS OF A

MUNICIPALITY

A. The New York Experience


principles of municipal law in the drafting of theMuch of the existing bankruptcy law governingmunicipalities was enacted following the efforts ofNew York City to deal with a financial crisis in1975. New York City was unable to market its3

debt because the bond market had discovered thatNew York had for more than 10 years been usingquestionable accounting and borrowing practicesto eliminate its annual budget deficits. AlthoughNew York City’s financial crisis ultimately wasaverted through the use of the State MunicipalAssistance Corporation which issued its ownlong-term securities to refinance the City’ssecurities, the then existing Chapter IX governingmunicipal bankruptcy was examined to determine4

if it presented a viable solution for the problemsfacing New York City. It did not. In particular, atthat time, a municipality had to show that aproposed plan of composition had been acceptedby 51% in amount of its creditors and theBankruptcy Act then in place did not provide amechanism for raising funds to pay the munici-palities' post-petition expenses. New York City’s5

problems then and now are no different from thoseof many major metropolitan cities: increasinglabor costs in a period of decreasing revenues.

B. The 1976 Legislation

The ineffectiveness of the old Chapter IX to afinancially troubled major city provided theimpetus for a substantial revision to municipalbankruptcy law. On April 8, 1976, the Billamending Chapter IX of the Bankruptcy Act wassigned into law (hereinafter referred to as “1976Legislation”). Among the major changes brought6

by this legislation was the elimination of therequirement that the municipality obtain theprepetition consent of 51% of its creditors. The1976 Legislation allowed a city to file forbankruptcy without the approval of its creditorsand permitted the City to continue borrowing foressential government services. The provisionsregarding municipal bankruptcy were furthermodified in the Bankruptcy Reform Act of 1978(also known as the “Bankruptcy Code,” whichredesignated Chapter IX as “Chapter 9”).

C. Subsequent Fine-Tuning

In time, it appeared that the drafters of theBankruptcy Code, while experts in corporate law,had failed to account for some fundamental

Bankruptcy Code. In November of 1988, basedupon a joint effort by, among others, the NationalLeague of Cities (“NLC”), Government FinanceOfficers Association (“GFOA”) and the NationalAssociation of Bond Lawyers (“NABL”), PresidentReagan signed into law substantive amendments toChapter 9 which corrected some of the incon-sistencies between the Bankruptcy Code andmunicipal law, the Municipal BankruptcyAmendments. The Municipal Bankruptcy7

Amendments were designed to harmonizebankruptcy law with existing municipal law andfinancing practices. Their focus includedassurances that liens on Special Revenues (asdefined therein) not be extinguished, thatprepetition payments on bonds and notes be freefrom the taint of possible preference attack andthat revenue bonds not be transformed into generalobligation bonds. Further, the MunicipalBankruptcy Amendments made the general failureto pay debts the criterion for municipal insolvencyand eligibility for filing. The Bankruptcy ReformAct of 1994 responded to a split in lower court8

decisions with regard to the nature of the stateauthorization to be a debtor under Chapter 9 of theBankruptcy Code. Previously, a municipalityqualified as a Chapter 9 debtor if it was “generallyauthorized” as such by state law. The right to sueand to be sued was seen by some courts as ageneral authorization to file a Chapter 9 pro-ceeding. After the Bankruptcy Reform Act of1994, a municipality is authorized as a Chapter 9debtor only if, by state law, it is specificallyauthorized in its capacity as a municipality or byname as a debtor under Chapter 9.9

D. Delicate Balance

As modified by these amendments, Chapter 9is a workable vehicle for the debt adjustment of amunicipality. A Chapter 9 proceeding is amechanism for a debtor municipality through acourt-supervised proceeding to attempt to settledisputes with all its creditors. Because a municipalunit cannot liquidate its assets to satisfy creditorsand continue to function as a municipality, theprimary purpose of Chapter 9 is to allow themunicipal unit to continue operating while itadjusts or refinances creditor claims. Indeed, oneof the stated purposes of the Bankruptcy Code was


to provide a usable procedure so that a creditor relationships, it should suffice to state thatmunicipality of any size that has encountered Chapter 9 proved to be a workable statute in thatfinancial difficulties may work with its creditors to case. While the Orange County bankruptcy inadjust its debts. 1994 came as a shock to all, its ending, including10

The competing interests of the creditors of atroubled municipality were taken into account inthe drafting of Chapter 9 as it currently exists. Thebankruptcy process was intended to provide abalance among the competing interests so that arealistic solution could be achieved. From time totime, particular interest groups have attempted toobtain amendments that would enhance theirposition in the event of a Chapter 9. For example,in 1991, a proposal entitled the “MunicipalEmployee Protection Amendments of 1991”suggested a number of changes to Chapter 9 of theBankruptcy Code. Among other things, that bill11

provided for a priority for wage and retirementbenefit claims of municipal employees. Inaddition, the bill required a municipality to followapplicable state labor law prior to modifying acollective bargaining agreement. Becauselegislators recognized that such legislation mightunfairly tip the balance in favor of a particularcreditor group and thus render the Chapter 9process futile, this legislation was not enacted.

II. THE FALLOUT FROM

ORANGE COUNTY

Orange County, California is the fourth largestcounty by population in the United States with anannual budget of approximately $4 billion. Anunwise, leveraged investment policy created aliquidity crisis in the late fall of 1994. Theinvestment losses suffered by Orange County arebest attributed to the desperate efforts of a revenuestarved municipality which had faced shrinkingrevenues in relationship to expanding costsbecause of a constitutionally imposed tax cap.12

The difficulty with an artificial and unrealistic taxcap and similar constitutional limits on taxation isthat there are certain municipal services (e.g.,police, fire and education) that are required andexpected by the citizenry. In essence, OrangeCounty turned to creative investments in order toobtain non-tax dollars to make ends meet.

While the Orange County bankruptcy has beendebated and may be the cause for manyevaluations of municipal finance and municipal

in essence the payment in full over time of itsmunicipal debt owed to the public markets,demonstrated the effectiveness of Chapter 9. As aresult, the Orange County experience does notmandate sweeping changes in Chapter 9. Even theOrange County type of Chapter 9, a true aberra-tion, demonstrates that a municipality cansuccessfully navigate the provisions of Chapter 9,and the provisions of Chapter 9 function wellunder the most stressful circumstances. It issignificant that GFOA, NLC and NABL, who havebeen at the forefront of the movement since theearly 1980’s, especially with respect to the 1988and 1994 adjustments to the Bankruptcy Code, andwho have as their basic constituency cities,counties and governmental entities that actually aresubject to the provisions of Chapter 9, have notcalled for the changes suggested by the Report.

www.nabl.orgIII. MODIFICATIONS PROPOSED BY

THE NATIONAL BANKRUPTCY

REVIEW COMMISSION

A. The Report is Issued

After a two-year study by the Commission, anumber of proposals for changes to the BankruptcyCode, including Chapter 9, were delivered toPresident Clinton, Congress and the Chief Justiceof the Supreme Court. Although theCommission’s proposals with regard to consumerbankruptcies has been met with public outcry, thefocus of this discussion will be on the provisionswith respect to municipal bankruptcy.

B. The Municipal BankruptcyProposals

The proposals which impact municipalbankruptcy law can be briefly summarized:

! The securities contract liquidation provi-sions that now apply to Chapter 11bankruptcy cases should also be applicablein Chapter 9 municipal bankruptcy cases.13

! Section 921(d) should be deleted to allowmunicipalities to file for bankruptcy and


move forward with the petition without problems elsewhere. See e.g., Bridgeportwaiting to obtain approval for the filings. Connecticut (1991), the San Jose School District14

! Chapter 11 should be amended to permitmunicipalities to serve on creditors' com-mittees in Chapter 9 cases.15

! Section 921(b) should be deleted so thatbankruptcy judges are appointed to presideover Chapter 9 cases in the same manneras they are appointed to supervise all othercases under the Bankruptcy Code.16

! Chapter 11 should be amended to providestay protection to nonresident “employees”of municipalities that have filed forChapter 9 relief.17

! Chapter 9 should be amended to providecomparable protection to all types oftax-exempt obligations sold in the mu-nicipal marketplace. The recommendationwill not affect the right of a municipality touse special revenue for the provision ofnecessary municipal services.18

C. Analysis of the Recommendations

1. Introduction

While the Report makes a brief allusion to therelative rarity of Chapter 9 filings, the Report couldhave benefited from a more in-depth analysis ofthe statistics. In fact, since 1937, there have beenonly approximately 500 Chapter 9 proceedingsfiled. This compares quite dramatically andfavorably with the statistics for Chapter 11business filings. For example, the AdministrativeOffice of the U.S. Courts reports Chapter 11 filingsfor the twelve-month periods ending June 30 asfollows: there were 10,054 Chapter 11 filings in1997, 11,634 Chapter 11 filings in 1996 and11,466 Chapter 11 filings in 1995. Correspond-ingly, only a handful of Chapter 9’s were filedduring those years. In addition, the Report couldhave stressed more than it did the relatively limitedutilization of Chapter 9 by large cities. TheChapter 9 petitions that have been filed have forthe most part been instituted by smallmunicipalities or special tax districts. In recentyears, large municipalities that have attempted touse Chapter 9, with the exception of OrangeCounty, have found the resolution of their

(1983), and the Richmond School District (1991).Given the likely solvency of Orange Countycoupled with the unwillingness to pay attitude,Orange County represents an aberration in manyrespects from the typical Chapter 9 case.Highlighting the rarity of Chapter 9 cases for majorcities would have explained why there is no generaldemand for any modifications to the existingChapter 9.

JOB BANK

Contact Patricia Appelhans — 630/690-1135

2. Incorporation of the Securities Contract Liquidation Provisions

The beginning of the Commission’s Reportwith respect to Chapter 9 proposals indicates thatthey are technical in nature and attempt to fill“statutory gaps that have been brought to light inrecent Chapter 9 cases, most notably the oneinvolving Orange County, California.” Therecommendation regarding securities contracts islikely the only necessary change suggested in theReport. It would be advisable to clarify theapplicability of securities contract liquidationprovisions to a Chapter 9 proceeding. While theresults of Orange County may make it less likelythat municipalities will invest widely in these typesof securities, it is advisable to include the relevantCode provisions in Chapter 9. 3. Chapter 9 Petition as an

Order for Relief

The Report asserts that Section 921(d) shouldbe deleted. That section refers to the court’sentering an order for relief under Chapter 9 if thepetition is not dismissed under subsection (c). Itshould be remembered that Section 921(c)compels the court to dismiss the petition if it is notfiled in good faith or if the petition does not meetthe requirements of the title. Remembering thestrong policy considerations and particularly theTenth Amendment concerns surrounding theappropriateness of federal bankruptcy legislation,it makes sense to demand the court determine thata Chapter 9 case is appropriately filed if objections


are raised to the petition. In fact, from time to does not argue for its elimination. As the presstime, legislation establishing the bankruptcy court coverage from the Orange County bankruptcy willas gatekeeper to Chapter 9 has been discussed as attest, the bankruptcy filing by a unit of localdesirable if state law does not establish an agency government is an extremely politically chargedto oversee the individual decision of a municipality event. The purpose for designation of anto file. Since Section 901 of Chapter 9 appropriate bankruptcy judge by the chief judge of19

incorporates by reference the provisions of Section the applicable Court of Appeals was to insure that301 with regard to voluntary cases, and since a judge would be selected who could withstand thesection 301 states that the commencement of a publicity and local pressure of such a high profilevoluntary case constitutes an order for relief under case. Moreover, as was often commented by thesuch chapter, it may be that there is need for some court in Orange County, municipal finance is aclarification with respect to the applicability of unique and sometimes complex area. The abilitySection 301 to Chapter 9. to select a judge with some working knowledge of

4. Eligibility of Municipali-ties to Serve on Creditors’Committees

The Report expresses concern that thedefinition of “person” under Section 101(41) doesnot include a governmental unit except inparticular situations. As a result, the Reportsuggests that it should be specified that munici-palities are “persons” entitled to serve on creditors’committees under all circumstances. In fact, it is The Report refers to the apparent lack ofa highly unusual circumstance in which a munici- applicability of the automatic stay to law suitspality will be a creditor in the bankruptcy of against municipal officers or employees who areanother unit of local government. Typically, only not residents of the Chapter 9 municipality. Thisobligations under intergovernmental cooperation highly unusual fact pattern does not appear toagreements or situations such as Orange County warrant a change in the bankruptcy laws of thewhere a municipality is investing for others would United States. While an adjustment could be maderender a municipality a Chapter 9 creditor. It was at the time of any omnibus amendments, the judgethe pool financing in Orange County that gave rise in Orange County was able to remedy the situationto the unique situation. In fact, the United States of non-resident employees by resorting to SectionTrustee in the Orange County case quite rightly 105 of the Bankruptcy Code which empowers theformed a separate committee comprised of the court to issue any orders, process, or judgmentslargest municipal creditors. Given the unlikelihood necessary or appropriate to carry out the provisionsthat membership on a creditor committee by a of the title. This proposed modification is anmunicipality will ever become a burning issue, the extremely technical one, and it appears that a courtproposed amendment does not appear to be could easily utilize Section 105 to solve anymandatory. problems with respect to non-resident employee

5. Elimination of 11 U.S.C.Section 921(b)

The Report suggests that the need for highercourt supervision of a Chapter 9 proceeding is nolonger necessary. Importantly, the purported lackof sophistication of bankruptcy judges implied bythe Report was not the driving force behind theinclusion of this provision in Chapter 9 and anincreased sophistication of the bankruptcy judiciary

municipal law and municipal finance is a realbenefit. There does not appear to be any com-pelling reason why a provision permitting athoughtful decision by a supervising judge as to theappropriate person to hear a municipal bankruptcycase should not be retained.

6. Inclusion of Non-ResidentEmployees in 11 U.S.C.Section 922(a)

lawsuits.7. Treatment of Municipal

Obligations in Chapter 9

a. The Report Overlooks the Differences Between Revenue Bonds and General Obligation Bonds


Of all the recommendations of the Report vendors has no general predicate in municipal ordirected to Chapter 9, this proposal is the most state law and may unnecessarily complicate acontroversial and appears to be based upon a belief municipality’s relationship with its other creditorsthat the municipal market has an expectation that in bankruptcy.the payment of general obligation bonds is some-how more sacrosanct than other full faith andcredit obligations to employees, pension funds and vendors. In fact, it is generally understood that a www.nabl.orggeneral obligation bond is simply debt backed bythe unlimited (occasionally limited) taxing power b. The Special Revenueson the residents, taxpayers and property owners Concept Was Necessarywithin the jurisdictional boundaries of the to Preserve the Rightsmunicipal borrower. Historically, states have of Revenue Bond-imposed conditions on general obligation bonds holders in a Chapter 9such as voter authorization, limitations toparticular purposes, or debt limitation to apercentage of assessed valuation on the power ofmunicipal entities to incur such debt. The basicalternative to a general obligation bond is arevenue bond which is an obligation to repay theborrowed money solely and only from somespecial fund pledged to the bondholders. Thatpledge is normally effected by the adoption of thebond ordinance or resolution by the governingbody of the debtor or appropriate state statuteauthorizing such. The contemplated remedy for adefault under a revenue bond often focuses on acovenant to charge rates sufficient to amortize thedebt so that defaulted bondholders are expected toseek mandamus in court to require the municipalborrower to raise its rates. As a result, revenuebonds are often analogized to nonrecourse debt inthe non-municipal world. Thus, for traditionalmunicipal borrowings, whether general obligationindebtedness or special fund revenue bonds, it iscommon that such obligations are not secured byany collateral pool of existing real or personalproperty held as security. Rather, they representclaims on pieces of the borrower’s current andfuture cash flow. Contrary to the assumption in theReport that general obligation bonds are alwaysdeemed more desirable than revenue bonds,occasionally revenue bonds from a strongmunicipal utility or a particular revenue bondfinance program, such as housing or economicdevelopment, have been rated higher than thegeneral obligation bonds from the samemunicipality. It all depends on the underlyingcredit. The preferring of general obligationbondholders over employees, pension liability and

Section 552(a) of the Bankruptcy Codeprovides that any prepetition pledge terminatesupon the filing of a bankruptcy except forproceeds, product, etc. of the property alreadysubject to the lien. Thus, prior to the enactment ofthe Municipal Bankruptcy Amendments in 1988,Section 552 could have been interpreted to defeasethe lien on revenues assigned by the municipality tosecure revenue bonds unless the revenues collectedafter the filing of the petition could be traced asproceeds of some other property of the debtor.The fear was that if a municipality filed a Chapter9 petition, Section 552 would terminate the pledgeof revenues (the source of recovery) on a revenuebond and would permit general creditors of themunicipality to seek payment from the pledgedrevenues. Such a result would have a devastatingeffect on the holders of revenue bonds who had norecourse to the unlimited taxing power of themunicipality. The situation of revenue bond-holders in bankruptcy differed from the holders ofgeneral obligation bonds supported by the full faithand credit of the municipality. As a result, theMunicipal Bankruptcy Amendments renderSection 552(a) inapplicable to revenue bondssecured by Special Revenues. The legislativehistory to the Municipal Bankruptcy Amendmentsmakes clear that this is not intended to create newrights that would not otherwise exist under statelaw and constitutional provisions. The Report failsto focus on the fundamental distinction betweenthe two major kinds of indebtedness ofmunicipalities, and this failure clouds the reasoningset forth in support of the change.


NABL has a

JOB BANK

Contact Patricia Appelhans630/690-1135

c. Special Revenues Were Designed to Allow Troubled Municipality Access to the Revenue Bond Market

Special Revenues came about as response tothe inability of a municipality to obtain financingwhen it was desperately in need of additionalfinancing in order to avoid a Chapter 9proceedings given Section 552 of the BankruptcyCode enacted pursuant to the Bankruptcy ReformAct in 1978. The example that the legislativehistory and others have cited is the City ofCleveland in 1979, when the traditional lenderswho wanted to help the City out of its plights wereconcerned about providing additional requiredfinancing because of fears that such would betransformed into a preference or voidable transferupon the unilateral decisions of the City to file aChapter 9. Special Revenues became a discreteand defined vehicle of financing which would bepreference proof even if made shortly before thefiling of a Chapter 9 and would continue to providepayment to lenders during the Chapter 9, so as toeliminate the risk and concern of lending to afinancially troubled municipality. SpecialRevenues were created for the purpose of allowingtroubled municipalities to raise preference proofcapital to allow them to work themselves out oftheir troubles, not to fund their general creditors.To elevate all debt to Special Revenue statuswould eliminate the benefit created in 1988 thatgives governments the breathing room needed towork things out.

d. There is No Evidence That Expanding the Concept of Special Revenues Will Lower the Cost of Borrowing

Despite protestations in the Report, the “mar-ket,” if it reads the official statements for thesecurities it purchases, knows that generalobligation and revenue debt are different obli-gations and there has been no sleight of handregarding their obvious differences. Similarly,there is no statistical or empirical data to supportthe speculation that the expansion of SpecialRevenues to all debt obligations will improveissuers’ access to the municipal market.


Moreover, it is unlikely that any supporting Special Revenues, not the expenses of the entirestatistics could be developed, given the highly municipality. Would payment to retired municipalinfrequent occurrence of Chapter 9 filings and the workers cease? Would police, fire and otherfact that at least thirty (30) states lack statutory protectors of public safety be paid pursuant to theirauthorization for Chapter 9 filings within their contracts or based upon a court determination ofborders. what is fair given the Chapter 9 filing? It must not

e. The Proposed Expan- sion of Special Revenues Will Make Chapter 9 Unworkable

As previously mentioned, the resolution of theproblems of a troubled municipality require abalance among labor, unfunded pension, trade,judgment and general obligation creditors who alllook to the full faith and credit of the municipality.There is no real distinction among these creditorgroups in most respects under state law. TheCommission’s proposal justifies ongoing payments a preferred class over all other municipalto general obligation bondholders during a Chapter obligations will effectively destroy any ability of a9 proceeding arguing that they are simply being municipality to balance all competing interestspaid pursuant to their contract. However, (e.g., labor, pensions, vendors and public safety) indisgruntled employees, retirees, trade creditors and working out a fair plan of adjustment. There is novendors could assert that they too should be paid reason in municipal law that general obligationpost-petition pursuant to their contracts as well. bond debt should be on a different footing than20

To require payment during a Chapter 9 proceeding labor, pension or public safety obligations. Toto general obligation bondholders and all tax-ex- suggest a form of Chapter 9 where all tax-exemptempt debt holders while not paying employees, obligations for the sake of the “expectations of thepension obligations and other creditors may doom market” are paid in full on a priority basis, whilethe Chapter 9 proceeding to financial gridlock the obligations owed to employees, citizens, ven-because of insufficient funds and inability to dors and others are left wanting, defies the realityrestructure the tax-exempt debt. Chapter 9 was and the necessities of a municipality’s existence.designed as a method of adjusting all municipal Typically, an insufficient tax base leads to aobligations including tax-exempt debt. General municipality's Chapter 9 filing. This tax base mustobligation debt may be a large component of the support general obligation debt, labor and pensionindebtedness of a municipality and may require obligations and vendor claims. If these claimantssome restructuring in a Chapter 9 to save a munici- are not treated equitably with respect to thepal operation and to give it a fresh start. The available tax base, the Chapter 9 proceeding willCommission recommendation would provide no fail. Further, the likely result will be increasedneeded relief. A solution that defies gravity is hesitancy on the part of the voters to approvenothing more than an illusion. The Report pays lip future general obligation bond issues.service to the notion that necessary municipaloperations would be funded but neglects to explainhow this would be accomplished. Indeed, theReport may go too far when it says that it will notprevent a municipality in Chapter 9 from usingdedicated revenues for the provision of necessarymunicipal services. Existing Section 928 permitsSpecial Revenues to be used to pay the necessaryoperating expenses of the system that created the

be forgotten that the Tenth Amendment precludesa federal bankruptcy judge from interfering withthe government and affairs of a municipality.Given that restriction, how would the appropriatedecisions be made as to necessary municipalexpenditures? A Chapter 9 plan has to be in thebest interest of creditors. How can a Chapter 9plan meet that criterion if the tax-exempt creditorsare paid on an ongoing basis and other bona fidecreditors take major haircuts?

Elevating all municipal borrowing vehicles to

Furthermore, to create a priority mandated bystatute for all tax-exempt borrowings wouldeliminate the ability of all parties to consensuallyagree to provide higher priority to junior creditorsif needed to resolve the government’s problems.Elevating all tax-exempt debt to the highestpriority, above other obligations like fire and policesalaries, pension and trade debt, will make itimpossible to balance the competing interests


unique to a municipal bankruptcy. Taking this step law on the ability of states to legislate in this areawould make it more rather than less difficult to must be carefully considered. A rush to incor-resolve municipal insolvency. When a creditor’s porate Section 1113 into the municipal bankruptcyposition is tied down too tightly, paralysis can provisions was rejected. However, no preferentialoccur. In addition, because Special Revenues arise treatment can be created for municipal financebecause of a pledge of Specific Revenues, and if obligations without dealing with this importantsuch status were to be granted to all municipal issue.borrowing, the designation should be done by statelaw first. To integrate a priority of payment provi-sion with Special Revenue provisions invitestrouble and tremendous legal battles relating tothird parties and the relative priorities alreadyextant for special priority status.

8. The Commission Properly Rejected Attempts to Incorporate Section 1113

Congress in the 1984 legislation, responded to Commission’s recommendation with regard tothe Supreme Court’s decision in NLRB v. Bildisco expanding the definition of special revenues is a& Bildisco. In Bildisco, the court rejected the different issue altogether. No one would criticize21

standard whereby a collective bargaining agree- efforts to strengthen the position of the tax-exemptment could be rejected only if it was demonstrated debt of municipalities. That said, the approachto be onerous and burdensome and would thwart taken in the Report to expand the scope of specialthe efforts to save the debtor from collapse. In revenues to all tax-exempt municipal obligations isresponse, Congress added Section 1113 to the counterproductive. A plan of adjustment can onlyBankruptcy Code. This provision had the effect of be successfully negotiated if the rules of the gamemodifying the Supreme Court’s ruling so as to provide an incentive for compromise. Moreover,prohibit unilateral rejection without a court hearing while the ability to access the municipal bondand ruling upon an application for such rejection. market is key to the financial health of aThe thrust of Section 1113 is to allow a court- municipality, special revenue protections can provesupervised balancing of interests between the illusory if the municipality is in crisis because ofcollective bargaining agreement and the reha- failure to treat other municipal creditor groupsbilitation of the debtor. The legislation appears fairly. As a result, it must be concluded that thedirected at ad hoc determinations by a court proposal with respect to the expansion of thewithout detailed and defined guidelines. The concept of special revenues to all tax-exemptpossibility of incorporating Section 1113 into municipal obligations does not adequately confrontChapter 9 has been raised from time to time since the ramifications of the proposal on the realities of1984. Many have argued against such the Chapter 9 case. If there is real concern in theincorporation because of state law and Tenth market with regard to the treatment of generalAmendment Constitutional considerations. There obligation debt in a Chapter 9, it is respectfullyis real fear that the applicability of Section 1113 to suggested that the proposal contained in the Reportmunicipal collective bargaining agreements would is not the answer.inappropriately interject a federal bankruptcy courtjudge into state law matters. Nevertheless, theNLOC, the GFOA and NABL are painfully awareof the complicated and important issue raised withrespect to municipal collective bargainingagreements in bankruptcy. A careful analysis ofexisting state laws and the impact of any federal

IV. CONCLUSION

The proposals of the Commission, as describedabove, in many cases are not required by existingpractice. With the notable exception of thesecurities contract liquidation provisions, themajority of the Commission’s recommendationswith regard to Chapter 9 already have been dealtwith in a practical way by bankruptcy courts, andthere appears to be no requirement of immediatemodification of the Bankruptcy Code. The

James E. Spiotto

Chapman and Cutler

Chair, Committee on Bankruptcy


14 “Commission Recommendation 4.3.2.

1 National Bankruptcy Review Commission,FINAL REPORT, BANKRUPTCY: THE NEXT

TWENTY YEARS, October 20, 1997 (the “Re-port”).

2 11 U.S.C. §101 et seq.

3 A detailed account of the history of municipalbankruptcy may be found in the Chapter by theauthor of the three-volume treatise, THE LAW

OF STATE AND LOCAL GOVERNMENT DEBT

FINANCING edited by Professor David Gelfandand published by Clark Boardman Callaghan.

4 50 Stat 654 (1937); 60 Stat 409 (1946).

5 A major obstacle would have been reachingthe holders of bearer instruments. It wasestimated that 160,000 individuals or familiesheld $4.89 billion in New York bonds, abouttwo-thirds of the $7.35 billion in outstandingbonds. New York Times, October 19, 1975, at48.

6 90 Stat 315 (1976).

7 Pub. L No. 100-597 (1988).

8 108 Stat 4106 (1994).

9 Currently, twelve states have statutes thatspecifically authorize a municipality to file aChapter 9, seven states require writtenapproval of a state commission, agency orofficial, one state specifically prohibits aChapter 9 filing, and 30 states provide nospecific authorization.

10 HR Rep No. 137, 93rd Cong, 1st Sess237-248, reprinted in 1978 USCCAN 6221.

11 HR 3949, 102d Cong, 1st Sess (1991).

12 Article XIIIA 1 of the California Constitution.

13 “Commission Recommendation 4.3.1.Incorporation of the Securities ContractLiquidation Provisions - 11 U.S.C. §§555,556, 559 & 560.

The securities contract liquidation provisionsin 11 U.S.C. §§555, 556, 559 & 560 should beapplicable in Chapter 9 cases and should beadded to the list contained in section 901(a).”

Chapter 9 as Order for Relief

Section 921(d) should be deleted. Section 921authorized the court to dismiss a Chapter 9petition for (1) lack of good faith; or (2) failureto meet the requirements of title 11. Deletionof Section 921(d) will eliminate the statutoryconflict between section 301 providing that avoluntary petition constitutes an order for reliefand section 921(d) authorizing the court toorder relief only if the petition is not dismissedunder section 921(c). Deletion of section921(d) will also conform Chapter 9 to all otherchapters of the Bankruptcy Code where avoluntary petition is the order for relief.”

15 “Commission Recommendation 4.3.3.Eligibility of Municipalities to Serve onCreditors’ Committees

11 U.S.C. §101(41) should be amended topermit municipalities to serve on creditors’committees in Chapter 9 cases under theprovisions of 11 U.S.C. §1102.”

16 “Commission Recommendation 4.3.4.Elimination of 11 U.S.C. §921(b)

Section 921(b) should be deleted. Bankruptcyjudges should be appointed to preside overChapter 9 cases in the same manner as they areappointed to supervise all other cases underthe Bankruptcy Code.”

17 “Commission Recommendation 4.3.5.Inclusion of “Employees” in 11 U.S.C.§922(a)

11 U.S.C. §922(a)(1) should be amended toprovide stay protection to nonresident “em-ployees” of municipalities that have filed forChapter 9 relief. Section 922(a)(1) shouldread:

(1) the commencement or continuation,including the issuance or employment ofprocess, of a judicial, administrative, or otheraction or proceeding against an officer,employee or inhabitant of the debtor that seeksto enforce a claim against the debtor[.]”

18 “Commission Recommendation 4.3.6.Treatment of Municipal Obligations inChapter 9


Chapter 9 should be amended to providecomparable protection to all types of tax--exempt obligations sold in the municipalmarketplace. The Recommendation will notaffect the right of a municipality to use specialrevenues for the provision of necessarymunicipal services.”

19 See discussion in paper prepared at the requestof Rep. Richard H. Baker (R-La) in TheQuarterly Newsletter, September 1, 1996, at18.

20 Creating a special status for municipal financeobligations could open a Pandora’s box. Iflabor reasserts its claim to priority status and ifthe corporate scheme embodied in 11 U.S.C.§507(a)(3) is used for a model each worker’sclaim for $4,000 in wages earned within 90days of the Chapter 9 would be paid ahead ofgeneral creditors. For a major city, thisobligation could be huge.

21 465 U.S. 513 (1984).

www.nabl.org

LEGAL ASSISTANTS' CORNER

Susan Parker, a member of the Legal Assis-tants Committee, has been asked to serve on theNABL Web Page Committee, a committee formedto evaluate NABL's current web site(www.nabl.org). Questions to be considered bythis committee include: What publications wouldbe appropriate for the site? What kind of linkswould be useful to members? How can the chatgroups be more useful? Susan will provide herexpertise to the committee from a legal assistant'spoint of view and also as a frequent user of theInternet.

We envision using the NABL home page tolink to public finance websites. Those sites wouldprovide information ranging from federal agencies,such as the SEC or the Department of Treasury, tolaw and legal related topics, to media sources, suchas national newspapers, to state and localgovernments, and lastly to municipal financesources, such as the CUSIP home page, ratingagencies, or The Bond Market Association(formerly, the PSA). Once these sites areaccessed, even more links could be made.

When the new home page is developed, it willbe an invaluable informational and educational toolfor use by legal assistants and lawyers. Over thepast few months, the Legal Assistants Committeehas reviewed several public finance websites andprepared summaries of each to enable the user toget a thumbnail sketch of the content of that site.Examples might look like this:

CUSIP Service Bureau (http://www.cusip.com)

History of CUSIP. Members can obtainnumbers on the Internet.

U.S. Department of the Treasury (http://www.ustreas.gov)

Link to IRS for complete list of forms andinstructions. May download forms foruse.

Of course, we are always looking for additionalsources of information and since new sites arecreated daily, the possibilities are endless. If youknow of any interesting work-related websites andwould like to contribute to our efforts, please


contact Susan at 212/435-6230 or at her e-mail tomized for this purpose and seems more user-address (userparker@aol. com). friendly than the earlier versions. For example, the

Ann L. Atkinson the data base to search, rather than requiring thatChair you first pick the section and then open a search

SOFTWARE REVIEW:FEDERAL TAXATION OFMUNICIPAL BONDS

As some readers of this publication know, I'vebeen taking a lot of time off lately. So when theygave me this computer program called "Aspen" totry, I naturally assumed it was about skiing.Normally I like to work with the computer after acouple of martinis. It makes coping with theglitches a little easier. But tonight I was out of gin,so I poured myself a scotch and settled back tolearn a bit about thin people and fat skis.

Imagine my dismay when this municipal bondstuff came up. The scotch wore off almostimmediately. Desperately I tried another, but thebonds wouldn't go away. So I turned to themunicipal bond stuff.

Aspen previously published NABL's FederalTaxation of Municipal Bonds ("FTMB") in paperform, except that the private rulings werecontained on a computer floppy disk and weresearchable only through a very dated version ofFolio Views software. Aspen's new CD Romversion of FTMB is a great advance over theearlier software. While the paper versioncontinues to be offered, the CD now contains all ofthe material contained in the paper version as wellas all the private rulings. This material includes theCode, including a history of both the '86 and '54codes, legislative history, regulations, preambles,proposed regulations, including withdrawnproposed regulations, revenue rulings, revenueprocedures, IRS announcements, private rulings,GCMs, SLGS regs and Treasury Departmentforms. Moreover, this information is accessedthrough a vastly improved Folio Views Windowsinformation base and search machine. Thosefamiliar with Tax Analysts One Disk will recognizethe general format, but the version used in FTMBis a more advanced version that has been cus-

tool bar allows a direct selection of the portion of

dialogue box. This makes moving about in thedata base and searching over the full data basesignificantly easier than it would otherwise be.Generous use of hot links also assists in movingabout quickly.

In a potentially major advance, the data baseviewed by the user is not the exact data basecontained on the CD, but instead is a combinationof that information and a "shadow file." Theshadow file allows the user to paste notes in thedata base, highlight passages and insert bookmarksfor later return, all just like on paper. These notes,highlights and bookmarks can be saved as part ofthe shadow file so that over time a user or firm cancreate a customized, annotated version of the database. Aspen says that because each record has itsown unique identifier, the customized data basewill survive when the CD is updated, as it is to bethree times a year.

Unlike some other software, the Aspen CDsalso allow data to be tagged so that the user doesnot have to stop in the middle of research to printor save passages but instead can wait to the endand do it all at once.

There are, however, still a few quirks andissues. Although the data base represents atremendous research effort, there are still somegaps, so that for completeness it will be necessaryto cross-check research with other sources. Inaddition, Folio Views searches by record ratherthan by document. Aspen advises that each privateruling is a record, but that each paragraph of casesand revenue rulings is a separate record. Thus,when a search is made for a document containingtwo different words, a search of documents inwhich each paragraph is a record will return onlythose in which the words are in the sameparagraph. (There is a way to defeat this, but it'stoo complicated to write down.) The highlighter isa good feature, but the default highlighter is none(yellow and other colors and names can be used),and the default form of file saved is that oldfavorite WordPerfect 6. Installing the software onmy office computer, I found that the network


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software seemed to prevent the program from disks. To add insult to injury, the disks are datedestablishing menu items and icons for starting the and stop working after a certain time.program. While this may be largely the fault of our(and undoubtedly many another) klutzy network, itwas a nuisance to have to call Aspen for thecommand line, something they have indicated theywill provide in subsequent documentation.

The price is not cheap. A single user must pay$850 for both the print version and the CD, and inaddition $240 to update the paper version as wellas $80 for each of the three updated

The multiuser license is a better deal. A $1650license covers the paper version plus up to 99users. Again the paper updates are $240 and thedisks are $80. Aspen says the disks can be runover a network and that each user can haveindividual shadow files in addition to the possibilityof one or more group shadow files. (I did not tryany of this.) Under the multiuser license, userswho want their own disks can get them for $80 apop.

Aspen recommends as a minimum configu-ration a 486 processor with 4 megs of ram andWindows 3.1. I tested it on a 133 Pentium with 32megs of ram and Windows 95, so I can't speak tothe minimum configuration, but it ran fine on whatI had.

To sum up, despite the carping, this programis a major, major advance, for which the NABLeditors and Aspen deserve commendation.

Richard H. Nicholls

Orrick, Herrington & Sutcliffe LLP


VOICE FROM THE PASTChapter 5

One of the industrial development bond issuesthat caused Congress to start limiting the taxexemption of such bonds may have been a 1967transaction for an aluminum company in CalcasieuParish, Louisiana. George Ramspeck worked onthe lease and I worked on the indenture for thisissue, and George Pitt ably backed us up. The userof the facility was a subsidiary of a Swissaluminum company. The parent had looked atseveral sites, including British Columbia andIceland, where they could get hydroelectric powercheaply, as electricity is the major cost in refiningaluminum; but the combination of cheap naturalgas, accessibility to shipping, and tax exemptfinancing in southwestern Louisiana won out.

The lead underwriter was Glore, Forgan &Company of Chicago, represented by JimJamieson, a man who was used to putting largedeals together. He knew that the newly formedsubsidiary would not have the credit to sell theissue, so he arranged for a take-or-pay agreementunder which the Swiss parent would agree to takeor pay for enough of the plant’s output so thatthere would be enough money to pay the bonds.Such agreements were customary in financing steelmills, and he thought it would work for thisaluminum company. But some of the potentialinvestors wanted to know how a bondholder couldenforce such an agreement against a Swisscompany. A letter from a solo practitioner inZurich to the effect that such agreements could beenforced in Swiss courts didn’t encourage them.

So the deal was re-cast with Phelps-Dodgeagreeing to guarantee payment of the bonds, or ofrentals sufficient to pay the bonds. This provedsatisfactory to potential investors, but it did raiseone challenge for bond counsel. The guaranty hadto be treated as a separate security for SECpurposes, and as such had to be registered with theCommission. The then head of Chapman and Cut-ler’s SEC department was willing and able to takecare of this with one exception. Since theindenture was the instrument through which thebondholders would be secured, the indenture hadto be qualified under the Trust Indenture Act of1939; he didn’t qualify indentures. (Not long after

that we got a new head for this department.) Thiswas left up to a municipal bond lawyer who hadnever had anything to do with the SEC, namely,me. I was warned of an SEC ogre named SamBinder who was very hard on lawyers who madethe least little mistakes in their work, and told to dothe best I could.

I got a copy of the Trust Indenture Act, andproceeded to incorporate a swarm of provisionsand technical changes in the form of indenture. Itwould not do to incorporate the Act by reference,nor to include all the pertinent provisions in aseparate section beginning, “Anything to thecontrary herein notwithstanding. . . .” And I had tocome up with a workable indenture that the trusteecould understand and follow, so all items in theform that might conflict with the requiredprovisions had to be eliminated or modified. Someof these items, pertaining to the right of the trusteeto get away with almost anything, were ones thattrustees generally insisted on in unregistered deals,but the trustee on this transaction was pretty docilewhen told that the new provisions were required bythe SEC. This experience provided me with amemorable lesson in the shenanigans trustees hademployed before the Act was adopted, especiallyin situations where the same bank lent its ownmoney to an issuer and also acted as trustee for itsbondholders.

Eventually I contorted the indenture to includethe required provisions, to eliminate the proscribedones, and to comprise a workable document.When the draft was completed, I prepared a shortguide showing, on the left side, the number of eachpertinent section of the Act, and on the right side,the number of the section of the indenture in whichthe required provision was incorporated. Then,apprehensively, I sent the draft indenture and guideoff to Mr. Binder. Several days later I got a tele-phone call, and when I learned it was he, began tosweat. The sweating stopped when he said that Ihad submitted one of the best forms of qualifiedindenture he had ever seen, and was verycomplimentary. He had a couple of questions thatI answered easily, and told me to cut out thenonsense when I explained that I was not acorporate securities lawyer but a mere municipalbond lawyer who worked on indentures onlyoccasionally.


The most sincere mark of his respect for mywork came a few months later when a lawyer froma major California firm telephoned and, in aslightly apologetic tone, asked for some help. Mr.Binder had told him to call me to find out how toqualify an indenture.

Eventually the transaction came to market. Atthat time Louisiana law required industrialdevelopment bonds to be sold at advertised publicsale. I had wondered how Jim Jamieson was goingto make the sort of profit he would expect underthe circumstances, and I found out. He included inhis syndicate every dealer who was likely to formhis own, or to be a major player in another,syndicate to bid on bonds of this sort. So when thebids were taken, Glore, Forgan & Company’ssyndicate submitted the only one.

This being in the days before our SECdepartment told us not to, I later bought a few ofthe bonds for my own account, and rememberedthe transaction with fondness every time I clippedthe coupons. I was sad when they matured and Ihad to turn the bonds in.

Manly W. Mumford

BOND DOGS

(Our dogmatic duo, Skippy, an erudite Scottishterrier, and Jake, a mutt, continue their assessmentof the municipal bond biz. Comments fromreaders, care of The Quarterly Newsletter, areencouraged.)

Skippy: Well, did you have a good ChicagoWorkshop?

Jake: I sure did. The panels were up to theirusual high standards, the luncheonentertainment was a good choice, andthe new officer elections went offwithout a hitch. But the real reason Igo is that Chicago has some of the bestrestaurants in the country.

Skippy: I agree. Le Francaise is probablysecond only to Le Bec-Fin.

Jake: Give me a break. We're talking goodAmerican food, like pizza, bratwurst,chow mein, pirogi and tandoorichicken. Why, the Thursday morningdumpster behind Greek Islands lookedlike two dozen bond lawyers hadordered one of everything on the menuand then decided that the ouzo androdytis were really the reason foreating there.

Skippy: While, of course, I would neverpartake myself, rumor has it that theMudge Rose alumni gathering at theBlackhawk filled their dumpster withequal quantities of steak and cabernet.On the other paw, at the annual dinnerof the American College of BondCounsel, they combined halibut andwild mushrooms with a discussion of"pay to play" and managed to avoidindigestion or worse. I guess it takesa strong stomach to succeed in thebond business.

Jake: But not as strong a stomach as it takesto be in banking. A headline in arecent Investment Dealers Digest read"Merrill Lynch Poaches Smith BarneyBanker."

Skippy: Did they suggest appropriate sauces,side dishes and wines? I hear theytaste like chicken.

* * * * * *

Jake: You know, we bond dogs get a badrap. I have a bone to pick with thatRichard Chirls fellow. In his speech inChicago on tax developments, hesuggested that one might avoid IRSenforcement efforts through theexcuse that "a dog ate my 8038."That's just not fair. I tried one onceand it lacked any flavor whatsoever.Now, an old leatherbound transcript .. .

Skippy: I agree about our soiled reputation.But the biggest damage has undoubt-edly been done by an old friend andone of the most famous bond dogs in


history. This yield burning mess is all firm that does work for X. B is anhis fault. Everywhere you turn, the old-line firm who sees its position andimpermissible markup in Treasury stature being eroded and is trying tosecurities is being compared to Spot's protect its turf. C is a smaller firm,price. well respected in its own region, but

Jake: I knew all that running around withDick and Jane would bring him down.

* * * * * * expanding into C's region.

Skippy: It used to be that bond lawyerspracticed with respect and regard forone another. Like a brotherhood,although perhaps lacking insisterhood. Now it has become justtoo damn cutthroat.

Jake: You mean the story of the plagiarizedbond documents?

Skippy: As I understand it, bond counsel Adeveloped a complex structure for aparticular type of financing, includinga fund flow embodied in a bondresolution. The bonds were under-written by banker X. Banker X thenprovided bond counsel B with a copyof the documents to duplicate thetransaction in a different part of thecountry. And in a third jurisdiction,bond counsel C was retained by X andprovided with the documents of B.Now B is suggesting that C should payB for its documents. C contacted Awho has assured C that if B sues Cthen A will provide evidence to showthat B had merely copied A's work.

Jake: To begin with, the original documentsare of public record. They embodylanguage and concepts that representthe work product of the entire legalcommunity over a period of manyyears. Efforts by groups such asNABL have also contributed to thedevelopment and improvement ofthese same bond documents. It'sgoofy for B to claim ownership ofsuch a "public good."

Skippy: There is more to the dynamic here.Bond counsel A is a large national

with the potential to make inroads intomarkets which B controls anddefinitely capable of keeping B from

Jake: Sounds like a formula to create a realdogfight. Take three pit bulls, throw apiece of raw meat in the middle, andtell each of them that "winner takesall." When they are done, the loserswon't know whether to kill themselvesor go bowling.

* * * * * *

Jake: The new tax hot topic appears to be aforward option to purchase tax-exempt obligations as investments.Tax lawyers around the country arewrestling with the issue of whether theup-front premium paid for the optionis yield for arbitrage purposes.

Skippy: The transactions could be referred toas "municipal option puts," "guaran-teed option offered forwards" or"bond acquisition rebate free securi-ties."

Jake: And that is why the transaction willnever sell. Not a marketable acronymamong them.

Skippy: In order to sell a financial product youdo need an acronym. The best, orworst, example has to be the Bureauof Public Debt, State and LocalGovernment Series, known as"SLUGS."

Jake: Imagine you have just been hired asmarketing director for the SLUGSprogram and told to go out and sell abillion dollars worth of thosemollusks. This has to be the mar-keting assignment from hell.

Skippy: The poor guy wouldn't know whetherto smother them with butter and garlic


or put out a pan of beer to keep them personnel recruiters, died at the age of 53 onfrom ruining the tomatoes. October 12, 1997, after a seven-month illness. I

Jake: Or put salt on their backs and watchthem shrivel. Remember when youwere a puppy and popped ants with amagnifying glass and . . .

Skippy: You are one sick dog!

Jake: Notwithstanding their feline origin,"CATS" and "TIGRS" had appealingnames. The first banker to come upwith a product with a name like"dachshunds," "dobermans" or even"beagles" is destined to succeed.

Skippy: What about terriers?

* * * * * *

Jake: One other aspect of the tax-exemptoption transaction bears mentioning.A reliable source claims that the IRSfirst learned about the concept fromthe Chicago Workshop. There arethose among us who think we shouldexclude IRS personnel from ourconferences. But I believe the betterand more enlightened view is that weare all best served by an informed andeducated government enforcementeffort.

Skippy: I agree in principle, but recent horrorstories about actual IRS strongarmenforcement tactics call into questionwhether anything we do that furthersIRS efforts is advisable.

Skippy & Jake

REMEMBERING BARRY MANN

Barry Blair Mahl, known to many of us asBarry Mann of Barry Mann Associates, the

had the personal privilege of being a friend ofBarry's since he began specializing in locating andplacing lawyers devoted to the municipal bondpractice about fifteen years ago. Though only afew of us ever knew Barry as other than a voice onthe telephone, many NABL members have eitherfound positions with Barry's help and advice orwork with those who have. A large number ofpractice teams have been aided by Barry or haveused Barry's advice in structuring their practices.I do not think it an overstatement to suggest thatBarry had a hand in many of our professional livesand a lasting effect on many of our careers. Inaddition to the professional help Barry provided,he was also a friendly voice to many, a man ofgreat integrity, a gentleman, and a gentle person.He is survived by his wife Joan, a daughter andthree sons. Fortunately, Barry Mann andAssociates will continue helping to place lawyersin the future.

Henry S. (Hank) Klaiman

Brown & Wood LLP


EDITOR'S NOTES

The SEC, always arcane and mysterious, iseven more arcane and mysterious of late. On theone hand, it does slam the crooks who need roughtreatment. On the other, it goes after — and/orthreatens to go after — rank innocents.

As to yield-burning, the SEC is certifiablybifurcated. At this writing, it has brought no cases.It has not endorsed the strange spot market pricingstandard espoused by the IRS guys in last year'sRev. Proc. But it hovers. That's a concern. Theseguys and gals can bring down upon any one of us— or our clients — the full dead weight of thefederal government. No one can afford to quarrelat length with the SEC. The SEC has more horsesand dollars than your average issuer will ever hopeto have.

This is no fun at all. How does one cope?Attendees at the September 24-26 Bond Attorneys'Workshop were treated to a number of strategies,none of them totally palatable or seamless. Inyield-burning cases, it seems, the bond lawyer iswell-advised to ask him/herself whether the SEC,at bottom, is really after the bond lawyer. If so, thebond lawyer must recuse him/herself (you can't, inmost states, be a witness in a case which you aredefending). But you'd better get this right in thefirst or second telephone call.

The optimum yield-burning solution, ofcourse, is that the underwriter/securities providersettles with the SEC, which turns the settlementover to the IRS in full satisfaction of the issuer'stheoretical liabilities. Let's hope.

Lewis C. Horne, Jr., formerly a bond lawyerwith Powell, Goldstein, Frazer & Murphy, Atlanta,who served on the Association's Board ofDirectors from 1988 to 1990 and on the BondAttorneys' Workshop Steering Committee in 1990and 1991, chaired the Washington Seminar in1992, and consulted extensively with the SpecialCommittee of the Association in the late eightieson preparation of its report on "LawyerProliferation in Public Finance Transactions," isnow Executive Director of the National MinorityGolf Foundation (7226 North 16th Street, Suite210, Phoenix, AZ 85020), and would welcomecontributions, deductible to the extent provided by

law. That foundation, incorporated by the UnitedStates Golf Association, is not to be confused withthe Tiger Woods Foundation, with which Lewworks very closely. Although Lew has participatedin golf clinics with the Tiger, and played golfseveral times with Tiger's dad, he says he is"waiting for the golf police to arrest me forimpersonating a golfer."

Henry S. (Hank) Klaiman, of Brown & WoodLLP, New York, has made a contribution to theRobert H. Hilderbrand, Jr. Fund, the Association's§501(c)(3) affiliate, in memory of Barry B. Mahl,widely known as Barry Mann. And now is thetime for other members to come to the aid of theFund, which grants stipends to governmentemployees to cover their personal costs ofattending Association seminars and serving aspanelists at the Bond Attorneys' Workshop. TheFund was named in honor of Robert H.Hilderbrand, Jr., a partner in the Philadelphia firmof Saul, Ewing, Remick & Saul, long active in theAssociation's educational activities, who died in anairplane crash in 1985. Contributions are tax-deductible to the extent provided by law.

Joe Mysak (ex-Editor of The Bond Buyer) andJames Grant (he of Grant's Interest RateObserver) have launched Grant's Municipal BondIssuer, targeted to issuer officials. Subscriptionsare free for the asking to senior issuer officials(write 30 Wall Street, New York, NY 10005-2201).

Grant's Issuer is a sort of plain-languageversion of Grant's Municipal Bond Observer,which sells for about $500 per year and is targetedto market professionals. Your clients will like it,and (but for the fact that it better equips clients tosecond-guess you) so will you.

The exposure draft of Joint Recommendationsfor Communicating with the Beneficial Owners ofDefaulted Municipal Securities which appearssupra represents at least the partial realization offormer President William H. McBride's vision —born of bitter experience — that there had to be abetter way. On behalf of the industry and theprofession, Wally, profound thanks. Seriousthanks are also due member Monty Humble, whodid the heavy lifting as the primary draftsman.


QUARTERLY LIMERICKS

I

Give me your poor huddled classes,Yearning to access toll roads (and bypasses):

Chuckin' in quarters,Helpin' contorters,

Privatizin' roads for the masses.

Is this great new scheme gonna work?Or is it just a fresh quirk

To befuddle the raters(Those N.Y.C. waiters)

Who in Wall Street's dark canyons do lurk?

II

Chairman Levitt he's gonna re-up —At our table continue to sup.

Up, yea, and over(He'll dine on the clover) —

The municipal market he'll thwup.

Did the Chairman long past get him bluedBy those boyos in Memphis, white-shoed?

Did they shake 'im and bake 'im,Telephone 'im and take 'im?

Are his soles in the past firmly glued?

III

Polishing silver and gold — Bringing the sheep to the fold —

Hanging those hides,And taking those rides

Before committees of Congress is bold.

But where are the pain and the gain?The analysts are out in the rain —

Grousing and whining — For status quo pining:

Is 15c2-12 all that sane?

A rational safe harbor'd be coolWith a dash of chlorine in the pool

So issuers could talkWithout walking the walk

That'd conclude with their playing the fool(s).

So how 'bout it old Arthur, old chum?Try a dollop of Jose's good rum

And give us a systemThat won't dismay Tristram

Or Isolde, and let's get it all back plumb.

Orin Magruder

MEMBERSHIP SERVICESEducation Program

The Association conducts seminars and workshops dealing with matters of interest to the bond lawcommunity. These include:

� February 4, 5 and 6, 1998: Tax Seminar, San Diego — covering issues arising under theInternal Revenue Code and Treasury Regulations

� April 15, 16 and 17, 1998: Fundamentals of Municipal Bond Law, Atlanta — intendedfor those with less than three years of experience in bond law

� May 7 and 8, 1998: Washington Seminar — covering the areas of securities, tax, andother timely Washington topics

These events offer members opportunities to exchange ideas about law and practice with fellow practitio-ners. For more information, call Executive Director Patricia Appelhans at 630/690-1135.Law Reform: Committee Participation

Through its Committees on Arbitrage and Rebate, General Tax Matters, and Securities Law andDisclosure, as well as ad hoc committees and task forces, the Association regularly testifies and fileswritten comments about proposed tax, securities and other federal legislation and Regulations, and actsas 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 toparticipate in committee activities. The Association works closely with public interest groups and indus-try organizations on matters of mutual interest.Office of Governmental Affairs

In Washington, Director of Governmental Affairs Amy K. Dunbar represents the Association infederal regulatory and legislative matters. The Director cooperates with state and local governmentgroups, congressional and regulatory staffs, the Association's substantive committees, and individualmembers to help identify, inform, and educate Congress and federal regulatory agencies about publicfinance issues. Members may contact the Director at 202/778-2244 (e-mail [email protected]), orat 1900 K Street NW, Suite 1200, Washington, DC 20006-1109, to discuss legislative and regulatoryissues, request copies of current public finance proposals before Congress or regulatory agencies, andobtain NABL comments on proposed securities and tax regulations. For those with Internet access whosend their e-mail address to her, she maintains e-mail contact with members on timely issues.Other Membership Benefits

‚ Subscription to The Quarterly Newsletter‚ Information of immediate concern is mailed to the membership‚ "NABLnet" home page on the World Wide Web: 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 Taxationof Municipal Bonds (through Aspen Law & Business); Blue Sky Regulation of MunicipalSecurities; and seminar course books

‚ Free access to the Association's Job Bank through which members can receive job listingsand firms can seek members interested in employment opportunities

‚ No charge for placement in The Quarterly Newsletter of brief notices of employmentopportunities available or sought

‚ Budget Rent-A-Car discount

[Bond Buyer ad on outside back cover]

Documents

The Twenty-Second Bond Attorneys' Workshop 12