contents president's column (william h. mcbride) 2ethi cs (or whichever subgroup of the aba...

CONTENTS

President's Column (William H. McBride) 2

Washington Saga (Amy K. Dunbar) 5

NABL at a Glance 9

NABL Committee Meetings atBond Attorneys' Workshop 10

Actions by the Board of Directorson July 18 and 19, 1996 (Susan Weeks) 10

Dean Pope Elected to Municipal Securities Rulemaking Board 16

The Twenty-First Bond Attorneys' Workshop(Robert W. Buck) 17

Chapter 9 — Municipal Bankruptcy 17

Shared Tax ObservationsTable of Effect of Certain Changes UnderFinal Regulations Relating to Reissuance (Sharon Stanton White) 22

IRS Responds to General Tax Matters Committee'sRecommendations on IRS Audit Program 37

Remembering Chuck Kades 38

Employment Opportunities 39

Washington Office Move 40

Editor's Notes 40

Quarterly Limerick 42

Volume 17, No. 3 September 1, 1996

The Quarterly Newsletter of the National Association of Bond Lawyers is published on or about March 1, June 1, September 1 and December 1 of each year, for distribution byfirst class mail solely to members and associate members of the Association. Membership information may be obtained by writing to Patricia F. Appelhans, Executive Director,National Association of Bond Lawyers, 1761 S. Naperville Road, Suite 105, Wheaton, Illinois 60187, or by calling 630/690-1135. Explicit or implicit editorial positions presentedherein do not necessarily reflect policies adopted or approved by the Board of Directors of the Association.

MEMBERSHIP SERVICESEducation Program

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

Q September 18, 19 and 20, 1996: Bond Attorneys' Workshop, for lawyers with more than threeyears of bond experience — the preeminent annual gathering of bond lawyers, covering virtuallyall aspects of municipal bond law

Q February 20 and 21, 1997: Tax Seminar, Orlando — covering issues arising under the InternalRevenue Code and Treasury Regulations

Q April 9, 10 and 11, 1997: Fundamentals of Municipal Bond Law, New Orleans — intended forthose with less than three years of experience in bond law

Q May 8 and 9, 1997: Washington Seminar — covering the areas of securities, tax, and othertimely Washington topics

These events offer members opportunities to exchange ideas about law and practice with fellowpractitioners. For more information, call Executive Director Patricia F. Appelhans at 630/690-1135.

Law Reform: Committee ParticipationThrough its Committees on Arbitrage and Rebate, General Tax Matters, and Securities Law and

Disclosure, as well as ad hoc committees and task forces, the Association regularly testifies and 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 andindustry organizations on matters of mutual interest.

Office of Governmental AffairsIn Washington, D.C., Director of Governmental Affairs Amy K. Dunbar represents the Association

in federal regulatory and legislative matters. The Director cooperates with state and local governmentgroups, congressional and regulatory staffs, the Association's substantive committees and individualmembers to help identify, inform and educate Congress and federal regulatory agencies about public fi-nance issues. Members may contact the Director at 202/778-2244 (e-mail [email protected]), orat 1900 K Street N.W., 12th Floor, 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, shemaintains 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: http://www.nabl.org/nabl# Preferential admission to the Association's educational programs at substantially reduced rates

and reduced air fares# Discounts on many of the Association's publications, including Disclosure Roles of Counsel in

State and Local Government Securities Offerings, Second Edition; Federal Taxation of Munici-pal Bonds (through Aspen Law & Business); Blue Sky Regulation of Municipal Securities; andseminar course books

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

The Quarterly Newsletter September 1, 1996

National Association of Bond LawyersOfficers and Directors

William H. McBride . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . President Hunton & WilliamsRaleigh, North Carolina

Julianna Ebert . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . President-Elect Quarles & BradyMilwaukee, Wisconsin

Susan Weeks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Secretary Foley & JudellNew Orleans, Louisiana

William H. Conner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Treasurer Squire, Sanders & DempseyCleveland, Ohio

Jeannette M. Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Director LeBoeuf, Lamb, Greene & MacRaeNew York, New York

Robert W. Buck . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Director Palmer & DodgeBoston, Massachusetts

David A. Caprera . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Director Kutak RockDenver, Colorado

John M. Gardner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Director Hogan & HartsonDenver, Colorado

Steve A. Matthews . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Director Sinkler & BoydColumbia, South Carolina

Floyd C. Newton III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Director King & SpaldingAtlanta, Georgia

Howard Zucker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Director Hawkins, Delafield & WoodNew York, New York

Andrew R. Kintzinger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Director Briggs and Morgan Immediate Past President Minneapolis, Minnesota

Frederick O. Kiel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Honorary Director Cincinnati, Ohio Editor of The Quarterly Newsletter

N N N

Patricia F. Appelhans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive Director Wheaton, Illinois

Amy K. Dunbar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Director of Governmental Affairs Washington, D.C.

The Quarterly Newsletter 2 September 1, 1996

PRESIDENT'S COLUMN

August Ruminations

Through the years I have seen Association Presidents use this column in two general ways.Most often the columns are merely reports on current events concerning bond law practice and theAssociation. But sometimes Presidents have used this space as a "bully pulpit" -- arguing for acertain course of action that might not occur of its own accord. With the possible exception of myfirst column, which was the speech I postponed in order to end our longest-ever annual meeting,I have so far used this column solely in the first manner. It has discussed the work of theAssociation and its committees. While this one will also talk about those things, I have decided topreach a bit toward the end.

Workshop and Annual Meeting

In connection with the 21st annual Bond Attorneys' Workshop next month, the Association willbe holding its 18th annual meeting. While it remains to be seen whether this year's meeting will beas exciting as was the 17th, there are valid reasons for every member of the Association to attend.After diligent and careful work, your Board of Directors has adopted revisions to the Association'sBy-Laws. As has been mentioned in previous issues of The Quarterly Newsletter, during the yeara committee of the Board proposed changes and the By-Laws were reviewed several times by theBoard as a whole. The text of the amended and restated By-Laws, which all of you should havereceived by now, was formally adopted by the Board at its July meeting. There will be a vote onthe changes to the By-Laws at the annual meeting. While no amendments from the floor will bepermitted, the Board would still appreciate evidence of the approval of the amended and restatedBy-Laws by the members.

There will also be the usual elections and speeches. By now you will have seen the NominatingCommittee's report. This slate was the result of considerable thought and your support thereofwould be very much appreciated. The Nominating Committee did have some members of theBoard (including myself), but a majority were not Board members. I think all of us on thecommittee believe our final report benefitted from this composition. There are tentative plans forthe committee to go a bit further and attempt, after the Workshop, to set forth in writing some ofthe basic criteria and considerations that went into the nominating process this year. If we aresuccessful in this it should aid future committees in their deliberations.

It is expected that several of the sessions during the Workshop this year will include discussionof proposed revisions to the model bond opinions and form engagement letters being worked on bythe Opinions Committee and the Professional Responsibility Committee, respectively. It is theintention of everyone concerned that these Association products be updated and expanded, generallyto incorporate the points noted in the 1995 edition of The Function and Professional Responsibili-ties of Bond Counsel. If you are interested in the way either of these two projects is headed (andyou should be), think about them in selecting which sessions to attend.


Outside of the Association

The ABA -- Those of you who are active in the American Bar Association know that theAssociation is not the only bar group which has had to wrestle with the matter of politicalcontributions. The Association of the Bar of the City of New York formally asked the ABA toadopt a rule prohibiting political contributions for lawyers involved in public finance. It is somewhatunclear whether the formal request was actually filed with the House of Delegates, but everyoneknows what has been sought. It remains to be seen whether the ABA will act on the request, onceformally received.

I would hope that consideration by the ABA will allow the discussion to focus on theapplicability of such a rule to all attorneys involved with public bodies. There is absolutely noreason why bond and public finance attorneys should be focused on to the exclusion of zoninglawyers, attorneys representing public contractors, attorneys handling employment and otherlitigation matters on behalf of public bodies and even counsellors advising individual members ofdeliberative public bodies on public questions. For those who believe logic indicates attorneysshould not make political contributions to people who may be making hiring decisions, the samelogic should apply to all attorneys who may be hired by a public body. If the ABA Committee onEthics (or whichever subgroup of the ABA megapolis is given jurisdiction) decides thatcontributions should not be permitted, then there can be no reason to separate out public financeattorneys alone.

Orange County -- In California, we finally had the filing of an action against the former bondcounsel for Orange County. I strongly recommend that every member of the Association read thatcomplaint in fine detail. Regardless of your feelings about the underlying substantive issues, thecomplaint is well worth your review for the lack of understanding of the municipal bond issuanceprocess that it evidences. As just one example, there are several references to the "due diligenceobligations" of counsel to the underwriters. No recognition is made that any such due diligenceobligations are those of the underwriters, who presumably hired counsel to aid them in that task.

It was because of the increase in these sorts of errors and misunderstandings that theAssociation is pleased to have the revised edition of The Function and Professional Responsibilitiesof Bond Counsel. Hopefully the expected revisions to the form engagement letters and modelopinions will further aid the education of parties, including issuers, who should be moreknowledgeable about public finance.

Ferber -- The conviction of Mr. Ferber earlier this month, even though it is bound to beappealed, will not reduce the scrutiny and intense review under which we operate in the municipalfinance area. While the factual allegations made there seem to have little relevance to the counselaspects of a transaction, I suggest you not forget Ferber. The SEC will be encouraged to go aftermarginal cases, IRS auditors will hear of this and ask more nebulous questions about the subject,and even our clients may ask for more comfort from their attorneys. It is a classic nightmare for usall that someone's error can be used as an example to pose harsh and uneconomic restrictionsconcerning tax-exempt bonds. Bad facts make bad law. Be careful out there!


Rev. Proc. 96-41 -- One of our Committee chairs has described this recent pronouncement asthe "worst thing since the 1986 Tax Act." While I am not quite in agreement with that, I do find itappalling. The Service, albeit apparently trying to be helpful, has retroactively created a standardof review for the purchase of open market Treasury portfolios which a) was not followed by anyone,b) is impossible to follow since the "spot price" as defined bears little relationship, if any, to marketvalue and c) is inherently and improperly coercive because of the one year limitation. Further, Rev.Proc. 96-41 creates only a rebuttable presumption, not a safe harbor, and completely ignores theService's ability under Section 6700 to deal with this sort of situation.

Your Association, through both tax-related committees and their chairs, has attempted to getthe Treasury and the Service to withdraw 96-41. Apparently, this is not destined to happen, at leastin the short term. That leaves all of us with the nice problem of dealing with the situation. Shouldwe recommend that issuers actually consider entering into closing agreements on this basis? Shouldwe recommend that they send letters to the underwriters, financial advisors or others who obtainedopen market portfolios, which letters would suggest those persons should pay for the closingagreements? Where is the benefit in all this?

Two Practice Points

Indemnification -- Any reader of the Orange County complaint will also note that bondcounsel was required to indemnify the county. It appears to me, as well as others, that there is agrowing trend in the country whereby bond issuers seek to have broad indemnification provisionsexecuted by their bond attorneys. This is wrong. To execute a blanket indemnification clausevastly changes the nature of the traditional attorney-client relationship. One can argue that a bondattorney signing an indemnification provision ceases to have the basic protection of a negligencestandard of review for any advice given the client. We still should be attorneys, not guarantors ofanything. Further, such a contractual provision may inhibit any liberality which might benefit aclient. In what respect can a lawyer really be an advisor or counsellor to a client if he will be strictlyliable for any misjudgment? Does it not follow that, with such a policy in place, only the most tepidof variations from the traditional will be entertained? Is this really a benefit to the client?

And the apparently growing trend of indemnification is made worse by its seeming applicabilityonly in the public finance area. Public bodies which seek indemnification from bond attorneys donot seem to be requiring these contracts from other counsel representing them.

I earnestly hope that each of you will strenuously avoid agreeing to any such broad indemnifica-tions. It may put you at a competitive disadvantage, but I submit that you, and your clients, arebetter served in the long run. You might also wish to check with your insurer to see if it will payamounts due under indemnification clauses! I understand not all will. (The Association's Board ofDirectors discussed indemnification at its July meeting, reported infra.)


Stepping Up to the Line -- As a final point, I will exercise a personal privilege and rail againstone situation I perceive is increasing. I see an increasing number of occasions when the "bondcounsel" on a transaction tries to avoid giving the tough opinions. I can accept that special taxcounsel will be present in some very complicated transactions. However, even in thosecircumstances there is no excuse for supposed "bond counsel" relying on a local attorney for anopinion on the validity of the main obligation! I have had this tried several times recently in dealswhere we were not acting as bond counsel. My response has been as yours should be -- if theputative "bond counsel" is not giving the tough opinion in the transaction, then disclosure should bemade as to who is giving that opinion. If local counsel to the issuer is being relied upon for thevalidity opinion, then that fact should be disclosed. In addition, the local counsel arguably shouldget more in fees and the "bond counsel" less due to this misallocation of responsibility. Pleaseunderstand that I do believe bond counsel can acceptably rely on other counsel for particular aspectsof the opinion, including whether the applicable procedural requirements for adoption andauthorization of action by an issuer have been met. Yet this seems to me to be strikingly differentfrom when there is reliance on another counsel for the validity of the instrument. There were bondcounsel before the income tax was instituted and it was the validity opinion for which they wereengaged.

It is not right that anyone avoids the hard question and still calls themselves "bond counsel" forthe deal. I was trained and still believe that the bond counsel opinion should suffice to allow aninvestor to conclude there is no material legal risk in his purchase. If this is not correct, becausesome points are ignored or pushed off on inexperienced counsel, then all participants in thetransaction had best be wary, to say the least.

William H. McBrideAugust 14, 1996

WASHINGTON SAGA

July and August are usually a slow time in refunding issues. A technical description of theWashington, especially during an election year. Revenue Procedure is in Sharon White's columnHowever, the tax world has been keeping us all infra. On July 23, the Arbitrage and Rebateunexpectedly busy. While Congress is off to Committee members dealing with comments onnominate presidential candidates and approve the proposed Fair Market Value Regulations heldplatforms at the conventions, those of us left in a conference call to discuss the implications of theWashington are picking up the pieces on legislative Revenue Procedure. Because President McBrideand regulatory issues. and I would be meeting with Secretary of the Trea-

Revenue Procedure 96-41

On July 19, the Internal Revenue Servicereleased Revenue Procedure 96-41 regarding theclosing agreement program relating to advance

sury Rubin the following day at the announcementof the SLGS program revisions, we had contactedthe Secretary's representatives to alert them to the


prospect that the Secretary would receive ques In the meantime, The Bond Buyer has sent ations on the Revenue Procedure during the SLGS questionnaire to the issuers of the 100 largestregulation announcement press conference. Tax refundings in its database, questioning whetherLegislative Counsel Mike Thompson and Deputy their deals involved yield burning and how theyTax Legislative Counsel Buck Miller joined our intend to respond to the Revenue Procedure.conference call to hear concerns about the Revenue Many of you may receive calls from your issuersProcedure. On the morning of July 24th, President regarding this questionnaire or calls from otherMcBride was one of two speakers at a Public members of the media regarding this issue. ThereFinance Network meeting held at the National is significant media interest in this topic due to theLeague of Cities at which Secretary Rubin an- several years of discussion at the SEC regardingnounced the proposed SLGS regulations. Presi- yield burning and the allegations of Michaeldent McBride thanked the Secretary for the work Lissack and his attorneys that this is a "billionof his staff and the process through which the state dollar problem." Because we are working onand local government and public finance com- clarifications and changes to the Revenuemunity were consulted on these regulations. He Procedure and comments on the proposedpraised the important results of the process and regulations, we take the Secretary at his word thatthanked the Secretary for his work and the atten- this is a work-in-progress, and suggest that wetion of his staff. An issuer raised a question about await the final resolution before over-reacting tothe Revenue Procedure during the meeting, to the situation. We will keep you informed as bestwhich Secretary Rubin replied that the Revenue we can. I have been using e-mail and our webProcedure was "a work-in-progress" and that the page to alert people. Mitch Rapaport is headingIRS and Treasury would work together with the up this effort on behalf of NABL.public finance community on the problems identi-fied. On August 9, as I write this column, we havehad initial discussions with Treasury and IRS staffabout a meeting which we hope will be held beforethe end of August.

Small BusinessJob Protection Act of 1996

Those involved with local furnishing issuersneed to review the modification made by Section1608 of the bill to local furnishing. It effectivelyeliminates tax-exempt financing by local furnisherswho are not local furnishers on July 1, 1997. Italso changes some of the fundamental definitions.Copies of the legislation and report language areavailable from the Washington Office.

S.1880, Moynihan Stadium Bill

On June 14, Senator Daniel Patrick Moynihan(D-NY) introduced S.1880, the Stop Tax-ExemptArena Debt Issuance Act. The bill defines asprivate activity bonds any bond issued as part of anissue if proceeds of the issue are to be useddirectly or indirectly to provide professional sportsfacilities. The term "professional sports facilities"means real property or related improvements usedfor professional sports exhibition, games, or train-ing, regardless of whether the admission of thepublic or press is allowed or paid. The provisionis effective for bonds issued on or after June 14.


Later, Senator Moynihan issued a transition rule this process. Shortly after introduction of this bill,similar to the transition rule provided in the generic Congressmen Gerald D. Kleczka (D-WI) and F.transition rule provided in the 1986 Tax Act. James Sensenbrenner, Jr. (R-WI), introduced a billSenator Moynihan introduced S.1879 at the same with an immediate effective date prohibiting thetime he introduced S.1880 to return 501(c)(3) financing of recreational fitness centers by tax-ex-bonds to their pre-1986 tax status and eliminate empt hospitals (H.R.3801). The issuing com-the $150 million volume cap. S.1880 was offered munity is extremely concerned about the advent ofas an offset to pay for S.1879. a new era of retroactive effective dates.

I have worked with members of the state andlocal government community to urge that theChairmen of the Senate Finance Committee andHouse Ways and Means Committee issue astatement that their respective committees will notapprove legislation with retroactive effective dates.We have met with the staffs of the Finance Com-mittee and Ways and Means Committee and withSenator Moynihan's staff to point out the problemswith retroactive effective dates in the municipalbond area and the substantive problems with thislegislation. If you would like copies of thislegislation, please contact the Washington Office.If you are in the process or planning to financefacilities at which professional sports exhibitions,games or training will occur, please get in touchwith me so that we can identify the breath of theproblems created by this legislation. It should benoted that Senator Moynihan announced, in hisstatement regarding the transition rule, that heintended to re-introduce the bill with the sameeffective date next year so that the legislation willnot die at the end of this session as a matter ofdisclosure. In our conversations with a member ofthe Senator's staff, he explained that comment wasmade to give bond counsel comfort that thetransition language would be included, but whenpressed, would not back away from inclusion ofthe June 14 effective date.

Members of public interest groups havewritten to the Chairman of the Ways and MeansCommittee, Rep. Bill Archer (D-TX), and to theChairman of the Senate Finance Committee,William V. Roth, Jr. (R-DEL), urging theiradoption of a statement on retroactive effectivedates. Speaker Newt Gingrich has been quoted assaying he opposes the bill and issuers havecontacted the Speaker to urge his involvement in

SLGS

On July 24, the Treasury Departmentannounced its proposed revised SLGS program.The Treasury Department worked closely with thestate and local government community receivingcomments and input in the first major revisions ofthe program since its creation. The TreasuryDepartment is to be applauded for the wonderfulchanges that it has made in this program, offeringstate and local governments a legitimate alternativeto open market Treasury securities. After years ofcomplaints to the Treasury Department about theSLGS program, Treasury staff heard andunderstood our pleas and responded veryfavorably. NABL will be making some technicalcomments on the program.

Safe Drinking Water Act

The President signed the Safe Drinking WaterAct on August 6. It contains language creating astate-revolving loan fund with many new technicalissues to be addressed. Some states may be ableto immediately implement it through their existingClean Water Act programs, while others will needto authorize the program via new legislation. Wehave copies of the legislation and a memo done bythe Executive Director of the Council of Infra-structure Financing Authorities regarding thisprogram available through the Washington Office.

Congressional Budget Office Report:"Reducing the Deficit:

Spending and Revenue Options,"August, 1996

The following text was included in the above-titled report with many other options for reducingthe deficit. The other options mentioned affectingstate and local government bond-related issues


included eliminating state and local tax deduct- of funds shares the benefit with theibility, the low income housing tax credit, grants investor in tax-exempt bonds. In additionfor water infrastructure programs, aid to mass because tax-exempt financing is not atransit, airport grants, and educational programs. budget outlay, the Congress may notEliminating private activity bonds saves $8.3 routinely review it as part of the annualbillion from 1997-2002, while raising the cap and budget process.expanding it to include all private activity bondsraises $3 billion during that period.

Tax law permits state and local govern- beginning in 1968. During the 1980sments to issue bonds that are exempt from those restrictions included limiting thefederal taxation and thus bear lower volume of new issues of tax-exempt bondsinterest rates than taxable bonds. For the for some activities and eliminating ormost part, the bonds' proceeds have setting expiration dates on the use of tax-financed public investments such as exempt bonds for other facilities. Theschools, highways, and water and sewer Congress, however, frequently postponedsystems. Beginning in the 1960s, some of the expiration dates. In thehowever, state and local governments Omnibus Budget Reconciliation Act ofbegan to issue a growing dollar volume of 1993, the Congress permanently extendedtax-exempt bonds to finance quasi-public the use of mortgage bonds for single-facilities, such as ports and airports, and family (and some two-family) homes andprivate-sector projects, such as housing the use of small issues for manufacturingand shopping centers. Those bonds facilities and agricultural land and propertyeventually became known as "private- for first-time farmers.purpose" bonds because the beneficiariesof the tax-exempt borrowing were private,nongovernmental entities.

Private-purpose, tax-exempt bonds tive minimum tax and placed a singleinclude mortgage bonds for rental housing state-by-state limit on the volume of newand single-family (in some cases two- issues of exempt facility bonds, smallfamily) homes; bonds for exempt facilities, issues, student loan bonds, and housingsuch as airports, docks, wharves, mass and redevelopment bonds. Those statetransit, and solid waste disposal; small- limits on volume are the greater of $50 perissue bonds for manufacturing facilities resident or $150 million a year. Bonds forand agricultural land and property for first- publicly owned airports, ports, and solidtime farmers; student loan bonds, which waste disposal facilities and bonds forstate authorities issue to increase funds nonprofit 501(c)(3) organizationsavailable for guaranteed student loans; and (primarily hospitals and educationalbonds for non-profit institutions, such as institutions) are exempt from the limits onhospitals and universities. issues of new bonds. However, large

Although private-purpose bonds providesubsidy for activities that may meritfederal support, tax-exempt financing isnot the most efficient way to provideassistance. With a direct subsidy, thebenefit would go entirely to the borrower. If the Congress eliminated tax exemptionWith tax-exempt financing, the borrower for all new issues of private-purpose

The Congress has placed restrictions ontax-exempt financing several times,

The Tax Reform Act of 1986 includedinterest earned on newly issued private-purpose bonds in the base for the alterna-

private universities and certain othernonprofit institutions may not issue tax-exempt bonds if they already have morethan $150 million in tax-exempt debt out-standing.


bonds, the gain in revenue would be about $8billion in 1997 through 2002. That amountassumes that at least some construction of airportsand sewage and solid waste facilities would qualifyfor tax-exempt financing because they aregovernmental in nature. Eliminating the taxexemption would eventually raise the cost of theservices provided by nonprofit hospitals and otherfacilities that currently qualify for tax-exemptfinancing, but it would also result in more efficientallocation of resources.

Including all bonds for private nonprofitand quasi-public facilities under a singlestate limit on volume -- while raising thelimits beginning in 1997 to, say, $75 percapita or $200 million a year -- wouldincrease revenues by $3 billion in 1997through 2002. Those changes would curbthe grown of all private-purpose bondswithout sharply reducing their use. Thecurb would primarily affect bond issuesfor nonprofit hospitals, which are notincluded in the current cap. The proposalwould also apply to bonds for airportfacilities, such as departure gates, that arefor the exclusive private use of airlinesunder long-term leases, but wouldcontinue to allow unlimited tax-exemptfinancing of public airport facilities, suchas runways and control towers.

September promises to be a very active month,as Congress returns to conclude its agenda prior toan expected early October recess. There are manyhot topics to discuss at the Workshop this year.Please don't hesitate to catch me in Chicago if youneed to talk about these issues. Otherwise, staytuned for more news from the Nation's Capitol . ..

Amy K. Dunbar

Director of Governmental AffairsAugust 9, 1996

NABL AT A GLANCE

June 18: Director of Governmental AffairsAmy Dunbar briefs South Africandelegation of local officials on tax-exempt bond financing.

June 24: Director of Governmental AffairsDunbar meets with representa-tives of issuers and the PublicSecurities Association on S.1880,the Moynihan bill eliminatingstadium bond financings.

June 28: Director of Governmental AffairsDunbar meets with representa-tives of issuers and SenateFinance Committee staff andHouse Ways and Means Com-mittee staff regarding the retro-active effective date of S.1880.

July 9: Director of Governmental AffairsDunbar briefs another South Africandelegation of local officials on tax-exempt financing.

July 10: Arbitrage and Rebate CommitteeChair David Walton hosts aconference call on the ProposedFair Market Value Regulations inpreparation for drafting commentsthereon.

July 11: Director of Governmental AffairsDunbar meets with representa-tives of issuers and SenatorMoynihan's staff and House Waysand Means Committee Minoritystaff on the retroactive effectivedate of S.1880.

July 18-19: Board of Directors Meeting, Van-couver.

July 23: Conference call regardingRevenue Procedure 96-41 withTax Legislative Counsel MichaelThomson, Deputy Tax Legislative


Counsel Buff Miller, and members of the Arbi-trage and Rebate Committee.

July 24: President William McBride ad-dresses Treasury Secretary Rubinand the Public Finance Network atthe National League of Citiesregarding the Secretary's an-nouncement of the Proposed Stateand Local Government Series(SLGS) program revisions.

July 29: The Washington Office moves to1900 K Street, N.W.

August 6: Director of Governmental AffairsDunbar meets with representa-tives of issuers and New YorkGovernor Pataki's staff regardingS.1880.

August 13: Nominating Committee meeting,Hyatt Regency, O'Hare Airport.

NABL COMMITTEE MEETINGSAT BOND ATTORNEYS' WORKSHOP

Five NABL committees meet at 8:00 a.m.Friday morning, September 20, prior to the firstsession during the Bond Attorneys' Workshop.They are:

Committee Room Arbitrage and Rebate Denver General Tax Matters Kansas City Opinions Salon A Professional Responsibility Salon B Securities Law and Disclosure Salon C

Please be sure to attend if you are interested inparticipating in the activities of one of thesecommittees during the coming year or haveparticular concerns you are interested in sharingwith committee participants working on the issues.A schedule of the meeting locations will also beposted on the bulletin board at the registrationdesk.

ACTIONS BY THEBOARD OF DIRECTORSON JULY 18 AND 19, 1996

The Board of Directors met on July 18 and 19,1996, at the Four Seasons Hotel, Vancouver,British Columbia. President William H. McBridepresided. Also present were: Julianna Ebert,President-Elect; William H. Conner, Treasurer;Susan Weeks, Secretary; Directors Jeannette M.Bond, Robert W. Buck, David A. Caprera, JohnM. Gardner, Steve A. Matthews, Floyd C. NewtonIII, and Howard Zucker; Andrew R. Kintzinger,Immediate Past President; Patricia F. Appelhans,Executive Director; Amy K. Dunbar, Director ofGovernmental Affairs; and Michael A. Budin,Chair of the Committee on Opinions.

Minutes

The Board approved the minutes of its meetingof May 2 and 3, 1996, as revised.

Committee on Opinions

President McBride welcomed OpinionsCommittee Chair Michael A. Budin, of Wolf,Block, Schorr and Solis-Cohen, and asked that hegive the Board a brief history of the Committee'sactivities in revising the model opinions. Mr.Budin advised the Board that the model opinionswere originally prepared in 1982 and 1983 andfirst revised in 1987 by the Committee, anddescribed the Committee's efforts to update andrevise them to reflect current practice. PresidentMcBride advised Mr. Budin that it is the Board'sdesire that the model bond opinion report reflectthe guidance and insights contained in the 1995edition of The Function and ProfessionalResponsibilities of Bond Counsel with regard tothe responsibilities of bond lawyers in renderingbond opinions. At Director Zucker's request, Mr.Budin then led the Board in a page-by-pagediscussion of the model bond opinion report inwhich a number of suggestions were made.

At the conclusion of the discussion, Boardmembers expressed their appreciation to Mr.


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Budin and the Committee. Mr. Budin agreed topresent the Board's comments to the Committeewith a view to circulating a revised draft of themodel bond opinion report for review by the Boardat its November meeting.

By-Laws

President McBride called on Director Buck toupdate the Board on the By-Laws revision project.

Director Buck confirmed that termination ofregular membership is not explicitly grounds forremoval of a director under Illinois law butspeculated that death probably is. President-


Elect Ebert characterized the discussion as "Dead exceeding both budgeted projections and 1995Man Walking." After debate, the Board concurredwith the recommendation of the Ad Hoc By-LawsRevision Committee that the amended and restatedBy-Laws provide that a directorship is terminatedin the manner provided by Illinois law.

President McBride then engaged the Board ina discussion of the procedure for approval of theamended and restated By-Laws by themembership of NABL and called for a vote on theamended and restated By-Laws with technicalcorrections. Upon motion of President-ElectEbert, seconded by Director Newton, the Boardapproved the amended and restated By-Laws to beeffective as of September 19, 1996, subject to theirapproval by a vote of the members at the annualmeeting on September 18, 1996, with theunderstanding that the membership vote on theamended and restated By-Laws will take placeprior to the election of the officers and directors,and that the election of officers and directors willbe conducted in accordance with the provisions ofboth the existing By-Laws and amended andrestated By-Laws to the extent possible.

It was the consensus of the Board thatmembers should receive both a clean copy of theamended and restated By-Laws as well as ablacklined draft showing revisions to the currentBy-Laws. The Board concluded its action on theamended and restated By-Laws by adopting aresolution, upon motion of Secretary Weeks,seconded by Director Gardner, designating the21st Century Edition of Robert's Rules of Orderedited by the Princeton Language Institute (1995)as the appropriate edition to govern the conduct ofmeetings of members and directors.

Report of the Treasurer

President McBride called on Treasurer Connerto give his financial report.

In summarizing the Association's revenues asof June 30, 1996, Treasurer Conner observed thatmembership dues exceed budget projections by9% while seminar results are mixed (withFundamentals and Tax Seminar revenues

revenues, while Washington Seminar revenueswere below budget). Treasurer Conner alsopointed out that book sales are lagging behind1995 sales despite numerous member and non-member promotional mailings, but that sales of theSection 15c2-12 Handbook and Blue SkyRegulation of Municipal Securities have beenrobust.

On the expense side, Treasurer Connerreported that overall expenses as of June 30, 1996,approximate the budget projection with increasesin certain expense categories such as printing andmailing being offset by decreases in others such asthe National Office move, Bond Attorneys' Work-shop book printing, director and officer expensesand committee expenses. Treasurer Connerpredicted that if Bond Attorneys' Workshoprevenues come in at budget, the year-end deficit ofthe Association will be approximately $45,000, orone-half of the budgeted deficit. It was thereuponmoved by Treasurer Conner, seconded by DirectorMatthews and approved that 1997 membershipdues be set at 1996 levels.

Model Engagement Letters

President McBride welcomed Roy J. Koegen,of Perkins Coie, Vice-Chair of the Committee onProfessional Responsibility, who gave a briefhistory of the Committee's work in revising themodel engagement letters, first published in 1988,to reflect current practice and the increased focuson the attorney-client relationship with respect tobond lawyers.

President McBride expressed the sentiment ofthe Board that the annotations to the form ofengagement letter should be greatly expanded toinclude the reasoning behind the text of theengagement letter and should cite relevantauthority, including cases, model rules ofprofessional responsibility and relevant conceptscontained in The Function and Profes


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sional Responsibilities of Bond Counsel. OtherBoard members provided specific suggestions forthe Committee's consideration, with particularreference to post-1988 developments.

Following the Board's discussion of the draftmodel engagement letter report, Mr. Koegenpromised to submit a re-draft of the modelengagement letter report to the Committee in timeto discuss the revisions at a Committee meeting tobe held in conjunction with the Bond Attorneys'Workshop and to then submit a new draftreflecting Committee input for consideration by theBoard at its November meeting. As Mr. Koegendeparted, Board members expressed theirappreciation to him and to the Committee for their

efforts in advancing theproject.

Orange County

Director Zucker voiced hisconcern over the increasing usein bond counsel contracts andin RFPs of provisions forlawyer indemnification ofclients similar to that cited inthe Orange County pleadings.He observed that suchindemnification provisionsarise from procurement codesof public bodies, are notappropriate to the lawyer-clientrelationship and may createcauses of action against bondcounsel that are premised onneither negligence nor mal-practice and that therefore theyare not covered by a firm'smalpractice insurance.Director Matthews suggestedthat such indemnificationcovenants might violate theModel Rules, and PresidentMcBride observed that alawyer who indemnifies hisclient ceases to have a lawyer-client relationship and becomes

instead an insuror or agent of the issuer. DirectorZucker urged the Board to consider the bestapproach to educate the membership on thisproblem and it was agreed that the topic ofindemnification should be covered in thecommentary to the model engagement letters.

Committee Reports

President McBride then called for Committeereports by Board members.

Securities Law and Disclosure - DirectorNewton reported that the primary activity of theSEC Enforcement Subcommittee continues to becompiling materials on SEC enforcement actions.Director of Governmental Affairs Dunbar advisedthe Board that the Bondholder Notification Sub-


committee chaired by Monty G. Humble is still Fundamentals Seminar attempting to develop an awareness by the market Chair Lauren McNulty Mackthat a problem communicating with bondholders in Vice-Chair Eric E. Balloubook-entry-only issues does in fact exist. She alsoindicated that this Subcommittee will probably beasked to respond to a proposal that officialstatements be published on the Internet.

Nominating - President McBride remindedBoard members that the 1996 NominatingCommittee will meet in Chicago on August 13,1996. He also noted that he had received noresponses to a request for Friel Medal nominationsin the June 1 issue of The Quarterly Newsletter.It was the consensus of the Board that the Asso-ciation not award the Friel Medal in 1996.

Bond Attorneys' Workshop - Director Buckreported that Jim Morris, a political impressionistand satirist, will be the luncheon speaker at the1996 Workshop. Immediate Past PresidentKintzinger mentioned that ALAS has scheduled ameeting at Northwestern University on theWednesday morning of the Workshop to reviewbond counsel practice.

Arbitrage and Rebate - Secretary Weeksadvised the Board that the Committee sent afollow-up letter to the Bureau of Public Debtendorsing the proposals in the SLGS AdvanceNotice and making a number of technicalcomments.

Education - Director Matthews informed theBoard that the following are the recommendationsof Charles S. Henck, of Ballard Spahr Andrews &Ingersoll, Chair of the Committee on Education,for the Chairs and Vice-Chairs of the Association's1997 seminars:

Tax Seminar Chair John J. Cross, III Vice-Chair

Washington Seminar Chair J. Douglas Rollow Vice-Chair Mitchell H. Rapaport

The nominee for Vice-Chair of the Tax Semi-nar will be relayed by Mr. Henck to the ExecutiveCommittee in the near future. Director Matthewsalso described Mr. Henck's proposal that theCommittee on Education be designated a standingcommittee consisting of the Chair and Vice-Chairof the Committee, together with that year's seminarChairs and Vice-Chairs, since this is how theCommittee in fact functions. The Board concurredwith this recommendation, agreeing that volunteersfor the Committee could best serve NABL byparticipating as faculty or panelists at seminars orworking on substantive committee reports. Uponmotion of Treasurer Conner, seconded by DirectorMatthews, the Board unanimously approved theCommittee's recommendations for Chairs andVice-Chairs of the 1997 Fundamentals andWashington Seminars, and for the Chair of the1997 Tax Seminar, authorized the ExecutiveCommittee to approve the Vice-Chair of the 1997Tax Seminar, and approved the reorganization ofthe Committee on Education as a standing commit-tee consisting of the Chair and Vice-Chair of theCommittee on Education, together with the Chairsand Vice-Chairs of the current year's seminars.

General Tax Matters - Director Capreraadvised the Board that Committee Chair John J.Cross, III, is considering whether to send a letter tothe IRS with respect to the treatment of qualifiedtender bonds and certain technical matters needingadditional attention under the final reissuanceregulations. Director Caprera praised Mr. Cross'work on behalf of NABL during the past year,noting that Mr. Cross shouldered most of theresponsibility for the Committee's projects.Director Buck suggested to President-Elect Ebertthat she include as a 1997 Board project a reviewof the Guidelines for Committee Operations.


Legal Assistants - Treasurer Conner reported Bond Attorneys' Workshop - As of July 18,that Ann L. Atkinson has submitted to the Board 1996, there were 605 registrants for the Bondan outline of the Legal Assistant's Handbook and Attorneys' Workshop, an increase of 128relayed Honorary Director Kiel's comment that the registrants from the same time in 1995. Exhibitorsoutline appears to assume that there is only one will contribute a total of $10,000 in fees for exhibittype of bond structure. Several Board members space at the Workshop. The Workshop book willsaid that they had not seen the Statement on be given to the printer during the week of July 22.Utilization of Public Finance Legal Assistants orthe NABL Job Description for a Public FinanceLegal Assistant referenced in the outline, andBoard members requested Treasurer Conner toarrange for the distribution of these items to theBoard for review at an upcoming meeting.

The Quarterly Newsletter - Director Gardnerreported that Honorary Director Kiel is generallypleased with the new printer of The QuarterlyNewsletter and is working with the printer toreduce the turnaround time after receipt of camera-ready copy.

Section 103 Editorial Board - Director Bondreferenced the report of Section 103 EditorialBoard Chair Jeffrey M. McHugh on the activitiesof this Committee, noting that a new edition of theDeskbook is expected to be included in Aspen'sJuly mailing of updates. Secretary Weeksrequested that Executive Director Appelhansincrease her efforts to sell NABL's existing stockof Deskbooks and devise a plan to market the newedition. Director Bond also described hercontinuing efforts to obtain an accounting ofAspen's royalty payments.

Form Indenture - President McBrideannounced his intention to resume active par-ticipation in the Form Indenture project oncePresident-Elect Ebert assumes the presidency.

Report of the Executive Director

Executive Director Appelhans gave her report,including the following:

Membership - As of July 18, 1996, theAssociation has 2,553 regular members, 125associate members, 174 legal assistant membersand 7 retired members, for a total of 2,859, anincrease of 24 members from the previous month.

E-mail - The National Office now has two e-mail addresses, one of which accesses ExecutiveDirector Appelhans directly.

Tax Returns - The Association's 1995 taxreturns have been completed by the accountantsand signed by Treasurer Conner. PresidentMcBride noted that no lobbying tax is owed for theyear 1995.

Report of Director of Governmental Affairs

Director of Governmental Affairs Dunbar gaveher report, including the following:

SLGS Regulations - On Wednesday, July 24,1996, the revisions to the SLGS regulations will bepublicized by the Secretary of the Treasury at apress conference with municipal finance groups,including NABL and issuer groups.

Offices - Ms. Dunbar will move when Hunton& Williams moves to its new Washington officeson July 26, 1996. The NABL telephone and e-mail numbers will not change.

Stadium Bonds - Ms. Dunbar described herefforts to coordinate opposition to the retroactivedate in Senator Moynihan's bill curtailing taxexempt financing of stadia.

Fair Market Value Regulations - Committeeon Arbitrage and Rebate Chair David A. Waltonheld a conference call with NABL members whohad participated in the fair market value commentproject last year. It was the consensus of the groupthat the recently released fair market valueregulations merit substantial comment and willrequire a line-by-line analysis.

TEFRA Requirements - Committee on GeneralTax Matters Chair John J. Cross, III, plans to senda letter to the IRS commenting on the recent


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

private letter ruling concerning TEFRArequirements in blind pools.

Pay-to-Play - The Bar Association of the Cityof New York has requested that the ABA considerat its upcoming annual meeting the adoption of apay-to-play policy similar to that endorsed by theunderwriting community.

NABL Home Page - Accessing and commu-nicating through the NABL home page continuesto be a difficult process. Director Capreraattributed one of the difficulties to a change insoftware by NABL's server necessitating programchanges by NABL's Website consultant.

Bankruptcy - In response to a request byUrsula H. Hyman, a NABL member on theindependent Municipal Bankruptcy Task Force, forNABL's endorsement of the Task Force's proposedchanges to the Bankruptcy Code, PresidentMcBride appointed a study committee comprisedof Rick L. Frimmer, James E. Spiotto and Peter C.Kornman to analyze the proposed changes. Mr.Kornman indicated in a letter to President McBridedated July 11, 1996, that comprehensive legislativeamendments such as those proposed are notneeded at this time, and that instead considerationshould be given to limiting a public body's accessto Chapter 9.

Susan WeeksSecretary

DEAN POPE ELECTED TOMUNICIPAL SECURITIESRULEMAKING BOARD

Robert Dean Pope, a former President of theAssociation whose nomination was proposed bythe Association, was elected to a three-year term,beginning October 1, as one of five "public" mem-bers of the fifteen-member Municipal SecuritiesRulemaking Board. Mr. Pope, who in 1994received the Association's Friel Medal fordistinguished service in public finance, is a partnerwith Hunton & Williams, Richmond, Virginia. Heserved on the Association's Board of Directorsfrom 1982 to 1989, was successively Treasurer,Secretary, President-Elect and President, and haschaired or vice-chaired five Association com-mittees.

Mr. Pope is a member of the AnthonyCommission on Public Finance, and was one of theprincipal draftsmen of its report entitledPreserving the Federal-State-Local Partnership:The Role of Tax-Exempt Financing. He is also anAdvisory Member of the Committee onGovernmental Debt and Fiscal Policy of theGovernment Finance Officers Association. Hereceived his A.B. magna cum laude in historyfrom Princeton University in 1967, where he waselected to Phi Beta Kappa; a Diploma inHistorical Studies from Cambridge University in1971; his J.D. and M.Phil. in history from Yale in1972; and his Ph.D. in history from Yale in 1976.

Mr. Pope has spoken often on municipalmarket topics, having participated as speaker,panelist or moderator in forty-eight venues justsince 1988. He was a contributing author to thesecond edition of Disclosure Roles of Counsel inState and Local Government Securities Offerings(1994), and has been a member of the SteeringCommittee of the Bond Attorneys' Workshop since1993. He is also the author of at least seventy-fivebook reviews since 1987.


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Mr. Pope is only the third bond lawyer to serveon the MSRB. Roswell C. Dikeman, also arecipient (posthumously) of the Friel Medal, wasthe Board's first chairman. Donald J. Robinsonserved on the Board for eighteen months, filling anincomplete term, in the early eighties. BothMessrs. Pope and Robinson were the subjects ofinterviews in Bond Lawyers and Bond Law: AnOral History, published by the Association in1993.

Also elected to the MSRB were LynnHampton, Chief Financial Officer of the Met-ropolitan Washington Airports Authority; RichardKolman, Vice President and Manager of Mu-nicipal Underwriting, Goldman, Sachs & Co.;Damon P. Smith III, Managing Director of theMunicipal Bond Department, J. P. Morgan & Co.;and Scott C. Sollers, a principal with Stone &Youngberg LLC.

The Association also proposed thenominations of former Presidents SharonStanton White and Andrew R. Kintzingerand former Treasurer Ruth T. West. Theirwillingness to serve is greatly appreciatedby the Board of Directors. Any of themwould have been an excellent addition tothe MSRB.

THE TWENTY-FIRST BOND ATTORNEYS' WORKSHOP

The approach of autumn, the short-ening days and the return of children toschool are all signs that the annualmigration of bond lawyers to Chicago isabout to begin. From Wednesday,September 18, to Friday, September 20,one thousand of the nation's finest bondattorneys will gather for the twenty-firstBond Attorneys' Workshop.

The Workshop has long been consid-ered to be one of the best continuing legaleducation events of any kind, in terms ofboth content and value, and is the crown

jewel of NABL's superb educational program.This year's Workshop is again being held at theDowntown Marriott in the Windy City, and theformat will be the same as it has been in the past.

The many recent developments in the lawshould make this year's Workshop especiallyinteresting and informative. In the tax area, severalnew proposed or final regulations have recentlybeen issued, covering reissuance, SLGS, the fairmarket value of Treasuries, contingent interest,amortization of bond premium and enterprisezones. In addition, the just issued RevenueProcedure on yield burning will be sure to generatelively discussion. Similarly, important devel-opments in the securities law field, particularlythose arising out of the Orange County and Thorn,Alvis cases, will be hot topics.


The Steering Committee of the Workshop has of credit enhancers, State legislative changes andbeen working diligently for several months now to agreements with affected parties, has now returnedmake sure that the written materials and the to the market.presentations will be timely and of the highestquality. In addition to panels on many of thetraditional topics, several new panels have beenadded, including Stadium Financings, SECEnforcement, and two new ethics panels.

Registration for this year's Workshop isrunning well ahead of prior years. If you can breakaway from your busy schedule, and if Workshopregistration has not reached capacity, you shouldjoin your colleagues in Chicago. Without doubt,you'll find it worthwhile.

Robert W. Buck

CHAPTER 9 — MUNICIPAL BANKRUPTCY

Editor's Note: The following paper was preparedat the request of Rep. Richard H. Baker (R-LA) bya group coordinated by James E. Spiotto ofChapman and Cutler, Chicago.

In July, 1995, in response to the OrangeCounty, California, Chapter 9 bankruptcy filing,the Committee on Banking and Financial Servicesof the House of Representatives (the "HouseCommittee") held hearings and took testimony onthe subject of municipal bankruptcy. At the timeof those hearings, Orange County had not yet fileda plan. Several issues in the Orange County casehad not yet been decided. The major source ofmarket consternation at that time appeared to bethe speed with which the County had fallen fromthe perception of being a creditworthy borrower tobeing a "debtor" in a Chapter 9 proceeding.Market distress existed because of the relativeinfrequency and consequent lack of experiencewith a large municipal debtor in a Chapter 9context. The plan of adjustment of the County hasnow been approved, and the County, with the help GENERAL COMMENTS

Following its hearings, Staff for the HouseCommittee met and consulted with variouslawyers and municipal market participants todetermine if any helpful amendments to Chapter 9could be proposed.

It is entirely possible that no amendments tothe Code are necessary in light of the OrangeCounty bankruptcy. It is also possible to use the1

Orange County bankruptcy as an opportunity formaking major changes and clarifications to theCode, and even to rearrange priorities amonggeneral unsecured creditors of municipalities.

The amendment which is proposed here is aminor change and much more modest than theTask Force proposal which appeared in the June 1,1996, edition of The Quarterly Newsletter. Theproposal herein set forth is not intended to be a"competing proposal" with that suggested by thetask force. Unlike that proposal, this does not seekto change the treatment in Chapter 9 of the priorityof general obligation bond debt over otherunsecured claims against the municipality; itleaves the concept of "special revenues" alone andintact, on the assumption that it is currently suffi-cient to deal with problems of conduit bonds; andit is intended to avoid the creation of any potentialfor new constitutional problems involvingfederalism and its application to municipal defaultsor the powers granted to municipalities by theirState creators. It is put forth only for the proposi-tion that if either the bond market, or otherunsecured creditors of municipalities (such asother municipal entities, municipal employees, andmunicipal suppliers) would like more notice, morefinancial information and more State involvementprior to the actual filing of a Chapter 9 proceeding,then the proposed amendment may be worthy ofconsideration.

A POSSIBLE AMENDMENT FOR

DISCUSSION


The suggestion was made in the testimony of a bankruptcy filing will be diminished. If thetaken before the House Committee that the municipality has to get State approval first, thenmunicipal default process could benefit if the State the State has the opportunity to condition thatin which a municipal debtor is located was approval on the creation and dissemination ofinvolved in the initial Chapter 9 process to assure financial information which would serve to slowthat the State -- which has the legal authority to down the process, calm the markets and help tosupervise, control and authorize its constituent avoid surprises. An additional aspect is to invitepolitical subdivisions -- approves of the proposed the States to consider municipal bankruptcyactions by the municipality seeking bankruptcy generally, and whether such proceedings areprotection. The suggestion contained herein deemed by the State to be appropriate. Thisfocuses on this single concept of involvement of concept is already contained in the priorthe State in a municipal bankruptcy process before amendments to the Code. Any new amendment tothe petition can be filed. the Code may further suggest to the States that

Municipal entities are increasingly linked toother governmental entities within the same State.As has been seen in Orange County, this linkagecan be a financial relationship based on contract orfiduciary trust principles. The linkage can alsoexist on a partnership or joint venture basis. Theintent of the proposed amendment is to increasethe involvement of the State in which the troubledmunicipality is located, to attempt to force thedissemination of more financial information aboutthe municipality before the Chapter 9 is filed, andto thereby try to limit the availability of Chapter 9to those situations that are true financial disasters.A distinction is made in the proposed amendmentbetween "Major Municipal Issuers," which areentities with substantial outstanding debt, and The proposed amendment is set forth below;other municipalities. The process is intended to be additions to the existing provisions of the Code aresomewhat more onerous for Major Municipal underlined; deletions are struck through.Issuers in order to assure that a Chapter 9proceeding is really appropriate.

The general approach is that very little, if any,change is necessary. And, any change should notattempt either to create unnecessary legislativeproblems for the various states, or to create thepotential for unnecessary political confrontation be-tween State officials and the local government inthe event that a municipality truly needs to file forChapter 9 relief. "Supervising State Authority" means the

There are several aspects to the presentedamendment. First, the thought is that by requiringsome formal State approval as a prerequisite to avalid filing, the ability of a troubled municipality tocreate surprise and quickly flee into the protection

they adopt new and specific statutes governingmunicipal defaults, if they determine that theirmunicipalities should have the benefits of Chapter9; the hope is that these new State statutes wouldgo beyond mere authorization to file a Chapter 9proceeding, and would additionally contain someState-sponsored workout processes, such as thosefound in Pennsylvania, New York, Ohio and NewJersey. Not all States do or will permit their2

municipalities to use Chapter 9. At least one State(Georgia ) prohibits any of its municipalities from3

access to Chapter 9.

POSSIBLE AMENDMENT TO THE

BANKRUPTCY CODE

ADD TO DEFINITIONS IN §101 OF THE CODE:

"Major Municipal Issuer" means a mu-nicipality which has more than $25,000,0004

of outstanding bonds, notes, securities orother obligations for borrowed money orcapital leases or installment purchaseagreements, which are payable from sourcesother than special revenues.5

governor of a State or an officer of thegovernment of a State designated by thegovernor of the State to act hereunder, or anyperson or entity so designated by State law.6


AMEND §109 OF THE CODE TO READ AS (6) not less than 14 days, and not moreFOLLOWS: than 60 days, before filing a petition

§109(c) An entity may be a debtorunder Chapter 9 of this title if and only ifsuch entity —

(1) is a municipality;

(2) is specifically authorized, in itscapacity as a municipality or byname, to be a debtor under suchchapter by State law, or by agovernmental officer or organiza-tion empowered by State law, toauthorize such entity to be a debtorunder such chapter;

(3) is insolvent;

(4) desires to effect a plan to adjustsuch debts; and

(5) (A) has obtained the agreement ofcreditors holding at least amajority in amount of theclaims of each class that suchentity intends to impair under aplan in a case under suchchapter;

(B) has negotiated in good faithwith creditors and has failed toobtain the agreement ofcreditors holding at least amajority in amount of theclaims of each class that suchentity intends to impair under aplan in a case under suchchapter;

(C) is unable to negotiate withcreditors because such nego-tiation is impracticable; or

(D) reasonably believes that acreditor may attempt to obtaina transfer that is unavoidableunder Section 547 of this title;and

under such chapter, has given noticeto the Supervising State Authoritythat the municipality intends to filethe petition; and7

(7) if the municipality is a MajorMunicipal Issuer, has obtained notmore than 30 days before filing thepetition, from the Supervising StateAuthority, written approval to filethe petition.8

COMMENTS ON THE SUGGESTED

AMENDMENT

The amendment is primarily designed to givesome short prior notice of any intended Chapter 9filing to the state and to the public, including othermunicipalities, the bond market and otherinterested creditors.

There are three concepts present in theamendment which involve the municipality withthe State: "authorization," "notice to the State ofintent to file" and "approval." There are two typesof "municipalities" contemplated in the amend-ment: "Major Municipal Issuers" and others.Major Municipal Issuers are defined with respectto the outstanding amount of their securities.

All municipalities must have specific"authorization" to file, which they obtain eitherfrom a State statute or from a current act of asupervising State entity. In any event, as undercurrent law, that "authorization" ultimately mustderive from a "specific State statute." This concept is already contained in§109 as a result of its most recent amendment.Many states have not specifically responded to thismost recent change in the Code.

All municipalities must also give notice to theState of their intent to file. (This new requirementappears in new §109(c)(6) and is part of the"approval" process for non-Major MunicipalIssuers.) Many municipalities are financiallyrelated to other municipalities: the giving of noticeto the State is intended to alert these other


municipalities, as well as the bond market and concept of population. However this conceptother creditors of the troubled municipality. It may is defined, most issuers will clearly fall on onebe expected that other municipalities and creditors side or the other, while there will always beof the proposed debtor will seek to have the State some municipalities that are questionable.become more actively involved with the financiallydistressed municipality as a precondition to anyactual Chapter 9 filing.

The "approval" comes from the same proceeding, and the bond market itself shouldsupervising state entity. Only Major Municipal not need the cooling off period provided byIssuers must obtain the approval. Other mu- this amendment.nicipalities, assuming that they have been duly"authorized" and have "given notice" are onlyrequired to "ask" for the "approval" by "giving theprior notice."

It is contemplated that the plan would not be approve such municipality's actions pursuantrequired to be filed with the petition, and that to section 109(c) to be a debtor under chaptermodifications of the plan would not require State 9 hereof, or if no such person or entity shallapproval. have been so designated by state law, then the

The State does not get involved in either thecontents of the municipality's plan or the legality ofthe proposed plan under applicable State law. Nordoes the State get involved in any modifications of All municipalities have to give prior notice tothe municipality's plan. the Supervising State Authority, and wait at

It has been suggested that the Code might1

benefit from a clarification that §555, §556,§559 and §560 relating to liquidation ofsecurities contracts, commodities contracts,repurchase agreements and swaps, and anysimilar provisions, are intended to be incor-porated into Chapter 9. Such amendmentscould be accomplished by simply adding suchsections to the list of sections which areincorporated into Chapter 9 in Section 901.

See Ohio Rev. Code Ann. §118.01 et seq.;2

53 P.S. §12720.211; N.J.S.A. 52:27-1 etseq.; and NY, Pub. Auth. Law §§3030, etseq.

Ga. Code Ann. §§36-80-5.3

There is no magic to the $25 million of4

indebtedness. The figure could be a largernumber. The definition of Major MunicipalIssuer could also be written to include the

If a large municipality had only special5

revenue obligations, then those obligationsshould not be impaired by a Chapter 9

ALTERNATIVE: "Supervising State6

Authority" means that person or entitydesignated by state law to review the financialcondition of a municipality and to authorize or

Governor of the state in which the mu-nicipality is located, or such Governor'sdesignee.

7

least 14 days. Only Major Municipal Issuershave to actually get a response. Note thatunder the definition of Supervising StateAuthority, no new state legislation is requiredon this point, because here (as opposed to§109(c)(2)), the Governor or a similar officercan act if there is no state legislation.

The giving of the notice of intent to file maycreate "events of default" for the troubledmunicipality under some existing documenta-tion, and under agreements drafted after thisproposed change in law. The use of "intends"is designed to describe a statement which isnot an admission of insolvency, but futuredraftsmen will still be able to createcontractual defaults.

ALTERNATIVE: (7) if the municipality is a8

Major Municipal Issuer on the date that itfiles a petition under chapter 9, either it

(A) has obtained, not more than 30 daysbefore filing the petition, from the Super-


vising State Authority, written In a surprising flurry of activity in the pastapproval to file the petition, or quarter, the Treasury Department has issued six

(B) has obtained, within 60 days after thefiling of the petition, a court order, en-tered after a hearing held as soon aspossible, but in any event within 30 daysafter the filing of the petition and afternotice to the creditors of themunicipality, that such municipality isinsolvent, taking into account applicablelaw, and good faith, reasonable attemptsto increase taxes or revenues, to decreaseexpenditures, and to repay such debts, inwhole or in part, with the proceeds ofadditional securities issued by themunicipality. The municipality shallhave the burden of proof in establishingthe matters specified in this paragraph(7)(B).

This foregoing alternative (7)(B) contem-plates that a State statute does "specificallyauthorize" the filing in fulfillment of therequirement of subsection (c)(2), but thatthere is no "willing" Supervising StateAuthority to act with respect to the re-quirement of subsection (c)(7)(A). In suchinstance, the municipality, if it is a MajorMunicipal Issuer, can go through the hearingprocess which is intended to demonstrate tothe bankruptcy court (and to creditors) thatthe filing has been made in good faith. If themunicipality is not a Major Municipal Issuer,then it need only show compliance with anotice to the Supervising State Authorityunder (7)(A), bearing in mind that under(c)(2), it still must either be specificallyauthorized by State statute or must have actu-ally received approval from the SupervisingState Authority.

SHARED TAX OBSERVATIONS

sets of regulations relating (specifically orgenerally) to tax-exempt bonds; the InternalRevenue Service has issued a major revenueprocedure as well as its usual quantity of privateletter rulings; two immediately-effective bills havebeen introduced in Congress and, as well, Con-gress has enacted amendments to tax-exempt bondsections of the Internal Revenue Code; and theTax Court has issued a follow-up opinion in theColumbus case. This in turn has produced a levelof journalistic interest beyond The Bond Buyer andhas stimulated intra-firm tax activities beyond theirusual pace. At least we can be thankful (knock onwood) that the SEC has temporarily quieted itsSpring interest in tax-exemption questions.

Treasury Regulations.

Regulations relating to tax-exempt bonds thathave been released by the Treasury Departmentduring the past quarter are as follows:

Proposed regulations regarding entityclassification, PS 43-95, 1996-24 IRB 20, 61FR 21989 (May 13, 1996), hearing scheduledfor August 21, 1996, comments requested byAugust 12, 1996.

Final regulations regarding enterprise zonebonds, TD 8673, 1996-27 IRB 4, 61 FR27258 (May 31, 1996), generally effective 60days after May 31, 1996.

Final regulations regarding contingent debtinstruments, TD 8674, 1996-28 IRB 7, 61 FR30133 (June 14, 1996), effective June 14,1996, except for certain provisions effectiveAugust 13, 1996.

Final regulations regarding reissuance, TD8675, 1996-29 IRB 5, 61 FR 32926 (June 25,1996), effective September 24, 1996.

Proposed regulations regarding investmentin open market federal securities, FI 28-96,1996-31 IRB 33, 61 FR 33405 (June 27,1996), hearing scheduled for October 24,1996; comments requested by September 25,1996.


Proposed regulations regarding SLGS, An "eligible entity" is automatically classifiedFederal Register July 24, 1996, comments as a partnership if it has at least two members,requested by August 23, 1996 (no hearing unless it elects (i.e., "checks the box") to be ascheduled). corporation. (Also, an entity with only one owner

These regulations are described below in orderof issuance.

Entity Classification Proposed Regulations.These proposed regulations (sometimes referencedas the "Check-the-Box" regulations) primarilyamend regulations §§301.7701-1 through301.7701-3, are designed to simplify thedetermination of whether an organization is acorporation or partnership for federal income taxpurposes, and are relevant to tax-exempt bonds forthe purpose of determining whether a particularentity is a pass-through entity (such as a part-nership) as contrasted with an issuer of bonds forpurposes of tax-exempt interest. This questionarises, for example, in the case of certainfinancings involving certificates of participation orcustodial receipts.

The proposed regulations generally do notapply to grantor trusts (which continue to besubject, therefore, to the existing "Sears regu-lations" (§301.7701-4)) and so should not affectstandard certificate of participation financings.The proposed regulations do, however, greatlysimplify the identification of an entity as apartnership.

Under the structure of the proposed regula-tions, one first determines whether the organi-zational arrangement is a separate entity at all, asopposed to, for example, a security device. If theorganization is a separate entity and is not a trustfor income tax purposes or otherwise subject tospecial tax treatment (e.g., REMICs and REITs),then the entity is deemed to be a "business entity."Certain business entities are automaticallycorporations: entities organized under State law asState law corporations, banks, insurancecompanies and special entities specifically givencorporate status under the Internal Revenue Code,including publicly traded partnerships as well astaxable mortgage pools. The remaining businessentities are "eligible entities."

is disregarded unless it elects to be treated as acorporation.) Thus, the proposed regulationseliminate the onerous current requirement that anarrangement may be classified as a partnership(thereby enabling pass-through of tax-exemptinterest) only if it lacks two of the four char-acteristics of continuity of life, centralization ofmanagement, free transferability of interests andlimited liability (current regulations§§301.7701-2(a)(2) and (3)).

The proposed regulations would be effectiveupon publication of the final regulations in


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the Federal Register, but (in most cases) existing tangible and intangible property, source of grossclassifications would not be challenged. income from the active conduct of business and

Enterprise Zone Final Regulations. Thesefinal regulations relate to enterprise zone facilitybonds issued by State and local governments underInternal Revenue Code section 1394 and wereoriginally proposed as a part of the proposedprivate activity bond regulations.

The regulations focus primarily uponascertaining compliance. Helpfully, the com-pliance period is identified (being from the later of18 months after the issue date or 18 months afterthe financed property is placed in service to thelonger of the remaining period during which thezone is designated and the period that ends on theweighted average maturity date of the bonds,except that compliance is not required after thedate on which the last of the bonds of the issueceases to be outstanding).

Also, the method for measurement ofcompliance with requirements relating to locationof performance of employee services, location of

residence of employees is fixed (requiring annualcompliance, but permitting a five-year averaging);the method for measurement of the residentemployee requirement (any reasonable method,e.g., per employee or per employee actual workhours) is established; and the percentage for"substantially all" (as 85 percent rather than 90percent as originally proposed) is specified.

The regulations provide rules for treatment (aswithin compliance percentages) of employees thatmove (moving is disregarded if employeecontinues to perform services and principal userhires a zone resident for the next comparableposition) and of property that has been abandoned(use prior to a one-year vacancy period isdisregarded for determining original use). Theregulations also define the term "principal user"(an owner or, in the case of commercial real estate,a lessee) for purposes


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of the requirement that the principal user of bond definition of VRDI under present regulations.proceeds be an enterprise zone business andpermit businesses to treat zone activities as part ofa separately incorporated business if income andactivities are allocated reasonably.

The regulations are generally effective July 31, for tax-exempt debt instruments than for taxable1996, except that elective retroactive application in debt instruments.whole is permitted.

Contingent Debt Final Regulations. These premium bond (having a premium, generally, morefinal regulations relate to the treatment of than 15% of par), where principal payments arecontingent debt for purposes of the original issue not contingent and where the interest rate is eitherdiscount rules. Under present law (as you are (i) a "qualified floating rate" (or rates or combinedaware), original issue discount is the excess of the with a single fixed rate) or (ii) an "objective rate"stated redemption price at maturity over the issue or a fixed rate with a qualified inverse floating rate.price, and the term "stated redemption price at A "qualified floating rate" is one which varies withmaturity" means all payments on a debt instrument contemporaneous variations in the cost of newly(i.e., not simply those payable on the last due date) borrowed funds with permitted multiples of .65 toother than "qualified stated interest." Present 1.35, without caps, floors or governors unless theregulations specifically define "qualified stated same are not expected to affect yield. Aninterest" for purposes of variable rate debt "objective rate" (for tax-exempts) is limited toinstruments ("VRDIs"). On December 16, 1994, either a qualified inverse floating rate or a qualifiedthe IRS proposed original issue discount inflation rate; thus, for example, a rate based uponregulations designed primarily to deal with the the S&P 500 would not be a qualified floating ratedetermination of original issue discount in the or an objective rate.context of contingent payments debt instruments("CPDIs") that otherwise did not satisfy the A tax-exempt CPDI is a qualifying CPDI if it

The new final regulations distinguish (improp-erly, in the view of some) between tax-exemptdebt instruments and taxable debt instruments andcontain more restrictive definitions and provisions

In general, a VRDI is a bond that is not a


QualifiedTax-Exempt VRDI/CPDI

Comparable yield is based on a comparablefixed rate debt instrument of the issuer (e.g.,the yield on a synthetic fixed rate debt instru-ment that would apply if a hedge wasavailable, or the yield at which the issuerwould issue a fixed rate debt instrument withcomparable terms and conditions)

Daily interest and net positive adjustments aretreated as interest for purposes of Codesection 103

A net negative adjustment is treated as areduction of the amount that was otherwiseidentified as interest and, beyond this, is anondeductible, noncapitalizable loss, exceptthat for RICs, a net negative adjustmentexcess requires reduction of tax-exemptinterest on other issues held by RIC

Gain recognized on sale or exchange is treatedas a gain from the sale or exchange of property

Loss recognized on sale or exchange is treatedthe same as a net negative adjustment (seeabove) except to the extent of recovery ofadjusted basis plus allocable daily portion ofinterest

NonqualifiedTax-Exempt CPDI

Comparable yield is based on the tax-exempt"adjusted federal rate" (based on AA credit),and this presumption may be overcome onlyupon clear and convincing evidence

Daily interest is treated as interest forpurposes of Code section 103, but net positiveadjustment is treated as gain

A net negative adjustment is treated as a lossfrom sale of property

Same

Loss recognized on sale or exchange is treatedas a loss from the sale or exchange of property

is (i) an instrument that would be a VRDI but for The final regulations set forth specific rules forfailure to satisfy certain technical limits (such as computing original issue discount and generallythe limits on caps, floors and governors) or (ii) an determining the effect of a receipt or payment (i.e.,instrument that refunds a debt instrument issued as tax-exempt interest or not) on qualifying andprior to the final regulations that financed a project non-qualifying instruments. The basicand had interest determined on the basis of a per- computation procedure requires (i) determinationcentage of revenue or value or similar performance of comparable yield, (ii) establishment of ameasure. (How many bond counsel permitted this projected payment schedule, (iii) determination ofin the first place?) daily interest, and (iv) adjustment of the projected

schedule for actual receipts and payments. In thecontext of this procedure, different results followfrom identification of an instrument as a qualifyingVRDI or CPDI or as a nonqualifying CPDI. Theseare as follows:


The regulations also contain a broad anti-abuse (1) The alteration results in the substi-provision, as well as provisions describing tution, addition, or deletion of an obligor;"contingencies" as excluding remote and incidentalcontingencies and provisions for analyzing debtinstruments with alternative payment schedules.

The regulations are primarily pertinent to thosebond counsel providing advice regardingsecondary market transactions. They are nev-ertheless important to bond counsel advising onoriginal issuance, for (among other things) theyreinforce the concept that the bond counsel opinionmerely states that interest is tax-exempt and doesnot identify the amount of interest that is tax-exempt. The regulations are also notable for beingnon-section-103 regulations that identify what isinterest for purposes of section 103. Thisdivergence may have slipped by some of us in thepast.

Reissuance Final Regulations. Final reg-ulations relating to reissuance have been issuedunder Internal Revenue Code section 1001. Theseregulations are applicable to bonds issued afterSeptember 24, 1996, other than qualified tenderbonds. Qualified tender bonds presumablycontinue to be subject to Notice 88-130. (Note,however, that even under this Notice, certainchanges are deemed a reissuance bycross-reference to Code section 1001.) For themost part, these regulations are wonderfullydesigned to enable precise analysis of debtmodifications.

In general, under the regulations, a reissuancedoes not occur unless there is a "significantmodification." The alteration of a debt instrumentthat occurs by its terms is not a "modification"except in five limited cases. In those cases or inthe case of a modification of a debt instrumentother than by its terms, a modification is not"significant" (and so does not result in reissuance)unless it is economically significant (the "generalrule") or unless it is one of five specific types ofmodifications for which specific rules apply.

The five cases in which an alteration of a debtinstrument that occurs by its terms is a"modification" are, for the most part, fairly rare.These are as follows:

(2) The alteration results in a change inthe recourse or nonrecourse nature of theinstrument (all tax-exempt bonds are recourseexcept those payable from a conduit loan thatis itself nonrecourse, and except those whichhave been defeased);

(3) The alteration results in a non-debtinstrument or a property right (except for analteration that occurs pursuant to a holder'soption to convert the debt instrument to equityof the issuer);

(4) The alteration results from the exer-cise of an issuer's option that is not unilateral(so, if the alteration results from the exerciseof an issuer's option that is unilateral, it is nota modification and therefore is not areissuance, no matter how significant); and

(5) The alteration results from the exer-cise of a holder's option that either (a) is notunilateral or (b) results in a deferral or reduc-tion of any scheduled payment of principal orinterest (so, if the alteration results from theexercise of a holder's option that is unilateral,it is not a modification and therefore is not areissuance, unless it results in a deferral orreduction of a scheduled debt service paymentand, in that case, it is a reissuance only if it is"significant," as described below).

Once it is determined that a change of a debtinstrument is a "modification," then it is necessaryto determine whether the modification is"significant" in order to determine whether there isa reissuance. If the modification is not"significant," then it is not a reissuance. For fivespecific modifications, a specific rule applies indetermining whether the modification issignificant. In other cases, a modification issignificant under the general rule that amodification is significant if it is "economicallysignificant." The five specific rules, however,cover most requested changes. These are asfollows:


(1) Yield. If the modification results in a (4) Security. If the modification is ofyield change, then it is significant if the yield security or credit enhancement, then foron the modified debt instrument varies from recourse bonds, it is significant only if itthe yield on the unmodified instrument by results in a change in payment expectationsmore than the greater of 25 basis points or 5 (see above); and for nonrecourse bonds, it ispercent of the annual yield of the unmodified significant unless it is a substitution of fungibleinstrument. collateral, a substitution of a similar

(2) Payment Dates. If the modificationresults in a change in the timing of payments,then it is significant if it results in a materialdeferral of scheduled payments. As a safeharbor, a deferral is not material if the deferredpayments are unconditionally payable no laterthan the end of the period beginning on theoriginal due date of the first scheduled pay-ment that is deferred and ending on the datethat represents the lesser of 5 years thereafteror 50 percent of the original term.

(3) Obligor. If the modification results inthe substitution of a new obligor on anonrecourse bond (see above), then it is notsignificant; but on a recourse bond (i.e., mosttax-exempt bonds), it is significant with twoexceptions (i.e., if these exceptions apply, thesubstitution is not significant and a reissuancedoes not result): (i) the new obligor acquiressubstantially all of the assets of the originalobligor, a "change in payment expectations"does not result and the transaction does nototherwise result in a significant alteration, or(ii) the new obligor is a related entity to theoriginal obligor, and the collateral securing theinstrument continues to include the originalcollateral. The addition or deletion of aco-obligor is significant only if it results in a"change in payment expectations."

A "change in payment expectations"occurs only where there is a substantialenhancement of the obligor's capacity to pay(including payment from any payment source,collateral, guarantee or other credit enhance-ment) and that capacity was primarily specu-lative before the modification and is adequateafter the modification, or vice versa. ("Pri-marily speculative" is not defined.)

commercially available credit enhancementcontract or an improvement to propertysecuring the nonrecourse bonds. Also, forboth recourse and nonrecourse bonds, achange in priority of bonds relative to otherbonds or debt of the issuer is significant if itresults in a change of payment expectations(see above); otherwise it is not significant. Anaddition, deletion, or alteration of customaryaccounting or financial covenants is notsignificant.

(5) Recourse Nature. A change fromrecourse (or substantially recourse) to nonre-course (or substantially all nonrecourse), andvice versa, is significant, with two exceptions:(i) defeasance of tax-exempt bonds is notsignificant (assuming a trust deposit ofgovernment securities or other tax-exemptbonds under the terms of the original instru-ment), and (ii) a change from recourse tononrecourse if the instrument continues to besecured only by the original collateral and thechange does not result in change of paymentexpectations. (However, a modification thatresults in a property right that is not debt isalways a significant modification.)

Modifications other than those referencedabove are analyzed for significance under thegeneral rule of economic substance.

Each modification is tested for significance.Modifications of different terms under the separatespecific rules that individually are not significantdo not collectively constitute a significant modi-fication, but under the general rule separatemodifications of terms not covered by specificrules are considered collectively in determiningsignificance. In addition, separate modificationsover a period of time may cumulatively result in a


significant modification, even if each modification of the bidding procedure; and (ii) the issuer retainwas not significant under a specific rule. an issuer's statement certifying under penalty of

Included as an appendix to this column is atable setting forth the above rules and theexamples contained in the regulations.

The reissuance regulations are effectiveSeptember 24, 1996, for obligations issuedthereafter.

Open Market Federal Securities ProposedRegulations. These regulations propose arebuttable presumption for the purchase of openmarket federal securities for all purposes of thearbitrage and rebate regulations. Under thispresumption, the price paid is deemed to be fairmarket value if the issuer follows a specifiedbidding process and satisfies certain documentretention requirements.

The bidding process requires that (i) the issuerreceives three bids from providers without amaterial interest in the transaction, (ii) the issuerpurchases the highest-yielding securities for whicha qualifying bid is made, (iii) the yield on thepurchased securities is not significantly less thanthe yield available from the provider on"reasonably comparable" securities offered toothers for purchase from a source other thantax-exempt bond proceeds (and if closelycomparable forward prices are not available, areasonable basis for comparison is the impliedforward prices based on standard financialformulas, as established by a certificate of thebidding agent), (iv) the yield on each purchasedsecurity is not less than the highest yield thenavailable on a SLGS of the same maturity, and (v)the terms of the agreement to purchase thesecurities are reasonable.

The document retention provisions require that(i) the issuer retain (a) a copy of the purchaseagreement for the securities or of the confirmationwith a statement detailing oral or other terms, (b)a receipt of the amount paid for the securities,including a statement of any brokeragecommissions or fees or bidding fees paid to or bythe seller of the securities, (c) each bid stamped toshow date and time received, and (d) a description

perjury that (a) the bidding agent did not bid, (b)all bidders had an equal opportunity to bid withoutan opportunity to review other bids, (c) the biddersare reasonably competitive sellers of securities,and (d) the issuer received at least three bona fidebids from providers without a financial interest inthe bonds.

The proposed regulations also provide that abidding agent fee is a qualified administrative costonly if (a) it is separately stated and reasonable(.02% of the amount invested is presumedreasonable), and (b) it is comparable to a feecharged for a comparable investment of securitiesacquired with a source other than tax-exemptbonds.

The proposed regulations thus would imposea new burden on issuers. This burden isparticularly onerous in that the certifications relateto facts beyond the knowledge of issuers (e.g.,who are reasonably competitive sellers ofsecurities? What is the benchmark for determiningimplied forward prices? Why must the issuerassure that bids are datestamped? How does theconcept of the perjury penalty apply to a municipalcorporation?).

It should be particularly noted that theregulations apply for all purposes, not simply foradvance refunding escrows.

If issued, these regulations would be effective60 days after the adoption of final regulations.

Proposed SLGS Regulations. As contrastedwith the regulations relating to open market federalsecurities, the proposed SLGS regulations areeminently reasonable and designed to facilitateissuer investment. (In fact, one Treasury officialstated that it was hoped that, given flexible SLGSregulations, open market federal securities wouldno longer be purchased -- at least for advancerefunding escrows.)

The proposed SLGS regulations also apply forall purposes of the arbitrage and rebate regulations(without regard, for example, to whether the


proceeds being invested are subject to yield that are subject to yield restrictions; (b) thatrestrictions). the total investment is not less than all of such

The proposed SLGS regulations ease thepresent regulations in the following ways (amongothers):

(1) The time deposit SLGS rate is set atfive basis points (rather than .125%) below thecurrent estimate Treasury borrowing rate forcomparable maturities.

(2) The $100 rule is eliminated and secu-rities will be issued in a minimum amount of$1,000, or more in increments of $1.00, fortime deposit securities and in any incrementover $1,000 for demand deposit securities.

(3) Although the minimum maturity of 30days for time deposit certificate SLGS isgenerally retained, a minimum maturity forcertificate SLGS bearing a zero interest rate is15 days up to and including one year.

(4) Alternate payment procedures (inaddition to automated clearing house) arepermitted for payment.

(5) Initial subscriptions may be submittedup to five days before the issue date in the caseof subscriptions of $10 million or less andseven days before the issue date in the case ofsubscriptions of $10 million or more (thoughthe earliest initial subscription date of 60 daysbefore the SLGS issuance date is retained).Note, however, that the date of receipt by theBureau of Public Debt begins the period,rather than the date of fax, postmark or carrierstamp.

(6) All certifications for investment in timedeposit SLGS but one are eliminated. (Theretained certification is that no proceedssubmitted in payment for the SLGS are de-rived, directly, or indirectly, from the re-demption before maturity of other SLGSpurchased before December 28, 1976.)

Thus, the following certifications areeliminated: (a) that the investment is beingmade only with proceeds of a tax-exempt bond

proceeds (i.e., the "all or none rule"); (c) thatnone of the proceeds is derived fromredemption before maturity of other SLGS;(d) that no portion of the investment is madewith amounts used to discharge a tax-exemptbond issue that are derived from the sale ofescrowed open market securities or, alterna-tively, that the yield of the SLGS does notexceed the composite yield of the securitiessold.

(7) All certifications for investment indemand deposit SLGS are also eliminated.Thus, the limitation of the availability ofdemand deposit SLGS to bond issues of $35million or less is repealed as is the requirementthat the investment consist solely of specifiedgross proceeds (now generally those subject tothe rebate requirement).

The preamble to the proposed regulationsindicates that the certifications relating to SLGSare eliminated because the concept of thecertifications may be more effectively administeredunder the arbitrage regulations than under theSLGS regulations. In keeping with this concept, anew provision is added to the SLGS regulationspermitting revocation of the SLGS if their issuanceis in connection with a violation of the taxregulations. (Present regulations limit revocationto improper certifications or misrepresentations.)

Revenue Procedures.

Fair Market Value. On July 22, 1996, theTreasury Department released Revenue Procedure96-41. This Revenue Procedure establishes whatamounts to an amnesty program. It provides that,during a period of one year expiring July 19, 1997,issuers may, if they wish, enter into closingagreements with the IRS under which the intereston advance refunding bonds would not (in theevent of an audit or otherwise) be consideredtaxable by reason of the purchase of open marketescrows at a price in excess of fair market value.The Revenue Procedure applies to bonds sold prior


to July 19, 1996, and is therefore retroactively The Revenue Procedure indicates that, absentapplicable, presumably, as far back as 1968. extraordinary circumstances, a bona fide bidding

The closing agreement is permitted if theissuer pays to the federal government an amountequal to the excess of the amount paid for thefederal securities over the "spot price" of thefederal securities. The "spot price" is defined asthe "noncontingent price on the trade date fordelivery on the next day." No guidance is providedfor issuers to enable them to determine spot price. Although, apparently, a few issuers (perhapsPresumably, the issuers would contact the under- those under audit or in litigation?) have indicatedwriter or financial advisor to determine the spot that the Revenue Procedure is helpful in that itprice on the date of purchase of the federal provides for a "penalty" that will ordinarily be lesssecurities; however, the underwriters and financial than the differential between taxable andadvisors will, in most cases, be unable to deter- tax-exempt bond interest rates, most publicmine the spot price, for, in many cases, records interest groups indicate otherwise. The Revenueregarding spot price are not retained. More Procedure and its context, both with respect toimportantly, perhaps, even where spot price customary procedures followed at the time of priorrecords are retained, the prices are subject to issuance and with respect to spot price deter-volatility throughout each day. Also, of course, the minations, make it difficult for bond counsel tospot price may not indicate costs associated with provide helpful advice -- always assuming thatpurchase and sale of securities to an issuer, for the neither the issuers nor the bond counsel knowinglyactual price may have reflected "short sales," dealt with dishonest providers.delayed delivery, bulk quantity purchases,custodial requirements, administrative costs orsimilar items. Researching of spot prices may becostly and time-consuming (three months wasindicated in one case).

Assuming the issuer is able to determine spot Revenue Procedure is difficult. Revocation orprice and is willing to wait the time and pay the non-retroactive application is probably preferable.amount necessary for that determination, the issuerwill then consider whether it should in fact beresponsible for the payment required under theRevenue Procedure. Issuers will, undoubtedly,wish to shift the burden to the provider of thesecurities or the underwriters, financial advisors orother professionals that indicated that the pricepaid by the issuer at purchase was fair marketvalue. In negotiations, issuers are expected to Private Letter Rulings.emphasize that they followed generally applicableprocedures on the dates of purchase, that there wasno deliberate or intentional purchase on their partof federal securities at prices in excess of fairmarket value and that they dealt with professionalsof experience and good reputation.

procedure consistent with the principles of the safeharbor for guaranteed investment contracts isrebuttably presumed to establish fair market valuefor transactions to which the Revenue Procedure isapplicable. The Revenue Procedure also indicatesthat "other procedures" (not specified) may alsoestablish fair market value.

The Revenue Procedure will not be applicablein all cases (for example, in the words of oneofficial, where the advance refunding escrow yieldwas substantially below the bond yield), but in theordinary case, the potential applicability of the

Housing Bonds. Revenue Procedure 96-37provides guidance as to area and national mediangross income figures for computing the housingcost/income ratio, for high housing cost areas, forissuers of qualified mortgage bonds. ThisRevenue Procedure supersedes RevenueProcedure 95-32.

TEFRA Hearing and Approval Require-ment. Private letter ruling 9622032 (March 1,1996) holds that qualified 501(c)(3) pooledfinancing bonds do not satisfy the TEFRA publichearing and approval requirement where theowners and locations of the financed facilities arenot identified. This is contrary to Example (6) in


the final enterprise zone regulations (see above) security test where the 75 percent- completedwhich permits post-issuance public hearings to facility had been abandoned. Also the advancesatisfy the TEFRA hearing requirement where the refunding bonds do not require an allocation of thesubsequent hearings are held upon identification of private activity bond volume cap.borrowers and projects and where a pre-issuancehearing describing the program is also held.

This ruling is also contrary to the statement on private letter ruling 9628007, April 10, 1996) andpage 1219 of the General Explanation of the Staff for "numerous projects" leased to state agenciesof the Joint Committee on Taxation accompanying financed by multiple bond issues (under privatethe Tax Reform Act of 1986, namely: letter ruling 9627012, April 4, 1996) where bonds

In extending this requirement [i.e., thepublic hearing and approval requirement]to all private activity bonds, Congressintended that the applicable Treasuryregulations will be amended for . . .qualified 501(c)(3) bonds that qualify forthe special exception to the maturitylimitation for pooled financings (where thefacilities need not be identified before Federally Guaranteed Bonds. Private letterissuance of the bonds). ruling 9623032 (March 7, 1996) holds that

Private Business Use Test. Private letterruling 9625042 (March 26, 1996) holds that theprivate business use test is not met in the contextof a wastewater system where 91% of the waste isgenerated by 45 industrial customers (of which 42have no contractual rights or minimum paymentsrequirements and the remaining three use less than.1% of the capacity).

Private letter ruling 9624013 (March 15,1996) holds that a nonprofit corporation formed tooperate a juvenile detention facility is aninstrumentality of the county and so its business isthat of a governmental unit, not that of a privatebusiness user.

Private letter rulings 9623011, 9623012 and9623013 (all dated February 29, 1996) hold thatjoint operating arrangements of hospitals arepartnerships but do cause private business use orunrelated (to 501(c)(3)) use.

Private Payment or Security Test. Privateletter ruling 9623017 (March 5, 1996) holds thatproceeds of sale of bond-financed electricgenerating equipment will not cause prior bonds orrefunding bonds to satisfy the private payment or

Change of Use. Privatization programs arepermitted for water and sewer facilities (under

are redeemed or other appropriate remedial actionsare followed. In analyzing whether the multiplebond issues are single issues, the second rulingprovides definitive guidance: Revenue Rulings74-380, 77-55 and 78-159 apply for bonds issuedbefore August 24, 1981, and Revenue Ruling81-216 applies for those issued thereafter andbefore the effective date of 1.150-1T(c)(1).

qualified 501(c)(3) bonds may be issued for amuseum (purportedly the Smithsonian museum inWashington D.C.), that the museum restaurantdoes not cause unrelated use and that even thoughthe museum operates with federal funds, thosefunds may not, by law, be used for projectpurposes or for debt service and so the bonds arenot federally guaranteed.

On-Behalf-Of Issuance. Private letter ruling9629012 (April 18, 1996) holds that obligationsissued to finance a headquarters and instructionalfacility by an entity formed by members of boardsof education to provide special education servicesproperly qualify as "on-behalf-of" bonds under theprinciples of Revenue Rulings 57-187 and 60-248.

Court Decision.

The Tax Court in City of Columbus, Ohio v.Commissioner, T.C. Memo. 1996-343, Tax Ct.Dkt. No. 3301-95B, has denied the City's motionto reconsider its adverse prior ruling holding thatbonds proposed to be issued to refund priorobligations incurred by the City of Columbus tothe State of Ohio would be taxable arbitragebonds. Transitioned refunding bond provisions ofthe Tax Reform Act of 1986 did not apply be-


cause, in the view of the Court, the purpose of the bonds (section 1614), provides for the creation ofbonds was to acquire investment-type property, in financial asset securitization investment truststhe form of prepayments. Also, in the view of the (section 1621), makes technical corrections to theCourt, both advance refunding bonds and recapture provisions applicable to qualifiedprepayments "accomplish the same objective, mortgage bonds (section 1702(d)), and makesnamely to obtain a financial advantage from the technical corrections to the hedge bond provisionsinterim use of borrowed funds." (section 1704(b)).

Federal Legislation.

Bills with immediate (i.e., retroactive)effective dates have been introduced by SenatorMoynihan (S. 1880 prohibiting professionally-usedstadium financing) and by Representative Kleczka(H.R.3801 prohibiting recreational service fitnessfacilities in hospitals). These bills, with limitedtransition provisions, apply to bonds issued afterthe introduction of the bills, even though the billshave not been enacted. Senator Moynihan has alsointroduced S.1879, providing for the removal ofthe $150 million cap for qualified 501(c)(3) bonds,effective for bonds issued after enactment.

The Small Business Job Protection Act of1996 (H.R.3448) has been approved by Congressand is expected to be signed by the Presidentduring the week of August 19. This Act containsseveral limited provisions relating to tax-exemptbonds. The most significant of these is section1608, repealing the ability to issue tax-exemptexempt facility private activity bonds for the localfurnishing of gas or electricity except for facilitiesthat (i) will be used by persons engaged in thelocal furnishing of that energy source on January 1,1997, and (ii) will be used to provide servicewithin the area served by such person on that date(or within a county or city any portion of which iswithin such area), or facilities used by successorsin interest to such persons for the same use andsame service area.

The Act also expands the definition of"first-time farmers" for purposes of small issueprivate activity bonds (section 1117), permitstax-exempt bonds for the sale of the Alaska PowerAdministration facilities (section 1804), permitsqualified scholarship funding corporations toconvert to taxable corporations without causingbonds to fail to be qualified scholarship funding

That's All(?) Folks!! I'm off, perhaps foolishly(for the temperature is purportedly 111 degrees),to Palm Springs (California) to mull theramifications of these many developments whileafloat in the pools or, alterna-


TABLE OF EFFECT OF CERTAIN CHANGESUNDER FINAL REGULATIONSRELATING TO REISSUANCE

NOTE: Each change is tested separately (e.g., five non-significant modifications do not addup to one significant modification)

KEY: DI = Debt InstrumentCPE = Change in Payment ExpectationsNM = No ModificationNS = Not Significant

CHANGES THAT DO NOT

RESULT IN REISSUANCE

CHANGES THAT RESULT

IN REISSUANCE

Temporary and De Minimis Changes

Waiver by holder of acceleration or similardefault right for period not over 2 years plusa good faith negotiation period (NM)

Acceleration by holder followed by one yearwaiver of accelerated payment (NM)

Failure by issuer or holder to exerciseoption (NM)

Failure to perform (NM)

Addition, deletion or change of customaryaccounting or financial covenants (NS)

Waiver by holder of acceleration or similardefault right for period over 2 years plusgood faith negotiation period (if significant)

Yield Changes

Modification results in yield change by nomore than the greater of 25 basis points or5% of annual yield (NS)

Modification results in yield change bymore than the greater of 25 basis points or5% of annual yield

tively, to rid my mind of the specter of thoseramifications!

Sharon Stanton WhiteAugust 9, 1996


Payment Timing Changes

Deferral of payments to date no later thanlesser of 5 years or 50% of original term(NS)

Extension of CAB maturity if to date nolater than lesser of 5 years or 50% oforiginal term and if yield changes by nomore than the greater of 25 basis points or5% of annual yield

Reduction of principal that results in yieldchange by no more than the greater of 25basis points or 5% of annual yield (NS)

Deferral of interest payments if to date nolater than lesser of 5 years or 50% oforiginal term and if yield changes by nomore than the greater of 25 basis points or5% of annual yield (NS)

Deferral of interest to maturity uponunilateral exercise by issuer of option underterms of DI (NM)

Deferral of payments to date later thanlesser of 5 years or 50% of original term

Extension of CAB maturity to date laterthan lesser of 5 years or 50% of originalterm or if yield changes by more thangreater of 25 basis points or 5% of annualyield

Reduction of principal that results in yieldchange by more than the greater of 25 basispoints or 5% of annual yield

Deferral of interest payments if to date laterthan the lesser of 5 years or 50% of originalterm or if yield changes by more than thegreater of 25 basis points or 5% of annualyield

Deferral of interest payment upon unilateralexercise by holder of option under terms ofDI

Obligor Changes

Substitution of obligor on nonrecourse DI(NS)

Substitution of obligor on recourse DI in381(a) corporate acquisition (NS)

Substitution of obligor on recourse DI ifsubstantially all assets acquired, no CPEand no other significant alteration (NS)

Substitution of obligor on tax-exempt bondif new obligor a related party and collateralcontinues to include original collateral (NS)

Addition or deletion of co-obligor if no CPE(NS)

Assumption by property purchaser ofobligor's debt and other assets if no CPE(NS)

Substitution of obligor on recourse DI(generally)

Addition or deletion of co-obligor if CPE

Assumption by property purchaser ofobligor's debt but not obligor's other assets

Assumption by property purchaser ofobligor's debts and other assets if CPE


Changes in Security or Credit Enhancement

Substitution of collateral on decrease ofvalue of original collateral under terms ofDI (NM)

Release, change, or addition of collateral onrecourse DI if no CPE (NS)

Release, change, or addition of guaranteecredit enhancement on recourse DI if noCPE (NS)

Substitution of fungible collateral onnonrecourse DI (NS)

Substitution of similar commerciallyavailable credit enhancement on nonre-course DI (NS)

Improvement of property securing nonre-course DI (NS)

Addition of new building to land securingnonrecourse debt (NS)

Change in debt priority if no CPE (NS)

Defeasance of tax-exempt bond (NS)

Substitution of new LOC on rating declineof issuer of original LOC not under terms ofrecourse DI if no CPE (NS)

Release, change, or addition of collateral onrecourse DI if CPE

Release, change, or addition of non-fungiblecollateral on nonrecourse DI

Change in debt priority if CPE

Substitution of new LOC on rating declineof issuer of original LOC not under terms ofDI if CPE

Change in Nature of Instrument

Change in recourse to nonrecourse or viceversa if DI continues to be secured byoriginal collateral and no CPE (NS)

Change from recourse to nonrecourse orvice versa if DI is not secured by originalcollateral or if CPE

Change of DI to non-debt instrument orproperty right

Interest Rate Changes

Rate reset based on index value under termsof DI (NM)

Rate reset through remarketing agentauction under terms of DI (NM)

Rate reduction on SEC registration of DI byissuer under terms of DI (NM)


Interest Rate Changes(continued)

Rate increase based on decline in value ofcollateral under terms of DI (NM)

Rate increase resulting from rating declineupon unilateral exercise by holder of optionunder terms of DI (NM)

Conversion of variable rate mortgage tofixed rate upon unilateral exercise bymortgagor of option under terms of DI(NM)

Rate reduction upon unilateral exercise byholder of option under terms of DI if yieldchanges by no more than the greater of 25basis points or 5% of annual yield underterms of DI (NS)

Rate reduction upon unilateral exercise byholder of option under terms of DI if yieldchanges by more than the greater of 25basis points or 5% of annual yield

Puts and Calls

Holder payment to issuer to waive call rightif yield change not more than greater of 25basis points or 5% of yield and if callelimination is not economically significant(NS)

Addition, deletion, or change of put right ifnot economically significant (NS)

Holder payment to issuer to waive call rightif yield changes by more than greater of 25basis points or 5% of yield or if callelimination is economically significant

Addition, deletion, or change of put right ifeconomically significant

I

RS RESPONDS TO GENERAL TAX MATTERS COMMITTEE'SRECOMMENDATIONS ON IRS AUDIT PROGRAM

Editor's Note: The following letter, datestampedAugust 8, 1996, was received from the IRS inresponse to the recommendations of theAssociation's Committee on General Tax Matterscontained in a letter dated May 7, 1996, andpublished at page 50 in the June 1, 1996, numberof The Quarterly Newsletter.

JohnJ .Cros sIIIChai rmanGene ra lTaxCommitteeof

theNational Association of Bond Lawyers9th Floor2000 Pennsylvania Ave. N.W.Washington, D.C. 20006

Dear Mr. Cross:

Thank you for your comments and recom-mendations made on behalf of the NationalAssociation of Bond Lawyers in your letter datedMay 7, 1996. As with other letters of this type, wehave reviewed and carefully considered yourcomments and recommendations.

Your letter recommends that the Serviceinform tax-exempt bond issuers of the specificcircumstances surrounding why a particular bondissuance was selected for examination. Whenasked, the Service generally does inform taxpayers


of why they were selected for examination, e.g.,general audit, market segment, or part of astatistical sample designed to measure compliance.We have and will continue to do this in the bondarea. We are initiating our first statistical samplingprogram in the tax-exempt bond area early nextfiscal year.

Although we indicate the reason for aparticular examination, we may not disclose thespecific criteria for selection or circumstances sur-rounding why a particular bond issuance wasselected for examination. While the Freedom ofInformation Act (FOIA) generally obligatesagencies to make available for public inspectionand copying administrative staff manuals, see 5U.S.C. § 552(a)(2)(C), the FOIA excepts from thisgeneral obligation "guidelines for law enforcementinvestigations ... if such disclosure couldreasonably be expected to risk circumvention oflaw." 5 U.S.C. § 552(b)(7)(E).

In our view, to provide a description of theissues classified or targeted in a specific exami-nation could adversely impact the success of theServices's bond examination program, by creatinga false implication as to the breadth and scope ofan examination and by creating the possibility ofshaping future reporting to the Service.

We appreciate your interest in promoting theefficiency of our audit process and the need tomeet increased disclosure responsibilities underapplicable Federal securities laws. As the tax-exempt bond examination program matures, weexpect all involved to become more effective inidentifying and resolving issues. We believe thiswill assist in fulfilling the new and increaseddisclosure responsibilities. If you have anyquestions, please call me at 202-622-8100.

Sincerely,

Marcus S. OwensDirectorExempt Organizations Division

REMEMBERING CHUCK KADES

Charles L. Kades died on June 18, 1996, at theage of 90. A graduate (N$6) of Cornell University(1927) and the Harvard Law School (1930), hewas Of Counsel to Hawkins, Delafield & Wood athis death, having retired as a partner of the firm onDecember 31, 1977. Association DirectorHoward Zucker, who worked for him in 1977, saidthat Mr. Kades "was brilliant as a lawyer and agentlemen in the truest sense of the word."

Obituaries published in The Bond Buyer, TheJapan Times, The Yomiuri Shimbun, TheEconomist, The New York Times, The BostonGlobe, Daily Hampshire Gazette, The Recorder(Greenfield, MA), Connecticut News, and by theAssociated Press, tell us that Chuck Kades was nota garden-variety bond lawyer. After workingbriefly at Hawkins, he served the Rooseveltadministration as Assistant General Counsel of thePublic Works Administration under Harold Ickesfrom 1933 to 1937, and as Assistant GeneralCounsel of the Department of the Treasury andGeneral Assistant to the Chief Counsel of theBureau of Internal Revenue from 1938 to 1942.

In 1942, Mr. Kades was called to active dutyas a First Lieutenant in the United States Army.He landed in Southern France with the FirstAirborne Task Force on D-Day, and participated inthe Alpes-Maritime and Basse-Alpes campaignsand the battle for Rhineland. In April of 1945, hereturned to Washington as Executive Officer forthe Civil Affairs Division of the General Staff ofthe War Department. By then a Colonel, he wasassigned to General Douglas MacArthur's staff (inlater years, he served as MacArthur's counsel andexecutor of his estate), and arrived by air in Tokyoa week before the surrender on the U.S.S.Missouri.

Colonel Kades served in Japan as DeputyChief of the Government Section of the GeneralHeadquarters of the Supreme Commander(MacArthur) for the Allied Powers. MacArthurgrew impatient with the foot-dragging of theJapanese politicians who — under pressure fromthe Allies — were revising the 1881 Meiji


TRANSACTIONALATTORNEY(S) NEEDEDPARTNERS DESIRED

Baber & Kalinowski, P.C. is asmall firm in Fairfax, Virginia, whichrepresents REITs, life insurancecompanies, and national apartmentowners and developers in connec-tion with real estate and bond fi-nancings. We need one or moremid-level attorneys, who have runcommercial real estate, bond orsecurities deals. We also want tovisit with one or more partner-levelattorneys who are interested inhaving their own practice with asophisticated small firm. Locationin Virginia office required.

Fax résumé to 703-591-9347

PARALEGAL POSITIONAVAILABLE

Robinson, Bradshaw & Hinson, P.A., isseeking an experienced public financeparalegal for its Charlotte, NC, office.Qualified candidates will have 3+ years ofexperience in this area. Please send résuméto Carol L. Fisher, Robinson, Bradshaw &Hinson, P.A., 101 North Tryon Street,Charlotte, NC 28246.

Constitution. One Sunday morning, in earlyFebruary, 1946, MacArthur ordered ColonelKades, assisted by a staff of twenty-four, to drafta constitution which would convert Japan from amonarchy, governed by the Emperor, to a democracy. The work — which became the Showa Constitution — was completed in about ten days ofintense and secret activity, was approved by theJapanese legislature, with minor changes — eachvetted by Colonel Kades, who kept control of hisdocument — and proclaimed on November 3,1946; it took effect on May 3, 1947. The BostonGlobe, citing a 1992 account in MainichiShimbun, said that Colonel Kades marked up aMacArthur draft of the document as follows:"...the Emperor is at the head shall be the symbolof the state."

The Showa Constitution renounces war and"the threat or use of force as a means of settlinginternational disputes." (This clause has beentroubling in the context of Japan's maintenance ofSelf-Defense Forces and its recent participation inU. N. peacekeeping operations.) It also conferredcollective bargaining rights on workers, andprovided for equality between the sexes. ColonelKades is now regarded as a founding father of theeconomic miracle that is post-war Japan.

Mr. Kades rejoined Hawkins in 1949. Inaddition to municipal bonds, he handled tax,banking, corporate, and estate matters. An experton Section 103 matters, he also invented "potholebonds," issued for the first time in 1973 by theNew York State Thruway Authority to finance

highway projects and payable from motor fueltaxes, and he advised then-Governor Hugh Careyin the 1970s on the creation of the MunicipalAssistance Corporation, the New York City defaultrecovery vehicle.

In a July 3, 1991, letter to your editor, Mr.Kades (in response to an invitation to participate inthe Association's oral history project) said, "I don'tthink it would be worth your while to interviewme." He is survived by his third wife, a daughter,three stepchildren, and nine grandchildren. Hewas buried on June 28, with full military honors, inArlington National Cemetery. Many Japanesenationals attended the funeral. At his insistence,there were no eulogies.

EMPLOYMENT OPPORTUNITIES


BOND/TAX ATTORNEY WANTED

Stoel Rives LLP, one of the largest PacificIntermountain West law firms, seeks alawyer interested in dealing with the taxaspects of municipal bonds and handlingbond transaction work as well. Stoel Rives'Municipal Finance Practice Group offers theopportunity to join a thriving multi-statebond practice in the firm's Portland, Oregon,office, one of the most attractive areas in thecountry. Outstanding academic record,writing ability and client relationship skillsare required. Broad experience in a widerange of governmental purpose and privateactivity bonds preferred but not necessary.Equal Opportunity Employer. Send résuméin confidence to Ms. Lee Dayfield, StoelRives LLP, 900 SW Fifth Ave., Suite 2300,Portland, OR 97204.

NABL

has a

JOB BANK

for members and public sector lawyersseeking employment opportunities

with private law firms.

Contact Patricia Appelhans at630/690-1135

WASHINGTON OFFICE MOVEDirector of Governmental Affairs Amy K.

Dunbar reports that the Association's WashingtonOffice has relocated to 1900 K Street N.W., 12thFloor, Washington, DC 20006-1109. There havebeen no changes in tele-phone or fax numbers, nor in the e-mail address.

EDITOR'S NOTES

For much too long, bond lawyers have laboredin obscurity — often deliberate — as they built andrebuilt the country's infrastructure with paperbricks no less tangible than those fired in kilns.There were and are giants among us — ChuckKades, Hobby McCall, Huger Sinkler, Pope Mc-Intire, John Mobley, Jim Perkins, Joe Johnson,John Mitchell, Don Howell, Harold Judell, JimEllis, Manly Mumford, Ralph Gibbon, and manyothers. They are our heroes, and (if it only knew)

the country's. They are lawyers whose vision,competence, and sheer intellect leavened the com-monweal.

In a fascinating report of a case scheduled tobe tried beginning August 26 before a Federaljudge in Pittsburgh, Securities Industry News(August 5) tells us that PNC Securities has suedCitibank for $1,118,025 in damages arising fromPNC's purchase of Shell Oil and Texaco bonds.

Citibank, as transfer agent, refused to processthe transfer of the bonds to PNC or its customers,maintaining that the bonds were cancelled. Thebonds were perforated "near the center of thebottom edge of the certificates with the initialsCNA or FNCB," but not with the words"cancelled" or "paid." Citibank had allegedly hiredMSM Corp. to safekeep and destroy the bonds.

In the absence of legal guidance as to howcancellation should be evidenced, expert testimonyis expected at trial on prevailing industrystandards. The message that issuers of municipalsecurities — and their paying agents — shouldderive from this case is to be very certain thatthose securities are plainly cancelled byperforation, and/or destroyed, all in accordancewith applicable state law, lest they be required topay twice, or to pay damages.

Since the July Board meeting, the Committeeon Opinions, chaired by Michael A. Budin ofWolf, Block, Schorr and Solis-Cohen, has been


working diligently on revisions to its model bond Drew Kintzinger [almost rhymes with "refunder"],opinions report, and anticipates that an exposure not to mention the indomitable Trudy Halla, whodraft will be available at the Bond Attorneys' may have been NABL's longest-serving TreasurerWorkshop for review and comment. and was certainly its most vivacious) has many

As James Lebenthal could — and does — tellyou, munis are ubiquitous. 'Tis fitting, then, that amuni — Maestro Nicholas Muni — has just beenappointed the Artistic Director of the CincinnatiOpera. The Cincinnati Post (June 13) quotes aTulsa journalist as saying that Mr. Muni (like Mr.Lebenthal) "takes works that are very familiar andmakes you see them in new ways. Unlike somepeople who are visionary, he is also very down-to-earth about explaining it." Faithful readers willremember Mr. Lebenthal's "Built by Bonds"bumper stickers.

One of our correspondents tells us that JimPerkins, the Association's seventh President, tookhis third Harvard degree this summer — at theDivinity School — and was last heard from on theway to Devon, on one of the British Isles, where heintended a walkabout with two shirts and threebooks. Mr. Perkins is fondly remembered (interalia) for his sock-tucker/cork-soaker/coke-sackerstory, blushingly told at more than one postprandialgathering.

As this is written, your editor is watching acardinal feeding sunflower seeds to a cowbirdfledgling. Joe Mysak (Grant's Municipal BondObserver, June 14) has noted that among thosearguing that an end to tax exemption would not besuch a bad thing are a few states' treasurers andassorted others of bright plumage. They may findthat cowbirds do not beget cardinals.

We have no idea what your chicken cordonbleu looks like, but ours, from a major grocerychain, looks a lot like a plump baby armadillo. Ithas those impressed stripes across its back. Notquite roadkill . . . but still.

Grant's (July 12) characterizes Peter Seed ofBriggs and Morgan, St. Paul, as "one of ourspiritual advisors when it comes to bond law." Mr.Seed (who counts as partners former NABLPresidents Bernie Friel [rhymes with "deal"] and

fine qualities, but it is fair to question his ties to thespirit world. We won't question his bow ties, orManly Mumford's either.

Passing through, Patricia Duke, Esquire, whopractices in Victoria, Australia, left with us a copyof the May issue of The Law Institute Journal.Much of it deals with the arcana of the practice oflaw in Australia, but it includes a delightfulculture-shock account of five years of practice inLos Angeles by a lawyer trained in Australia.

What struck us was the language. Thefollowing words were casually used in the Journal,and we are in some doubt as to what they signify:stood the matter over, a proposed float, workcover,this special callover, soapie, served his articles,costing services, superannuation, ferals, bovverboots, and goofy footedness. Better-traveledreaders are invited to shed some light here.

QUARTERLY LIMERICK

Editor's Note: The following is not up to Orin'susual metric standards, but by way of grudgingapology he offers only that Rev. Proc. 96-41 madehim awfully crotchety. (He may be acurmudgeon, but he's our curmudgeon.)

There's probably no truth to the rumorThat the trial lawyers got there some sooner,

But Rev. Proc. 96-41Is not near zero-sum:

The fallout could be less sunny than lunar.

Sec. Rubin has done this recuseWhile the rest of us here in the ooze

Are sweating certificates,Examining the predicates,

And gathering old documents to peruse.

So this is no fun, and we quail(As Clinton and Gore hit the rail)

To think that we might


Be in for a fightOn a spot price from out of the vale.

Orin Macgruder

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contents president's column (william h. mcbride) 2ethi cs (or whichever subgroup of the aba...

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