the bond lawyer - nabl · the bond lawyer® september 1, 2000 president's column i in the...

CONTENTS President's Column (Howard Zucker) 1 Actions by the Board of Directors on July 27 and 28, 2000 (William J. Noth) 3 Washington Saga (William L. Larsen) 7 National Office News (Jane L. Walter) 10 Report of the 2000 Nominating Committee; Notice of and Agenda for Annual Meeting 11 Shared Tax Observations (Sharon Stanton White) 13 Bob and Dalia Baker's Letters From Albania (Robert H. and Dalia Baker) 18 Association Comments on SEC Releases on Use of Electronic Media 21 Report of the Opinions and Documents Committee Re: Electronic Bidding of the Sale of Municipal Bonds 29 Electronic Signatures In Global and National Commerce Act (Wayne D. Gerhold) 34 Report of the Opinions and Documents Committee Re: Revised Article 9 of the Uniform Commercial Code 39 Interviews With John N. Mitchell (The Bond Buyer) 43 Legal Assistants' Corner The Electronic Age — Advantage or Cause for Confusion? (Nancy Mendenhall) 48 Voice from the Past (Manly W. Mumford) 50 Bond Dogs (Skippy & Jake) 52

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THE BOND

LAWYER®

°° °° The Journal of the National Association of Bond Lawyers

Volume 21, No. 3 September 1, 2000

The Bond Lawyer® September 1, 2000

National Association of Bond Lawyers Officers and Directors Howard Zucker ................................................................................................................................................................................... President Hawkins, Delafield & Wood New York, New York

J. Hobson Presley, Jr.................................................................................................................................................................. President-Elect Maynard, Cooper & Gale, P.C. Birmingham, Alabama

William J. Noth................................................................................................................................................................................... Secretary Ahlers, Cooney, Dorweiler, Haynie, Smith & Allbee, P.C.

Des Moines, Iowa Linda L. D'Onofrio.............................................................................................................................................................................. Treasurer Whitman Breed Abbot & Morgan LLP

New York, New York Virginia D. Benjamin ............................................................................................................................................................................ Director Calfee, Halter & Griswold LLP

Cleveland, Ohio William L. Gehrig.................................................................................................................................................................................. Director Arter & Hadden LLP

Washington, D.C. Mary Jo Kelly ........................................................................................................................................................................................ Director Nixon Peabody LLP

Washington, D.C. Jeffrey M. McHugh Miller, Canfield, Paddock and Stone, P.L.C. ...................................................................................................................................... Director Detroit, Michigan

William L. Nelson ................................................................................................................................................................................. Director Squire, Sanders & Dempsey L.L.P.

Phoenix, Arizona David A. Walton ................................................................................................................................................................................... Director Jones Hall, P.L.C. San Francisco, California

Cynthia M. Weed .................................................................................................................................................................................. Director Preston Gates & Ellis LLP Seattle, Washington

Floyd C. Newton III .............................................................................................................................................................................. Director King & Spalding Immediate Past President

Atlanta, Georgia Frederick O. Kiel ................................................................................................................................................................ Honorary Director Cincinnati, Ohio Editor of The Bond Lawyer® ° ° Jane L. Walter ........................................................................................................................................................ Interim Executive Director

Wheaton, Illinois Interim Publisher of The Bond Lawyer® William L. Larsen ....................................................................................................................................... Director of Governmental Affairs Washington, D.C.

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

The Bond Lawyer® September 1, 2000

PRESIDENT'S COLUMN I In the March, 2000, edition of The Bond Lawyer, I focused on NABL’s ambitious agenda of projects for 2000. Many NABL members have been working diligently over the last several months on these projects, which will provide useful guidance in a number of diverse subject areas. In the securities law area, NABL intends to issue guidance designed for public officials on three subjects, including electronic disclosure, how to respond to analysts’ requests for information, and public officials’ responsibilities under the federal securities laws. Three subcommittees of the NABL Securities Law and Disclosure Committee have undertaken these projects. Also in the securities area, the Blue Sky Subcommittee is working on providing blue sky practice guidance. Under the auspices of NABL’s Professional Responsibility Committee, a subcommittee is analyzing the appropriateness of issuer requests for indemnification. The Opinions and Documents Committee has issued guidance on electronic competitive bidding of municipal bonds and the proposed modifications to UCC Article 9. The Task Force on Financial Products of the Future is looking creatively at the development of potential new municipal bond products. Finally, the Task Force on Law Student Outreach is developing guidance and programs designed to raise the profile of public finance practice at law schools. I am very encouraged at the progress all the project groups have made to date. I am confident the hard work of these NABL volunteers will result in exceptional guidance in these diverse subject areas for NABL members, their clients, public officials, and the municipal marketplace in general. I expect some of these projects to be completed by the Bond Attorneys’ Workshop in September. II In addition to this update on NABL projects, I would like to describe progress in another area that I have focused on at NABL since becoming President last fall. I wanted NABL to expand its agenda beyond its excellent educational programs for members and reach out to the broader municipal market community of public officials, investment bankers, and regulators. To this end, NABL has increased efforts to provide speakers on topics related to municipal bond law for a variety of groups representing different sectors of the municipal market. Walter St. Onge of Palmer & Dodge and John McNally of Hawkins, Delafield & Wood, Chair and Vice-Chair, respectively, of NABL’s Securities Law and Disclosure Committee, spoke before the Municipal Securities Rulemaking Board at the MSRB’s November, 1999, meeting. NABL President-Elect Hobby Presley and I also spoke at the MSRB forum and information exchange in January, 2000. In February, Neil Arkuss of Palmer & Dodge, Richard Chirls of Orrick, Herrington & Sutcliffe, and Mitch Rapaport of Nixon Peabody conducted an educational forum for Internal Revenue Service agents at an IRS training session. Also in February, John Cross of Hawkins, Delafield & Wood, Chair of the NABL Task Force on Financial Products of the Future, and I met with the Government Finance Officers Association to brief them on NABL activities and positions, as well as to describe the work of the Task Force on Financial Products of the Future. NABL’s speaking activity continued into the spring. In March, Linda Schakel of Ballard, Spahr, Andrews & Ingersoll addressed the Taxation and Finance Subcommittee of the National Association of Counties (NACO). Also in March, Bill Larsen, NABL’s Director of

The Bond Lawyer® 2 September 1, 2000

Governmental Affairs, participated in the National League of Cities Advisory Council meeting. In late March, I was on a panel discussing new products and regulatory developments at the Council of Infrastructure Financing Authorities’ annual legislative conference. In April, I provided the NABL perspective on selection of bond counsel at the spring conference of the Association of Local Housing Agencies. In May, Ken Artin of Lowndes, Drosdick, Doster, Kantor & Reed represented NABL on a panel on Internet financial reporting at the annual conference of the Florida Government Finance Officers Association. Also in May, Bill Nelson of Squire, Sanders & Dempsey was on a securities panel at the annual conference of the National Federation of Municipal Analysts (NFMA). Summer 2000 has continued to present speaking opportunities for NABL. In June, Wally McBride of Hunton & Williams spoke on evolving bond covenants at The Bond Market Association’s Municipal Division Credit Workshop. Also in June, Jeff McHugh of Miller, Canfield, Paddock & Stone and Monty Humble of Vinson & Elkins joined me at the annual meeting of the GFOA Debt and Fiscal Policy Committee to discuss bond law topics and current NABL activities. Later that month, I spoke before the Western State Treasurers’ Association on municipal bond disclosure and other topics. In July, both Walter St. Onge and John McNally spoke on the issue of disclosure. Walt spoke at the American Bar Association meeting and John addressed the NACO annual conference. In early August, I was on a municipal market roundtable discussion at the annual meeting of the National Association of State Treasurers. The months ahead will bring other outreach opportunities for NABL speakers. In September, Hobby Presley, Walter St. Onge, and Richard Chirls will speak at the NFMA Advanced Seminar on Legal Issues. I will be speaking at the fall conference of the National Council of Health Finance Facilities Authorities. In October, Hobby Presley will address the Texas Municipal League. Providing speakers on municipal bond law topics for municipal marketplace participants is an important part of NABL’s outreach efforts. However, I believe it is also important to give these other groups an opportunity to speak to NABL. One method of accomplishing this has been to invite regulators and public interest group representatives to meet with NABL’s Board of Directors. This year, NABL’s Board has met with a variety of individuals representing different segments of the municipal marketplace. In March, the NABL Board met with MSRB Chairman Robert Estrada and MSRB Executive Director Kit Taylor, as well as with Paul Maco, Director of the Office of Municipal Securities at the SEC. At its May meeting, the Board met with Lynnette Hotchkiss, Assistant General Counsel of The Bond Market Association, and with Ben Watkins, Director of Florida’s Division of Bond Finance and a member of the GFOA Debt and Fiscal Policy Committee. In July, the Board met with Tom Louthan, Director of Alternative Dispute Resolution and Customer Service for the IRS National Appeals Office. Also at the July meeting, the Board met with Cynthia Green, a member of the Governmental Accounting Standards Board (GASB) and Kenneth Schermann, a GASB Senior Project Manager. Finally at the July meeting, the Board met with Dina Kennedy, Chair, and Alan Polsky, Chair-elect of the NFMA. The Board has found these discussions with guests from other organizations very useful in fostering mutual understanding of activities and policy perspectives between NABL and other participants in the municipal marketplace, including our regulators.


ACTIONS BY THE BOARD OF DIRECTORS ON JULY 27 AND 28, 2000 The Board of Directors met on July 27 and 28, 2000, in Halifax, Nova Scotia. President Howard Zucker presided. Also present were: J. Hobson Presley, Jr., President-Elect; Linda L. D'Onofrio, Treasurer; William J. Noth, Secretary; Directors Virginia D. Benjamin, William L. Gehrig, Mary Jo Kelly, Jeffrey M. McHugh, William L. Nelson and Cynthia M. Weed; Immediate Past President Floyd C. Newton III; Jane L. Walter, Interim Executive Director; and William L. Larsen, Director of Governmental Affairs. Also present for the indicated portions of the meeting were: Thomas C. Louthan, Director of Alternative Dispute Resolution and Customer Service in the National Appeals Office of the Internal Revenue Service; Cynthia B. Green, a member of the Governmental Accounting Standards Board ("GASB"), and Kenneth Schermann, Senior Project Manager for GASB; Dina Kennedy and Alan Polsky, with Financial Security Assurance, Inc. and Dougherty & Company, LLC, respectively, as Chair and Chair-Elect of the National Federation of Mu-nicipal Analysts ("NFMA"); Past President Neil P. Arkuss; and Association member John M. Gardner.

IRS Meeting

President Zucker introduced Mr. Louthan and described the recent action of the Board in creating a special Task Force on Alternative Dispute Resolution Procedures, chaired by Past President Arkuss. The Task Force has held two meetings, he noted.

Mr. Louthan explained that the Appeals Division considers both the Service's position and that of the issuer; it is not limited to the Service's view taken in examination. In addition to the appeals route provided by Revenue Procedure 99-35, the Service is developing other optional alternative dispute resolution programs, including early referral, mediation and arbitration, in an effort to resolve issues at the lowest practical level. Assistance and input from the Task Force in developing those pro-grams for the tax-exempt bond area, he concluded, will be appreciated. President Zucker thanked Mr. Louthan for attending the meeting and expressed the Board's appreciation for involving the Task Force in the dialogue developing over the use of such alternative dispute resolution procedures. GASB Meeting President Zucker introduced Ms. Green and Mr. Schermann to the Board, noting that the 2000 Bond Attorneys' Workshop was expected to contain a

Besides the outreach efforts I have described above, we have extended an invitation to other municipal market groups to work with NABL in developing programs similar to our Fundamentals program to help educate the market on the legal aspects of municipal finance. Because of the high degree of our members’ expertise and the quality of our established educational programs, NABL has excellent educational resources to offer. Sharing these resources will benefit both NABL and the rest of the municipal marketplace. III Notwithstanding all the emphasis I have placed in this column on NABL’s “outreach” to others in the municipal marketplace, I want to conclude by noting the progress NABL has made this year in increasing and improving “inreach” to members. The NABLNET Alert system we put into place last fall has made communicating with our members easier and faster than in the past. More members than ever have participated in NABL activities and projects this year. NABLNET contributed to this increased participation by getting the word out to members more effectively. Look for NABL to continue its efforts to improve member “inreach” in the future.

Howard Zucker August 16, 2000


presentation on GASB's new Statement 34. Ms. Green and Mr. Schermann then described the workings of GASB and the development of Statement 34. Created in 1984, GASB exists to establish and improve accounting standards for the approximately 85,000 state and local governments in the United States. The Governmental Accounting Standards Advisory Counsel (referred to as "GASAC") is its official advisory group, although there are specific task forces or advisory groups created for specific projects. Statement 34 establishes new requirements for the annual financial reports of state and local governments, including a required "management's discussion and analysis" section. The Statement is intended to complement what was already in place and not to replace any existing standards. Through the use of a new Statement of Net Assets and a new Statement of Activities, it is hoped that a government's performance as an economic unit can be better evaluated. Implementation of Statement 34 commences with the fiscal year ending June 30, 2002, with full implementation by all issuers expected by June 2004. Task Force on Alternative Dispute Resolution Past President Arkuss described the Task Force's recent discussions and the materials it expects to prepare and submit to Mr. Louthan. Following discussion, it was moved by President Zucker, seconded by Director McHugh and approved by the Board that Immediate Past President Newton be added to the Task Force as an additional representative. Visit NABL's Website: www.nabl.org

Report of Director of Governmental Affairs Director of Governmental Affairs Larsen report-ed on discussions with several industry groups that had expressed an interest in being consistent with the Association's comments on the Securities and Exchange Commission's Interpretive Release on the Use of Electronic Media. Several groups, he noted, also had asked for the Association's assistance in providing speakers on bond law-related topics at various workshops or meetings. He also described the several NABLNET alerts that had been disseminated to the membership since the last Board meeting, including statements on retroactive tax-exempt bond legislation and staffing in the IRS Tax-Exempt Bond Branch. Report of Interim Executive Director Interim Executive Director Walter reported that current membership now is 3,084, up 75 from a year ago. The book promotion begun in May has been well received. The Association purchased exhibit space at the GFOA meeting in Chicago in June, but sold only one Fundamentals book in the process. Legal Assistants' Committee Director Benjamin led a discussion of the current draft of the Handbook for legal assistants that she had recently received and circulated to the Board. Following discussion, it was agreed that the Handbook should limit its scope (at least for now) to the definitions and glossary of terms frequently encountered in the municipal finance practice, and not address those areas where practices or rules may vary. Director Benjamin also agreed to consider whether the talents of a single editor could be brought to bear once a revised draft of the Handbook was available. General Tax Matters Committee Director McHugh referred the Board to the July 14, 2000, report of Charles Cardall, Chair of the Committee. Final comments on guaranteed investment contract broker fees have been submitted and are expected to be posted on the Association's website in the near future. The Committee currently is reviewing preliminary comments on the solid waste regulations prepared by Association member Charles Henck. Opinions and Documents Committee Secretary Noth referred the Board to the minutes


of the conference calls held by members of the Com-mittee, and to the reports prepared by the Committee concerning the electronic bidding of the sale of municipal bonds and revised Article 9 of the Uniform Commercial Code. Both reports represented the final work product of the Committee in those areas. It was agreed that both reports should be made widely available, either through publication in The Bond Lawyer or by posting on the Association's website. [The Committee's reports are printed infra.] Education Committee Director Gehrig reported that the Education Committee recommended that Association members Bruce Weisenthal and Mary Wilson be appointed as the Chair and Vice-Chair, respectively, of the 2001 Fundamentals Seminar, that Association member John Overdorff be appointed as Chair of the 2001 Washington Seminar, and that Association member Scott Schickli be appointed as Chair of the 2001 Tax Seminar, with the Committee's recommendation for the two remaining Vice-Chairs to be delivered and acted upon separately. Upon motion of Director Benjamin, seconded by Director Kelly, the foregoing appointments were approved by the Board. Appointment of the two remaining Vice-Chairs is expected to occur at the September Board meeting. With assistance from Interim Executive Director Walter, the Committee also has been considering proposals from several graphic designers for the development of a cohesive "corporate identity" format to be used in all Association publications. The current logo would be retained, but the printing and mailing of brochures would be undertaken by an outside firm. Annual mailing and printing costs are expected to be reduced as a result. Specific proposals are expected to be considered and acted upon by the Board at the September meeting. Professional Responsibility Committee Director Kelly reported that the Committee's indemnification project is progressing, and that the relevant legal issues have been framed for specific review and comment. By entering into an agreement to indemnify its client, she reported, bond counsel may be effectively placed in the position of acting as the guarantor of the transaction. In such a situation, the lawyer's self-interest may adversely affect the representation of a client, in violation of Model Rules 1.7 or 1.8. Further materials with respect to the Committee's projects are expected to be available by the September Board meeting.

Section 103 Editorial Board Treasurer D'Onofrio reported that a new Deskbook edition of Federal Taxation of Municipal Bonds dated September 2000, was expected to be released in the near future, replacing the September 1999 version. She also reported that the Editorial Board recommended that Scott Lilienthal be named as the third member of the Editorial Board for the term beginning at the 2000 Bond Attorneys' Workshop. Upon motion of Treasurer D'Onofrio, seconded by Director McHugh, the Board approved the appointment. Treasurer's Report Treasurer D'Onofrio presented the balance sheet and statement of revenue and expenses for the period ending June 30, 2000. Several adjustments have been made with respect to specific line-items, with the result being a more accurate presentation. Executive Session The Board adjourned to executive session to receive the report of President-Elect Presley as Chair of the Search Committee. The Search Committee has met with the recruiter and the position of Executive Director has been advertised widely. Interviews are expected to take place in early September. Before NABL, there was what?


NFMA Meeting President Zucker introduced Ms. Kennedy and Mr. Polsky, and thanked them for taking the time to meet with the Board. The NFMA, they explained, is a 15-year old organization having approximately 1,000 members, primarily "buy-side" participants in the municipal market. There are a number of local chapters, and an 18-member board whose members are chosen by the various chapters. The organization's primary mission is the education of its members. Ms. Kennedy and Mr. Polsky described the "best practices" disclosure projects that have been developed in the areas of land-secured, hospital, and housing financings. Additional projects addressing disclosure matters in higher education, solid waste and general obligation financings are anticipated. All of these "best practices" projects are considered to be works in process, and to change over time as practices evolve. Other issues of concern to the NFMA at present include: issuer communications with analysts, the cost of acquiring disclosure docu-ments, and "plain English" initiatives in disclosure. The tension between simplicity and accuracy, they acknowledged, is not always easy to balance. President Zucker thanked Ms. Kennedy and Mr. Polsky and expressed the Board's appreciation for their participation in the meeting. It was agreed that greater communication between the two organizations would be productive for all concerned. ABA Ethics 2000 Association member Jack Gardner joined the meeting for the purpose of reporting on the progress of the American Bar Association's Commission on Evaluation of the Rules of Professional Conduct. A summary of the recommendations to date, prepared by Commission member Margaret Love, also was re-viewed. The Commission's focus remains primarily on litigation rather than transactional practices, and the issues associated with multi-disciplinary practice are being treated separately. Noteworthy recommendations to date include new definitions of "informed consent" and "confirmed in writing," although the conflicts area is not expected to undergo major conceptual changes. The Commission hopes to submit a discussion draft of its report to the House of Delegates in October, so that it can be debated at the ABA annual meeting in July 2001. Securities Law and Disclosure Committee

Director Nelson reviewed the two comment letters submitted on behalf of the Association to the SEC regarding the recent Interpretive Release on the Use of Electronic Media. Both letters are available on the Association's website. A draft report prepared by Association member Monty Humble on the subject of communications with analysts also was reviewed, and it is hoped that the final draft of it will be available for the 2000 Bond Attorneys' Workshop. Bond Attorneys' Workshop Director Weed reported that the Workshop attendees this year will receive the largest book ever, although it is still only one volume. The CD-ROM distributed with the book will be fully searchable and indexed for ease of use. Director Weed has also developed new graphics for the CD-ROM label and case and will continue to work with Interim Executive Director Walter in finalizing the Workshop arrangements. Respectfully submitted, William J. Noth, Secretary August 11, 2000 NABL has a Job Bank Contact Jane Walter 630/690-1135


WASHINGTON SAGA

Greetings from Wash-ington. It’s the middle of the August Con-gressional recess in an election year. Not

surprisingly, considerable

attention around here has focused on the party conventions and on which candi-date is going to get the bigger

post-convention momentum bounce to carry into fall campaigning. The Republicans put on a well choreo-graphed and tightly scripted show in Philadelphia clearly aimed at staking a claim on moderate, centrist voters. They did such a good job of hijacking the Democratic message, it almost seemed like the Democratic convention had started two weeks early. Bush got the early bounce, but the Democrats battled back in Los Angeles. Although not quite to the extent the Republicans managed, the Democrats too downplayed the more extreme elements of their party in an attempt to capture crucial middle-of-the-road voters without losing their grip on the tradition-al party faithful. After a more successful convention than expected, Gore should get a counter-bounce and draw even with Bush going into September. After that, I think it’s anyone’s guess. While many pundits say Al Gore faces an uphill race, the 2000 election at twelve weeks out looks to me too close to call. I think this Presidential race is going to be more interesting than most people expect, just because of all the unknown quantities. Will George W. Bush exhibit the demeanor and seriousness of purpose he needs to persuade the American people he is “presidential?” Will Al Gore get beyond his notoriously stiff image? Will the majority of the American public buy the notion of a kinder, gentler, and more open Republican Party? Will Al Gore be able to distance himself from Bill Clinton, the im-peached President, yet successfully espouse the Clinton policies the Democrats would like to credit for bringing about the country’s long-lived economic expansion? Will the Democrats be able to sell

themselves as the party of fiscal responsibility in opposing Republican tax cuts? Amid all the focus on the Presidential campaign, it would be a mistake to lose sight of the struggle for control of Congress that will be taking place simultaneously. The real battle will be for control of the House. The Democrats are within a few seats of regaining their historic majority. In contrast, the Senate seems destined to remain under Republican control in this election. Legislative Update From the legislative perspective, it will be interesting to see the impact of the Presidential campaign and the general elections on Congressional action. Last year at this point, Congress had passed a massive tax cut bill. The President vetoed the bill. This year, Congressional Republicans tried a differ-ent approach, advancing a number of smaller, targeted tax cuts. In July, Congress passed H.R. 8, a bill that phases out and eventually repeals estate, gift, and generation-skipping taxes. Congress also passed H.R. 4810, a “marriage penalty” tax relief bill. Both bills are on the President’s desk, facing almost certain veto. The Administration believes the tax breaks are too expensive and overly favor the wealthy. You can bet that the Republicans will attempt to make the vetoes as politically costly as possible to the Democrats. Republicans will probably try to override a veto of the marriage tax relief bill. Both the marriage tax relief bill and the estate tax repeal bill could also reappear in reconciliation legislation expected to be introduced in September. Republicans have a double-edged advantage on the tax cut issue. If they are unsuccessful in achieving tax cuts, they can argue that Democrats are hoarding a massive surplus to fund big government programs. If the President signs any of the tax cut bills, it may be difficult to argue that there is not enough budget surplus to support more substantial tax relief. What do marriage and death tax relief have to do with legislation we have been following? The Re-publican strategy for moving these bills will affect whether and how other types of tax legislation move. If marriage and death tax relief are stymied this fall, it may lessen the chances for other tax legislation to get through before Congress adjourns for the election. As we know, municipal bond measures typically do not move independent of some more comprehensive legislation such as a larger tax or education bill. If no tax bills leave the station this fall

[Larsen photo]


or derail along the way, municipal bond legislation probably will not make it either. That said, there is still hope that a few of the bills we have been following may have a chance of passage, including volume cap acceleration, and small issuer and arbitrage relief in the education area. Efforts continue to secure volume cap relief for private activity bonds. Earlier this year, the House passed H.R. 3081, the Small Business Tax Fairness Act. H.R. 3081 links an increase in the minimum wage with several small business tax relief provisions, included among which are provisions accelerating the phase-in of an increase in the private activity bond cap and increasing the low-income housing tax credit. However, H.R. 3081 is stalled as the Senate attempts to figure out how to detach its small business tax relief and minimum wage package from the pending bankruptcy reform bill. Other legislative vehicles have emerged this year as potential hosts for volume cap acceleration legislation. The latest of these bills on the House side is H.R. 4923, a community renewal bill. The House passed the Community Renewal and New Markets Act in July by a margin of 394-27, after the White House and the House leadership reached agreement on a plan to aid distressed communities. The bill’s volume cap acceleration provisions would result in the current cap rising from the greater of $50 per capita or $150 million per state to the greater of $75 per capita or $225 million per state over the period of 2001 to 2007, as opposed to the currently scheduled 2003 to 2007. Given the seemingly high level of support on the Hill for volume cap acceleration, many in the municipal bond community had hoped for a full increase in volume cap beginning in January 2001 and expressed disappointment in H.R. 4923’s more modest volume cap acceleration. On the Senate side, two community renewal bills with volume cap relief provisions are now pending after an effort failed in July to append similar provisions to the estate tax repeal bill that the Senate subsequently passed. Both S. 2779, sponsored by Senators Santorum (R-PA) and Lieberman (D-CT), and S. 2936, sponsored by Senator Robb (D-VA), feature a full volume cap increase beginning January 1, 2001, and also would increase the low-income housing tax credit. Both provisions provide for future inflation adjustment. S. 2779 and S. 2936 are similar, but Senator Robb’s bill excludes a controversial provision dealing with faith-based charities. The Senate Finance Committee has not yet scheduled a markup of the community renewal legislation, but discussions reportedly are under way

to resolve the differences in the bills. It appears the Administration will support the bipartisan approach underlying the three House and Senate community renewal bills if the controversial measures added in the Senate can be eliminated. If the Senate bills can be reconciled to the Administration’s liking, volume cap relief may have a shot at passage. Supporters further hope the Senate’s immediate volume cap relief provision will prevail over the House bill’s slower phase-in. In the wake of a heavy emphasis on education by both parties at their conventions, Congress is under pressure to pass education reform and school construction bills. However, there has not been much change in the status of education legislation since my June column. On March 2, 2000, the Senate approved the “Affordable Education Act of 2000” (S. 1134), a comprehensive education bill. S. 1134 includes the small issuer exemption raiser, creates a separate category of private activity school bonds for states limited to the greater of $10 per capita or $5 million annually, and would also allow the Federal Home Loan Banks to guarantee up to $500 million in school bonds annually. The Senate rejected an effort by Senator Robb (D-VA) to amend S. 1134 to include a $24.8 billion education tax credit bond provision. Progress on education and school construction bills has been slower on the House side. In late March, the Ways and Means Committee approved H.R. 7, the “Education Savings and School Excellence Act of 2000.” H.R. 7 would increase the small issuer arbitrage rebate exemption from $10 to $15 million, and would also extend the spend-down period for school bonds from two to four years. H.R. 7 never reached the House floor, however. Republican leadership prevented a vote that might have sent H.R. 7 back to Ways and Means for consideration of an alternative proposal (H.R. 4094) sponsored by Representatives Rangel (D-NY) and Johnson (R-CT). The Rangel/Johnson proposal would strike the provisions of H.R. 7 easing arbitrage rebate requirements and substitute a $22 billion tax credit bond program. The current outlook for action is unclear, but mounting pressure to pass some kind of major education bill may bring movement on H.R. 7 in the fall. Even if H.R. 7 overcomes its internal House difficulties, however, both H.R. 7 and S. 1134 face a Presidential veto because of their expansion of tax-favored education savings accounts and making tax incentives applicable to private schools. Republicans do not have the votes to override in either House.


Thus, it may be left to the next Congress to pass major education legislation. We have seen the introduction of a number of tax credit bond proposals this session. Some have predicted that Congress might pass tax credit bond legislation before adjournment. For example, there is a possibility that the Rangel/Johnson tax credit bond proposal could garner enough bipartisan support to persuade Republican leaders to allow it to become the vehicle for school modernization legislation. Better America Bonds are also mentioned as a possibility in the environmental area. To date, however, tax credit bond proposals have made little headway in a Republican-controlled Congress. We continue to watch for retroactive tax bills. None has surfaced since last year, when several retroactively-dated bills were introduced, including H.R. 3097 (the “Private Enterprise Protection Act” by Congressman Sanford (R-SC)), H.R. 2756 (the “Fair Competition in Tax-Exempt Financing Act” by Con-gressman Hall (D-TX)), and H.R. 2398 (the “Private Activity Bond Clarification Act” by Congressman Delay (R-TX)). No movement is anticipated on any of these bills. NABL is now on record opposing, on grounds of good public policy, the use of retroactive bills in the municipal bond area. The Board’s statement regarding retroactive tax-exempt bond legislation was published in the June 2000 issue of The Bond Lawyer and also can be found on the NABL website. There are new developments in the area of deregulation and restructuring of the electric power industry. On July 11, representatives of municipal and investor-owned electric utilities announced a long-sought agreement, which would settle the extent to which municipal utilities should be allowed to use tax-exempt debt in a competitive electricity market. Essentially, the compromise grandfathers existing municipal utility debt and would permit municipal utilities to issue new tax-exempt debt for transmission (for “local transmission facilities,” i.e., those serving a utility’s existing wholesale or retail customers only) and distribution facilities, but not for generation facilities. Under the plan, municipal utilities could elect to terminate issuing new tax-exempt bonds for generation facilities or remain subject to modified private use rules. Shortly after announcement of the compromise agreement, Representatives English (R-PA) and Hayworth (R-AZ) introduced H.R. 4971 and Senator Murkowski (R-AK) introduced S. 2967. The companion bills embody the agreement and both are entitled the

“Electric Power Industry Tax Modernization Act.” Supporters of the proposals will push to have the legislation included in any broader tax bills that the House Ways and Means Committee and the Senate Finance Committee consider in the fall. Bankruptcy legislation remains procedurally snarled on the Senate side. The municipal market’s interest in this legislation is in provisions affecting municipal bankruptcy, including a requirement that a municipality receive a court order for relief after filing a petition under Chapter 9 and an enlargement of the scope of section 901 of the Code. While these provisions are not controversial, several others in the legislation are, including measures related to abortion clinic violence and a cap on homestead exemptions. In addition, the bill contains the Senate’s minimum wage/tax relief package. The tax provisions prevent the bill from moving to conference because tax legislation must originate in the House. The Senate Republican leadership has been unable to secure the unanimous consent necessary to strip out the tax provisions due to Democratic opposition to the bill. It remains to be seen whether bankruptcy reform legislation will pass in this Congress. Second Annual SEC Municipal Market Roundtable Scheduled The SEC will again sponsor a Municipal Market Roundtable for municipal market participants. The second annual Municipal Market Roundtable will take place at the Commission in Washington, D.C., on October 12, 2000. The SEC has asked NABL members to suggest potential topics for discussion at the Roundtable. In other news related to the SEC, NABL filed two letters of comment on the SEC’s recent Interpretive Release on the Use of Electronic Media. The letters are reprinted in this edition of The Bond Lawyer and are also on the NABL website. The SEC also recently approved final Regulation FD on selective disclosure and amended Rule 10b-5 on insider trading. NABLNET subscribers received all of these materials in the form of an e-mail NABLNET Alert as soon as they were available. www.nabl.org Website Update In addition to the NABL comment letters and SEC Releases noted above, recent NABLNET Alerts


have included requests for advance questions for Bond Attorneys' Workshop panels and for nominations for the Friel Medal, as well as NABL Board Statements on (1) Retroactive Tax-Exempt Bond Legislation and (2) Staffing in the IRS Tax-Exempt Bond Branch. If you are not receiving the Alerts and you would like to, please inform us of your e-mail address. Also, if you change e-mail addresses, please let us know so we can update our records. As always, we welcome your feedback on the website. End Note Wall Street is taking what at first glance might seem a curiously neutral approach to the 2000 elections. The New York Times reports that, while ordinarily attracted to government-shrinking, tax-cutting Republicans, the Street is inertially loathe to support any candidate who might effect policy changes that would undermine the country’s long-lived economic boom. A better result from the Wall Street point of view would be continued legislative control in the hands of one party with White House control in the other. In other words, to paraphrase an old advertising slogan, “Washington — gridlock is our most important product!” Bill Larsen Washington, D.C. August 18, 2000 NATIONAL OFFICE NEWS

Registrations for the 25th Annual Bond Attorneys' Workshop are pouring in to our office. If you haven't already signed up, there is (as this is written) still time. Registration forms are printable from our web site, www.nabl.org, or may be obtained from our office. This year's Workshop has 30 breakout sessions in addition to an early Wednesday session on GASB-34, and general sessions on Developments in Tax, State and Securities Law. Our Thursday luncheon speaker is Nina Totenberg, National Public Radio's award-winning legal affairs correspondent. You have heard her reports on NPR's critically acclaimed newsmagazines, All Things Considered, Morning Edition, and Weekend Edition. Probably the biggest development for the Bond Attorneys' Workshop will be the addition of a CD-ROM of the BAW book. Attendees will receive the traditional bound volume of the BAW proceedings and, in addition, will receive the book in (fully searchable) CD-ROM format.

Cynthia Weed, Chair of BAW, has done a wonderful job of orchestrating this Workshop and producing the CD-ROM. To celebrate our 25th Workshop, she has compiled a section in the book reflecting the history of the Workshop. Following the first day of the Workshop, NABL will hold its Annual Meeting. One of the highlights of this meeting will be the election of our new officers and directors. In addition, there will be a report from President Howard Zucker and remarks from our incoming President, Hobby Presley. Hope to see you there. Be sure to check our web site for future information about our Winter teleconference on ethics. We received positive feedback from last year's teleconference, and plans are now being made to provide a similar program that will offer continuing legal education credits from most mandatory CLE states. Information about this teleconference will be mailed in the near future. If you have any comments or suggestions, please contact us at [email protected] or 630/ 690-1135. Jane L. Walter Interim Executive Director August 10, 2000 NABL pays attention to its members. Each member inquiry is answered on a same-day or next-day basis. Who else does this? REPORT OF THE 2000 NOMINATING COMMITTEE; NOTICE OF AND AGENDA FOR ANNUAL MEETING The 2000 Nominating Committee of the National Association of Bond Lawyers, selected by the Board of Directors of the Association, respectfully nomi-nates the following members for election to the indicated offices for one-year terms, or as directors for the indicated terms, at the Annual Meeting of the Association to be held on September 20, 2000: Nominee for Officer Office William J. Noth President-Elect William L. Nelson Secretary Helen C. Atkeson Treasurer


Nominee for Director Term Ending W. Jackson Williams 2001 Linda B. Schakel 2003 Meredith L. Hathorn 2003 Pursuant to Section 7.01 of the Association’s By-Laws, any member may nominate any other member for an executive office or for the Board of Directors from the floor of the Annual Meeting, provided that written notice of intention to so nominate (naming the candidate or candidates and specifying the office or directorship to which each such candidate is to be nominated) is delivered to the President and to the Executive Director of the Association not less than 14 days before the Annual Meeting. Pursuant to Section 6.02 of the By-Laws, President-Elect J. Hobson Presley, Jr., automatically succeeds to the office of the President upon the election of a new President-Elect. Howard Zucker, as Immediate Past President, will remain as a director for another year pursuant to Section 5.02 of the By-Laws. Frederick O. Kiel, as Editor of The Bond Lawyer: The Journal of the National Association of Bond Lawyers, continues as an honorary director pursuant to Section 5.02 of the By-Laws, and the new Chair of the Bond Attorneys’ Workshop, Eric E. Ballou, will be, ex officio, a director of the Association for one year. In addition, the persons listed below will continue to serve as directors for their unexpired terms as indicated: Director Term Ending Virginia D. Benjamin 2002 Jeffrey M. McHugh 2002 William L. Gehrig 2001 Respectfully submitted, 2000 NOMINATING COMMITTEE Floyd C. Newton III Mae Nan Ellingson Monty G. Humble Bruce P. Weisenthal Howard Zucker By: Floyd C. Newton III, Chairman

August 4, 2000

NOTICE OF 2000 ANNUAL MEETING OF THE NATIONAL ASSOCIATION OF BOND LAWYERS Notice is hereby given that the annual meeting of the National Association of Bond Lawyers will be held on Wednesday, September 20, 2000, at 6:00 p.m., local time, in the Red Lacquer Room, on the fourth floor of The Palmer House Hilton Hotel, 17 East Monroe Street, Chicago, Illinois. All Association members are encouraged to attend. An agenda for the meeting and the report of the 2000 Nominating Committee are included with this notice. The By-Laws of the Association provide that a quorum will be deemed to be present at any annual meeting and that a member is entitled to vote only in person and not by proxy. The annual meeting has been scheduled to coordinate attendance at the Twenty-fifth Annual Bond Attorneys’ Workshop. Attendance at one event is not a prerequisite for attendance at the other, nor does attendance at one event entitle a person to attend the other. William J. Noth Secretary AGENDA NATIONAL ASSOCIATION OF BOND LAWYERS TWENTY-SECOND ANNUAL MEETING The Palmer House Hilton Hotel Chicago, Illinois Red Lacquer Room 6:00 P.M., Wednesday, September 20, 2000 I. Introduction


Howard Zucker

II. Report of the Treasurer Linda L. D’Onofrio III. Report of the President Howard Zucker IV. Report of the 2000 Nominating Committee Floyd C. Newton III V. Election of new Officers and Directors VI. Remarks of the new President

J. Hobson Presley, Jr. VII. Adjournment When you join the National Association of Bond Lawyers you harvest sigfigicant discounts on its Bond Attorneys' Workshop and its state-of-the-art seminars.

SHARED TAX OBSERVATIONS So, you have returned from the mountains and beaches and trips abroad? You’re ready to tackle any transaction, assume any challenge, draft any document? That’s what vacations are for! Sewer Revenue Bonds, a Negative Ruling and a Court Challenge The most interesting tax law development this quarter relates to sewer revenue bonds. On April 3, 2000, the IRS ruled (PLR 200026020) that sewer revenue bonds proposed to be issued by the City of Santa Rosa, California, would be taxable. On June 30, 2000, the City petitioned the US Tax Court for judgment declaring to the contrary. The fight will be fought through the autumn and winter, and I, for one, am looking forward to it. Facts. The facts are these. The City, which is located in Northern California not too far from the geothermal geyser fields, proposed to issue sewer revenue bonds to finance a pipeline (the “Facility”) to carry treated wastewater (tertiary treatment, almost potable) past a few agricultural areas owned by persons needing irrigation (the “irrigators”) to the geyser fields. There, the water (oops, I misspoke, the wastewater) would be held in a storage tank and, ultimately, injected into the ground, become heated, and produce steam. The steam would be used to generate electricity for sale by an electric company (the “Company”). Also, a small portion (less than 5%) of the wastewater would be received, under 10+ year contracts, by the irrigators to irrigate their fields. The Company entered into a contract with the City to receive the wastewater in specified quantities at specified times. The Company agreed to pay the City: nothing. Right, zero dollars. The term of the contract was Z years. During the last third of the term, the Company was permitted to terminate by making a termination payment to the City, and during the first two-thirds of the term, the City was permitted to collect specified liquidated damages if the Company did not take the wastewater. Also, as a standard contract term, specific performance rights were available to each party to compel performance on breach. Output Regulations Inapplicable. The ruling held that the temporary output regulations did not apply to the Facility because (1) under the definition of Reg.

[White photo]


§1.141-1(b), an output facility includes a water facility, but not a wastewater facility, (2) the Facility was not a water facility because (by analogy to Code section 142(a)(4)), the Facility was not available to the general public since the contracts with the irrigators (even if they were members of the public) exceeded the 180-day use permitted by Reg. §1.141-3(c)(3), (3) the Facility was not a water facility because it was an integral part of the City’s sewer system, (4) the output regulations are intended for owners of output facilities generally subject to an open-ended obligation to serve members of the public required to make continuing payments for service and neither the irrigators nor the Company were within this category, and (5) even if the Facility was within the scope of the output regulations, the contract would be subject to analysis under Reg. §§1.141-3 and 1.141-4 because the special benefits and burdens test of output Reg. §1.141-7T(c) does not apply to contracts which provide a nongovernmental purchaser with specific performance rights. Business Use Test Met. The ruling then holds that the private business use test of Reg. §1.141-3 was met because (1) the right of the Company to receive wastewater was a reservation of capacity of the Facility, (2) a reservation of capacity is a special legal entitlement, and (3) a special legal entitlement is private business use within the meaning of the private business use test. The Company, therefore, would use the Facility in its trade or business of pro-duction of electricity. Private Payment or Security Test Met. Finally, the ruling holds that the private payment or security test of Reg. §1.141-4 was met, not by reason of the liquidated damages and termination payments possibly to be paid by the Company (these were entirely disregarded as contingent), but rather by reason of the sewer fees paid by the ratepayers. The ratepayers were deemed to use the Facility (which, as noted, was bond-financed property used in the electric generation business of the Company) to dispose of their sewage after treatment at the City’s plant and the ratepayers made payments in respect of the Facility. Thus, the fact that the acknowledged user (the Company) made no payments was irrelevant. Example 5 Applicable. The ruling applied Example 5 of Reg. §1.141-4(g) (holding that the payment test is met in the case of general obligation bonds issued to finance a revenue-producing hospital operated under a bad management contract). As with that Example, “While [the bad]

use is occurring, the ratepayers pay sewer fees, which are pledged to debt service on the Bonds, for processing and disposing of their sewage. Thus, the sewer fees, like the patient fees in Example 5, are payments in respect of property . . . used for a private business.” Example 4 Inapplicable. The ruling discounts the analogy of Example 4 of Reg. §1.141-4(g) (holding that payments by utilities for an electric line to be placed underground at a cost paid with bond proceeds are not to be counted against the payment test). “City misunderstands Example 4. Example 4 is an example of when payments will not be taken into account because they are directly allocable to other property being used by the person making the payment. . . . Unlike Example 4, there is no separate governmental property being financed to which the sewer fees can be allocated.” Petition for Declaratory Judgment. In the petition for declaratory judgment filed by the City, the City alleges error of the IRS Commissioner under the security or payment test (in, among other things, concluding that the sewer fees were to be paid in respect of property used for a private business use, when in fact the fees were to be paid with respect to the governmental function of sewage disposal), under the private business use test (in, among other things, concluding that the use by the Company was a special legal entitlement when, in fact, such use was merely an incidental use of the Facility) and under the output regulations (in concluding that the Facility was not an output facility, as well as in concluding that the specific performance rights under the Contract were the same as the specific performance rights referenced in Reg. §1.141-7T(c)(5)). The fight will be an interesting one and should have the side benefit of provoking a national discussion on the intent of the Senate Finance Committee in 1986 in reinstating the security interest test eliminated by the House Ways and Means Committee in 1985. The controversy will also be of interest to those in the Treasury Department who are responsible for drafting the allocation regulations relating to the private business tests.

Private Business Tests: Instrumentalities The private business tests were also of interest to certain instrumentalities this Spring. Nonprofit Corporation for Electric Power. Private


letter ruling 200026013 (released March 29, 2000) held that a nonprofit corporation formed and operating under the principles of Rev. Proc. 57-128 was a wholly-owned instrumentality of its members (a state agency, a city agency, a state instrumentality and a public corporation, each of which was represented to be a political subdivisions) for purposes of the private business tests. The instrumentality was formed to coordinate the operation of electric generation resources and the purchase and sale of electric power. Nonprofit Corporation for Resort Development. Similarly, private letter ruling 200022028 (released March 2, 2000) holds that a corporation created by the state legislature as a subsidiary of an authority was an instrumentality of the state under Rev. Rul. 57-128 for purposes of the private business tests and was permitted under Rev. Rul. 57-187 to issue bonds as an “on behalf of” issuer. The corporation was created for the purpose of issuing sales tax revenue bonds and tax increment financing bonds, the proceeds of which bonds were to be used by a company to construct a resort anchored by a theme park. Sounds right to me. (Do you sometimes won-der why regular people think 103 tax lawyers a little quirky? On the one hand, a wastewater disposal facility financed with sewer revenue bonds meets the private business tests, while on the other a resort and theme park financed with sales tax bonds is perfectly permissible!) Of Peripheral Interest to the Private Business Tests Two IRS holdings not directly related to tax-exempt bonds may nevertheless interest bond counsel. Depreciation of Streets. In Technical Advice Memorandum 200017046 (September 10, 1999), the IRS holds that a developer may not depreciate streets and related facilities to be dedicated to the city. True, I would say. Why did he try? PILOT. In PLR 200025043 (March 27, 2000), the IRS approves the deductibility of PILOT (payments in lieu of taxes). Bond counsel will recall that PILOT do not count against the security or payment test due to their substantial character as generally applicable taxes. This private letter ruling, in reaching a favorable conclusion on deductibility, applies the tests of Rev. Rul. 71-49: (1) the payments must be measured by and equal to amounts imposed by regular taxing statutes, (2) the payments must be

imposed by a specific state statute, and (3) the proceeds of the payments must be designed for a public purpose (as contrasted with a privilege, service, regulatory function or local benefit). Political Subdivisions Two rulings in the past quarter have upheld the status of entities as political subdivisions. Port Authority. The first ruling (PLR 200017018, January 27, 2000) relates to a port authority created by three governmental units for the purpose of constructing facilities to transport and sell natural gas. The ruling holds that the authority is a political subdivision by reason of its broad power of eminent domain. The ruling also noted that the authority was controlled by governmental units and motivated by a “wholly public purpose.” Indian Organization. In the second ruling (PLR 200027019, April 5, 2000), the power of eminent domain did not exist. The favorable ruling relates to a city organization for members of a particular Indian tribe, where the organization shared the sovereign governmental powers of the Tribal council and where those powers included the power to enact regulations and establish a court (namely, the police power). The ruling is based on §2.03 of Rev. Proc. 84-38, providing that a subdivision of an Indian tribal government which has been delegated one of the generally accepted sovereign powers may qualify as a political subdivision. Qualified Mortgage Bonds for Reservation Residences In private letter ruling 200022038 (March 6, 2000), the IRS considers the qualified mortgage bond requirement of Code section 143(c)(1)(B) that an aided residence must be “within the jurisdiction of the authority issuing the bond” and holds that Indian reservation lands are within the issuer’s jurisdiction. The ruling reasons, quite nicely, that because the population of Indian reservations is included in the volume cap, it is only fair that the reservation lands be included in the issuer’s jurisdiction for purposes of qualified mortgage bonds. 501(c)(3) Health Care Integration

Asset Transfer Permitted. In private letter ruling 200025056 (March 20, 2000), the IRS holds that the 501(c)(3) status of individual organization is not


adversely affected by creation of an integrated health care delivery system relating to four hospitals. “Section 501(c)(3) organizations do not jeopardize their tax-exempt status by transferring their assets to other organizations exempt under section 501(c)(3) where the assets transferred are used to further exempt charitable purposes.”

IRS Review of Joint Ventures. Tax Notes Today (August 1, 2000) reports that, in a talk on August 1, 2000, before the AICPA National Health Care Industry Conference, Thomas Miller, manager, EO Technical, Tax Exempt/Governmental Entities Division (nice, short, title) stated that the IRS will continue to review operations of joint ventures between exempt and for-profit hospitals for excessive private benefits. The scenarios of Rev. Rul. 98-15 (contrasting between a permissible arrangement and an impermissible arrangement) will form the basis of the review. Of importance in the reviewing process will be the price of transfer of assets (as at fair market value), the nature of the joint venture arrangement, and the structure of the board (including the fre-quency of board meetings and the mechanisms for board receipt of operational information).

Manufacturing vs. Ancillary Facility

Technical Advice Memorandum 200025004 (February 16, 2000) holds that cheese curing is part of the core manufacturing of cheese. Although you may believe the topic somewhat remote (how often are you faced with a bond-financed cheese curing facility?), the three substantive paragraphs of the TAM are of general interest: ancillary activities must be located on the same site as core manufacturing, but not all of the key components of core manu-facturing need be located on the site; making cheese is manufacturing; curing cheese is a key component of manufacturing cheese and not an ancillary activity; and, therefore, the cheese curing process may be located on a separate site. Federal Guarantees FSA 200023018 (March 3, 2000) confirms the opinions of bond counsel rendered over several decades: the commitment by a federal agency (read, FmHA/RDA) to purchase permanent financing conditioned on final project approval does not cause interim obligations to be federally guaranteed. Because the federal funds are not available until the project is completed and are not available upon mere default of the interim financing, there is not a guarantee.

Even if the proceeds of the permanent financing are pledged to the payment of the interim financing, “The mere fact that federal funds are available to pay debt service on the [interim financing] does not necessarily result in an indirect guarantee. The more important question is whether the substance of the transaction results in a transfer of risk to the federal government in the event of a default on the [interim financing].” You were never really concerned with the statutory reference to being “otherwise indirectly guaranteed,” were you? Section 42 Investment Proceeds As you know, for Code section 42(h)(4)(B) tax credit purposes, at least 50% of the aggregate basis of any building and land must be financed by a tax-exempt bond subject to the volume cap. In PLR 200022042 (March 7, 2000), the IRS holds that in determining the portion of the project financed with bonds, it is appropriate to aggregate investment proceeds (net of rebate) with sale proceeds. Query, to what extent with the IRS will aggregate investment proceeds with sale proceeds in applying other percentage requirements? For example, issuance costs financed with private activity bonds may not exceed 2% “of the proceeds of the issue.” If proceeds include investment proceeds, the 2% allowance may be higher than is customarily permitted. It is unlikely that bond counsel will urge this view (except on audit, of course). Rebate Computations Technical Advice Memorandum 200023002 (December 14, 1999) will assist you in computing rebate in the extreme case. The TAM holds that for the purpose of computing rebate for the final computation period, a late payment is taken into account on the date the rebate payment was due, not on the date of payment of the late payment (this in the context of discovery of a failure to pay rebate some 9.5 years after issuance). Abusive Arbitrage Device FSA 200030003 (April 18, 2000) considers whether golf course bonds were issued as an artifice and device. The repayment of the bonds was predicated on new development which, in turn, was dependent on the approval of permits and zoning changes, as well as on the availability of substantial additional financing. “The doubt surrounding the economic viability of the Development raises the


question as to whether there was a legitimate governmental purpose behind the issuance of the Bonds and whether more tax-exempt bonds were issued than necessary.” Ultimately, the FSA explained, whether an abusive arbitrage device was present would be dependent on a successful challenge of the property appraisal and market analysis. These were “at the very least, overly optimistic,” but not necessarily flawed when prepared. The FSA fails to discuss the economic advantage accruing to the issuer from the differential between taxable and tax-exempt interest rates. Presumably, however, if the issuer unreason-ably expected the development, the standards for the 3-year temporary period could not have been reason-ably expected. Final Observations I am sad to observe that this is my last column, as I substantially retired from my firm on August 1. I have greatly enjoyed writing with and for you in this column over the years and hope that you have found it sometimes helpful. As a final observation, I would like to say that perhaps now is the time for reconsideration of the written standard for our tax opinion. As chairman of the NABL committee on the standard for the tax opinion many years ago, I was a strong advocate of the view, ultimately adopted by the committee and the Board of Directors, that bond counsel should render a favorable tax opinion only if it there was no reason to believe that the IRS would not concur or, if there was reason for such a belief, then based on the standard for the state law opinion, that is, that a court could not reasonably find otherwise. That dual standard was based on the recognition that, in the vacuum of judicial decisions relating to the tax-exemption of municipal bonds, it was appropriate to take into account the IRS view. We are now entering an era of heightened sophistication in transaction structuring and intensified controversy regarding tax regulatory nuances. I, for one, wonder at the integrity of the cited standard. Like the Berlin Wall, it may be crumbling for lack of concerted belief. How many hot topic panels have you attended where audience opinion was divided? Can it be concluded that the IRS will concur with the view of the majority in the room? If your respected, knowledgeable, experienced colleague across the aisle is disagreeing

with you, is it not likely that both the IRS and the courts will disagree with one or the other view? Reasoned opinions are occasionally asserted as an answer to the conundrum, but these assertions are correctly desultory in the face of the recognition of failure of market support. Is not the more appropriate approach a recognition by bond counsel that the standard is, in fact, a little bit less lofty than the assertions of NABL's guidance to date? In Closing In closing, I would like to take this opportunity to extend heartfelt thanks and my sincere gratitude to the many NABL friends who have assisted me over the years. You have been my silent mentors. You have consistently inspired me to write with clarity, to read with perception and to analyze with common sense. Together we have been through some tough times (who can forget the Decembers of the mid-1980s), but we have also had some wonder-ful galas. I will miss both. Finally, I extend my thanks to your editor and my friend, Fred Kiel. He has been acknowledged as the creator of the Bond Attorneys' Workshop (which led to NABL), the one who had the first idea, and I am among the many who continue to be in awe of the success of this association of colleagues. And also, I cannot imagine how we would have coped if, as was originally intended, each NABL president had been responsible for preparation of a periodic newsletter to the membership. The consistent excellence of his quarterly compilation of The Bond Lawyer has strengthened the whole. Few have given as much to bond counsel, none have given more. Signing off for the last time, I urge you to write me when you are taking an indenture break or pursuing an adventure. Sharon Stanton White [email protected] August 5, 2000 BOB AND DALIA BAKER'S

LETTERS FROM ALBANIA


Editor's Note: There follow two more e-mailed letters from member Robert H. Baker, who took leave of the Chicago office of Jones, Day, Reavis & Pogue last summer, and his wife, Dalia, who are ministering to Kosovar refugees in and near Albania. Bob can be reached at [email protected]; contributions to aid the Bakers' mission may be sent to Presbyterian Disaster Assistance, 100 Witherspoon St., Louisville, KY 40202; checks should be payable to Presbyterian Church (USA), with "#9-2000137 — Kosovo Project" on the memo line. 24 July 2000 Dear Friends, It is difficult to believe that we have been working in Albania for a year. At times it has been frustrating; other times it has been lonely; and most of the time it has been challenging. But at all times it has been rewarding. This letter is to give you some idea how we live and what we do. Tirana: Tirana is the capital of Albania. It is a city that has grown from 250,000 people to 800,000 in just nine years. Village people are flocking to the capital looking for work. Some move in with extended families, but most find a small and empty lot and quickly build a small brick house for their family. All these houses are considered illegal, and the government is now threatening to destroy much of the illegal housing. None of these houses have running water and most do not have electricity. Those who do, have illegally tapped into the city’s electrical lines and water pipes. We live in a legal house that was built in 1993 and has always been rented to foreigners. It is on a dirt alley, but it is comfortable and spacious. We brought packets of flower seeds from America and now are enjoying a garden filled with flowers and even some tomatoes. We have running water and electricity, but only sporadically, because every day the city shuts off the power for several hours. Weather: The summers are sunny and very hot with the temperatures reaching over 100 degrees most days. There is no air-conditioning, but we have fans. The winters are cold and rainy. The difficulty in winter is that houses are not heated, and there is nowhere to go to get warm. We have a small propane heater in the house, which heats up the downstairs room to about 47 degrees, so I do cook with my coat on. At night we are very grateful for down comforters and flannel sheets. Food: We shop in open-air markets for all our

needs: even tins of tuna and bars of soap can be bought in the markets. I especially like


to buy from the village women who come to the city wearing their traditional black dresses with white scarves covering their heads. They sell what they were able to pick so the fruits and vegetables are ripe, fresh and fragrant. Meat is sold hanging on a hook, and the butcher will cut off a slab of what you want. I have been very nervous about the meat, be-cause it is usually hanging in the sun and is covered with flies. Chickens are sold live, so we never eat chicken since I do not know what to do with a live chicken. Cheese is plentiful, but only feta cheese is available and it is delicious. Albanians have the market on home baked bread, which is sold for 60 lek, which is about 40 cents. Worship: We go to an International Church on Sunday for a service that is in both English and Albanian. The Church is a Pentecostal mission church for the Albanians. Coming from a traditional Presbyterian service at Fourth Presbyterian in Chicago, it was difficult to get used to contemporary Christian rock music sung by a worship team complete with drums, guitars and electric keyboards. However, it is so wonderful to see the young Alba-nians coming to the Church and joyfully singing both in English and Albanian. I never thought that we would be clapping to the rhythm of the music in a church service but we are and it is actually fun. We miss John Buchanan’s brilliant preaching, but we understand the need for simplicity in Christ’s message to these new Christians. Work: Bob has found his work as Administrator of the Albanian Encouragement Project (AEP) interesting and challenging. He has already planned and hosted two national meetings about mission work and economic development. AEP has decided to offer an e-mail service to its members, and Bob has been busy implementing that program. We have already visited about half of the missionaries working in Albania and learned first hand about their work and commitment to this country. The prospect of a law regulating religions is of concern to the Protestant evangelical community. Albania recognizes four religious communities: Orthodox, Roman Catholic, Islam and Bektashi (the “whirling dervishes”). Protestants are not recognized as a religious community and currently are considered a cult. Bob has been working with a variety of government officials, from the President of Albania to the American Ambassador regarding this concern. His law training and diplomacy have won him progress, but the resolution is still not final. The most taxing job is his responsibility for the safety of

the 350 Protestant missionaries in the country. Albania is bracing itself for the fall elections. There has never been a peaceful election in this country. We ask for your prayers that we can get through September and October with no violence in the streets. Dalia has enjoyed teaching in the mission school called GDQ, the initials of the first Albanian missionary. It has been a wonderful school year. We are grateful to Fourth Presbyterian Church of Chicago, which made it possible for three El Salvadorian mission children to be able to attend GDQ school, one of whom is in her class. At the Lincoln Center, she trained the teachers to teach a TOEFL preparation course and received money from the Church of the Covenant in Cleveland, Ohio, to buy all the text books and tapes that were needed to start the program. The program has already had two eight-week sessions with 45 students enrolled and others on a waiting list. In the evenings, Dalia taught the writing section of the course. We visit the orphanages and visit the hospital with abandoned babies. We go to the center that has Kosovar victims who are still in Albania. Many are women that have not been able to cope after the trauma of war or rape. With the babies now born, another problem emerges: who will take care of these “rape babies?” Albanians do not want them; Kosovars say they are Serbian babies; and so the babies are here, in yet another center, simply left. We are helping out with craft projects that are done by widows who are living in the villages both in Albania and Kosovo. This is economic devel-opment at the most basic level. There are not many boring days in Albania. There are so many needs, but there are just not enough helpers and never enough time. We thank God for all of you who support our work here and who pray for us. We really believe that God has kept us healthy this year because of all your prayers. Keep our families in your prayers, since the real difficulty being here is being away from them. Blessings to all, Bob and Dalia Baker

03 August 2000


Friends, I am not sure what most people expect in retirement, but I doubt it is my experiences during the first part of this week. Early Monday morning I got a call from one of the Baptist missionaries from a city about 100 miles east of Tirana. She said that one of the Evangelical missionaries had been driving Sunday afternoon and had a traffic accident in which a nine year old girl had been killed. The missionary was being held by the police in jail while they investigated the Albanian version of vehicular homicide. (My blood ran cold knowing of the Albanian tradition, perhaps obligation, of vendetta and that the missionary in jail was ethnic Chinese from Singapore. Because of the dictator's alliance with Mao during the 60s and 70s, most Albanians hate the Chinese.) I called the British embassy to report the situation since that embassy handles the affairs of Singapore citizens here because their country does not have an embassy in Albania. I also called an Albanian Christian lawyer that I work with to learn about Albanian criminal law. In Albania, the police have the right to hold someone 48 hours without phone calls or visitors (except for the suspect's lawyer) and if the prosecutor presses charges, the defendant will be held in jail until trial which could be six or more months away. I hated to think what would happen to a 50 year old female Singaporean missionary held in an Albanian jail for that length of time. I decided that I needed to go to Korca the next day and bring our lawyer with us. That night I learned that some of the other missionaries working in Korca had talked to the family and gone to the girl's funeral (in Albania, bodies are buried within 24 hours of death). Someone in the family had told the missionaries that they didn't blame the missionary and might not press charges. While Korca is only about 100 miles from Tirana, it is a four hour drive. We traveled knowing that there might be a hearing in the case before we could get there. We were modestly hopeful. I had notified the entire Evangelical community of the situation, and I know that prayers were said throughout the country for both the missionary in jail and the family grieving the loss of their daughter. We arrived outside the court and learned that the family had come to court and had not pressed charges. The court hearing had been held, and the missionary had been freed. However, she was still being processed by the police when we arrived. About 30 minutes

later, the missionary left the police building to be greeted with tears of joy by her four fellow missionaries working in Korca and the people from her village church. The missionary works alone in a village about 30 minutes outside of Korca, but the people of her church had come to support her and celebrate her freedom. When asked what she wanted, she simply said, "a shower." Now we had the difficult duty to visit the family. What do you say to a family on behalf of the mission community, one member of which drove the car that killed their daughter? I know that I was not elegant or insightful, but I did the best I could. Incredibly, the girl had attended the children's group of a local Evangelical church in their village (a different village than the one the Singaporean missionary works in) and her brother was a Christian. I can't begin to calculate how remote the possibility is of a Evangelical Christian missionary killing an Evangelical Christian child in a traffic accident, but it had happened. The family lived on the fourth floor of a typically run-down Communist period apartment house. These are the ones that look like they might fall down, every other stair is broken concrete and no one has cleaned anything since the old regime fell in 1992. Usually, the insides of these apartments are surprisingly nice, but this apartment had almost nothing. This was the apartment of one of those families that have not succeeded in the post Communist world and are extremely poor. So poor in fact that the 16 year old Christian son has left Albania to be an illegal worker in Greece to help support the family. There is also an 11 year old boy who is troubled, and the only person the middle son spoke to was his now deceased sister. The father hadn't shaved in some time, and the mother looked gaunt and very frail. In the room in which we were shown also were two grandmothers and a collection of aunts, uncles and cousins. After Dalia and I had said all that we could think to say to the grieving family, the father spoke to us and said two things. He did not blame the missionary for his daughter's death (the girl had run into the road right in front of the missionary's car to get some ice cream from a vendor across the road), and he wanted us to know that the missionary had nothing to fear from his family. There was an inward sigh of relief at this because this meant that there would be no vendetta. We got into the car for the long drive back to Tirana. I could only think of the missionary and the family. I fear that she will be tormented by the "if only I had" thoughts and the resulting guilt for a long time. Will she be able to go back to her village


church? Should she? Can she continue to live alone in this society? For the family, I can't imagine the pain of losing a child in this way. I also was over-whelmed with their act of forgiveness. I wonder how many Western well-to-do Christians would have forgiven the driver within two days of the death of their beautiful daughter. Yes, they showed us the picture of her, and you couldn't help but cry at their loss. Under Albanian custom, the missionary driving the car must make things right with the family. Really, how do you ever make things right? So an incredible two day period closed. I have written about the experience of dealing with the death last fall of a 34 year old missionary with two children. Now I have sat in the apartment of a family speaking on behalf of the Evangelical missionaries of Albania expressing our sorrow for the death of a little girl killed by a missionary. Is this what retirement is supposed to be? Yet, I am glad that God has called me to be here at this time. Bob Baker ASSOCIATION COMMENTS ON SEC RELEASES ON USE OF ELECTRONIC MEDIA June 16, 2000 Mr. Jonathan G. Katz, Secretary U.S. Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549-0609 RE: Use of Electronic Media File Number S7-11-00 Dear Mr. Katz: On behalf of the National Association of Bond Lawyers ("NABL"), we file these comments regarding the Commission's Release Nos. 33-7856, 34-42728 and IC-24426 (the "Release") pertaining to the use of electronic media under the federal securities laws. NABL encourages such use and appreciates the opportunity to express the views of its Board of Directors with respect to this important development in the municipal securities industry. By separate letter, the Electronic Disclosure Subcommittee [of the Securities Law and Disclosure Committee] of NABL is submitting additional comments [printed infra] to supplement the comments provided in this letter.

National Association of Bond Lawyers NABL was organized in 1979 for the purposes of educating its members and others in the law relating to state and municipal bonds and other obligations, providing a forum for the exchange of ideas as to law and practice, improving the state of the art in the field, providing advice and comment at the federal, state and local levels with respect to legislation, regulations, rulings and other action, or proposals therefor, affecting state and municipal obligations, and providing advice and comment with regard to state and municipal obligations in proceedings before courts and administrative bodies through briefs and memoranda as a friend of the court or agency. Over 3,000 attorneys and paralegals are members of NABL representing members from all 50 states, the District of Columbia, and Puerto Rico. NABL conducts an extensive series of seminars and workshops throughout the year and is active in the publication of materials on professional standards and conduct (in addition to coursebooks for the seminars), including the Model Bond Opinion Report (1997 Edition), the Model Letter of Underwriters' Counsel (1999 Edition), and The Function and Professional Responsibilities of Bond Counsel (1995 Second Edition), and has co-sponsored the project first published in 1987, revised in 1994, as Disclosure Roles of Counsel in State and Local Government Securities Of-ferings. Facilitation of Electronic Communications NABL applauds the Commission's steps to facilitate electronic delivery of communications to investors. We agree that there are significant benefits that investors, underwriters and broker-dealers as well as municipal issuers can gain from the increased use of electronic media, and we believe that such use can occur in a manner consistent with the federal securities laws. The Commission's clarifications in the Release regarding investor consent, delivery of documents in portable document format and the general legal principles pertaining to online offerings should go far in permitting issuers of municipal securities and broker-dealers to continue development of sound electronic communications practices. NABL's able, that's no fable (credit: Rick Ballard, the only person who pronounces it thus).


Access to Historical Information One of the most important issues raised by the Release is how to facilitate communication of information by an issuer on a web site in a manner consistent with the issuer's duties under the federal securities law, in particular Section 10(b) of the Exchange Act and Rule 10b-5.1 It is NABL's position that electronic versions of official statements, annual and quarterly financial information, and other types of information available on an issuer's web site and intended for investors should be treated the same as that information in paper format,2 so long as a reasonable investor accessing the electronic version would understand that the information speaks as of a certain date. Therefore, the duties of an issuer with respect to such information would be the same whether the issuer chose to release information in a paper format or via its web site.3 Outside an offering period, absent a duty to correct or update, an issuer does not have a duty to update an earlier disclosure merely because an investor receives or accesses such earlier disclosure. Further, the duty of an issuer to correct or update information after its release, if any, should be no different for the issuer who has released the information on paper (through a filing with a NRMSIR, a press release or otherwise) or electronically (through posting on its web site or by internet delivery).4 In short, electronic documents should be treated no better and no worse than paper documents under the federal securities antifraud laws. Issuers of municipal securities have been encouraged by investors and analysts to post information on their web sites (outside the context of an offering of particular securities) in the interest of providing investors, analysts and the financial markets easier and more available access.5 Offering documents related to outstanding securities,6 comprehensive annual financial reports, press releases containing information of interest to investors, annual or quarterly information statements and event notices are a few examples. In the interest of providing this information promptly to a wider audience in the format (i.e., electronic) that many wish to receive such information, the use of a web site to communicate such information should be encouraged. without imposing any additional burdens or liabilities. In its Interpretive Release,7 the Commission stated that an issuer must meet the anti-fraud standards when it releases information to the public reasonably expected to reach investors in the trading

markets. The Release now raises the issue whether, due to the continuous availability of information once it is posted on a web site, information may be considered to be "republished" each time that it is accessed by an investor or each day it appears on the web site.8 NABL believes that the issuer does not release, and is not intending to release, information to the trading markets anew each time an investor accesses the issuer's posted information.9 Information on an issuer's web site should not be considered "republished" each time an investor accesses it or prints it out any more than information in a printed format would be considered "republished" each time accessed or photocopied by an investor. To conclude otherwise would create a new and unique continuing duty to update such information merely because it is provided by means of an issuer's web site, and would place an unreasonable burden on issuers choosing to provide information electronically rather than by a paper method of communication. Such a conclusion would frustrate the proper purpose of encouraging issuers to release to the investing public more information sooner, for a longer period of time and in a cost-effective manner. In the Release, the Commission requested comment on how technology can help minimize investor confusion while providing for the accessibility of potentially useful information.10 Notwithstanding our views as expressed in the previous paragraph, we do not dispute the fact that the release of information on a web site differs from a paper format in respects that may necessitate certain steps in the case of a web site presentation to minimize investor confusion as to whether the information is current or historical. While the facts and circumstances relating to an issuer's presentation of information by electronic media will ultimately determine whether a reasonable investor would be so confused, we believe that approaches such as those discussed below can be effective to avoid that confusion but such approaches are proferred as examples only and are not intended to be the definitive approaches.

In the case of past official statements for outstanding issues or prior year CAFRs, for example, many issuers have posted such documents in a special, archival section on their web site, clearly designated as such. The use of such an archival section can be effective to avoid confusion, particularly if accompanied by a portal message such as the following which users must respond to and click to acknowledge their acceptance:


"By clicking the [CONTINUE] button below, the user acknowledges that the requested information has not been updated since [its date]."

Keeping official statements, CAFRs and other relevant information in a governmental archive is often required by local law. This should be no different if an archive is on paper or in a public electronic file such as a web page. Governments are required to maintain public access to their archived documents. Making them available on a web page fosters the public interest in open government but should not form the basis for special securities law liability.

In the case of other historical documents and information that an issuer may wish to provide on its web site but not segregate in a separate archival section, it is NABL's understanding that issuers have taken many approaches to presenting such information by electronic media in a manner that clearly labels them as historical and indicates that they have not been updated. For example, access to an issuer's most recent annual or quarterly infor-mation statement may be provided with a portal message such as the following which users must respond to and click to acknowledge their acceptance. Alternatively, such a message can be provided as a necessary step before a reader can click to access the document. "The information in this [name of document]

is provided as of [the date]. Issuer A has not undertaken nor has it assumed any responsibility to update such information."

Conclusion We submit these comments with the hope that the Commission will clarify its view as to an issuer's use of a web site to release information to the investors and the trading markets. NABL concurs with the basic principle expressed by the Commission in the Release (and prior related releases) that the use of electronic media to facilitate communications in the securities markets is to be encouraged. We hope these comments are helpful. We appreciate the opportunity to comment on the Release, and we look forward to further discussion of these important issues with the Commission and Staff.

Respectfully submitted, Howard Zucker, President National Association of Bond Lawyers Electronic Disclosure Subcommittee

Helen C. Atkeson, Co-Chair, Subcommittee Denver, Colorado John M. Gardner, Co-Chair, Subcommittee Denver, Colorado C. Richard Johnson, Co-Chair, Subcommittee Chicago, Illinois Walter St. Onge, III, Chair Securities Law and Disclosure Committee Boston, Massachusetts John McNally, Vice Chair Securities Law and Disclosure Committee Washington, D.C. Stephen J. Adnopoz New York, New York Patrick K. Arey Baltimore, Maryland Michelle F. Blain Baltimore, Maryland David Y. Bannard Boston, Massachusetts Doron Bar-Levav New York, New York James E. Dinerstein St. Paul, Minnesota Parker W. Eads Louisville, Kentucky Colleen E. Hicks Philadelphia, Pennsylvania Thomas E. Klancnik Madison, Wisconsin William L. Larsen Washington, D.C. Daniel M. McRae Atlanta, Georgia John S. Overdorff Phoenix, Arizona Bradley D. Patterson Salt Lake City, Utah Kenneth B. Pollock Atlanta, Georgia Carol Polumbo Austin, Texas Margaret H. Purcell Jacksonville, Florida Linda Port Boston, Massachusetts


Lynn Reynolds Birmingham, Alabama R. Patrick Riley Cincinnati, Ohio John M. Rumin Pittsburgh, Pennsylvania Alan Wohlstetter Philadelphia, Pennsylvania Dee P. Wisor Denver, Colorado 1. 15 U.S.C. 78i(b); 17 CRF 240.10b-5. 2. NABL's position is consistent with that of the

SEC as articulated in Release No. 33-7233 (October 1995) (17 CFR Parts 231, 241 and 271): "Electronically delivered documents must be prepared, updated and delivered consistent with the provisions of the federal securities laws in the same manner as paper documents." See Footnote 20.

3. In this letter, we discuss only the release of infor-

mation by an issuer with the intent of reaching the investing markets. In many cases, issuers will use their web sites to provide unrelated information not intended for such markets.

4. This letter does not address issues concerning if

and/or under what circumstances an issuer may have an obligation to correct or update infor-mation under the federal securities laws.

5. A web site also offers issuers the opportunity for

communication with investors and the financial markets during an offering period for particular securities. For example, during an offering period, an issuer of municipal securities may wish to post an offering document on its web site in connection with the offering of its securities. In such a case, NABL believes that the electronic version of that offering document should be treated the same as one in paper format. Offering documents in paper format routinely indicate a date and explain that the information is subject to change without notice. NABL understands that some issuers have been advised to avoid potential confusion by posting offering documents during an offering period on a separate page/screen of their web site, clearly identified for that particular offering of securities. Some issuers have also removed the offering document for a particular issue of securities from that screen following the related

offering period, to avoid confusion as to the purpose of the posting.

6. For example, after issuance and delivery of

securities, it may be important that offering documents related to those outstanding securities continue to be accessible to investors. While transaction confirmations delivered under Rule G-15 of the Municipal Securities Rule-making Board ("MSRB") contain important summary information, it is typical that the best source of detailed information concerning terms of the securities remains the offering documents. Paper copies of such offering documents are fre-quently requested from and provided by issuers and are also available from the MSRB and other repositories. However, investors have complained that the paper copy retrieval systems are not cost effective and do not provide information on a timely basis. Details of redemption provisions, issuer covenants, and bondholder rights are often critical to an invest-ment decision and should be as easily and immediately accessible as technology will permit. For the great majority of institutional investors, online access to such information is already important, and such access will continue to grow in importance as internet access becomes universal in the investor community.

7. See SEC Release No. 33-7049 (March 9, 1994) (17

CFR Parts 211, 231 and 241). 8. Release at part D-5. 9. This letter also does not address when the volun-

tary release of information by an issuer to the marketplace does occur, i.e., as of the dated date of the information, the date of mailing, filing or publishing a paper format of the information, the date of posting by the issuer on the web site or at any other time.

10.

Release at part 5. June 16, 2000 Mr. Jonathan G. Katz, Secretary U.S. Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549-0609


RE: Use of Electronic Media File Number S7-11-00 Dear Mr. Katz: On behalf of the National Association of Bond Lawyers ("NABL"), we file these comments regarding the Commission's Release Nos. 33-7856, 34-42728 and IC-24426 (the "Release") pertaining to the use of electronic media under the federal securities laws. NABL encourages such use and appreciates the opportunity to express the views of our Sub-committee with respect to this important change in practice in the municipal securities industry. This letter supplements the letter of Howard Zucker, President of NABL, filed on behalf of NABL's Board of Directors.

National Association of Bond Lawyers NABL was organized in 1979 for the purposes of educating its members and others in the law relating to state and municipal bonds and other obligations, providing a forum for the exchange of ideas as to law and practice, improving the state of the art in the field, providing advice and comment at the federal, state and local levels with respect to legislation, regulations, rulings and other action, or proposals therefor, affecting state and municipal obligations, and providing advice and comment with regard to state and municipal obligations in proceedings before courts and administrative bodies through briefs and memoranda as a friend of the court or agency. Over 3,000 attorneys and paralegals are members of NABL representing members from all 50 states, the District of Columbia, and Puerto Rico. NABL conducts an extensive series of seminars and workshops throughout the year and is active in the publication of materials on professional standards and conduct, in addition to coursebooks for its seminars. The Subcommittee that prepared this letter is composed of members of NABL's Securities Law and Disclosure Committee. Members of the Subcommittee act as bond counsel, underwriter's counsel, issuer's counsel, trustee's counsel, purchaser's counsel, and counsel to other parties involved in municipal securities transactions. Subcommittee members are familiar with disclosure practices in a broad variety of transactions, among varied types of issuers, and in disparate geographic areas. Our comments, therefore, reflect these

different perspectives. This letter has received the general agreement of a majority of the Subcommittee, and its submission to the Commission has been authorized by the Board of Directors of the Association. However, this letter does not necessarily constitute the views of all NABL Officers and Directors or of all members of the Subcommittee. Facilitation of Electronic Communications We applaud the Commission's steps to facilitate electronic delivery of communications to investors. We agree that there are significant benefits that investors can gain from the increased use of electronic media, and we believe that such use can occur in a manner consistent with the federal securities laws. In particular, the Commission's clear statements in the Release regarding underwriters' reliance on municipal securities issuers' placement of official statements on web sites and identification of the documents comprising the preliminary, deemed final and final official statements for purposes of Exchange Act Rule 15c2-12,1 are welcome recognition that use of electronic media is authorized under such Rule. As indicated in President Zucker's letter, we believe that one of the most important issues raised by the Release is how to facilitate communication of information by issuers on a web site in a manner con-sistent with the issuers' duties under the federal securities law. Our Subcommittee fully endorses NABL's position that electronic versions of official statements, annual financial information and other information available on an issuer's web site and in-tended for investors should be treated the same as that information in paper format. The following comments are designed to provide more detail regarding facilitation of the use of elec-tronic media in connection with the sale and delivery of municipal securities. Clarification of Regulations We note several additional points related to regulations dealing with municipal securities. In the Release the Commission clarified that underwriters may rely on an issuer's identification of electronic documents that comprise the preliminary, deemed final and final official statements for purposes of Rule 15c2-12. The Commission has also recognized that sending an official statement in electronic form to


requesting customers complies with the "first class mail or other equally prompt means" requirement of section (b)(2) of the Rule.2 To clarify that delivery in electronic media will comply with other portions of the Rule, we note our belief that (i) an underwriter may "obtain and review" an official statement in electronic form under section (b)(1) of the Rule, (ii) issuers may deliver electronic versions of official statements to underwriters in response to section (b)(3) of the Rule, and (iii) an issuer may provide continuing disclosure information and notices of the 11 events under section (b)(5) of the Rule solely by electronic means. Because municipal securities dealers are governed by the rules of the Municipal Securities Rulemaking Board ("MSRB"), issuers of municipal securities will be prevented from fully developing their use of electronic media in connection with securities offerings unless those rules recognize such form of documents and clearly permit filings made with the MSRB to be in electronic form. Although the MSRB has indicated that electronic delivery of material can comply with most of its rules,3 such rules are written in language and concepts that assume the use of paper documents. Some of the rules may be read to support use of electronic disclosure, others will not. For example, MSRB rule G-32 contemplates the delivery to cus-tomers of a "copy" of a final official statement or a "written notice" that such a document is not being prepared by the issuer, and MSRB rule G-36 now requires that the dealers send two copies of the official statement to the Board in paper form. Issuer Responsibility for Hyperlinked Information In parts A-4 and B-1 of the Release, the Commission indicates that hyperlinked information will be considered part of an official statement for purposes of Rule 15c2-12 and discusses theories under which third-party information can be attributable to, and therefore becomes the responsibility of, an issuer of securities. While the Commission's discussion of the factors relevant in determining whether an issuer has adopted such information will provide very useful guidance to issuers in their use of, and cross reference to, third party information, we wish to address a concern about inclusion in a state or local government's web page of links to off-site information. Official statements relating to municipal securi-

ties offerings often contain (or include by cross reference) information coming from official and other sources that are not impossible to verify in any independent fashion. Examples of such information include state and regional demographic, assessed valuation and tax information compiled by governmental and other entities. This information is often vital to understanding the nature of the security and credit behind the securities being offered. However, it is not information that the issuer of the securities necessarily completes or can verify. In electronic format, the best way to make some of this information available may be by providing a hyperlink for the convenience of the investor. Where it is clear that the information is not provided by the governmental body, or even by those in the government responsible for matters concerning its financings, there should be no basis for considering that the government has securities law duties for the linked information. The analogy would be the continuing disclosure requirements of Rule 15c2-12, where information contained in an official statement, but not supplied by an obligated person, is not required to be updated. We, therefore, respectfully disagree with the Commission's conclusions that hyperlinked information in an official statement should "always be deemed" to be adopted by the issuer. Rather, other factors such as the risk of investor confusion and the manner of how the hyperlinked information is presented should be among the factors used in determining whether the information has, in fact, been adopted. We recognize the Commission's views on disclaimers as set forth in footnote 61 to the Release. However, to automatically treat hyperlinked information as adopted by the issuer would be to treat a document in electronic form differently than one in paper form. We see no justification for this difference, which would discourage the use of electronic media. Electronic-Only Offerings As indicated in part D-4 of the Release, issuers are not prevented from structuring their offerings to be effected entirely through electronic means. We believe that offerings of municipal securities may be particularly adaptable to electronic-only formats, so long as issuers can be assured that the offering will reach enough potential investors to reflect true market pricing.


Municipal securities are often offered to relatively small groups of investors. Reasons for this aspect of the municipal market include (i) the size of the offerings, (ii) particular interest from institutions, and (iii) particular interest from a limited group of investors, such as local investors who can use the state as well as federal tax exemption of interest paid on the obligations. There has never been a suggestion that limiting the scope of the offering violates any federal law. We, therefore, suggest that where participation in an offering is conditioned upon investor consent to electronic-only delivery by e-mail, paper forms of the offering documents should not be needed if the MSRB rules are revised to accept electronic filings. Other Issues In addition to the questions raised by the Commission in the Release, we wish to point out that an assumption underlying much of the Release may be that the electronic version of a document is the "same" as the paper version. For example, in part A-4 of the Release, the Commission discusses what docu-ments may comprise an official statement for purposes of Rule 15c2-12 and states that "the paper and electronic versions of each . . . official statement must be the same." Because of inherent differences in software and printer capabilities and design, paper and electronic versions of documents will always be subject to some differences in font, print size, pagination, etc. In order to accommodate these technical differences, we interpret the Commission's advice to mean that paper and electronic versions must be substantially equivalent, meaning that the content is the same while permitting minor variations in formatting.4 To conclude otherwise would severely hamper issuer efforts to make documents available in electronic form, putting them at risk for differences that may be the result of the user's software. Conclusion We hope these comments are helpful. Because of the growing desire of issuers to provide more information through electronic media, coupled with the already clear preference of the investment community for electronic availability of such information,5 we stand ready to serve as a resource in addressing the legal concerns that accompany the rapid evolution of these investor communications. We urge the Commission to continue its efforts to

facilitate the use of electronic media in connection with the sale of municipal securities. We appreciate the opportunity to comment on the Release, and we look forward to further discus-sion of these important issues with the Commission and Staff. Respectfully submitted, Helen C. Atkeson, Co-Chair National Association of Bond Lawyers Electronic Disclosure Subcommittee John M. Gardner, Co-Chair National Association of Bond Lawyers Electronic Disclosure Subcommittee 1. 17 C.F.R. 240.15c2-12 2. See, Release No. 33-7288 (May 1996), footnote 47. 3. See, "Electronic Delivery and Receipt of Informa-

tion by Brokers, Dealers, and Municipal Securities Dealers." MSRB Reports, Vol. 19, No. 1, Feb. 1999.

4. In Release No. 33-7288 (May 1996), the

Commission stated that, "Regardless of whether information is delivered in paper form or by electronic means, it should convey all material and required information. If a paper document is required to present information in a certain order, for instance, then the information delivered electronically should be in substantially the same order."

5. See, for example, the prepared remarks at the

MSRB Forum on Disclosure, November 11-12, 1998, of Gerry Lian, Vice President, Morgan Stanley Dean Witter Advisors: "NFMA vigorously endorses greater use of electronic disclosure;" Raymond Kubiak, Chairman, National Federal of Municipal Analysts: "Elec-tronic dissemination will enhance timeliness and may reduce costs;" and Thomas F. Walsh, Franklin Templeton: "The internet seems to be a logical delivery system for disclosure." See also "NFMA Recommended Best Practices in Housing Transactions," draft dated May 18, 1999, which


states in Part I that " . . . we strongly encourage the dissemination of data through the issuers' websites."

REPORT OF THE OPINIONS AND DOCUMENTS COMMITTEE RE: ELECTRONIC BIDDING OF THE SALE OF MUNICIPAL BONDS The Committee on Opinions and Documents reviewed a series of Bond Buyer articles which have appeared over the past several years concerning the implementation of various methods of providing for the electronic bidding of the sale of municipal bonds. Checklist of State Law Issues The electronic bid method used for the sale of bonds has expanded rapidly over the last three years with many new websites available for this purpose. The Committee developed a checklist of items to be reviewed by bond counsel. The items on the checklist are designed to assist bond counsel in their review of the requirements for the competitive sale of bonds as provided for in each State and in assessing compliance by a particular electronic bidding system with the requirements of that State. The checklist includes: (1) A review of the statutory authority for

an issuer to bid the sale of bonds through an electronic medium, including, if applicable, Maturity by Maturity (MBM) bidding.

(2) Performance by bond counsel of “due

diligence” to review the various screens that the electronic bidding service posts on its web site; the contractual language which appears and is agreed to by a potential bidder; and a review of what screens may be observed by the bidder during the bidding process.

(3) Because of questions that may occur

with regard to the jurisdiction of and venue for litigation regarding disputes involving electronic bidding, the Committee advises bond counsel to review the bid proposals and place a statement of jurisdiction and

applicable law such as “Any disputes arising hereunder shall be governed by the laws of ________, and any party submitting a bid agrees to be subject to jurisdiction and venue of the federal and state courts within _________ with regard to such dispute.” The precedent for establishing jurisdiction through this type of language, involving electronic transactions, is provided for in Compuserve, Inc. v. Patterson, 89 F.3rd 1257 (6th Cir. 1996).

Attribution Another area of potential dispute, albeit one that is easily resolved through proper procedures, involves the satisfaction of the burden of proof that an electronic transmission was from a specific source. An electronic record or electronic signature is attributed to a person if it was the act of that person. Therefore, another question bond counsel should ask during the electronic bidding process is the specific mechanism that would permit a bidder to be accepted into the bidding process and identified as the person submitting that bid. Maturity by Maturity Bidding One type of electronic bidding service provides an option for broker dealers and institutional buyers to bid on the purchase of bonds on a maturity by maturity basis (MBM), rather than the traditional “all or none” basis. In order to avoid the complex logistical problems related to the payment for the bonds at the closing by potentially twenty or more different purchasers, a clearing agent is used. The issuer enters into a clearing agent agreement in which the clearing agent agrees to wire the appropriate amount of funds for the purchase of the bonds on the day of the closing. The clearing agent is responsible for collecting funds from the individual maturity by maturity purchasers. It is important to review the computer screens which lead the maturity by maturity purchaser into a binding agreement to purchase a specific maturity for the bid price. It would be better to make sure the clearing agent has the contractual obligation of paying the appropriate funds to the issuer on the day of the closing so that a remedy that the issuer has for the payment of the appropriate amount funds exists for the issuer against the clearing agent. This simplifies the legal actions required if there is a failure to deliver the appropriate funds on the day of closing. Proposed State Legislation


While the electronic bidding process has been in existence for almost three years, many States have begun to develop legislation that follows the Uniform Electronics Transactions Act (“UETA”) developed by the National Conference of Commissioners on Uniform State Laws. This State legislation confirms the enforceability of the electronic transaction process and provides basic legal requirements related to the enforceability of an electronic transaction. Its purpose was to make such revisions to general contract law as are necessary and/or desirable to support transaction processes utilizing existing and future electronic or computerized technologies. An electronic signature is not necessarily an actual signature. A transaction can be consummated in any electronic manner so long as the parties express some form of acquiescence to conduct the transaction electronically, such as clicking on an “I agree” icon. Section 2(8) of UETA defines an “electronic signature” as “an electronic sound, symbol or process attached to or logically associated with a record and executed or adopted by a person with an intent to sign the record.” Section 2(7) of the UETA defines an electronic record as “a record created, generated, sent, communicated, received or stored by electronic means.” Section 7 of the UETA is the operative provision, which provides that a record or signature may not be denied legal effect or enforceability solely because it is in electronic form and that a contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation. If there is a legal provision which requires a record to be in writing, the electronic record satisfies that legal provision. If a law requires a signature, the electronic signature satisfies that requirement of the law. Federal Legislation The Electronic Signatures in Global and National Commerce Act, passed the United States Congress and was signed by the President on June 30, 2000. A summary of the Electronic Signatures in Global and National Commerce Act (“Electronic Signatures Act”) appears later in this report. It is designed to provide national and international standards related to the enforceability of electronic transactions. It is a more complex piece of legislation than the UETA and preempts the state legislation in this area to the extent that there is conflict with the Electronic Signatures Act.

A thorough analysis of the differences between the Electronic Signatures Act and the UETA can be found in an article written by Patricia Brumfield Fry of the University of Missouri School of Law. The URL is as follows: www.uetaonline.com/docs/pfry700.html SUMMARY OF THE ELECTRONIC SIG-

NATURES IN GLOBAL AND NATIONAL COMMERCE ACT

Scope — Any transaction in or affecting interstate or foreign commerce. General Provisions — (1) a signature, contract, or other record relating to such transaction may not be denied legal effect, validity, or enforceability solely because it is in elec-tronic form; and (2) a contract relating to such transaction may not be denied legal effect, validity, or enforceability solely because an electronic signature or electronic record was used in its formation. Electronic Records — The Electronic Signatures in Global and National Commerce Act (the “Electronic Signatures Act”) contains extensive procedural requirements under its Consumer Disclosures section before the use of an electronic record may be substituted for paper records. The electronic record may be used only if — (A) the consumer has affirmatively consented to

such use and has not withdrawn such consent; (B) the consumer, prior to consenting, is

provided with a clear and conspicuous statement —

(i) informing the consumer of (I) any right or

option of the consumer to have the record provided or made available on paper or in nonelectronic form, and (II) the right of the consumer to withdraw the consent to have the record provided or made available in an electronic form and of any conditions, consequences (which may include termi-nation of the parties’ relationship), or fees in the event of such withdrawal;

(ii) informing the consumer of whether the

consent applies (I) only to the particular


transaction which gave rise to the obligation to provide the record, or (II) to identified categories of records that may be provided or made available during the course of the parties’ relationship;

(iii) describing the procedures the consumer

must use to withdraw consent as provided in clause (i) and to update information needed to contact the consumer electronically; and

(iv) informing the consumer (I) how, after

the consent, the consumer may, upon re-quest, obtain a paper copy of an electronic record, and (II) whether any fee will be charged for such copy;

(C) the consumer — (i) prior to consenting, is provided with a

statement of the hardware and software requirements for access to and retention of the electronic records; and

(ii) consents electronically, or confirms his or

her consent electronically, in a manner that reasonably demonstrates that the consumer can access information in the electronic form that will be used to provide the information that is the subject of the consent; and

(D) after the consent of a consumer in accordance

with subparagraph (A), if a change in the hardware or software requirements needed to access or retain electronic records creates a material risk that the consumer will not be able to access or retain a subsequent electronic record that was the subject of the consent, the person providing the electronic record —

(i) provides the consumer with a statement

of (I) the revised hardware and software requirements for access to and retention of the electronic records, and (II) the right to withdraw consent without the imposition of any fees for such withdrawal and without the imposition of any condition or conse-quence that was not disclosed under sub-paragraph (B)(i); and

(ii) again complies with subparagraph (C). However, the legal effectiveness, validity, or enforceability of any contract executed by a consumer shall not be denied solely because of the

failure to obtain electronic consent or confirmation of consent by that consumer in accordance with paragraph (C)(ii) above. Electronic Agents — A contract or other record relating to a transaction in or affecting interstate or foreign commerce may not be denied legal effect, validity, or enforceability solely because its formation, creation, or delivery involved the action of one or more electronic agents so long as the action of any such electronic agent is legally attributable to the person to be bound. State Preemption And Exemptions To State Preemption (a) A State statute, regulation, or other rule of

law may modify, limit, or supersede the elec-tronic signature or records provisions of the Electronic Signatures Act with respect to State law only if such statute, regulation, or rule of law —

(1) constitutes an enactment or adoption of

the Uniform Electronic Transactions Act as approved and recommended for enactment in all the State by the National Conference of Commissioners on Uniform State Laws in 1999, except that any exception to the scope of such Act enacted by a State under section 3(b)(4) of such Act (other laws specifically identified by a particular State as exempt) shall be preempted to the extent such excep-tion is inconsistent with the Electronic Signature Act, or would not be permitted under paragraph (2)(A)(ii) below; or

(2)(A) specifies the alternative procedures or

requirements for the use or acceptance (or both) of electronic records or electronic signatures to establish the legal effect, validity, or enforceability of contracts or other records, if—

(i) such alternative procedures or

requirements are consistent with the Electronic Signatures Act; and

(ii) such alternative procedures or

requirements do not require, or accord greater legal status or effect to, the implementation or application of a specific technology or technical specification for performing the functions of creating, storing, gener-ating, receiving, communicating, or


authenticating electronic records or electronic signatures; and

(B) if enacted or adopted after the date of the

enactment of this Electronic Signatures Act, makes specific reference to the Electronic Signatures Act.

(b) EXCEPTIONS FOR ACTIONS BY STATES AS

MARKET PARTICIPANTS — Subsection (a)(2)(A)(ii) shall not apply to the statutes, regulations or other rules of law governing procurement by any State, or any agency or instrumentality thereof.

(c) PREVENTION OF CIRCUMVENTION —

Subsection (a) does not permit a State to circumvent the Electronic Signatures Act through the imposition of nonelectronic delivery methods under section 8(b)(2) of the Uniform Electronic Transactions Act.

Excepted Requirements — The provision of section 101 of the Electronic Signatures Act shall not apply to a contract or other record to the extent it is governed by — (1) a statute, regulation, or other rule of law

governing the creation and execution of wills, codicils, or testamentary trusts;

(2) a State statute, regulation, or other rule of

law governing adoption, divorce, or other matters of family law; or

(3) the Uniform Commercial Code, as in

effect in any State, other than Sections 1-107 and 1-206 and Articles 2 and 2A.

Applicability to Federal and State Governments Section 104 of the Electronic Signatures Act contains extensive provisions permitting State and Federal regulating agencies to require specified standards or formats for filing and access of information. It also permits, subject to certain specified limitations, Federal or State regulatory agencies to adopt regulations, orders or guidance related to interpreting the Electronic Signatures Act if they are authorized by other statutes to do so. The Electronic Signatures Act requires the Securities and Exchanges Commission to issue regulations or orders which exempts records that are required to be provided in order to allow advertising, sales literature, or other information concerning a security issued by an investment company that is registered

under the Investment Company Act of 1940, or concerning the issuer thereof, to excluded from the definition of a prospectus under section 2(a)(10)(A) of the Securities Act of 1933. The Electronic Signatures Act provides definitions for terms such as: (1) CONSUMER — The term ‘consumer’

means an individual who obtains, through a transaction, products or services which are used primarily for personal, family, or household purposes, and also means the legal representative of such an individual.

(2) ELECTRONIC — The term ‘electronic’

means relating to technology having electri-cal, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities.

(3) ELECTRONIC AGENT — The term ‘elec-

tronic agent’ means a computer program or an electronic or other automated means used independently to initiate an action or respond to electronic records or perfor-mances in whole or in part without review or action by an individual at the time of the action or response.

(4) ELECTRONIC RECORD — The term

‘electronic record’ means a contract or other record created, generated, sent, communicated, received, or stored by electronic means.

(5) ELECTRONIC SIGNATURE — The term

‘electronic signature’ means an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record.

Transferable Records Title II of the Electronic Signatures Act contains provisions specifically permitting a transferable record to be executed using an electronic signature. A “transferable record” which means an electronic record that — (A) would be a note under Article 3 of the

Uniform Commercial Code if the electronic record were in writing;

(B) the issuer of the electronic record ex-

pressly has agreed is a transferable record;


and (C) relates to a loan secured by real

property. Except as otherwise agreed, a person having control of a transferable record is the holder, as defined in section 1-201(20) of the Uniform Commercial Code, of the transferable record and has the same rights and defenses as a holder of an equivalent record or writing under the Uniform Commercial Code, including, if the applicable statutory requirements under section 3-302(a), 9-308, or revised section 9-330 of the Uniform Commercial Code are satisfied, the rights and defenses of a holder in due course of a purchaser, respectively. Delivery, possession, and endorsement are not required to obtain or exercise any of the rights under this subsection. Except as otherwise agreed, an obligor under a transferable record has the same rights and defenses as an equivalent obligor under equivalent records or writings under the Uniform Commercial Code. ELECTRONIC SIGNATURES IN GLOBAL AND NATIONAL COMMERCE ACT Introduction In November, 1997, the City of Pittsburgh bid the sale of its General Obligation Bonds through an electronic bidding system, using the Internet, developed by its financial advisors, Grant Street Advisors. This was the first time that a sale of municipal bonds took place which used the concept of establishing enforceable contracts through an electronic internet process. Soon other firms developed electronic competitive bidding systems and the cyber-sale of municipal debt was underway. Rather than waiting for the state and federal courts to develop the concept of electronic transactions through common law, a movement, driven by commercial interests outside of the municipal bond industry, pushed for the development of clear statutory authority for the enforceability of agreements made electronically, without written signature. The result was the creation of the Uniform Electronic Transactions Act (“UETA”) in June, 1999, by the National Conference of Commissioners on Uniform State Laws. As of July, 2000, eighteen states

had adopted versions of the UETA. Updates on the status of the enactment of UETA and articles related thereto can be found at www.uetaonline.com. The U.S. Congress and the Executive branch generally supported legislation designed to provide standards of enforceability of the concept of elec-tronic contracts, nationally and internationally. This led to the adoption of the Electronic Signatures in Global and National Commerce Act (“E-SIGN”) which becomes effective on October 1, 2000. Issues related to conflicts of law and preemption of UETA and E-SIGN are discussed in detail on the UETA website. E-SIGN and Municipal Bonds While the purpose of E-SIGN is “to facilitate the use of electronic records and signatures in interstate or foreign commerce,” the new law may become a vehicle for requiring the use of electronic transactions even when state statutes require printed documenta-tion and written signatures. The federal law may also lead to the elimination of a printed closing book. Pre-closings and/or closings could take place at scattered locations with the parties sitting in front of their computers. As with most new legal-statutory concepts, E-SIGN also raises several issues that will probably be debated, if not litigated, for many years to come. Another general concept that will be decided only by future interpretation is whether E-SIGN is the “camel’s nose under the tent” leading to creation of a federal law of contracts at the expense of the traditional statutory and common law developed in the states. Enforceability — Section 101(a) of E-SIGN states the basic concept behind the adoption of the legislation: SEC. 101. GENERAL RULE OF VALIDITY. (a) IN GENERAL. — Notwithstanding any

statute, regulation, or other rule of law (other than this title and title II), with respect to any transaction in or affecting interstate or foreign commerce—

(1) a signature, contract, or other record

relating to such transaction may not be denied legal effect, validity, or enforceability solely because it is in electronic form; and

(2) a contract relating to such transaction

may not be denied legal effect, validity, or enforceability solely because an electronic


signature or electronic record was used in its formation.

The major area of contention that will be raised is the enforceability of obligations incurred by an electronic signature when existing state statues require written signatures on printed paper. An argument can be made that E-SIGN preempts certain state requirements in this area. For example, has E-SIGN eliminated the requirement, present in many state municipal debt enabling laws, of a paper signature on bond purchase agreements or bids? Have all of the state statutory provisions which specify how a document must be properly notarized been superseded? Section 101(b) of E-SIGN states: (b) PRESERVATION OF RIGHTS AND

OBLIGATIONS. — This title does not— (1) limit, alter, or otherwise affect any

requirement imposed by a statute, regu-lation, or rule of law relating to the rights and obligations of persons under such stat-ute, regulation, or rule of law other than a requirement that contracts or other records be written, signed, or in nonelectronic form; or

(2) require any person to agree to use or

accept electronic records or electronic signa-tures, other than a governmental agency with respect to a record other than a contract to which it is a party.

Stated in the affirmative, Section 101(b)(1) of E-SIGN says that statutes, regulations and rules of law are limited and altered when they concern require-ments that contracts be written and signed on a paper document. Finally if a state, municipal government or authority desires to use all electronic documents, will each transaction require the disclaimers and procedures outlined in E-SIGN at Section 101(c)(1) which states: (c) CONSUMER DISCLOSURES — (1) CONSENT TO ELECTRONIC REC-

ORDS. — Notwithstanding subsection (a), if a statute, regulation, or other rule of law requires that information relating to a trans-action or transactions in or affecting inter-state or foreign commerce be provided or

made available to a consumer in writing, the use of an electronic record to provide or make available (whichever is required) such information satisfies the requirement that such information be in writing if—

(A) the consumer has affirmatively

consented to such use and has not withdrawn such consent;

(B) the consumer, prior to consenting, is

provided with a clear and conspicuous statement—

(i) informing the consumer of (I)

any right or option of the consumer to have the record provided or made available on paper or in nonelectronic form, and (II) the right of the consumer to withdraw the consent to have the record provided or made available in an electronic form and of any conditions, consequences (which may include termination of the parties' relationship), or fees in the event of such withdrawal;

(ii) informing the consumer of

whether the consent applies (I) only to the particular transaction which gave rise to the obligation to provide the record, or (II) to identified categories of records that may be provided or made available during the course of the parties' relationship;

(iii) describing the procedures the

consumer must use to withdraw consent as provided in clause (i) and to update information needed to contact the consumer electronically; and

(iv) informing the consumer (I)

how, after the consent, the consumer may, upon request, obtain a paper copy of an electronic record, and (II) whether any fee will be charged for such copy;

(C) the consumer— (i) prior to consenting, is provided

with a statement of the hardware


and software requirements for access to and retention of the electronic records; and

(ii) consents electronically, or

confirms his or her consent electronically, in a manner that reasonably demonstrates that the consumer can access information in the electronic form that will be used to provide the information that is the subject of the consent; and

(D) after the consent of a consumer in

accordance with subparagraph (A), if a change in the hardware or software requirements needed to access or retain electronic records creates a material risk that the consumer will not be able to access or retain a subsequent electronic record that was the subject of the consent, the person providing the electronic record—

(i) provides the consumer with a

statement of (I) the revised hard-ware and software requirements for access to and retention of the electronic records, and (II) the right to withdraw consent without the imposition of any fees for such withdrawal and without the impo-sition of any condition or conse-quence that was not disclosed under subparagraph (B)(i); and

(ii) again complies with sub-

paragraph (C). After describing in detail the consents and disclosures that are required in Section 101(c)A-D, Section 101(c)(3) opens the door to dispute if the consents and disclosures are not made. Section 101(c)(3) states: (3) EFFECT OF FAILURE TO OBTAIN ELEC-

TRONIC CONSENT OR CONFIRMATION OF CONSENT. — The legal effectiveness, validity, or enforceability of any contract executed by a consumer shall not be denied solely because of the failure to obtain electronic consent or confirmation of consent by that consumer in ac-cordance with paragraph (1)(C)(ii).

State law may also be preempted when working with specific documents whose validity requires

notarization. Section 101(g) states: (g) NOTARIZATION AND ACKNOWL-

EDGMENT. — If a statute, regulation, or other rule of law requires a signature or record relating to a transaction in or affecting interstate or foreign commerce to be notarized, acknowledged, verified, or made under oath, that requirement is satisfied if the electronic signature of the person authorized to perform those acts, together with all other information re-quired to be included by other applicable statute, regulation, or rule of law, is attached to or logically associated with the signature or record.

Electronic Bidding of the Sale of Bonds — E-SIGN contains a specific provision concerning the enforceability of transactions conducted by an organization that provides the website and conducts the bidding process for the competitive sale of bonds. Section 101(h) states: (h) ELECTRONIC AGENTS. — A contract or

other record relating to a transaction in or affecting interstate or foreign commerce may not be denied legal effect, validity, or enforceability solely because its formation, creation, or delivery involved the action of one or more electronic agents so long as the action of any such electronic agent is legally attributable to the person to be bound.

There is no provision in E-SIGN that outlines a standard or test for what is meant by “legally attributable.” If a particular state has adopted a UETA statute, then the definition provided in that legislation may be used. If there is no UETA, then the common law of that state will have to be applied. This alone would still justify adding an applicable law and jurisdiction provision to the Notice of Bid. Exemptions to the Federal Preemption of State Law — Section 102 of E-SIGN contains the specific provisions providing for the preemption of all state statutes, regulations and rulings as they relate to the validity of an electronic transaction. Section 102 states as follows: SEC. 102. EXEMPTION TO PREEMPTION. (a) IN GENERAL. — A State statute, regulation,

or other rule of law may modify, limit, or supersede the provisions of section 101 with re-spect to State law only if such statute, regulation, or rule of law—


(1) constitutes an enactment or adoption of

the Uniform Electronic Transactions Act as approved and recommended for enactment in all the States by the National Conference of Commissioners on Uniform State Laws in 1999, except that any exception to the scope of such Act enacted by a State under section 3(b)(4) of such Act shall be preempted to the extent such exception is inconsistent with this title or title II, or would not be permitted under paragraph (2)(A)(ii) of this subsection; or

(2)(A) specifies the alternative procedures or

requirements for the use or acceptance (or both) of electronic records or electronic signatures to establish the legal effect, validity, or enforceability of contracts or other records, if—

(i) such alternative procedures or

requirements are consistent with this title and title II; and

(ii) such alternative procedures or

requirements do not require, or accord greater legal status or effect to, the implementation or application of a specific technology or technical specification for performing the functions of creating, storing, gener-ating, receiving, communicating, or authenticating electronic records or electronic signatures; and

(B) if enacted or adopted after the date of the

enactment of this Act, makes specific reference to this Act.

(b) EXCEPTIONS FOR ACTIONS BY STATES AS

MARKET PARTICIPANTS. — Subsection (a)(2)(A)(ii) shall not apply to the statutes, regulations, or other rules of law governing procurement by any State, or any agency or instrumentality thereof.

(c) PREVENTION OF CIRCUMVENTION. —

Subsection (a) does not permit a State to circumvent this title or title II through the imposition of nonelectronic delivery methods under section 8(b)(2) of the Uniform Electronic Transactions Act.

Section 103(b)(2)(B) provides for a specific

exemption to the preemption provision of Section 102 when there is a notice of “default, acceleration, repossession, foreclosure, or eviction, or the right to cure, under a credit agreement secured by, or a rental agreement for, a primary residence of an individual.” Also, Section 104(b)(3)(B)(i) and (ii) permit the federal and state governments to adopt regulations that may require the retention of certain documents in tangible or printed form but only if “(i) there is a compelling governmental interest relating to law enforcement or national security for imposing such requirement; and (ii) imposing such requirement is essential to attaining such interest.” The question is whether anyone will come to the conclusion that retention of bond documents is related to “law enforcement or national security.” Transferable Records — Section 201 of E-SIGN specifically permits the electronic transmission and retention of notes, mortgages and other security-related documents. Section 201 states as follows: SEC. 201. TRANSFERABLE RECORDS. (a) DEFINITIONS. — For purposes of this

section: (1) TRANSFERABLE RECORD. — The term

“transferable record” means an electronic record that—

(A) would be a note under Article 3 of

the Uniform Commercial Code if the electronic record were in writing;

(B) the issuer of the electronic record

expressly has agreed is a transferable record; and

(C) relates to a loan secured by real

property. A transferable record may be executed using

an electronic signature. (2) OTHER DEFINITIONS. — The terms

“electronic record,” “electronic signature,” and “person” have the same meanings provided in section 106 of this Act.

(b) CONTROL. — A person has control of a

transferable record if a system employed for evidencing the transfer of interests in the transferable record reliably establishes that person as the person to which the transferable


record was issued or transferred. (c) CONDITIONS. — A system satisfies

subsection (b), and a person is deemed to have control of a transferable record, if the transferable record is created, stored, and assigned in such a manner that—

(1) a single authoritative copy of the trans-

ferable record exists which is unique, identi-fiable, and, except as otherwise provided in paragraphs (4), (5), and (6), unalterable;

(2) the authoritative copy identifies the

person asserting control as— (A) the person to which the transferable

record was issued; or (B) if the authoritative copy indicates

that the transferable record has been transferred, the person to which the transferable record was most recently transferred;

(3) the authoritative copy is communicated

to and maintained by the person asserting control or its designated custodian;

(4) copies or revisions that add or change an

identified assignee of the authoritative copy can be made only with the consent of the person asserting control;

(5) each copy of the authoritative copy and

any copy of a copy is readily identifiable as a copy that is not the authoritative copy; and

(6) any revision of the authoritative copy is

readily identifiable as authorized or unauthorized.

(d) STATUS AS HOLDER. — Except as other-

wise agreed, a person having control of a trans-ferable record is the holder, as defined in section 1-201(20) of the Uniform Commercial Code, of the transferable record and has the same rights and defenses as a holder of an equivalent record or writing under the Uniform Commercial Code, including, if the applicable statutory require-ments under section 3-302(a), 9-308, or revised section 9-330 of the Uniform Commercial Code are satisfied, the rights and defenses of a holder in due course or a purchaser, respectively. Delivery, possession, and endorsement are not required to obtain or exercise any of the rights

under this subsection. (e) OBLIGOR RIGHTS. — Except as otherwise

agreed, an obligor under a transferable record has the same rights and defenses as an equivalent obligor under equivalent records or writings under the Uniform Commercial Code.

(f) PROOF OF CONTROL. — If requested by a

person against which enforcement is sought, the person seeking to enforce the transferable record shall provide reasonable proof that the person is in control of the transferable record. Proof may include access to the authoritative copy of the transferable record and related business records sufficient to review the terms of the transferable record and to establish the identity of the person having control of the transferable record.

(g) UCC REFERENCES. — For purposes of this

subsection, all references to the Uniform Commercial Code are to the Uniform Commercial Code as in effect in the jurisdiction the law of which governs the transferable record.

Conclusion The legal community will no doubt gradually begin the process of paperless bond transactions and documents, just as it has with electronic competitive bidding. Because E-SIGN does not comprehensively address every issue that may arise (what statute does?) it will be necessary to look at E-SIGN, a UETA, if any, and other state or common law when conflicts Volunteer to work on a special NABL project. Contact Bill Larsen 202/682-1498 or e-mail [email protected]


arise. It will also be interesting to see what Constitutional challenges may arise concerning the new federal law of contracts and its preemption of state law, especially when enforceability issues arise. Who will write the first enforceability opinion when the first electronic closing takes place?

Wayne D. Gerhold Thorp Reed & Armstrong, LLP Pittsburgh REPORT OF THE OPINIONS AND DOCUMENTS COMMITTEE RE: REVISED ARTICLE 9 OF THE UNIFORM COMMERCIAL CODE The Committee on Opinions and Documents carried out the following with respect to Revised Article 9 of the Uniform Commercial Code (“1998 Revision”): 1. A review of the 1998 Revision; 2. A survey of NABL membership with respect

to the effect of the 1998 Revision on the laws of their jurisdictions and on governmental transfers within their jurisdictions; and

3. Discussions by Committee members with

members of the Uniform Laws Commissions concerning the 1998 Revision. (informal discussions only; substantive discussions have not yet been held).

The Committee’s assessment of key issues to be addressed in the 1998 Revision is attached as Exhibit A. Exhibits B and C set forth the states in which the 1998 Revision has been enacted and the states in which the 1998 Revision has been introduced and is pending. At the date of this report the 1998 Revision has been enacted in 27 states and is pending in another 12 states and the District of Columbia, respectively. The Committee has ascertained, through its survey, that Iowa has enacted the 1998 Revision with amendments limiting its effect on governmental transfers. A similar amendment is attached to the 1998 Revision bill pending in Colorado and similar amendatory legislation is being drafted for Nevada. The Committee is of the view that, as with other enactments of Uniform Commercial Code revisions, there will be the need for the enactment of technical

corrections. Consequently, even in states where the 1998 Revision has been enacted, remedial legislation is still an option. To avoid the impact summarized in this report, states could take remedial action that includes: modifying Article 9, as revised, to continue the current exclusion of governmental transfers from Article 9; enacting a general bond statute governing the perfection and priority of governmental pledges to pre-empt Article 9, as revised; modifying Article 9, as revised, to make perfection of bond pledges automatic; modifying selected sections of the 1998 Revision; or modifying the transition provisions of Article 9, as revised, to preserve the status of prior grants without further action to perfect. The remedial action, if any, warranted in any particular state or territory will depend on state constitutional issues, local practice and the current state of non-UCC statutes dealing with governmental transfers, to which the 1998 Revision generally defers. Accordingly, the committee does not believe that NABL can recommend specific common action to avoid the impact summarized in this report. However, the committee recommends that NABL collect remedial action taken by the states and territo-ries and that it make its collection readily available to members who wish to develop and recommend remedial action in their own states. Workshops devoted to the 1998 Revision will be held as part of this year’s Bond Attorneys’ Workshop. They may reveal additional impacts or suggest other possible remedial action. See NABL's website: www.nabl.org


Exhibit A IMPACT OF UCC ARTICLE 9 REVISIONS ON PUBLIC FINANCE Article 9 of the Uniform Commercial Code (UCC) governs security interests. Under the 1972 Revision, currently in effect in most states, Article 9 does not apply to security interests created by a government or governmental subdivision or agency. Under the 1998 Revision, proposed to be effective July 1, 2001, Article 9 will apply to governmental security interests except to the extent that another statute (i.e., not just a home rule charter) expressly governs the creation, perfection, priority, or enforcement of the security interest. The 1998 Revision includes definitions relating to governmental transfers which require examination. Examples include “governmental unit” and “public finance transaction”. Following is a brief listing of potentially significant negative effects that could result from the 1998 Revision unless remedial action is taken by enacting state legislatures. 1. Increased Importance of Perfection: The

Bankruptcy Code “strong-arm” clause empowers debtors to ignore security interests that, because unperfected, can be subject to judicial liens. Since, under the 1972 Revision, Article 9's statutory means of perfecting security interests are unavailable to governmental units, in many states there is no statutory means to perfect governmental pledges made to secure bond issues. However, the “strong-arm” clause does not apply to unperfected security interests that cannot be perfected, according to its legisla-tive history. Consequently, absent means to perfect, governmental pledges to secure bond issues are not subject to “strong-arm” clause risks. Under the 1998 Revision, even governmental issuers will have statutory means to perfect their pledges under the UCC if statutory means to perfect are not otherwise available. Consequently, under the 1998 Revision, governmental issuers must perfect (or at least file notice of) their bond pledges under the UCC in order for bondholders to avoid risks of pledge avoidance under the “strong-arm” clause in bankruptcy, unless pledged revenue or other collateral is exempt from judicial liens or another statute (e.g., the enabling act for the bond issue) governs perfection of the pledge. Disclosure of the associated increase in creditor risk and the actions necessary to comply with the 1998 Revision could increase borrowing costs.

2. Net Revenue Pledges: It is unclear whether “net

revenue” pledges will be enforceable under the UCC (if it governs creation), since that term may not describe objectively determinable “property.” Under the 1998 Revision, the instrument creating the pledge must include a description that makes the collateral’s identity objectively determinable. “Net revenue” might not satisfy that requirement, since it is typically commingled with gross revenues, all of which are available to pay trade creditors, until trans-ferred to a debt service account. If a bond statute or other legislation expressly authorizes a pledge of net revenues (which is most often the case), it likely would govern creation, and the UCC requirements would be moot. If, however, creation were authorized merely by a home rule charter or similar authority, the UCC might preclude lawful creation of a net revenue pledge.

3. Revenues in Deposit Accounts: Under the UCC,

bondholders’ interests in revenues that are earned after a bankruptcy petition is filed and are deposited to a deposit account could be subordinate to the rights of the bankruptcy trustee, unless the interests are perfected by an account control agreement or the deposits are identifiable proceeds of a perfected security interest. (Bankruptcy trustees are included in the definition of “lien creditor;” a security interest cannot be perfected until the debtor has rights to the collateral; consensual security interests are subordinate to the rights of a person who has become a lien creditor before perfection or filing; and filings in respect of deposit accounts are not effective to perfect and therefore may not defeat judicial lienholder interests.) For reasons described in 4 below, many issuers may not be authorized to enter into account control agreements covering their deposit accounts. Accordingly, unless an appro-priate portion of the deposit account balance can be identified as proceeds, pledge of revenues deposited to the deposit account will not be per-fected and, accordingly, will be subject to “strong-arm” clause risks as described in 1 above. This consequence could make moot the municipal bond exception to Bankruptcy Code §552, which otherwise voids security interests in property acquired post-petition.

4. Control Agreements: Many bond issuers will

not be authorized to or are prohibited from entering into account control agreements,


because deposited revenues must be used to operate the financed enterprise as well as pay debt service, because gross revenues may not be pledged, and/or because such an agreement would be an impermissible contracting away of governmental control (except possibly as de-scribed in 8 below). Moreover, unless their bond pledges run in favor of a trustee, account control agreements would be impractical even if lawful (since there is no bondholder representative to exercise control), and the secured party could not control the account by becoming the account owner. Accordingly, many issuers (particularly issuers who do not use trustees) will be unable to perfect security interests in revenues held in deposit accounts under the UCC.

5. Financing Statement Requirements: Revenue

bond issuers who do not use trustees may be unable to perfect pledges by filing, since a financing statement is ineffective unless it includes the name and address of the secured parties, i.e., the bondholders in a trustee-less financing, which is an impractical requirement. (In the case of “book-entry-only” bonds, DTC might be listed as the secured party, unless its protocols prohibit that practice, but that course would not be available to outstanding certifi-cated issues.) In addition, governmental issuers’ legal names, as opposed to “trade names,” must be included on financing statements. It is often unclear whether a governmental issuer is an independent unit of government or merely an unincorporated operating division of another governmental unit. In that case, as well as cases of inconsistent statutory name references, it may be unclear as to which debtor name will be effective to perfect the security interest.

6. Continuation Statements: No continuation

statements need be filed to continue the perfection of pledges that secure bond issues that are “debt securities” with terms of 20 years or more, but financing statements providing notice of other pledges must be extended once every five years. In many states lease-purchase and “subject-to-appropriation” financings (and even revenue bonds generally) are not considered “debt,” at least for some purposes. These and shorter termed issues may require continuation statements. Particularly when there is no trustee to make or monitor the filing of continuation statements, these issues will be subject to risks of lapsed financing statements. (It is not clear, although likely, that security

interests granted by non-governmental borrowers to secure conduit financings would be equally exempt from the requirement to file continuation statements.)

7. Invalidation/Subordination of Prior Pledges:

Pledges that were effective when made, but would be ineffective under revised Article 9 (e.g., because creation is authorized by home rule charter, rather than by another statute, and the instrument making the pledge does not ade-quately describe the collateral pledged), will become invalid on July 1, 2002, unless action is taken before then to make the pledges effective under revised Article 9. Even if enforceable, prior pledges will not be deemed perfected (and therefore could be subordinated to other interests or avoided in bankruptcy), unless steps are taken to perfect the pledge under revised Article 9 by July 1, 2002 (except that prior financing statements filed in a previously effec-tive office remain effective for 5 years after filing, even if revised Article 9 requires filing in a differ-ent place). In either case, the owners of out-standing bonds will be at risk for any necessary issuer or trustee action, which may not be re-quired by outstanding bond contracts, unless these effects of the 1998 Revision are proscribed by the Contract Clause of the U.S. or state constitution. If prior pledges are not perfected and outstanding bond legislation permits additional pledges only on a parity with or subordinate to the prior pledges, it may be impossible to lawfully secure additional bonds by a perfected pledge.

8. Repeal of Restrictions on Transfers: The 1998

Revision makes ineffective any statute, regulation, or rule of law that restricts or prohibits the transfer or pledge of accounts (e.g., utility system receivables) or chattel paper (e.g., an equipment financing lease), or the creation of security interests while making the UCC inap-plicable to the creation of pledges to the extent governed by another statute. Although ambiguous, these provisions could invalidate many restrictions (e.g., Dillon’s Rule) on the creation of competing assignments and security interests by governmental units, thus increasing the practical risk of unperfected bond pledges. In addition, statutes and rules of law requiring consent to the assignment of claims against governmental units are made ineffective.

Exhibit B


CURRENT LIST OF STATES HAVING ADOPTED REVISED ARTICLE 9 Alaska Arizona California Delaware Hawaii Illinois ** Indiana Iowa Kansas Kentucky Maine Maryland Minnesota Montana Nebraska Nevada North Carolina ** Oklahoma Rhode Island ** South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia ** Awaiting Governor’s Signature Exhibit C STATES WHERE REVISED ARTICLE 9 IS INTRODUCED Colorado Delaware District of Columbia Florida Idaho Michigan Mississippi Missouri New Jersey New Mexico New York South Carolina Wyoming

If you have been admitted to practice for ten or more years, you can join the ABA for $295. Or, you could join NABL for $225. You should join NABL.


INTERVIEWS WITH JOHN N. MITCHELL Editor's Note: In this post-convention, pre-election season, President and bond law historian Howard Zucker thought it would be interesting — and fun — to hark back to a similar season in 1968, which set the stage for the appointment of the first (and, so far, the last) bond lawyer as Attorney General of the United States, and to remind of the ensuing dénouement. The following articles are reprinted, with permission, from The Bond Buyer. NEW YORK, FRIDAY, AUGUST 9, 1968 Counsel to a Candidate BY JOHN GERRITY MIAMI BEACH, Fla. — One night last November during the Investment Bankers Association's annual meeting at the Fountainbleau Hotel here, a small group of bankers were pleasantly ribbing John N. Mitchell, bond attorney recently turned politician. “John,” his hecklers asked, “how in heaven's name can you possibly support Dick Nixon? He's a proven loser, and everyone knows Nixon just can't win.” In the most dramatic fashion possible, John Mitchell gave his friendly critics the answer they sought early Thursday morning. As much as anyone else, Mr. Mitchell is responsible for Richard M. Nixon's triumphant return from the political graveyard [that] he, himself, had opted for following the 1962 gubernatorial race in California. For the past nine months, Mr. Mitchell has devoted himself entirely to operating the team of political advisers he put together to ensure Mr. Nixon's nomination as the 1968 Republican Presidential candidate. In this period of time he has absented himself completely from his lucrative law practice—and even during the 12 months immediately preceding last New Year's Day, he had halved his time between Mr. Nixon's cause and the demands of one of the foremost bond counseling law houses in the country. In an interview with “The Bond Buyer” on Tues-day—necessarily sandwiched in between confer-ences and meetings with the nominee, party bigwigs and vital delegations—Mr. Mitchell explained the “how” of the Nixon victory.

Describing the work of his 225-man team, under the immediate direction of his top lieutenants, Herbert G. Klein (press) and Richard G. Kleindist (convention organization), the 58-year-old bond attorney said the most innovating [sic] thing he had done was “to revamp the party's power structure. “The most unique aspect of this entire affair,” he said “was our early decision not to go with the old party hacks and outworn cliches. “Unlike my opposite number with Rockefeller (Leonard W. Hall of New York),” he continued, “we decided to start from scratch and build an entire new organization. I think the outcome will prove we

were wise.” All the evidence produced so far suggests that Mr. Mitchell may be being deliberately modest. Indeed, this new organization process was extended into every precinct and parish in the country. It was the major factor in the primaries, not one of which did his candidate fail to win. But there is more than just organization involved in putting together a winning ticket. Hard work, [sic] is a prime example. In the past 18 months Mr. Mitchell has traversed the country, East to West, North to South, dozens of times, canjoling [sic], browbeating when necessary, using the “soft sell” as frequently as possible and making every honorable deal imaginable to assure Nixon support. His working day has averaged about 18 hours with few pauses for regular meals. “Matter of fact,” he says, “I've gotten so used to gulping sandwiches that I'll have to take a refresher course in the use of knives and forks.” A good example was last Tuesday, the day Mr. Mitchell visited with “The Bond Buyer.” He arose at 6:00 a. m., after working the previous day until 4:00 a. m. In that 22-hour span, he saw 87 different individuals, some for only a minute or two. He attended five staff meetings, four delegation sessions and devoted a large chunk of time to winning over finally Maryland Governor Spiro T. Agnew. Asked what his “single most difficult task was in the past year and a half,” Mr. Mitchell retorted swiftly, “converting Ted Agnew.”

MIAMI VIEWPOINT


In this connection, he was referring to the fact that Governor Agnew was the first prominent state executive to publicly endorse Nelson Rockefeller. For three weeks preceding the convention, Mr. Agnew walked a narrow tightrope, switching over to Mr. Nixon only two days before the nominations began. A few days following the interview, Gov. Agnew was named as Mr. Nixon's vice presidential running mate. Mr. Mitchell, who seems to thrive on political fare, was asked if he “would not do it again?” “Nope,” he replied quickly. “Well, sir, have you enjoyed these past 18 months,” was the next question. “No, I have not,” he fired back. “Well, this raises another question. Why would a man abandon a handsome law practice to do some-thing he doesn't like. What's the real motivation?” “It's simple,” Mr. Mitchell replied. “Dick Nixon is a friend of mine, and I like him. He asked me to do this job for him and I said I would.” Because it's axiomatic that every politician—or nearly every politician—has his price, Mr. Mitchell was then asked, “When do you intend to return to your law practice?” “November 6—the day after the election.” “Do you mean to say, sir, that you are totally invulnerable to a bit of Presidential arm-twisting, that you wouldn't be tempted by a strong request to become Attorney General or Secretary of the Treasury.” “Absolutely not. I am invulnerable. I will never accept a Cabinet post. “You know,” Mr. Mitchell continued, “all of our banker friends say that I'll accept some plum, and I offer all of them 10 to 1 that I won't. “You could do them all a favor by reporting that I mean what I say,” he added. Hence, the message is delivered. On the basis of what Mr. Mitchell said to those who needled him at the Fontainbleau nearly 10 months ago, the facts of

today strongly suggest he's a man whose word should not be regarded lightly. Centennial Edition, September, 1991

A Conversation With John Mitchell Moral Obligation Bonds, the

Industry's Old Days, and More The Bond Buyer twice conducted interviews with John N. Mitchell (1913-1988), a crusty character now remembered as attorney general in the Nixon White House and a convicted conspirator in the Watergate break-in, for which he spent 19 months in prison. But long before Watergate, Mr. Mitchell was an innovative and highly regarded bond lawyer in New York. Among other achievements, Mr. Mitchell created the mechanism that permitted Wisconsin to evade its archaic constitutional bond limit of $250,000 of debt. And as counsel to New York's Gov. Nelson Rockefeller, he found a way around voter disapproval of bonded debt with the concept of the moral obligation bond. When he took office in January 1959, Gov. Rockefeller had grandiose plans to rebuild housing in New York's inner cities. He had the state Legislature create the Housing Finance Agency — one of 230 authorities established during his 14-year tenure. John Mitchell, then with Caldwell, Trimble & Mitchell, was called in for an opinion by James Gaynor, the commissioner of housing. In Mr. Mitchell's judgment, the “investment community was pretty sour on that type of obligation” and would demand a high rate of interest. To change the negative perception, he added language to the authority's indenture that included the “legislative intent” to supply money, in the event of revenue shortfalls, to meet principal and interest payments. Since the state had no legal obligation to aid the authority, the concept became known as a “moral obligation.” Mr. Mitchell talked about it in November 1984: Q. How did the idea for the moral obligation bond come about? A. [When] Nelson Rockefeller was elected the governor of New York in 1958, the voters turned down all of the propositions that had to be voted under the state constitution — for housing, mental health, etc. His director of housing was telling me about the state's problems. In order to keep the interest cost down and have a security that would be marketable, I transferred


over to the Housing Finance Agency a concept [moral obligation bonds] that had been used temporarily in connection with school districts. I just took that and adapted it to the Housing Finance Agency and structured the mechanics of it. It went very, very well and the bonds were marketable, the interest rates were more than reason-able, and, of course, we took it from there. Q. Critics of moral obligation bonds say they are a form of political elitism that bypasses the voter's right to a referendum or an initiative. A. That's exactly the purpose of them. The technique worked. The rating agencies accepted it, and the Office of the Comptroller of the Currency ruled that banks could buy and underwrite the bonds when it declared the debt was much the same as general obligation. Over the years, Gov. Rockefeller expanded the state's moral obligation to finance the State University Construction Fund, nursing, nonprofit housing, and health facility and hospital programs. The Battery Park City Authority and the City University Dormitory Authority also managed to obtain the state's moral obliga-tion. In 1968, after the assassination of Martin Luther King, the governor convinced state lawmakers to approve the Urban Development Corp. Backed with the state's moral obligation, the corporation's mandate was to build housing in “sub-standard, blighted areas.” Poorly run and unable to attract underwriters for additional debt, the agency defaulted on $104.5 million of notes in February 1975. Eventually, the state came up with the money and maintained the integrity of its moral obligation. The default had nothing to do with New York City's financial problems, which just then were becoming serious. As Mr. Mitchell explained to The Bond Buyer: Q. Some have argued that, by overextending the debt of various bond-issuing authorities, these bonds contributed to New York City's 1975 financial crisis, the city's high tax burden, declining population, and the flight of industry. Were these bonds really issued for the public good? A. First of all, moral obligation bonds were designed to get around the [state] constitution so that you didn't require the referendum. Second, the use of moral obligations may very well have been overextended, which required the state's contributions. I don't believe you'll find that to be

true in connection with the original concept set up with the Housing Finance Agency. With respect to New York City, obviously what the state did through this moral obligation financing had nothing whatever to do with the city. The concept under which the financings were done was such that it was reasonably anticipated that the revenues that flowed from these projects would take care of the required debt service, or lease-rental payments, and consequently there would be no necessity for a call upon the state appropriations. Unfortunately, they thought they had a very good thing going there, and they've extended it into fields where the revenues from the projects didn't meet the anticipated debt service requirements. That necessitated the state appropriations. Q. Did you advise Gov. Rockefeller at any point that he was overextending the use of the bonds? A. At one time I did, but by that time I had left the law firm and was down in the U.S. attorney general's office. There was a group of investment bankers that came to me in 1969 or 1970 and discussed the subject with me. The situation at that time had become exacerbated to the point where it looked like they were extending it beyond the initial purpose. But I must say that the advice of these gentlemen and myself was not taken very seriously, apparently because they [Gov. Rockefeller and his agencies] went right on with some of the programs that were not originally contemplated. Q. You have been described as one of the most powerful municipal bond lawyers in New York during the 1960s. Was it true that you could pick up the telephone and get the rating agencies to change a rating on a bond issue? A. It wasn't quite that easy. It was all done with pure, cold, hard logic. The rating agencies, of course, have their own professional standards that they live by. But frequently their consideration of matters were not sufficiently in depth to make a proper judgment and so, through a little further education, sometimes that took place. The ratings were improved. Q. By a telephone call? A. Well, I don't recall the specifics, but I remember a number of instances in which they were.


Q. It's been said that the municipal bond business of the 1950s and 1960s was a small, elite men's club, where business was conducted informally. In contrast, today's market is vast, largely electronic, anonymous, and highly competitive. Would you agree with this assessment? A. Absolutely true. In my opinion, there has never been a finer group in any financial community than the people that were in the municipal bond business back in those days. It was a select group, which I knew reasonably well, because I was president of both the Municipal Bond Club of New York and the Municipal Forum at one time. And it wasn't until the late 1960s that some of these boiler-room operations — not so much in New York but around the country — started to give the fraternity a bad name. Q. You don't think it put the fraternity on its toes to have this competition? A. Well, it wasn't so much the competition as the practices that they adopted. When you dealt with legitimate, standard municipal bond firms, you could trade bonds and buy and sell them close to what would be a market value regardless of the thinness of the market. But when these boiler-rooms and bucket shops started, they were trimming the uninformed and the small bankers, which led to all sorts of problems. Q. Which culminated in the creation of the Municipal Securities Rulemaking Board. A. Exactly true. And the fellows in the industry who fought so many years for that did a great service to the industry. Q. In the wake of the $2.25 billion Washington Public Power Supply System default, do you think that municipal issuers, bond lawyers, and underwriters will have to disclose more in official statements? A. Yes. It's obvious that there is going to be further regulation of the industry if they do not adhere to higher standards. There obviously should be. Maybe a strengthening of the self-regulation would be the best, by their adopting more rigid

standards along the line that the Securities and Exchange Commission requires with respect to disclosure. Q. Are bond lawyers too often selected on the basis of political patronage rather than merit? A. I believe the field has degenerated into that circumstance. Back in the days when I was practicing, there were a limited number of bond lawyers around the country that had a reputation for expertise. It was very seldom that a firm outside of that circle of about 20 firms nationwide was retained. There were a few others that operated on a regional basis. I'm not for a moment suggesting that all the wisdom was in New York, or Chicago, but there have been, to my knowledge, connections that have been pushed into the category of bond counsel with-out proper background. Q. Would you like to name any of those firms? A. You might lose some subscribers if I did. Q. Do you think that, in its effort to reduce the deficit, the Treasury Department will eliminate the tax exemption of municipal bonds? A. The Treasury has been trying to eliminate the tax exemption of municipal bonds for as far back as I can possibly remember. I'm sure they're still for it, but I don't believe they will prevail during this administration. The local interests are too heavy and too articulate. The Wall Street lobby isn't as strong as it sounds. The real strength in the lobbying comes from the local communities and the local bankers. Q. Does there need to be better communication between Wall Street and Washington? A. Very much so. Q. How could that be improved? A. As it is, a couple of groups on Wall Street have become real bold and come down here and try to tell the government how to run itself. That's not the way to do it. It should be more of an ongoing general dialogue with the appropriate executive and legislative officials that can act outside of the normal


pressure-group approach that's taken. I think it would be very helpful for both. As a rule, the congressional committees generally consider isolated situations and don't have an overview of the total picture (in the financial markets). * * * Q. Were you against home rule for Washington? A. Yes. It was one of the situations where I disagreed with President Nixon, and that was because I didn't believe that the national capital should be administered outside of the national government. Thus concluded The Bond Buyer's second interview with Mr. Mitchell. The first was conducted at the Republican national convention at Miami Beach, Fla., in 1968, by John Gerrity, the newspaper's Washington bureau chief. The interview, mainly a description of Mr. Mitchell's work on the Nixon presidential campaign, concluded with the following question: Do you mean to say, sir, that you are totally invulnerable to a bit of presidential arm-twist-ing, that you wouldn't be tempted by a strong request to become attorney general or secretary of the Treasury. To which he replied, “Absolutely not. I am invulnerable. I will never accept a Cabinet post.” The interview concluded that Mr. Mitchell is “a man whose word should not be regarded lightly.” ¨ E-mail a letter to the editor: [email protected]

LEGAL ASSISTANTS' CORNER THE ELECTRONIC AGE — ADVANTAGE OR CAUSE FOR CONFUSION? The phrase “electronic age” brings to mind previous stages in time commonly known as the “ice age,” “stone age,” “iron age,” and “industrial age.” Although some of us may feel stuck in the ice age, there is no denying that we are all members of the electronic age as the introduction of new technology has changed forever the way we live and work. A prime example of the technological inventions which have drastically changed our lives is the television. It is amazing how this device, which was introduced to the public in the early '50s as a small box which gave us a wavy, black and white image, has developed into a fixture of our culture which entertains and informs virtually every household with 24-hour-a-day news, sports and any type of program imaginable. However, while the television may be the most pervasive influence of the electronic age on our everyday lives, new technology has greatly influenced our working lives as well. The evolution of the practice of law through the use of new technology has been quite radical in the past 15 to 20 years. The use of electronic devices has brought tremendous advantages to the general operation of the law office and has literally changed the way law is practiced. Nevertheless, it is important that we continually evaluate our use of such technology to insure that the changes it brings are truly for the better. Few will deny that the practice of law generates vast amounts of paperwork. This is particularly true in an office populated with attorneys practicing municipal bond law. The mere mention of the words “bond documents” brings to mind an image of massive amounts of paper. Moreover, it seems the volume of paperwork grows every year with the introduction of new and different types of financing. It is therefore understandable that the practice of municipal bond law has demanded the most up-to-date technology to draft, revise, circulate and store documents and facilitate closings. The computers which are located on almost every desk in the modern day office have probably caused the largest and most significant technological change in the law office since the invention of the early typewriter. Word processing programs and shared libraries, which enable a number of staff/attorneys to access the same documents, greatly facilitate the production and revision of


documents. In addition, we are now able to instantly transmit documents around the world at the touch of the e-mail button and to conduct research using the vast resources of the Internet. It is becoming com-monplace to offer and sell bonds on-line, and in the near future CD Rom disks or other forms of electronic storage will replace the bound paper transcripts filling our shelves. Telephone and fax technology have also had their effects on our professional lives. Ten years ago pocket-sized cell phones were virtually unknown, portable phones were bulky and difficult to operate and car phones were a luxury. Today, with the proliferation of cell phones, no attorney can escape from those “bond emergencies” which can and do occur. Office phone systems have also evolved. Anyone who has spent much time in a law office has suffered through at least one telephone system upgrade. However, even those of us who may be technologically challenged must admit that modern systems containing voice mail and conferencing abilities have made our jobs easier. Twenty years ago the thought of being able to instantly transmit documents through a telephone line was surely a dream. Today, use of the fax machine has become so commonplace that we tend to forget what a time saver it is and, to many of us through the years, a lifesaver. We transmit correspondence, important data and even signed documents to close a bond issue via the fax machine. Not too long ago, it would have taken at least one if not two days to send that letter, the data would probably have involved a lengthy telephone conversation, and if that signed document was not present on the table at closing — well, I think we all know what could occur when that happens. With the introduction of each new electronic device, the law office has undergone major changes in the production of documents and interpersonal communication. One of the most important advantages to this new technology is the saving of staff / legal assistant / attorney time on individual tasks. Word processing advances have cut document production time in half. The ability of legal assistants and attorneys to research on-line and obtain information relating to securities filings has made it possible to complete assignments more quickly. Although attorneys’ average telephone calls do not seem be getting any shorter, the introduction of upgraded telephone systems, multi-person conference calls, cell phones and voice mail have made it easier to contact parties, discuss issues and leave detailed messages. The waste of a legal

assistant’s or secretary’s time through the years in tracking down an attorney or underwriter in an attempt to receive an answer needed for a deadline or obtain that last bit of information before an Official Statement can go to the printer has been greatly decreased by the ability to contact all parties to a transaction in a timely fashion via e-mail or cell phone. Remembering the years in the municipal bond business prior to the fax machine almost causes a shiver. This small miracle machine makes it possible for many of us to accomplish in a timely and efficient manner those duties which historically caused great stress. Paradoxically, the downside to this increased efficiency can sometimes be increased stress. Twenty years ago an attorney and her staff could breathe a sigh of relief when a set of document drafts went out in the mail, knowing that at least ten days would pass before the drafts would be received, reviewed and returned. Today we can e-mail a set of docu-ments in the morning, receive comments by noon, and be expected to have revised drafts out by the end of the day. The ease of revising documents has led to many more drafts of each document, each with increasingly minute refinements of language, and document control has become a complicated task. While “phone tag” and pink message slips may be a thing of the past, the e-mails and voice mails often pile up faster than they can be processed. Cell phones and other forms of wireless communication make it impossible to truly get away from the office and relax. And how many times have each of us stood over a fax machine, waiting for that final certificate or opinion, while the clock ticks down to DTCC’s closing deadline? The faster the world moves, the faster each of us is expected to react. In addition, each new device creates a new learning curve. It is essential that all are well educated in both the “why” and “how” of the application of any new device introduced to us in the office. Too often training on new devices occurs during times when workload is the heaviest, resulting in frustration for all concerned. The confusion which is created when new technology is not introduced correctly and personnel are not fully trained sometimes outweighs many of the ad-vantages of such technology. In our quest to have the finest and most updated technology, we tend to overlook the problems which will arise when the technology is not properly used. Most of our offices today have staff who are employed to do nothing but upgrade and maintain computer and telephone systems, as well as the myriad of printers, fax


machines and photocopiers we have come to depend upon. This is a positive development which has eliminated many of the problems brought on by the introduction of any new machinery and technology. Nevertheless, it is essential that someone adapt the firm’s operations, forms, duties and rules to the new technology. The legal assistant involved in munici-pal bond law is an important staff member working closely with other staff and attorneys and should be on the cutting edge of any new technology. To achieve the best and most efficient use of time, legal assistants should be proficient on any new machine or computer to provide the attorneys with the benefits of any new available procedure. Knowing from experience that many legal assistants tend to be non-mechanical and occasionally a bit stubborn about trying new technology, there may be many legal assistants who resist such changes. However, it is essential for the legal assistant to not only be aware of these new trends in technology and of its usage, but to educate other staff working in his or her area to ensure a complete and smooth working operation within the law office. Law offices have seen some of the most dramatic and positive technological changes within the last 15 to 20 years. To ensure that new and future technology is utilized correctly and to its fullest potential, the legal assistant must take that extra step forward and take advantage of the opportunity to “keep up” with all new technology that affects our business. That picture we saw in the high school typing class not so long ago of the assistant sitting at the typewriter with a one-line telephone and a steno book has been replaced by a whole new world. Just as legal assistants have always taken up many challenges on a daily basis, from drafting documents to preparing for closings, they now have an important role in leading their offices into this new world. Nancy Mendenhall Committee on Legal Assistants August 10, 2000 VOICE FROM THE PAST Chapter 16 One day in 1960 or thereabouts I got a call from Dave Lawrence, then head of the municipal bond de-partment of Boettcher and Company in Denver, who wanted to talk about some proposed financing. He really wanted to talk with my senior partner, Joe

Matter, who was out of the country; yet he was willing to discuss his plan with me. I agreed to see him, and none of our lives has been the same since. We discussed the situation in the City of Phoenix, which had issued two series of water revenue bonds, first and second lien, with no provision for additional parity bonds. These issues were not yet callable for redemption, and the City needed to finance more water system facilities. Mr. Lawrence had heard of a practice in Alabama in which an issuer delivered refunding bonds several years before the refunded bonds could be redeemed, invested the proceeds in government bonds, and was able to sell junior lien refunding bonds as if they were first lien bonds by convincing investors that the revenues of the system would not be needed to pay the prior lien bonds. The interest on the government bonds would more than cover the interest on the refunded bonds, so the issuer would not have to pay interest on both issues at the same time. He wondered if this could be done in Phoenix. I had learned not to say no to a client un-necessarily, so I took the easy way out by saying that the proposed financing could be done with authority from the State Legislature. He said, to my surprise, that obtaining legislation would not be a problem. I couldn’t think of any constitutional objection, and so my advance refunding career was born. Although it was known that the government bonds, bearing taxable interest, would bear a slightly higher rate than the tax exempt refunding bonds, most of the people involved in the transaction did

not, at that time, realize that the difference could, in a carefully

structured transaction, be

wonderfully magnified by the magic of

compound interest. When this information got out, it was mostly used in the West for a few years. The number of advance refund-ings was limited

[Mumford photo]


by the availability of underwriters and bond lawyers who knew how to do them. Whether or not a given refunding made sense otherwise, the arbitrage was enough to make it profitable for all concerned. The original dealers were sensitive enough about public opinion and their view of their rightful place in society so that they didn’t engage in many transactions that the local newspapers considered abuses. I suspect that the staffs of the local newspa-pers didn’t pay much attention to the arcane aspects of the Federal-State relationship involved, and that the public, if it thought at all about the matter, would have approved of making money at the expense of the Federal Government. In time, of course, people in other parts of the country found out about the practice and imitated it. Someone had the lack of judgment to ask the Internal Revenue Service for a ruling on a particularly abusive transaction. On August 11, 1966, the Internal Revenue Service whelped a Technical Information Release — TIR 840. This was really just a press release, but it said that pending a study, the IRS would not grant any rulings on the tax exemption of municipal bonds in situations: “1. Where all or a substantial

part of the proceeds of the issue (other than normal contingency reserves such as debt service reserves) are only to be invested in taxable obligations which are, in turn, to be held as security for the retirement of the obligations of the governmental unit.

“2. Where the proceeds of the

issue are to be used to refund out-standing obligations which are first callable more than five years in the future, and in the interim, are to be invested in taxable obligations held as security for the satisfaction of either the current issue or the issue to be refunded.”

Neither a regulation nor a ruling, TIR 840 had no force under the tax laws, but probably would have caused securities law problems for anyone who sold bonds of the sort covered without disclosing the implied threat. I don’t know of anyone who tried.

The Tax Reform Act of 1969 first defined “arbitrage bonds” and declared the interest on them

taxable. Exceptions from a prohibition against investing tax exempt bond proceeds in higher yield taxable obligations were established for “materially higher” and amounts less than a “major portion.” Precise definitions of these terms were left up to Treasury-IRS regulations. A group of bond lawyers headed by Danny Goldberg of New York met several times with people from Treasury and the IRS to discuss what ought to go into such regulations. Joe Johnson, Jim Perkins, Don Hodgman and I were in the group. Later, I testi-fied at public hearings on a succession of proposed arbitrage regulations.

I recall telling one Treasury-IRS panel that its proposed regulations would stimulate refunding issues by requiring them to be very profitable to underwriters. It was the underwriters who induced issuers to undertake such refundings; cities seldom regarded bond issues (which they had to pay back with interest) as a way to make money. By requiring issuers to invest at a yield below market, the law would open a flood of opportunity to underwriters. They would provide government bonds at prices well above their market value to reduce the yield on investments of the major portion of a refunding issue, and let the issuers earn whatever they could from investing the minor portion.

The panel members may or may not have believed me, but the proposed regulations were not changed much. For years thereafter, many refunding issues that had no beneficial municipal purpose but saving very modest amounts of money came to market. Many underwriters and lawyers (including me) profitably devoted substantial parts of their careers to such issues. Manly W. Mumford


BOND DOGS (There are three types of dogs: short haired dogs, long

haired dogs, and dogs who wear bow ties. Come join Skippy and Jake as they criticize the long and short of the practice of bond lawyering. The bow ties will take care of themselves.) Skippy: “Business casual” is making business

casualties of some of us. It is becoming increasingly difficult to dress “appropriately” for meetings, conferences and day-to-day office attire.

Jake: It used to be that gray was safe, blue

was trusted and brown was really stepping out. (No “full Cleveland” jokes this month.) But that was the suit color, not the color of the alligator on the shirt pocket.

Skippy: When Goldman Sachs went to business

casual full-time (see Investment Dealers’ Digest, February 21, 2000), it signaled to the street and the rest of the country that a new dress code was replacing the starched shirt of the past.

Jake: We at “S&J,” in keeping with our

responsibility to our readers, have developed our own set of standards for determining what is appropriate office appearance. We call it “A Guide to Lawyer’s Grooming.” “The Guide” is intended as an unfairly specific descrip-tion of what is, and is not, to be consid-ered acceptable. As we recognize that we may lack the experience and expertise needed to formulate such standards, we have retained as a consultant “D. J. Cool Dudes” Lednura, owner of DJ's Tattoo Emporium and Bait Shop, for his advice with respect to acceptable current casual dress and appearance. DJ's credentials include “Best Dressed Tattoo Parlor Owner” three years running, frequent interaction with particularly stylish lawyers (mostly criminal defense but occasionally domestic relations), and having a sister who once bought a scarf at Neiman Marcus. Based upon DJ's advice, below is our new appearance policy.

“A Guide to Lawyer’s Grooming” 1. Body Piercing. This category can be further

subdivided into three subparts: nipple rings, studs and face piercing. Nipple rings should not exceed 5 centimeters in diameter. Maximum equal to the greater of two rings or one per nipple. Tethers, including chain, wire or cord, will not be permitted during regular business hours. Studs – while some younger male employees may have delusions, we are currently of the opinion that the bond lawyer community does not have any. Generally, face piercing is to be discouraged. An eyebrow is a terrible thing to waste. And as Madaline Kahn said to Gene Wilder in “Young Frankenstein,” “no tongues.”

2. Hair. The policy regarding hair is as follows: a. Hair Pieces. Unlike body piercing, which

is discouraged, certain senior male attorneys are encouraged to consider how their looks may be improved. You know who you are. No cheapies.

b. Legs and underarms. All lawyers and

staff are required to be clean and neat. Any-one wishing to expose their legs and under-arms should “braid it or shave it.”

c. Nose hairs. “Wax them or whack them.” d. Mustaches. We have attempted to

develop a nondiscriminatory sex-neutral appearance policy (for example, see “Legs and underarms,” above). This is an exception. Women with mustaches may remind clients and colleagues of their dear departed grandmothers. Men only.

3. Collars. Collars should be starched.

Buttondown is optional. Leashes are not permit-ted; nor are electroshocking or other pain-induc-ing devices (except in unusual circumstances where little colored flags should be placed around the office to designate the boundaries of the electromagnetic field).

4. Tattoos. Tattoos, other than those of winning

sports teams, are not permitted. Physical exami-nations may be scheduled to determine whether lawyers or staff have attempted to circumvent this policy. Ankles tattooed black will not satisfy the requirement that everyone wear socks.


5. Interpretation and Adjudication. In order to create the false impression of fairness, Skippy and Jake on behalf of NABL have engaged Rita Carlson to act as the sole arbiter of good taste and appearance. Rita never met a pinstriped suit she didn’t like. If you have a “certain look” that doesn't fit on this list, forget about it. You could ask Rita, but she has been instructed that there will be no exceptions.

* * * * * * * * Skippy: The future of “tobacco bonds” is uncertain.

A recent Florida court has ruled in favor of a $140 billion judgment against the tobacco companies.

Jake: The investment banking response has

been as predictable as it is nonsensical. To potential issuers who are considering selling bonds secured as to repayment from the settlement with these same tobacco companies, the advice is “sell your bonds while you can.”

Skippy: Oh well, if the disclosure is adequate and

the price is right, we have long been advocates of not regulating the behavior of consenting adults. It just isn’t this doggie’s style.

* * * * * * * * Jake: It’s time for our regular heaping of

praise on the IRS. Skippy: And this time the heap is a “three scooper.” Jake: The IRS has recently begun to

implement “the Restructuring.” One commentator likened it to “a self-induced haircut.” We at S&J remain cautiously pessimistic as to whether anything good will come of it.

Skippy: For example, they are creating a tax-exempt

advisory committee to oversee the performance of the tax-exempt sector within the IRS and make recommendations. This we believe is a good idea provided that the advisory committee is truly listened to and its advice is seriously considered if not always followed. As of this writing, a list of volunteers has been assembled and interviews have been conducted.

But the interviews were staffed by the IRS personnel most likely to be directly affected by the advisory committee and the results of the interviews are likely to be determinative of the members selected. Sounds like the inmates choosing the warden.

Jake: The IRS recently requested comments

on the regulations concerning registration requirements for debt obligations. In particular, they are seeking comments on how to reduce the recordkeeping burden. That all sounds fine until you realize the “temporary and proposed” regulations were issued in November of 1982! I know how to ease the recordkeeping burden—don’t get 18 years behind. Of course, there are many regulations implementing the Tax Reform Act of 1986 that haven’t been written yet, but that is only 14 years (still, well over 100 dog years).

Skippy: Third, Mark Scott, IRS enforcement poobah,

was recently reported as having said that an issuer can settle with the IRS or go to appeals, but the issuer shouldn’t expect that it can continue settlement negotiations if it doesn’t like appeals’ answer. While this sounds like a bullying tactic, it makes sense where an issuer may be stalling or trying to whipsaw the government. But where the purpose of going to appeals is to seek resolution of a novel legal issue for which there may not be appropriate guidance, we think that the IRS should be obligated to continue negotiations.

* * * * * * * * Jake: In this, an election year, Congress is also

providing us with much comedic material. In addition to volume cap increase teasers which are unlikely to see the light of day and an equally improbably resolution of the battle between public power and investor-owned utilities over distribution, trans-mission and generation facilities, we have Senate Bill 2446 which would amend Section 144 of the Internal Revenue Code relating to bonds to finance manufacturing and first-time


farmers to include “any Formosan termite damage repair loan.”

Skippy: We ask the obvious question: “Why should

Formosan termites be able to borrow on a tax-free basis when all other species of insects have to pay for their repairs with after-tax dollars?”

* * * * * * * * Jake: We conclude this month with our view

of the problem of escalating associate salaries, particularly in major metropolitan areas which are experiencing the growth pains of “dot-com” and “e-commerce.”

Skippy: No first year lawyer is worth $125,000, plain and simple. The analogy to professional sports figures is a good one. If green kids just out of law school are going to be paid in excess of their current value in an attempt to capture their future potential, then the legal community needs to implement long-term contracts (currently considered unethical by the Rules and Code governing the conduct of lawyers in most states and probably unenforceable), place limits on trades and trading deadlines, and impose financial salary caps. Lawyers not re-porting to “camp” on schedule should be fined for each day late. Only a very limited number of franchise players could be protected. And lawyers who don’t produce or age beyond their highest level of productivity should expect to be released, retired, or, if they are lucky, find a job in broadcasting or journalism.

Jake: I can see it now. The draft. Signing bonuses to high school students. Agents with slicked-back hair. The ABA stating a policy advocating that all potential lawyers stay in school. And crime, violence, sex and drugs.

Skippy: The message is simple. For any law firm considering paying preposterous starting salaries because “the other firm is doing it,” just say no. It may hurt in the short run, but not for very long, and

in the end, the entire legal community will be better for it.

Jake: I say, “show me the client who is going

to take its business elsewhere because its law firm isn’t overpaying their starting associates.”

* * * * * * * * Skippy: It started as a greeting but it is becoming a

universal expression suitable for good-byes as well as hellos. So we close with our best farewell.

Jake and Skippy Wazzaaa!!! Skippy & Jake August 10, 2000

EDITOR'S NOTES As the

quadrennial national election impends, it may be well to remind members new to the fold that NABL, since its founding, has never been

"political" (unlike, say, the NRA or the

NAACP's spinoff(s)) and takes no position on which of the

presidential or other candidates for federal office might best advance the interests of issuers of munic-ipal obligations. The industry has more or less successfully weathered administrations and Congresses of both stripes, while digesting what promised to be and turned out to be serious hits on the tax side. And why? Because the "industry," while serving itself, serves — in the best sense of that word — the issuers, taxpayers, and ratepayers who knit up the

[Kiel photo]


fabric of the suit worn by the American body politic. We prosper — albeit modestly — but only in aid of documenting, facilitating, and opining upon the borrowing of below-market-rate dollars by issuers which develop, construct, or acquire facilities that serve every American of every income level, race, creed, and situation.

We best serve "our" issuers, I would suggest, by blessing debt structures which will not subject them (and their taxpayers and ratepayers) to the second-guessing and resulting depredations of the well-intentioned taxpayer-funded folks at the SEC and the IRS (let alone state and local auditors). Put another way, safer and simpler is almost always best. If Jane Councilperson cannot readily explain the deal to Joe Taxpayer, that alone maybe a reason not to do the deal. Give it some thought, but bear in mind that your editor is no spring chicken, and that "derivatives," in his lexicon, could be Hungarian for "European mushrooms."

With this issue, we bid a fond farewell to Sharon Stanton White, the Association's eighth President and our tax columnist since May 1, 1991, and wish her our best in retirement. Her many dozens of iterations of "Shared Tax Observations" have brought light and occasional heat to an often arcane and indispensable discipline.

Sharon served on the Association's Board of Directors from 1981 to 1988, and in 1993 she was awarded the Friel Medal for her distinguished service in public finance. She will be sorely missed.

The Twenty-Fifth Bond Attorneys' Workshop is hard upon us, and we are reliably advised that Chair Cynthia Weed, of Preston Gates & Ellis LLP, Seattle, has incorporated in the Workshop book a recapitulation of all prior Workshops, treating of both Executive Committee/faculty members and the subjects of individual breakout sessions. The Bond Attorneys' Workshop was a great experiment, now validated, in cooperative education for bond lawyers. In the early and mid-seventies, your editor had noted that the Practising Law Institute (and, to a lesser degree, the American Bar Association) was conducting forgettable bond-lawyer-targeted seminars which were characterized by poor logistics, the same faces on the dais, high prices, no audience input, and few amenities. With Chuck and Rita Carlson's connivance and hard work, the Bond Attorneys' Workshop was born in 1976.

The Workshop featured low prices, terrific logistics, great food (including, for a number of years, free shrimp provided by Northern Bank Note Co.), free coffee and soft drinks at breaks, breakout sessions with unfettered audience input around the tables, constantly changing faculty, and, of late, scintillating luncheon speakers. The Bond Attorneys' Workshop segued directly into the National Association of Bond Lawyers, in 1979, and here we are, today, more than 3,000 members strong. Compare your NABL dues to those you could or do pay to the American Bar Association, and reflect. Who best serves bond lawyers? Rita Carlson has enjoyed a fair measure of glory for her role as Executive Director in the Association's formative years (see, e.g., pages 4 – 8 of the November 1, 1994, number of The Quarterly Newsletter), but Chuck's contributions have been neglected, in part because he is relentlessly self-effacing. Week in and week out, Chuck cranks out Bond Case Briefs, an invaluable tool for those of us who try to keep up with bond law developments nationwide. But totally apart from his Bond Case Briefs, Chuck is a friendly resource. You can call him about anything, even if you are not a subscriber. To remind, he was the very first (1983) recipient of the Association's Bernard P. Friel Medal (except for Bernie éféin, who received the only sterling silver iteration of the Medal, and still treks solo through remote western venues with only his camera and pet squirrel). The Association is close to running out of Friel Medals.


created by Raymond Tanner, a Kentucky sculptor, who is now 60. Sixteen have been awarded to date. We have asked Mr. Tanner to arrange for the casting of twenty-five more medals. The Friel Medal weighs

about two pounds, and is a high-relief lost wax bronze casting of the Association's first eagle seal. The recipient's name, the legend "For Distinguished Service in Public Finance," and the presentation date, are engraved on the reverse as medals are awarded.

Top This Department: Former Association Presi-dent Pope McIntire's grand-daughter Elizabeth Palmour Dodd Kanne — of the fifth generation of her

family to do so, dating back to the first graduating class in 1860 — graduated cum laude in May from the School of Law at the University of Georgia. Pope, retired from King & Spalding, winters in downtown Atlanta (we're not making this up), summers in

[ESSENTIAL GUIDANCE ad — please center on page]


Cashiers ("Cassius"), near Asheville, and frets over his golf game in both venues. Some years ago, before or after a meeting of the Association's Board of Directors, Pope was piloting a golf cart down some western fairway. He proceeded quite deliberately past your editor's Titleist (well short of his ball), and, sans notice, u-turned the cart, thereby throwing your editor out on the greensward. When an explanation was demanded, Pope said (real quote), "I thought I'd see how far you'd roll." Since, your editor has shed forty pounds, and Pope's gesture was a contributing factor. I guess. Have you visited www.nabl.org?

QUARTERLY LIMERICKS I Came ol' Arthur L. down from New Yawk (He Dee Ceed with a sort of a squawk And vilified munis [Even some from the boonies] Whilst the market scratched head with a gawk.) "Let's make some new law," quoth Sir Arthur ("We can take it some far, and then farthur") "We can grind, We can find Rural felons whose heads we can offer." "We'll set a fine market example On the backs of a well-chosen sample, We'll try 'em and fry 'em And flay 'em and slay 'em Then go hide in an SEC wimple." Arthur could have done regs (And just left us the dregs) But preferred prosecution And circumlocution So we have here our hats without pegs. II Carlson and Carlson, they are fine, Older, wiser, just like wine, Aged and smooth (We have been soothed), Faithful, gifted, down the line. III Sharon, Sharon, Sharon White, Always helpful, never tight With her advices, Without prices, Ever trending toward the light. Orin Macgruder

MEMBERSHIP SERVICES

Education Program The Association conducts seminars and workshops dealing with matters of interest to the bond law community. Ahead in 2000 and 2001:

¨ September 20, 21 and 22: The twenty-fifth iteration of the Bond Attorneys' Workshop, Chicago — for lawyers with more than three years of bond experience — the preeminent national gathering of bond lawyers, covering virtually all aspects of municipal bond law

¨ December (date to be announced): Teleconference on Ethics

¨ February 15 and 16: Tax Seminar, Rancho Mirage, California — covering issues arising under the Internal Revenue Code and Treasury Regulations

¨ April 4, 5 and 6: Fundamentals of Municipal Bond Law, Dallas — intended for those with less than three years of experience in bond law

¨ May 3 and 4: Washington Seminar, Washington, D.C. — covering the areas of securities, tax, and other timely Washington topics

¨ September 19, 20 and 21: Bond Attorneys' Workshop, Chicago

These events offer members opportunities to exchange ideas about law and practice with fellow practitioners. For more information, call Interim Executive Director Jane L. Walter at 630/690-1135. Law Reform: Committee Participation Through its Committees on Arbitrage and Rebate, General Tax Matters, and Securities Law and Disclosure, as well as ad hoc committees and task forces, the Association regularly testifies and files written comments about proposed tax, securities, and other federal legislation and regulations, and acts as an amicus curiae in judicial and administrative proceedings of general interest to the membership. (Amicus curiae guidelines are available from the Interim Executive Director.) NABL members are invited to participate in committee activities. The Association also works closely with public interest groups and industry organizations on matters of mutual interest. Office of Governmental Affairs