the bond lawyer - nabl · the bond lawyer® ©2002 june 1, ... intended to reflect any position of...

President's Column (William J. Noth) 1 Washington Saga (William L. Larsen) 2 Friel Medal Nominations Sought 7 Actions by the Board of Directors on March 7 and 8, 2002 (W. Jackson Williams) 7 Actions by the Board of Directors on January 28 and 29, 2002 (W. Jackson Williams) 12 Actions by the Board of Directors on December 4, 2001 (W. Jackson Williams) 13 2002 Washington Seminar (Jeffrey C. Nave) 14 National Office News (Kenneth J. Luurs) 19 Federal Securities Regulation (Paul S. Maco) 20 "Pray to Play" Revisited (Griffith F.Pitcher) 23 Voice From the Past (Manly W. Mumford) 24 Tax Developments at the Crossroads (John J. Cross III) 26 Legal Assistants' Corner (Nancy Mendenhall) 39 Letter to the Editor 41 Book Review 41 Editor's Notes 42

The Bond Lawyer®: The Journal of the National Association of Bond Lawyers ("NABL") is published on or about March 1, June 1, September 1, and December 1 of each year, for distribution to members

and associate members of the Association. Membership information may be obtained by writing to Kenneth J. Luurs, Executive Director, NABL, 250 S. Wacker Drive, Suite 1550, Chicago,

IL 60606-5886, by calling 312/648-9590, or e-mailing [email protected], or at www.nabl.org. ©2002, NABL. Copyright is not claimed for any portion hereof prepared by any official or

employee of the United States of America in the course of his or her official duties, nor for articles or other items separately copyrighted by their authors.

THE BOND LAWYER®

°° °° The Journal of the National Association of Bond Lawyers Volume 23, No. 2 June 1, 2002

The Bond Lawyer® ©2002 June 1, 2002

National Association of Bond Lawyers Officers and Directors William J. Noth ................................................................................................................................................................ President Ahlers, Cooney, Dorweiler, Haynie, Smith & Allbee, P.C.

Des Moines, Iowa Helen C. Atkeson .................................................................................................................................................... President-Elect Hogan & Hartson L.L.P.

Denver, Colorado W. Jackson Williams ......................................................................................................................................................... Secretary Williams & Anderson LLP

Little Rock, Arkansas Linda B. Schakel ............................................................................................................................................................. Treasurer Ballard Spahr Andrews & Ingersoll, LLP

Washington, D.C. Virginia D. Benjamin......................................................................................................................................................... Director Calfee, Halter & Griswold LLP

Cleveland, Ohio John J. Cross III ................................................................................................................................................................ Director Hawkins, Delafield & Wood

Washington, D.C. Meredith L. Hathorn ......................................................................................................................................................... Director Foley & Judell, L.L.P.

New Orleans, Louisiana Monty G. Humble ............................................................................................................................................................. Director Vinson & Elkins

Dallas, Texas G. Mark Mamantov ........................................................................................................................................................... Director Bass, Berry & Sims PLC

Knoxville, Tennessee Jeffrey M. McHugh............................................................................................................................................................ Director Miller, Canfield, Paddock and Stone, P.L.C.

Detroit, Michigan Walter J. St. Onge III..........................................................................................................................................................Director Palmer & Dodge LLP

Boston, Massachusetts J. Hobson Presley, Jr.......................................................................................................................................................... Director Maynard, Cooper & Gale, P.C. Immediate Past President

Birmingham, Alabama Frederick O. Kiel .............................................................................................................................................. Honorary Director Cincinnati, Ohio Editor of The Bond Lawyer® ° ° Kenneth J. Luurs................................................................................................................................................ Executive Director

Chicago, Illinois Publisher of The Bond Lawyer® William L. Larsen ...................................................................................................................... Director of Governmental Affairs 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 opportunity to express

their individual legal interpretations, opinions, and positions. These interpretations, opinions, and positions, whether explicit or implicit, are not intended to reflect any position of NABL or the law firms, branches of government, or organizations with which the authors and editor are associated, unless they have been specifically adopted by such organizations. For educational purposes, the authors and editor may employ hyperbole or offer suggested interpretations for the purpose of stimulating discussion. Neither the authors, the editor, nor NABL can take responsibility for the completeness or accuracy of the materials contained herein; readers are encouraged to conduct independent research of original sources of authority. The Bond Lawyer® is not intended to provide legal advice or counsel as to any particular situation. Errors or

omissions should be called to the editor's attention: mail to 1095 Nimitzview Drive, Suite 103, Cincinnati, Ohio 45230-4341, or e-mail to [email protected].

The Bond Lawyer® ©2002 June 1, 2002

PRESIDENT'S COLUMN The education of our members and others in the practice of public finance has been part of the Association's mission since its inception in 1979. Many of our volunteer members have devoted tremendous amounts of time over the years to that cause, and we are better lawyers because of their efforts. Our educational program today is second to none in the quality of its offerings for bond lawyers. For many years, NABL's educational program has consisted of four annual seminars: the Bond Attorneys' Workshop, the Tax Seminar, the Fundamentals of Municipal Bond Law Seminar and the Washington Seminar. More recently, NABL has also conducted a handful of teleconferences on selected topics, including the Ethics Teleconference. Each of these has developed its own following among our members, with BAW recently attracting almost one-third of our membership. No organization, however, can afford to put things on automatic pilot, and NABL is no exception. If we are to stay com-mitted to presenting timely, effective and useful programs, it is necessary to reassess our educational programs periodically to determine whether adjust-ments are necessary to better meet the changing needs of our members. Over the past several months, the Board of Directors and our Education Committee (Scott Lilienthal, Chair; Bruce Weisenthal, Vice-Chair) have been doing just that. As the minutes of our March meeting (printed infra) reflect, the Board has determined to "merge" our Tax Seminar and Washington Seminar into a new seminar, to be held for the first time in Fort Lauderdale in February, 2003. Although many of the details are still in flux, we expect the new seminar to address advanced tax and securities law topics both in concurrent general sessions and in smaller break-out sessions on narrower topics. Two co-chairs, one drawn from the tax side of our membership and one from the securities side, will oversee the new seminar, rather than the traditional chair/vice-chair format. David Miller and Jeff Nave (who served as Vice-Chairs of the 2002 Tax Seminar and Washington Seminar, respectively) have agreed to serve as Co-Chairs for the new 2003 seminar. Our March minutes reflect much of the rationale that led to this decision, and I will not repeat it all here. Suffice it to say that the decision was motivated by the desire to use our member and staff resources wisely, and to ensure that our educational programs

are meeting the needs of as many of our members as possible. The new seminar, we think, strikes the appropriate balance in our program and should be a good fit. We hope you are able to attend it. The Board also intends to increase the use of teleconferences in the future. Holding four annual seminars has served to constrain our use of teleconferences a bit, since there has been a natural tendency to want to highlight any significant new developments or guidance at one of our seminars (particularly Tax or Washington). That should be less of a concern with our revamped seminar schedule, and give us more opportunities to address relatively narrow topics through teleconferences. Again, the goal here is a more focused and useful educational program for our members. In closing, I also want to mention that it is time for nominations for next year's officers and directors of the Association. The 2002 Nominating Committee was approved by the Board of Directors at its May 16-17, 2002, meeting, and consists of Hobby Presley (Chair), Cynthia Weed, Foster Clark, Kathleen Crum McKinney and me. (Please see the June 1, 1999, edition of The Bond Lawyer® — on the Website — for a description of the role, responsibility and functions of the Nominating Committee.) This year, I have been truly fortunate to be surrounded by volunteers who have brought a great deal of insight and energy to the tasks at hand. We need your input to ensure that this continues in the future, so please contact any one of the Committee members (by July 15th) with your suggestions for nominees. William J. Noth May 17, 2002 WASHINGTON SAGA

[Noth photo]

The Bond Lawyer® ©2002 2 June 1, 2002

Greetings from Washington. Of course, it

couldn’t last. Not in an election year with control of Congress hanging in the balance. The post-9/11 bipartisan spirit that had Democrats and Republicans singing together on the Capitol steps and showing a united front behind their President began to fray around the edges on domestic issues as early as last October and has continued to unravel. Democrats sensed that, despite the public’s near-unanimous sup-port for the President’s handling of the war on terror-ism, they could criticize his domestic initiatives and advance their own priorities without suffering in the polls. Perhaps the best recent example of this occurred when the Senate rejected oil drilling in the Arctic National Wildlife Refuge as part of major energy legislation passed on April 25. President

Bush had long advocated opening the ANWR to oil exploration as a matter with national security

implications. Moreover, the Senate failed fully to embrace more drilling and production of fossil fuels, a key element of the President’s energy policy, choosing instead to

emphasize increased renew-able resources.

Even though administration energy priorities may yet prevail in the conference committee that will begin work in June to reconcile the House and Senate energy bills, many observers considered the loss in the Senate a major domestic policy defeat for the President and a confirmation that big bipartisan victories such as the 2001 tax cut will be difficult to come by again. In recent days, questions have surfaced about the administration’s handling of early warnings of impending terrorist attacks and flawed intelligence sharing among counter-terrorist and law enforcement agencies. Again sensing election year vulnerability, Democrats have begun to criticize, mostly indirectly, aspects of the administration war against terrorism. Partisan criticism of the White House on this issue would have been unthinkable not long ago. Democrats must still be wary of a patriotic backlash if

they go too far in criticizing the White House, but the Bush administration must also be more careful than in the months immediately following September 11 to avoid overplaying what Senator Richard Durbin (D-Ill.) recently called “the wartime White House defense” as an answer to Congressional inquiries. With bipartisanship fast becoming a distant memory, the Bush administration is all but abandoning post-2000 election rhetoric about cooperation with the Democrats and focusing on regaining Republican control of the Senate and preserving Republican control of the House. As the elections approach, the White House will increase its political involvement, using the President’s continued popularity and the public’s support of his handling of the war on terrorism to keep Democrats on the defensive. Heeding their strategists, Democrats will retreat from criticism of the war on terror and focus on domestic issues where they believe they have an edge over Republicans. Stimulus Bill On March 8, after failing for several months to agree on an economic stimulus package and in spite of widespread forecasts of broadening economic recovery, Congress passed a streamlined stimulus bill. The President signed the Job Creation and Worker Assistance Act (P.L. 107-147) on March 9. The economic stimulus package includes some bond-related measures, in particular a number of provisions designed to provide relief for New York City in the aftermath of last September’s terrorist attacks. The legislation authorizes issuance of up to $8 billion in tax-exempt private activity bonds from 2002-2004 primarily for reconstruction and renovation of both residential and non-residential real property in lower Manhattan. The bonds are not subject to the annual state volume cap, and are exempt from use-of-proceeds restrictions and tenant-targeting rules, as well as the alternative minimum tax. The stimulus legislation provides for an additional advance refunding for the bonds of certain New York City issuers in an amount up to $9 billion. In addition to the New York City relief measures, the stimulus bill extended the Qualified Zone Academy Bond program (which had technically expired last December 31) through the end of 2003. The QZAB program allows issuance of up to $400 million a year of taxable tax credit bonds to renovate schools in poor neighborhoods. Enron Update

[Larsen photo]


The Enron scandal has faded somewhat from the headlines and nightly comedic monologues. No longer are the eleven Congressional committees which initiated probes into the Enron collapse holding hearings almost daily. However, as a direct result of Enron, Congress is seriously pursuing legislation designed to reform the audit process, improve corporate responsibility, and prevent future abuses. It is still too soon to tell how much Enron will affect regulation and practice in the municipal securities marketplace, but Enron-related reform legislation bears watching, particularly in the area of corporate and auditing accountability. On April 15, 2002, the House passed the Corporate and Auditing Accountability, Respon-sibility, and Transparency Act of 2002 (H.R. 3763). This comprehensive legislation creates a new audit oversight mechanism, consisting of a public regulatory organization to be established under SEC rules. H.R. 3763 also prohibits auditors from offering financial systems consulting and internal auditing services to clients. With respect to disclosure, the bill attempts to improve transparency, move disclosure to “real time,” and improve disclo-sure oversight mechanisms. In an attempt to prevent future corporate abuses, the legislation also prohibits insider trades during pension-fund blackout periods, permits the removal of insider trading profits from trades prior to correction of erroneous financial statements, permits the SEC to bar individuals from serving as officers/directors, and sets forth rules concerning the retention of records. The legislation also requires SEC and GAO studies and recommen-dations in several areas, including rules relating to analyst conflicts of interest, corporate governance practices, enforcement actions, credit rating agencies, investment banks, and model rules for attorneys of issuers. Democrats have criticized the House-passed bill as not being tough enough. A separate, more stringent, accounting reform bill, the Public Company Accounting Reform and Investor Protection Act of 2002, is now under consideration in the Senate. The bill, in the form of a committee print draft, was scheduled for Senate Banking Committee markup this week, but Chairman Sarbanes (D. Md.) postponed the markup until after the Memorial Day recess to give Committee Republicans more time to examine the issues. The Sarbanes measure has drawn heavy opposition from the accounting profession and the business community. In addition to establishing an independently funded Public Company Accounting Oversight Board, the

committee print requires the SEC to promulgate rules to prevent analyst conflicts of interest, and substantially increases the SEC budget. Other Legislative Items Effective May 15, the Treasury suspended sales of State and Local Government series (SLGS) nonmarketable Treasury securities until further notice. Treasury took this action because the statutory debt ceiling has not been raised. The House is considering supplemental appropriations legisla-tion that will likely include language raising the debt ceiling. The Senate also is expected to raise the debt ceiling in its supplemental bill. Raising the debt ceiling is not without controversy, however, and it may be mid to late June before both houses agree to the terms of the supplemental appropriation legislation that will also raise the debt ceiling, thus allowing the Treasury to resume selling SLGS. Both houses have passed comprehensive energy bills (each designated H.R. 4), which are now in conference committee. If approved by the conference committee, certain provisions would affect tax-exempt bonds issued for public power facilities. The House bill includes provisions clarifying the law in the areas of public power participation in competitive electricity markets and the tax-exempt status of bonds issued to purchase prepaid natural gas contracts. The Senate bill includes a provision calling for the Treasury to conduct an ongoing study of tax issues resulting from restructuring of the electric service industry, including the proposed output regulations released in January 2001. With a combined bill totaling over 1500 pages, conferees will literally have their hands full, while focusing on contentious issues such as ANWR drilling, climate change, an ethanol mandate, and electric industry reform. Conference committee negotiations on H.R. 4 are likely to continue through the summer. There is legislation pending in both houses of Congress to repeal the 10-year rule for mortgage revenue bonds. This rule limits the ability of mortgage revenue bond issuers to use the proceeds of mortgage prepayments and repayments to make new home loans. Support for repeal is steadily growing. S. 677 has 60 co-sponsors and H.R. 951 has 320 co-sponsors. Notwithstanding this high level of support, 10-year rule reform still needs a vehicle to advance in the legislative process. Further, repeal of the 10-year rule would cost the Treasury money. In this season of ever-tightening budgetary constraints, Congress may hesitate to act, leaving efforts to reform the 10-


year rule to carry over to next year. Bankruptcy Reform Currently in conference committee, bankruptcy reform legislation (H.R. 333) faces slow going. Both houses of Congress passed bankruptcy reform bills in March, 2001. The major obstacle for the conference committee is language in the Senate version that would bar the discharge of debts incurred as a result of acts of violence and other protest activities directed at abortion clinics and other targets. 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. Conferees are apparently prepared to continue negotiating for the rest of the 107th Congress. NABL Legislative Proposal Update On November 28, 2001, NABL introduced its legislative proposal for reform of the IRS enforcement program. NABL continues its efforts to broaden understanding and support of the legislative proposal in the issuer community by meeting with industry associations and public interest groups. In the last several months, NABL has met with a variety of groups in various forums. President Bill Noth briefed members of the Muni Council regarding the proposal during the Council’s meeting on March 14. Also in March, I introduced the proposal at a workshop panel at the National League of Cities’ Congressional City Conference in Washington and updated the Public Finance Network on the proposal. In April, Bill Noth spoke about the proposal before the National Association of Higher Education Facilities Authorities. On the same day, Bill Noth, Helen Atkeson, Linda Schakel, Neil Arkuss, John Cross, and I participated in a follow-up conference call regarding the proposal with the Government Finance Officers Association Debt Committee. Several other NABL presentations on the legislative proposal took place in May. Bill Noth addressed the National Federation of Municipal Analysts and the State Debt Management Network Conference of the National Association of State Treasurers. Linda Schakel appeared before the Council of Infrastructure Financing Authorities and chaired a panel discussion on the legislative proposal at the Washington Seminar. Hobby Presley spoke at the spring conference of the National Council of Health Facilities Finance Authorities. Other members of the NABL Board and ADR Task Force will be speaking

to various industry groups in the near future as NABL continues to solicit feedback and get the word out on this proposal. Spring Meetings with Regulators We usually schedule meetings with our Washington-based regulators to coincide with NABL’s May Washington Seminar. This year, NABL leaders again visited the IRS and the SEC. On May 8, NABL met with regulators from the IRS and Treasury. Attending for NABL were President Bill Noth, President-Elect Helen Atkeson, Treasurer Linda Schakel, Board Member John Cross, Tax Committee Vice-Chair Mitch Rapaport, Washington Seminar Chair Ed Oswald and Vice-Chair Jeff Nave, and I. IRS/Treasury attendees included Sarah Hall Ingram of the Office of Chief Counsel, Rebecca Harrigal, Tim Jones, and Rose Weber of the Bond Branch, Charlie Anderson, Cliff Gannett, and Sunita Lough of the Tax Exempt Bond unit of TEGE, Tom Louthan of Appeals, and Steve Watson of Treasury. Discussion centered generally on various guidance and enforcement-related topics. On May 8 at the SEC, President Bill Noth, President-Elect Helen Atkeson, Board Member Walter St. Onge, Securities Committee Chair John McNally and Vice Chair Ken Artin, Washington Seminar Vice Chair Jeff Nave, and I met with Caite McGuire and Josh Kans of the Office of Chief Counsel of the Division of Market Regulation, Martha Haines, Peg Henry, Mary Simpkins, and Alexandra Albright of the Office of Municipal Securities, and Amy Starr of the Division of Corporation Finance. Among other topics, the meeting focused on the OMS’ evaluation of the general condition of the NRMSIR system and various other disclosure topics. Muni Council Meets The Muni Council, an informal coalition of a number of industry groups, including the American Bankers Association, GFOA, ICI, the National Council of State Housing Agencies, NFMA, and TBMA met on March 14-15 in Washington at the Investment Company Institute (ICI). NABL’s representatives to the Council are President Bill Noth and President-Elect Helen Atkeson. Hosted and chaired by the ICI, the March meeting was the first meeting of the group outside the auspices of the MSRB. The Muni Council heard presentations from, among others, the NRMSIRs and the SEC. Bill Noth described NABL’s current projects,


including our legislative proposal, model opinion, and Article 9 projects. The Council generally identified disclosure improvement goals, including moving toward all-electronic filing of disclosure information by issuers, a central index or repository for disclosure filings, and one-stop filing of disclosure documents. The Muni Council will meet again on September 26-27, 2002. TBMA will chair and host the meeting in New York City. UCC Article 9 Survey Posted and Updated On February 28, NABL posted on its Website schedules developed by the Article 9 Subcommittee of NABL’s Committee on Opinions and Documents that track which states have adopted UCC Article 9 as proposed, and which have in some way preserved their municipal transaction exemption. Since the posting of the original survey, the Article 9 subcommittee received various comments, additions, and corrections from members. Based on this member feedback, Joan Stern, chair of the subcommittee, revised and updated the original schedules, merging two schedules into one and making a number of additions and corrections. On April 30, we posted the updated NABL “scorecard” of state action on amended Article 9 and the municipal transaction exemption. The NABL Article 9 survey was featured in a Bond Buyer article on March 19, and has been well received by members and other industry participants. The Article 9 subcommittee encourages members to continue to send timely corrections and supplemental information so that the information for each state remains complete and current. The subcommittee will continue to update the survey. IRS Advisory Committee for TE/GE Formerly known as the Tax Exempt/Gov-ernment Entities Advisory Committee (TEAC), the IRS advisory committee established to serve as an organized public forum for the IRS and repre-sentatives who deal with employee plans, exempt organizations, tax-exempt bonds, and federal, state, local, and Indian tribal governments now has a new name. The committee is now called the Advisory Committee for TE/GE (ACT). NABL member Perry Israel, of Orrick, Herrington, and Sutcliffe, is one of the two TEAC members appointed to represent the tax-exempt bond community. Perry reports that the ACT will hold a public meeting on June 21 in Washington. At that meeting, there will be a report on voluntary self-correction. Perry continues to encourage people having procedural

problems with the IRS/TEGE to contact him so that he can bring such problems to the attention of the committee and the IRS. NABL Representative to GASAC John Overdorff of Greenberg Traurig is NABL’s new representative on the Governmental Accounting Standards Advisory Council (GASAC). GASAC provides counsel on technical projects, priorities and accounting issues to the Governmental Accounting Standards Board (GASB). GASB recently issued Statement 34, which significantly changed the financial reporting of governments. In upcoming meetings, GASAC will be considering projects related to reporting and disclosure issues. Mr. Overdorff welcomes input from NABL members regarding issues on GASB’s agenda. Notes on the Regulators Three nominations for SEC Commissioner are pending before the Senate Banking Committee. They include Republican Paul Atkins, an accountant; Democrat Harvey Goldschmid, a lawyer and law professor who was SEC general counsel under former Chairman Levitt; and Democrat Roel Campos, a lawyer. Mr. Campos would replace current holdover commissioner Isaac Hunt. Mr. Atkins and Mr. Goldschmid would fill currently vacant positions on the Commission. The three new nominees would join Republican Chairman Harvey Pitt and Republican Commissioner Cynthia Glassman. Hats off to the IRS for developing a Website page devoted to tax-exempt bonds. You can find the IRS bond page at www.irs.gov/bonds. It is a work in progress, but contains a variety of useful information, including a Tax Exempt Bonds Essentials Tax Kit, various forms and publications, selected Internal Revenue Manual materials, Revenue Procedures, PLRs, TAMs, FSAs, Notices, Regulations and other resources. Website/NABLNET Update Speaking of Websites, please visit the NABL Website at www.nabl.org, where we post legislative, regulatory, and other materials that are substantively pertinent to bond law practice. We also send members NABLNET Alerts of significant developments. Our recent NABLNET Alerts have included notice of the NABL Website postings of the NABL Article 9 Subcommittee Survey of State Treatment of Governmental Transfers under Revised


UCC Article 9; H.R. 3090, the Job Creation and Worker Assistance Act of 2002; SEC Rules regarding Requirements for Arthur Andersen LLP Auditing Clients; IRS Proposed Regulations and An-nouncement regarding Hospital Acquisition Financing Bonds; IRS Proposed Regulations regarding Arbitrage, Investment-Type Property, and Prepayment; and Treasury’s Suspension of Sales of State and Local Government Series Securities. If you are not receiving the Alerts and you would like to, please send your e-mail address to [email protected] with SUBSCRIBE in the subject line. Also, if you change e-mail addresses, please let us know so we can update our records. We welcome your feedback as we continue our efforts to improve the Website as a useful resource for members. Mr. Osbourne Goes to Washington It is not unusual for Hollywood and Washington to cross paths. Politicians love to bask in the reflected limelight of Hollywood celebrities. Nor is it unusual for politicians to get a little starstruck. For example, when Oscar-winning actress Julia Roberts testified on the Hill recently, there was no question of obtaining a quorum of House Appropriations Committee members. Votes were postponed, schedules rearranged, and the hearing room packed with Congressmen eager to be in the same room with Ms. Roberts. Still, when one thinks of official Washington going a little crazy over a Hollywood star, it is not former Black Sabbath frontman Ozzy Osbourne who comes to mind. Yet this same bat-chewing rocker charmed the Washington Establishment, captivated the press, and got considerably more attention than President Bush at the annual White House Correspondents’ Dinner. The Washington Post quotes the following exchange between MTV’s latest star and the President. Ozzy (grabbing his brown and pink

hair): “You should wear your hair like mine!”

President Bush (hesitating): “Second term, Ozzy!”

Now there’s a reason to look forward to a Bush victory in 2004. Bill Larsen Washington, D.C. May 24, 2002

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

ACTIONS BY THE BOARD OF DIRECTORS ON MARCH 7 AND 8, 2002 The Board of Directors met on March 7 and 8, 2002, in Naples, Florida. President William J. Noth presided. Also present were Helen C. Atkeson, President-Elect; W. Jackson Williams, Secretary; Linda B. Schakel, Treasurer; Directors Virginia D. Benjamin, John J. Cross III, Meredith L. Hathorn, Monty G. Humble, G. Mark Mamantov, Jeffrey M. McHugh, and Walter J. St. Onge III; Immediate Past President, J. Hobson Presley, Jr.; Honorary Director Frederick O. Kiel; Kenneth J. Luurs, Executive Director; and William L. Larsen, Director of Governmental Affairs. Report of Director of Governmental Affairs William L. Larsen, Director of Governmental Affairs, made the following report: Legislative Proposal: Since the Board's January meeting in Washington with a number of municipal


market groups and regulators, outreach and education efforts continue with respect to the Association's legislative proposal. On January 29, 2002, President Noth, President-Elect Atkeson and Governmental Affairs Director Larsen met with the GFOA Debt Committee for a general presentation and questions and answers on the proposal. On February 11, 2002, Treasurer Schakel gave a presen-tation to the annual Washington Legislative Conference of the National Association of State Treasurers. Mr. Larsen is scheduled to appear on a workshop panel at the National League of Cities' upcoming Congressional City Conference in Washington on March 11. In May, Past President Presley is scheduled to speak at the Spring Conference of the National Council of Health Facility Finance Authorities. Also in May, President Noth will be addressing the National Federation of Municipal Analysts and Treasurer Schakel will appear before the Council of Infrastructure Financing Authorities. The Washington office has sent letters to a number of public interest groups that represent issuers offering to meet with group leadership in order to provide speakers on the Association's legisla-tive proposal. The Washington office has received expressions of interest from the Council of Development Finance Agencies and the Health Care Finance Management Association. MSRB Muni Council: President Noth and President-Elect Atkeson will represent the Association at the next Muni Council meeting on March 14-15, 2002. The Muni Council is an outgrowth of an MSRB proposal that public finance interest groups work together to improve municipal securities disclosure. The March meeting will be the first meeting of the group outside the auspices of the MSRB. Both the MSRB and the SEC have been invited to the meeting, which the ICI will hold and chair. UCC Article 9: Opinions and Documents Committee member Ms. Joan Stern has just completed work on a "scorecard" of state action on Amended Article 9 and the municipal transaction exemption. The "scorecard" is now posted on the NABL website. Seminar and Projects: Mr. Larsen reported he is assisting the Washington Seminar panel chairs to obtain government and outside group panelists and to coordinate their participation. In connection with the Washington Seminar, Mr. Larsen will be organizing the meetings with the Internal Revenue Service and Securities and Exchange Commission.

Further, Mr. Larsen was assisting Chair Kristin Franceschi with the pending Model Opinion Review Project and as needed with the Tax and Securities Committee projects. Report of Executive Director Executive Director Luurs made the following report to the Board: Tax Seminar: The recently completed Tax Seminar was well-received, albeit with some reduction in the number of participants compared to the last two years. Attendance was in line with budgeted expectations and it is anticipated that costs have been well contained within budget. Comments from attendees were very positive. Directory: The Association Directory for 2002 is in preparation and is expected to be distributed shortly. Additional Revenue Sources: Mr. Luurs reported on the possibility of several new sources of revenue to help offset increased costs. Mr. Luurs reported that many associations have created partnerships with for-profit organizations, developed new lines of products and services/or expanded the audience for the pro-grams. Thereafter he described a number of possibilities of new sources of revenue, and described their potential utility to the Association. Following this discussion, the Board agreed to request the Membership Committee to consider this matter and to report to the Board its recommendations. Further, the Membership Committee was asked to consider how the Association should plan its 25th anniversary year meeting.

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Strategic Plan President-Elect Atkeson reported to the Board the status of the Strategic Plan and the Board reviewed the most recent draft, including amendments suggested at the December meeting of the Board. During the discussion, several Board members suggested certain language changes which were approved and the Strategic Plan as so modified was unanimously approved, upon motion by Director Humble and seconded by Director Hathorn. As revised and approved, the Strategic Plan will be presented to the Board at its next meeting. By-Laws President-Elect Atkeson presented to the Board a draft of the current By-Laws of the Association and suggested several revisions. The suggested revisions and current draft of By-Laws were discussed extensively without any final action taken. President-Elect Atkeson was requested to prepare another draft of proposed By-Laws revisions consistent with the discussion at this meeting. She was also requested to review the Illinois Non-Profit Corporation statute in making a new proposal with the goal that new revised By-Laws could be considered at a subsequent Board meeting. Expense Guidelines President-Elect Atkeson reported on expense guidelines utilized by the Association and the Board considered current expense guidelines used for seminars, committees, invitees to Association meetings, employees, Bond Attorneys' Workshop Steering Committee members, and Directors. After an extensive discussion concerning expense guide-lines in an effort to create uniformity within the expense guidelines where appropriate, the Board then deferred the matter to be again reviewed and reconsidered at the Board's May, 2002, meeting. Bond Attorneys' Workshop Chairman Mamantov of the Bond Attorneys' Workshop reported on plans for the September, 2002, Bond Attorneys' Workshop. He advised that the Steering Committee would hold its meeting April 8-9, 2002, and hoped to complete plans for the Workshop at that meeting. Chairman Mamantov reported that the current arrangements with the Palmer House extend to 2005 and that the Association should begin plans now for where and at what hotel it wishes to continue the Bond Attorneys'

Workshop in 2006 and subsequent years. President Noth advised that the Board would consider this matter at its May, 2002, meeting. Opinions and Documents Committee The Board liaison, Jack Williams, reported on the current status of the Opinions and Documents Committee's work on the Model Bond Opinion Project. The Committee plans to meet on May 8, 2002, and hopes to submit a report to the Board by June 30, 2002. There followed an extensive discussion of this project; Director Williams was directed to advise the Committee to continue its work and to report progress at the May, 2002, meeting of the Board. Treasurer's Report Treasurer Schakel presented to the Board for its review the final budget of the Association for 2002. Task Force on Alternate Dispute Resolution Past President Presley reported on the status of the Task Force and its work to produce a legislative proposal which is now being considered by the Association. The Task Force had requested that it hold a meeting this year to evaluate the proposal further and see if it should be revised in any respects. Upon motion by Secretary Williams, seconded by Director Benjamin, the Board approved payment of expenses for a meeting of the Task Force. The Task Force was further requested to assess the view of the Association's own membership concerning the legislative proposal and to further discuss means and methods of moving the proposal forward. Would you like to serve on a NABL Committee? Call Executive Director Ken Luurs, 312/648-9590.


Report of Education Committee Director Benjamin, liaison to the Education Committee, reported to the Board the activities of the Education Committee. The Education Committee had prepared an extensive report and made specific recommendations to modify the current education program of the Association. The Education Committee pointed out that for many years the Association's schedule of education events has primarily consisted of four annual seminars: The Bond Attorneys' Workshop, the Tax Seminar, the Fundamentals of Municipal Bonds Seminar and the Washington Seminar. Most recently, the Association has also conducted several teleconferences on selected topics, including ethics. The Committee had received reports both formally and informally from a number of Association mem-bers, including President Noth, President-Elect Atkeson and members of the Board, raising certain concerns regarding the Association's educational program. Analysis of the Current Program: Major concern has been raised relating to the future of the Washington Seminar. Attendance at this seminar has always been somewhat low, and member interest in the event seems to have declined even further in recent years. The Washington Seminar was originally intended to provide members with an opportunity to interact with regulators from the Internal Revenue Service, U.S. Treasury, and the Securities and Exchange Commission. In recent years, however, these regulators have been participating significantly in other Associations seminars. In addition, the Internal Revenue Service and the Securities and Exchange Commission have significantly expanded their own outreach efforts, including numerous "roundtables" and similar events. Further, there has been a decrease in the output of published guidance and other newsworthy announcements from regula-tors. This combination of factors indicates that the Washington Seminar, as presently constituted, may have outlived its usefulness. Together, the Washing-ton and Tax Seminars typically are attended by approximately 10% of the Association's members each year. Further, it has been suggested that the resources of the Association and its members may be more effectively utilized by reducing the number of annual seminars from four to three. Each seminar requires significant commitments of time and effort from both the Association staff and the members who volunteer

their time. By reducing the number of seminars by one, even if that involves combining aspects of the two previously held seminars, the Association staff can more effectively focus their efforts in organizing the seminars and also be able to devote more time to the additional tasks for which they are responsible. Also, reducing the number of seminars to three would reduce the burden placed on many Asso-ciation members who serve in the critical roles of Chair, Vice-Chair and faculty members for Association seminars. Further, in the current environment of reduced travel budgets, it seems prudent to cut back on the number of times each year that the Association asks members to travel to Association educational events. Proposed New Seminar: In response to the concerns described above, the Education Committee recommended that the Association expand the scope of the current Tax Seminar to include securities law and other topics. Like the Tax Seminar, the new seminar would be targeted toward practitioners who already have achieved a certain level of expertise in the subject matter so that sessions can focus on more advanced topics and issues. The Board discussed the proposal of the Education Committee at some length. Thereupon, Director Benjamin moved, seconded by Director Hathorn, that there be no Washington Seminar in 2003, and that the current Tax Seminar and Washington Seminar be replaced by a new seminar, as described in the Education Committee's report and to be planned by and implemented by the Education Committee and as approved by the Board, to commence in 2003, the site to be Fort Lauderdale, Florida, the planned site for the 2003 Tax Seminar. Director Benjamin also reported that the Educa-tion Committee report recommended that the Association expand its use of teleconferences to be primarily focused on narrowly targeted subjects of special interests to the Association. Upon motion by Secretary Williams, seconded by Director Cross, it was unanimously approved that the Association hold up to two new teleconferences on timely topics of interest to Association members, the planning to commence immediately, the subject matter of each teleconference to be approved by the Education Committee, the Board Advisor to the Education Committee, and the President of the Association. Report of the Securities Law Publication Task Force


Director St. Onge reported on the Securities Law Desk Book Project. Director St. Onge reported that the Editorial Board, composed of Drew Kintzinger, John McNally, Paul Maco and Thomas Harding, had commenced its activities. Initially, they are working with LexisNexis to develop market data concerning demand for such a volume. LexisNexis has indicated that it would be comfortable moving forward if it could be demonstrated there was demand for at least 400 copies. Consideration will be given to a survey of the membership via NABLNET to test interest for a securities law desk book, similar to the Federal Taxation of Municipal Bonds desk book. Report of the Securities Law and Disclosure Committee Director St. Onge, liaison to the Securities Law and Disclosure Committee, reported that the Committee was moving forward with plans for the Washington Seminar. Among other features, Director Humble will lead a discussion on initial disclosure and Director St. Onge will lead a discus-sion on continuing disclosure. Director Humble advised that he was working on a paper concerning disclosure for variable rate demand bond transactions which would include market perceptions. Director Humble advised that some at the Securities and Ex-change Commission take the view that there should be a disclosure of the underlying credit in variable rate demand transactions, but according to Director Humble the corporate experience in this regard had been different. Report of General Tax Committee Director McHugh, liaison to the General Tax Committee, reported on the status of the Committee's projects. The active substantive guidance projects of the Tax Committee relate to (1) the project on allocation accounting rules under Code Section 141, (2) followup work (including negotiations with the Internal Revenue Service and U.S. Treasury and drafting) relating to Charles Henck's solid waste report, (3) a project, suggested and headed up by Jeanette Bond, on the definition of manufacturing facilities under Code Section 144(a), (4) a project regarding the tax treatment of "naming rights" transactions, and (5) a project regarding tax simplification proposals. On item (1), representatives of the Treasury reported that the Treasury and the Internal Revenue Service are again actively working on this gap in the

regulations and, consistent with the Committee's approach, are going to begin working on smaller, discrete areas of the reserved regulations. The first discrete topic for the Committee is the effect of partnerships on tax-exemption, focusing largely on partnerships between non-profit corporations and partnerships between non-profit and for-profit enti-ties. On (2), the Association representatives met with a number of Internal Revenue Service and U.S. Treasury representatives to discuss the solid waste report in more detail and submitted additional proposals in response to the issues raised at the meeting. At this point, the Committee is waiting for the Internal Revenue Service and U.S. Treasury to move forward on this project. On (3), Ms. Bond has circulated a second draft of her report on the definition of manufacturing facilities under Code Section 144(a). There is no current activity to report on (4), the project concerning "naming rights" transactions. On (5), tax simplification, Director Cross has indicated a willingness to take the lead in writing a proposal on tax simplification in regard to municipal bonds. This paper will go to the Committee for review, and the Committee will report further on this project at the May, 2002, Board meeting. The concept is that this report would be the Committee's project for contribution to ongoing discussions with the Internal Revenue Service and the U.S. Treasury. Report of Legal Assistants Committee Director Mamantov, liaison to the Legal Assistants Committee, provided the report on this committee to the Board. Mr. Eric Ballou has agreed to be the "coordinator" for the completion of the Legal Assistants Handbook. The goal is to complete the handbook this year. The plans for the current panel to be presented at the Fundamentals Seminar will be modified to add more substance to the presentation. If it can be arranged, President Noth and Director Benjamin will meet with the Legal Assistants Committee at the Fundamentals Seminar to discuss its panel and activities generally. The Board discussed the possibility of a teleconference for legal assistants and new attorneys in public finance on selected topics. Report of Membership Committee


Director Hathorn reported on the activities of the Membership Committee. She reported that consistent with the Board's earlier discussion concerning membership enhancements, the Committee will have a conference call on these issues and would be making its report to the Board at the May, 2002, meeting. The Committee will also discuss possibilities for the Association's 25th anniversary meeting. Ms. Hathorn also reported that in this connection the Membership Committee will utilize the Association's website as part of its efforts. NABL has a JOB BANK for members and public

sector lawyers seeking employment opportunities with private law firms. Contact Executive Director Ken Luurs at 312/648-9590.

Report of Professional Responsibility Committee Director Humble reported that Mr. Thomas Downs was working on a paper on indemnification requests of bond counsel and that he would have a further report to make on the activities of the Committee at subsequent Board meetings. W. Jackson Williams Secretary ACTIONS BY THE BOARD OF DIRECTORS ON JANUARY 28 AND 29, 2002 The Board of Directors met on January 28 and 29, 2002, in Washington, D.C. President William J. Noth presided. Also present were Helen C. Atkeson, President-Elect; W. Jackson Williams, Secretary; Linda B. Schakel, Treasurer; Directors Virginia D. Benjamin, John J. Cross III, Meredith L. Hathorn, Monty G. Humble, G. Mark Mamantov, Jeffrey M. McHugh, and Walter J. St. Onge III; Immediate Past President J. Hobson Presley, Jr.; Kenneth J. Luurs, Executive Director; and William L. Larsen, Director of Governmental Affairs. Also present was former President Neil Arkuss, Chair of the Task Force on Alternate Dispute Resolution, for portions of the meeting attended by representatives of the Internal Revenue Service and the U.S. Department of the Treasury. Meetings with Representatives of Various Government Agencies and Municipal Finance Organizations President Noth called the meeting to order and advised that a full schedule for the next two days was arranged for the Board to meet with representatives of several government agencies and public finance organizations. The meetings with the respective groups then followed at the various times shown below and with the representatives of each organization as so identified: January 28 Noon — 1:30 pm GFOA Alan Anders, Dir. of Financing Policy, NYC/OMB


Ben Watkins, Director, FL Div. of Bond Finance Tom Glaser, CFO, Cook County, IL Susan Gaffney-Campanella, Dir., GFOA Fed. Liaison Ctr. Mitch Rapaport, Counsel to GFOA Debt Committee 2:00 — 3:00 pm TBMA Frank Chin, Mgr. Pub. Fin. Dept., Salomon Smith Barney Lynnette Hotchkiss, Assoc. General Counsel, TBMA Frank Hampton, VP, Tax Legislation, TBMA 3:30 — 4:30 pm IRS Mark Scott, National Director for Tax Exempt Bonds Sunita Lough, Senior Tax Law Specialist, TEB Bruce Serchuk, Assist. Branch Chief, OCC Bond Branch Thomas Louthan, Director of Strategic Planning, Appeals 5:00 — 6:00 pm MSRB Howard D. Marsh, MSRB Chairman Christopher Taylor, MSRB Executive Director

January 29 8:00 — 9:30 am NFMA Peter Bianchini, Schwab, NFMA Chair Karen Szerzen, Allstate, NFMA Vice Chair 10:00 — 11:00 am SEC Josh Kans, Staff Attorney, Div. of Market Regulation Bill Baker, Assoc. Dir., Div. of Enforcement Amy Meltzer Starr, Spec. Counsel, Div. of Corp. Finance Martha Haines, Chief, Office of Municipal Securities

11:30 — 1:00 pm TREASURY Pam Olson, Deputy Assistant Secretary (Tax Policy) Steve Watson, Office of Tax Legislative Counsel 1:30 — 2:30 pm ICI Stanley Griffith, VP, Fidelity Investments Money Mgmt. Leslie Richards, Yellen, Principal, Vanguard Group Amy Lancellotta, Senior Counsel - Securities, ICI Barry Simmons, Assoc. Counsel - Securities, ICI Cathy Barre, Counsel - Tax, ICI The Board also entertained representatives of the various organizations at a dinner on the evening of Monday, January 28, 2002, at the meeting site. Following the conclusion of these meetings, the Board had a general discussion concerning the meetings just concluded with each organization. W. Jackson Williams Secretary ACTIONS BY THE BOARD OF DIRECTORS ON DECEMBER 4, 2001 The Board of Directors met on December 4, 2001, in Chicago. President William J. Noth presided. Also present were Helen C. Atkeson, President-Elect; W. Jackson Williams, Secretary; Linda B. Schakel, Treasurer; Directors Virginia D. Benjamin, John J. Cross III, Meredith L. Hathorn, Monty G. Humble, G. Mark Mamantov, and Walter J. St. Onge III; Immediate Past President, J. Hobson Presley, Jr.; Honorary Directors Eric E. Ballou and Frederick O. Kiel; Kenneth J. Luurs, Executive Director; and William L. Larsen, Director of Governmental Affairs. Report of Section 103 Editorial Board To complete the composition of the Section 103 Editorial Board, President Noth recommended that Michael G. Bailey of the Chicago office of Foley & Lardner serve as Second Vice-Chair. Upon motion


made by Director Hathorn, seconded by Director Onge, the Board resolved that Mr. Bailey be appointed Second Vice-Chair of the Section 103 Editorial Board for 2001 – 2002. Strategic Plan and By-Laws President-Elect Atkeson distributed the memorandum she had prepared describing suggested revisions to the Strategic Plan. There ensued a general discussion concerning the suggested revisions to the Strategic Plan, and suggestions were made for the Strategic Plan to include the concept of encouraging new products and new techniques. There was also discussion concerning leadership issues, and it was understood that those types of changes would require amendments to the By-Laws. At the conclusion of this discussion, President-Elect Atkeson was requested to continue her revisions to the Strategic Plan and also to make recommendations concerning amendments to the By-Laws. The revisions to the Strategic Plan and By-Laws would again be reviewed by the Board at its next opportunity. Washington, D.C., Board Meeting Director of Governmental Affairs Larsen reviewed with the Board the proposed schedule of the Washington Board meeting with various agencies and interest groups in Washington, D.C., January 28 – 29, 2002. All the groups invited to participate in this meeting have committed to participate. President Noth assigned respective Board members to each respective group to coordinate that group’s participation with the Board. President Noth advised that he will initiate a conference call of the Board in mid-January, 2002, to review final arrangements for the Washington, D.C., Board meeting. See you at the Bond Attorneys' Workshop? Tax Seminar President Noth advised that in order for Neil P. Arkuss, Palmer & Dodge, Boston, Chair of the Task Force on Alternate Dispute Resolution, to participate in the 2002 Tax Seminar, Board approval would be required, since he had appeared as a participant in the last three consecutive tax seminars. Upon motion by Director Humble, seconded by Director Benjamin, the Board resolved that Mr. Arkuss be approved to participate fully in the 2002 Tax Seminar to be held in February, 2002, in San Antonio, Texas. W. Jackson Williams

Secretary 2002 WASHINGTON SEMINAR NABL presented its 2002 Washington Seminar on May 9th and 10th under the leadership of Chair Ed Oswald (Orrick Herrington & Sutcliffe LLP) and with a strong slate of panelists and panel topics. The Seminar featured officials from the Securities and Exchange Commission, the Internal Revenue Service and the U.S. Treasury Department, who discussed regulatory and enforcement issues facing the municipal securities industry. In all aspects, the Seminar was a great success. Hollace Cohen (Jenkins Gilchrist Parker Chapin LLP) chaired the Seminar’s lead-off panel, which explored some of the lessons that the municipal securities market can extrapolate from the Enron crisis. After Hollace briefly summarized the bankruptcy proceedings, she turned the discussion over to Bill Doyle (Orrick Herrington & Sutcliffe LLP). Bill provided insight into the due diligence challenges facing counsel in public power financings. Many of these challenges — such as determining the extent to which a municipal power utility may be engaged in power marketing activities, or be exposed to counterparty risks, or be involved in off-balance-sheet financing transactions — have arisen in recent years as municipal utilities have sought to remain competitive during the era of industry deregulation. Bill was followed on the panel by Claire Cohen of Fitch Investors Service, Inc. Claire offered an analyst’s perspective on Enron’s relevance in the context of municipal securities. Enron’s collapse does underscore the analyst’s need to “always be suspicious” and to fully understand a financing structure. Claire touched on the differences between the equity market and municipal debt market, especially in the treatment of off-balance-sheet debt. The SEC’s Release No. 33-8070 was addressed by Martha Haines (Chief, Office of Municipal Securities, Division of Market Regulation). The release suggests that the late filing of annual financial statements audited by Arthur Andersen not be considered as a material breach of a continuing disclosure undertaking if certain conditions are met. Martha also indicated that disclosure regarding special purpose entities (SPEs) was a hot issue that may deserve greater attention by counsel. Paul Saltzman of The Bond Market Association


highlighted the legislative and regulatory initiatives that the Enron collapse has spawned. These included initiatives regarding the quality and timeliness of financial information (with the suggestion that the Internet will become the preferred means of disseminating information), bankruptcy reform, and greater oversight of rating agencies. While final action is not expected in all of these areas, Paul expected to see some “spill-over” into the municipal marketplace. Paul concluded his comments by observing that investment bankers must continue to be able to rely on professionals, such as accountants and counsel. Monty Humble (Vinson & Elkins LLP) moderated the morning’s second panel, which featured a lively discussion of the disclosure obligations arising in the context of variable rate demand obligations (VRDO) supported by direct-pay letters of credit. This topic has been a perennial favorite at the Bond Attorneys' Workshop, and recently has been aired in The Bond Buyer. Monty offered the money market funds an opportunity to discuss their need for information in the context of VRDO offerings. Stephanie Peterson (Charles Schwab & Co.) and Ruth Levine (Vanguard Investments), both representing the “buy” side on the panel, jointly announced the pending release of the National Federation of Municipal Analysts’ “Best Practices” disclosure guideline for short term obliga-tions. That document is now posted on the NFMA’s Website (www.nfma.org). They also described the lack of disclosure that often accompanies public offerings of bond anticipation notes (e.g., sometimes the investor receives only a notice of sale and must track down at the NRMSIRs other information regarding the issuer), that VRDOs are purchased as long-term investments, and that commercial paper has a very limited secondary market. With respect to new issue disclosure for VRDOs backed by a direct-pay letter of credit, the market fund panelists stated they were most interested in information showing the issuer has a justifiable reason for issuing the debt and that the issuer understands its obligations. They also underscored their need for continuing information in order to comply with Rule 2a-7 under the Investment Company Act of 1940, a topic that was discussed in greater detail during an afternoon session at the Seminar. Monty offered the SEC panelists an opportunity to state their positions regarding the disclosure

practices relating to VRDO offerings. Amy Starr (Special Counsel, Office of Chief Counsel, Division of Corporate Finance) commented on disclosure practices regarding the credit enhancer and the underlying issuer in the context of corporate offerings. She observed that the 1989 and 1994 releases relating to Rule 15c2-12 are noteworthy in the context of municipal offerings. Martha Haines engaged the audience when she queried why disclosure practices regarding insured bonds should differ from disclosure practices relating to VRDOs supported by direct-pay letters of credit. She then closed the morning session by asking bond lawyers to help educate issuers regarding Rule 15c2-12 compliance and to draft more user-friendly continuing disclosure undertakings. John Podesta — President Clinton’s Assistant and Chief of Staff — treated Seminar attendees to an insider’s view of the West Wing and the Washington political scene. His speech dealt with humorous topics, like President Clinton’s ambitions to be a television talk-show host, and sobering topics, such as the inability to achieve a Middle East peace settlement at Camp David. And for those of you who did not attend the Seminar, the television series “The West Wing” received high marks from Mr. Podesta for its relatively accurate portrayal of life within the White House. Continuing with the disclosure theme, Walter St. Onge (Palmer & Dodge LLP) launched the post-lunch crowd into a lively discussion regarding continuing disclosure topics. Walter, Ken Artin (Bryant, Miller & Olive, P.A.) and the other panelists highlighted problems that currently exist in this area. Peg Henry (Attorney-Fellow, Office of Municipal Securities, Division of Market Regulation) presented the audience with findings from the SEC’s examination of continuing disclosure compliance in 30 selected transactions. A handout that accompanied her comments is posted on NABL’s Website (www.nabl.org). Following up on the com-ments made earlier in the day, attorneys on the finance team were encouraged to educate transaction participants, at closing, of their on-going disclosure responsibilities. Stanley Griffith (Vice President/Associate General Counsel, Fidelity Investments Money Management, Inc.) observed that the NRMSIR system, in his view, is ineffective primarily because information cannot be accessed in sufficient time to make investment decisions (which often must be made with little notice). He explained that better


continuing disclosure is necessary so that money market fund investors can meet regulatory require-ments (e.g., Rule 2a-7 requirements) and their own liquidity, diversity and credit risk requirements. He also mentioned that the Investment Company Insti-tute is looking for a disclosure system that provides free access to information in electronic format and keyed to CUSIP numbers (with CUSIP numbers being included in the preliminary official statement, if possible). Peg Henry offered the Municipal Advisory Council of Texas as an example of a state information depository that satisfied many of these criteria. An issuer’s perspective regarding continuing disclosure was provided by Ben Watkins, the Director of Florida’s Division of Bond Finance. Ben discussed a number of initiatives undertaken by the Government Finance Officers Association. He emphasized the use of CUSIP numbers and The Bond Market Association’s cover sheets when making NRMSIR filings, and suggested that a single depository would be more user-friendly than four depositories. The Seminar turned to tax matters with a panel on NABL’s legislative proposal and IRS appeals, chaired by Linda Schakel (Ballard Spahr Andrews & Ingersoll, LLP). Linda briefed the audience regarding the current status of NABL’s legislative proposal (which is posted on NABL’s Website) and its purpose. She noted that the proposal still is in draft form. Mitch Rapaport (Nixon Peabody LLP) briefly discussed concerns issuer groups have regarding the fact the proposal assigns ultimate liability to the issuer. Bradley Waterman, who has represented clients in tax proceedings relating to municipal bonds, questioned why the IRS would give up its right to commence proceedings against bondholders. Not only would the IRS relinquish a tool it could use to compel issuers to settle, it also might relinquish the ability to collect full tax liability (especially under those circumstances where the issuer is not well funded). On the other hand, Brad expressed the view that the greatest market inefficiency today is the drastic market reaction to news reports that a transaction is under audit (i.e., bonds are liquidated). He believes this is addressed by NABL’s legislative proposal. The regulators on the panel did not comment on the NABL proposal. However, Thomas Louthan (Director, Office of Strategic Planning &

Communications, IRS) related that the IRS is very interested in settling disputes expediently through arbitration. Tom and Mark Scott (Director for Tax-Exempt Bonds, Tax-Exempt and Governmental Entities Division, IRS) closed the panel by informally announcing a new pilot program for mediation of factual disputes in audit situations. The IRS envisions that IRS appeals officers will serve as mediators. As envisioned, the mediation process is expected to result in a factual determination within a 60-day period. The final panel during Thursday’s session of the Seminar explored ethical considerations that arise for tax counsel. Vicky Tsilas (Ballard Spahr Andrews & Ingersoll, LLP) skillfully guided the panel — which also included Thomas Morgan (George Washington University Law School), William Freivogel (formerly of ALAS) and Lloyd Mayer (Caplin & Drysdale Chartered) — through a series of hypothetical sce-narios. Topics discussed included whether ethics rules might be violated if a tax opinion is rendered that does not meet NABL’s opinion standard; whether bond counsel can represent an issuer in a subsequent audit of a transaction for which such counsel rendered the tax opinion; when a new engagement letter may be appropriate for post-issuance guidance regarding tax issues; the degree to which bond counsel might be liable for providing casual post-issuance advice to issuers; and what counsel should do if a client refuses to follow counsel’s advice regarding the need to disclose adverse tax determinations. Friday’s session opened with a panel on federal tax developments, which was chaired by Mike Bailey (Foley & Lardner). The Seminar attendees were treated to a discussion of the recently proposed prepayment and acquisition financing regulations by the principal authors of those regulations — Rebecca Harrigal (Branch Chief, Tax Exempt Bond Branch, IRS), Bruce Serchuk (Senior Technician Reviewer, Office of the Chief Counsel, IRS) and Stephen Watson (Associate Tax Legislative Counsel, Office of Tax Policy, U.S. Treasury Department). The government representatives discussed the proposed prepayment regulations, with a special focus on the natural gas prepayment exception and its relationship to the business purpose and customary exceptions. The natural gas exception, they noted, was intended to address a specific fact pattern that had come to the IRS’ attention. The proposed regulations regarding acquisition financings were summarized by Bruce Serchuk. He


discussed certain hospital acquisition transactions that provided a backdrop for the regulations. The examples contained in the proposed regulations also were examined by the panelists. The panel session closed with a discussion of regulatory projects the IRS and Treasury Department are likely to undertake in the upcoming year. These included finalizing the output regulations, proposing allocation and accounting rules for output facilities, proposing regulations relating to refunding issues under Section 141 of the Code, and finalizing broker fee regulations for GICs and defeasance escrows under Section 148 of the Code. No Washington Seminar would be complete without a discussion of IRS enforcement initiatives. Mary Reichart (Bryan Cave LLP) presided over a panel that included Cliff Gannett (Manager, Outreach, Planning and Review, IRS), Charles Anderson (Manager of Tax-Exempt Bonds, Field Operations, IRS), Mark Scott and Timothy Firestine (Director of Finance, Montgomery County, Maryland). The panelists discussed the IRS’ new audit guidelines that are likely to be released soon in the form of an Internal Revenue Memorandum. The guidelines will provide procedures for following the IRS work plan, will address the audit “referral” process (i.e., audit “snitch” letters from inside and outside the agency), among other things. It is expected that IRS audit letters will indicate whether an audit is triggered by a “referral” or whether the audit is a targeted area compliance audit. The new policy guidelines also are expected to provide clearer guidelines on settlement of enforcement actions. The panelists also discussed the difference between the IRS’ Outreach Program and the Voluntary Closing Agreement Program (VCAP). The Outreach Program is intended to provide an opportunity to have dialogue between IRS and industry groups, whereas VCAP is intended to be used where an issuer wants to fix the problem but self-correction remedies (e.g., yield reduction payments) are not available. Change in use is the most prevalent issue arising in VCAP proceedings, followed by advance refunding escrows failing to roll into zero-coupon SLGs. The VCAP process is intended to result in a settlement agreement between the issuer and the IRS. The IRS representatives suggested that an issuer should commence the VCAP process by offering the

IRS some form of consideration (e.g., be willing to pay something or redeem outstanding obligations). If no consideration is offered, the IRS will refer the matter out of VCAP on the grounds that the issuer is looking for resolution of a legal issue. Legal issues are resolved through the private letter ruling process. Mark Scott briefly discussed the special closing agreement program for hospital affiliation transactions announced in IRS Announcement 2002-43, and asked for comments on the issue of how interest on variable rate bonds should be calculated for purposes of determining the closing amount. (The IRS informally had adopted the practice of determining tax liability based on the variable rate applicable at the time of settlement. In hospital acquisition/affiliation VCAP proceedings under Announcement 2002-43, the hospitals have suggested that the IRS calculate interest based on a rate that could be achieved had the issuer entered into a fixed rate swap for its variable rate bonds, which amount usually is higher than the variable rate on the settlement date. This would lower the amount of tax exposure for these transactions because the settlement amount under Announcement 2002-43 is a percentage of the arbitrage profits on the escrow investments purchased in such transactions.) The panelists also discussed “Round Two” of the IRS’ yield-burning audits, in which the IRS is targeting investment banking firms. The IRS apparently has found that certain firms involved in yield-burning audits settled through 1994 had yield burning problems for later deals. With respect to TRANs under audit, concerns were noted with TRAN pools that apparently borrowed for entities that indicated no need for working capital financing. The panelists also observed that the IRS’ solid waste audits have raised generic Section 142 issues beyond whether the targeted waste stream has value. Other issues arising on audit include: qualified 501(c)(3) bonds being threatened by unrelated business income; the reasonableness of issuer expectations in the context of loan pools involving poor origination history on multiple deals; “telephone book TEFRAs” (i.e., the practice of including a laundry list of potential borrowers/projects in TEFRA notices where money is not originated for those projects); and, for multi-family housing projects, the IRS is finding that tenants are not meeting the income requirements of Section 142(d) of the Code. The panelists turned their attention to issuer liability for tax exposure and the wisdom of NABL’s legislative proposal. The global settlement of the


yield-burning audits was offered as a prime example of a situation where the IRS was able to pressure investment bankers into settlement because issuers did not have statutory tax liability. Mark Scott concluded the Seminar by officially announcing the IRS’ proposed mediation program. The pilot program probably will last for one to two years and will involve factual issues only. The IRS envisions that the mediation process will occur after an initial audit letter is received by the issuer and before the preliminary determination letter is mailed. The issuer will have the discretion to elect into the mediation process. The issuer and the IRS agent will jointly select the mediator and the Office of Appeals will fund the process. The Office of Appeals has committed to completing the mediation process within 45 to 60 days.

Through the tireless work of Ed Oswald, Seminar Chair, and Bill Larsen, Director of

Governmental Affairs, as well as the panel chairs and NABL’s dedicated staff in Chicago and Washington, D.C., NABL pulled off another great

Washington Seminar. Limited supplies of the written materials for

the Seminar may be purchased from NABL’s Chicago office. Jeffrey C. Nave Foster Pepper & Shefelman PLLC Vice-Chair Washington Seminar

NATIONAL OFFICE NEWS

We have enjoyed nearly a year in our new offices. Normally, our year has some ebbs and flows in workload. This year has been one of constant activity. My thanks to everyone for their patience.

This summer will be spent making plans for locations for some of our upcoming meetings. This fall's Bond Attorneys' Workshop will be held at the Palmer House Hilton in Chicago on September 18-20. The Capital Steps will be performing at this year's luncheon, providing insightful humor and comment on the latest happenings in our nation's capital. We hope to be able to open a members-only section of the NABL website and have materials available for download there that have only been available via print in the past. We hope to forward information to you later this year. Finally, for subscribers to Federal Taxation of Municipal Bonds, you now have free access to a new component: a web-based version, which contains all of the material included in the 9-volume loose-leaf set plus the full texts of the IRS' Private Letter Rulings and Technical Advice Memoranda, which are summarized in the loose-leaf set. This product offers access to all this material via your internet browser (Internet Explorer or Netscape Navigator); easily locate the material you need by browsing, full-text search or citation cite, tables of contents, or tables of authorities. You can perform a simple search or quickly focus your research with advanced search techniques. On-line help is available along with search tips and there are frequent updates. Finally, you can print information out in very printer-friendly formats. Access to the content on the site is exclusively available to subscribers to the complete set of FTMB products at no additional charge. The public home page for this new product is located at www.lexisnexis.com/ municipalbonds. To access the content on the site, you must have a username and password provided by LexisNexis. (Note: your Lexis .com ID is not compatible with this product.) To obtain your username and password, send a brief e-mail message to llp.clp@ lexisnexis.com with "FTMB" in the subject line and the following required information in the message body: Firm or organization name Account number User's first name User's last name User's e-mail address User's phone number User's fax number

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No other information is required in the body of the e-mail message. Upon receipt of the e-mail, LexisNexis will send the username and password to the user's registered e-mail address. Your subscription to Federal Taxation of Municipal Bonds includes a single-user license to this new site. Please contact LexisNexis at [email protected] for multi-user pricing and to order additional licenses. If you have any questions about the new site, please contact LexisNexis at [email protected]. If you have any questions about your subscription, please contact LexisNexis Customer Service at 1-800-833-9844, Option 5. Kenneth J. Luurs May 24, 2002

FEDERAL SECURITIES

REGULA-TION

TURNED

AROUND BY UP-DATE AND BRING-DOWN? PERHAPS THIS WILL

HELP. A continuing disclosure topic that from time to time

confuses practitioners and, as commentators note, even judges, is the difference between a duty to correct and a duty to update and the circumstances under which each comes into play. First, a brief refresher course on duty to disclose. Recall that Securities Exchange Act Rule 10b-5 contains three prohibitions in con-nection with the purchase or sale of a security, the second of which is “[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.” Two acts are prohibited by these words: making and omitting. Counsel and clients are usually sensitive to the first when preparing disclosures (the gray areas surround whether some documents or statements count as “disclosure”). It’s the second that is more difficult to

get your arms around after the closing. When does inaction amount to a breach of the law? In Basic Inc. v. Levinson, 485 U.S. 224 (1988), the Supreme Court states clearly: “To be actionable, of course, a statement must also be misleading. Silence, absent a duty to disclose, is not misleading under Rule 10b-5” 485 U.S. at 239, fn. 17 (emphasis added). The obvious question then is, “when is there a duty to disclose?” The text of the Rule offers a clue. This second prohibition concludes with the words “necessary in order to make the state-ments made, in the light of the circumstances under which they were made, not misleading.” If utter silence reigns, that is, when no prior or contemporaneous statements exist to provide context, then under the Rule it’s hard to have a prohibited omission. Application of the make and omit prohibitions to contemporaneous disclosure inherently presumes breaking silence. Since disclosure is underway, there need not be a search for a duty to do so. However, when the situation involves silence plus prior disclo-sure, two duties have been entertained: the duty to correct and the duty to update. What’s the difference? The Seventh Circuit provides an excellent description in Stransky v. Cummins Engine Company, Inc., 51 F.3d 1329 (7th Cir., 1995):

“The most common and obvious method (of proving a 10b-5 claim) is by demonstrating that the defendant fraudulently made a statement of material fact or omitted a fact necessary to prevent a statement from being misleading. Two other avenues have been kicked around by courts, litigants and academics alike: a ‘duty to correct’ and a ‘duty to update.’ Litigants often fail to distinguish between these theories (as did Stransky in this case) and to delineate their exact parameters. The former applies when a company makes a historical statement that, at the time made, the company believed to be true, but as revealed by subsequently discovered information actually was not. The company then must correct the prior statement within a reasonable time. See, e.g., Backman v. Polaroid Corp., 910 F.2d 10, 16-17 (1st Cir. 1990). Some have argued that a duty to update arises when a company makes a forward-looking statement — a projection — that because of subsequent events becomes untrue…. This court has never embraced such a theory, and we

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decline to do so now.” (footnotes omitted). 51 F.3d at 1332.

While Stransky distinguishes the two duties, it did not accept both. Duty to update outside of registration does not have a home in the Seventh Circuit.1 Other circuits have not entirely closed the door on duty to update, but keep it open in limited circumstances. For example, the First Circuit observed in the Bachman case cited in Stransky: “We may agree that, in special circumstances, a statement, correct at the time, may have a forward intent and connotation upon which parties may be expected to rely. If this is a clear meaning, and there is a change, correction, more exactly, further disclosure, may be called for.” 910 F.2d at 17. The Second Circuit notes: “We agree that a duty to update opinions and projections may arise if the original opinions or projections have become misleading as the result of intervening events.” In re Time Warner, Inc. Securities Litigation, 9 F.3d 259, 267 (2d Cir. 1993). The Third Circuit, in reversing a motion to dismiss, stated: “The complaint alleges facts on the basis of which a reasonable factfinder could determine that Quaker’s statements regarding its total debt-to-total capitaliza-tion ratio guideline would have been material to a reasonable investor, and hence that Quaker had a duty to update such statements when they became unreliable.” Weiner v. The Quaker Oats Company, 129 F.3d 310, 318 (3d Cir. 1997). Before succumbing to panic, note that the instances in which these courts would have the duty apply fall within the narrow category of forward-looking statements that “remain alive.” Our fellow bond lawyer Robert Fippinger, in The Securities Law of Public Finance, 2d Ed., pp. 6-14–6-15, provides a helpful illustration of how the duty to update may come into play in a public finance context, and offers his view that for the duty to apply the statement would seem to need to have a promissory tone. Of course, one technique of limiting exposure regarding forward-looking statements is the use of proper cautionary language to take advantage of the “bespeaks caution” doctrine. As the SEC observed in a footnote to the Year 2000 release: “certain courts have adopted the "bespeaks caution" doctrine to afford protection of forward-looking statements that are accompanied by full and meaningful discussion of their limitations and assumptions. See, e.g., In re Donald J. Trump Casino Sec. Litig., 7 F.3d 357 (3rd Cir. 1993), cert. denied, 114 S.Ct. 1219 (1994).”2 Both the duty to correct and the duty to update cover situations in which, absent a duty, the actor

presumably would choose to remain silent — it’s the duty that compels the speech. Once a decision is made to speak, whether voluntarily, in response to a perceived duty, or in an annual filing under a Rule 15c2-12 contract, what then? Has the issuer now jumped into an arena where it must tell all? On this one, the language of Rule 10b-5 — “necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading” — again should provide a sense of perspective and calm. If the statement is voluntary, the issuer itself has the ability to control the scope of disclosure. Since no law, regulation, duty or contract compels the disclosure, the breadth of the disclosure is entirely up to the issuer, with one proviso: whatever is said must observe the “make or omit” prohibition. The disclosure cannot contain a falsehood — a misstatement of material fact; nor may it “omit to state a material fact.” Here, of course, is where the modifying words “necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading,” play an important role. An issuer will not violate Rule 10b-5 if it does not disclose a material fact that is unrelated to the topic about which it voluntarily speaks. The same analysis holds for statements prompted by a duty to correct or update. Statements confined to the matter corrected or updated do not trigger an obligation to correct an entire document in which the statement corrected or updated is found, providing the “make or omit” prohibition is observed.3 What about the annual information filed under a Rule 15c2-12 undertaking? That will be taken up in next quarter’s column. This Spring, a federal district judge in San Francisco enjoined Pacific Genesis Group, Inc., a municipal securities underwriting firm based in Alameda, California, and its former lead underwriter, David E. Fitzgerald, from future fraudulent conduct in violation of the federal securities laws. The judgments also require Fitzgerald to pay $300,000 in disgorgement, interest and penalties.4 One year earlier, the same judge, Charles R. Breyer, ordered that all proceeds of the latest bond offering be returned to investors following a trial in which the SEC’s


request for a permanent injunction was granted. The reported decision in that case, United States Securities and Exchange Commission v. David E. Fitzgerald, Pacific Genesis Group, Inc. 135 F. Supp. 2d 992 (N.D.Cal.) February 14, 2001, makes interesting reading for at least two reasons: (1) it provides an illustration of the workings of the antifraud provisions of the federal securities laws, including the remaining first and third prohibitions of Rule 10b-5 not usually thought of in the context of disclosure — employment of any device, scheme, or artifice to defraud and engaging in any transaction, practice or course of business operating as a fraud or deceit; and (2) it also illustrates application of the “make or omit” prohibitions in a tangible way useful to practitioners called upon to provide disclosure advice on a day-to-day basis in the transactional trenches. The decision also illustrates application of control person liability under Section 20(a) of the Exchange Act, the interplay of negligence and scienter under Sections 17(a), Rule 10b-5 and [MuniFinancial ad — "Never underestimate..."]


MSRB rule G-17, and the standards necessary for a permanent injunction under federal securities law. It is rare that an enforcement action reaches the stage of a trial on the issuance of a permanent injunction. The result is a decision by Judge Breyer that provides abundant detail, is well organized and well written. Practi- tioners should be familiar with this one. Paul S. Maco Vinson & Elkins, LLP Washington, D.C. May 27, 2002 1 See Gallagher v. Abbott Laboratories 269 F.3d 806,

810-811 (7th Cir. 2001). 2 Releases Nos. 33-7558; 34-40277; IA-1738; IC-

23366; International Series Release No. 1149 (July 29, 1998), fn. 24.

3 See the discussion on the scope of an issuer’s

disclosure obligation in Time Warner cited above. 4 Securities and Exchange Commission v. David Fitzgerald

and Pacific Genesis Group, Inc., United States District Court for the Northern District of California, Civil Action No. C-00-4802 (CRB), Litigation Release No. 17432 / March 22, 2002.

"PRAY TO PLAY" REVISITED In the early 1960s, a partner for whom I then was working and I had a meeting with a client. Periodically, the partner would interject, "Is that right?" The client would reply, "No, but it's correct." In like manner, I feel that the premise of my "Pray to Play" article is correct, but it may or may not be "right," depending upon one's personal religious beliefs or constitutional views. In my opinion, the current trend in the case law, if extended to its logical conclusion, will permit the conduit financing of facili-ties for sectarian uses, including places of worship, although I could not issue an opinion meeting the NABL standards without a U.S. Supreme Court opinion. If a satisfactory opinion should be obtained from the U.S. Supreme Court, we would be well advised not look a "gift horse in the mouth," and thereby increase our respective collections of green, black and white portraits of dead U.S. Presidents.1 In order to maximize our financial opportunities, we should request the "good" folks at the IRS to create a construction temporary period of at least 50 years and a rebate exemption spend-down period of at least 40 years for cathedrals, which take 60 to 200 years to build.2 Further, in the unlikely event that we can obtain clients who are Egyptian Pharaohs or Mayan or Aztec high priests,3 we can work on some real "pyramid bond" issues.4 As to the letters to the Editor about my article that appeared in the March edition of The Bond Lawyer®, I have the following comments. I thank David Caprera for his kind remark about the title of the article. The title is second (in my esteem) only to the title of my first student "Note" in the Virginia Law Review, Vol. 49, p. 125 (1963), relating to "away from home" travel expense deductions, entitled "A House is Not a Tax Home," in remembrance of the biography of Polly Adler, the New York madam, entitled "A House is Not a Home." As to Dean A. Spina's sug-gestions that Congress should provide for an interest exclusion for bonds issued directly by churches (as contrasted with bonds issued directly by 501(c)(3) organizations generally), I feel that this would not pass constitutional muster.5 I concur in the comments in Milton S. Wakschlag's letter about state law issues. I am glad that my article has stimulated some thought and comment.

Officer and Director Candidates Sought Members who wish to be considered for nomination as officers or directors of the Association, or who wish to propose other members for nomination, are invited to contact 2002 Nominating Committee Chair Immediate Past President J. Hobson Presley, Jr., Maynard, Cooper & Gale, P.C., 2400 AmSouth/Harbert Plaza, 1901 Sixth Avenue North, Birmingham, AL 35203-2602 (e-mail [email protected]). Members may also contact other Committee members: William J. Noth, Cynthia M. Weed, Foster J. Clark, or Kathleen Crum McKinney. Submissions should be received by July 15.


Griffith F. Pitcher Chamberlain, Hrdlicka, White, Williams & Martin Atlanta 1 The potential for such business is vast. 2 Fat chance. 3 Unlike probate lawyers, our best clients are not

dead clients. 4 Be careful of any naming rights on these bond

issues (particularly if the named sponsor is a multilevel marketing company that may be viewed as employing an illegal "pyramid" marketing scheme).

5 In addition, I feel that it is not likely that

Congress will take such action. VOICE FROM THE PAST Chapter 23 One of the reasons I was hired by Chapman and Cutler in 1950 involved the sudden increase in the number of schools that had to be built around the U.S. in the years following World War II. The baby boomers, who are now mostly in their fifties, were about to enter school, and buildings had to be readied. So I was brought up in the bond counsel practice believing that almost all bonds were for schools. There were also a few issues here and there for water, sewers, and streets, to provide for the subdivisions into which the parents of those children would move when the grandparents found living con-ditions crowded and the veterans got jobs. Most of the work I did on school issues was for districts in Louisiana and Utah (because of the way that work was parcelled out among the partners), but there were several in Georgia, Florida, Oklahoma, Texas, Arizona, and Idaho. Everywhere the bonds were general obligations and were voted at elections that very seldom failed to carry. In those days issues were much smaller than they are now, and $100,000 was considered a good size. I recall one issue of $7,000 to improve or build a school gymnasium. One week I found that I was working on the largest bond issue covered by the Weekly Bond Buyer's pink sheet. (This used to show all bonds coming to market). Mine was a $750,000 monster for a school

district in Idaho. Bond issues kept coming and coming. I recall one day when

twenty-seven pieces of mail arrived in my boss's office while he was away; all related to bond issues we were working on, few of them the same. The issues were not

particularly complex, but

there was enough difference among them so that (with one exception that I knew of) a lawyer could not simply turn a form over to a secretary and have her type up the papers. That exception was my boss, Joseph Matter, who had a particularly adept secretary; yet even he reviewed carefully every document she typed, and usually required several changes. This was before Xerox, or even stencil ma-chines. All documents were typed on one heavy red-lined sheet of paper, with three thin red-lined sheets and two plain sheets, all separated by carbon paper. The copies on plain paper were kept for use as forms on future transactions, and the letters so inked on them were far from crisp. Making a correction on any page was a chore, as the typist had to erase the error on six sheets of paper and then re-insert the pages into the typewriter so that the corrected items were not readily noticeable. Woe betide any young lawyer who had made a mistake in marking up a form that required one of the more experienced secretaries to correct a mistake that she did not make. And if the lawyer's error required retyping a page or more, his palms would sweat at the thought of facing that secretary. At this time we were still examining a number of transcripts prepared by local lawyers and submitted to us after the sale of the bonds but before delivery. We prepared the closing papers: the signature identification certificate and the treasurer's receipt. The latter included a clerk's certificate to cover any matters of fact that had to be tended to at the last minute. We also became adept at patching up mistakes that had been made in the preparation of the documents included in the transcripts. I recall a letter we sent from time to time, pointing out that the voted

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proposition as it appeared in the proceedings calling the election differed from that appearing in the ballot. Our letter suggested that perhaps the certified copy of the proceedings sent us was in error and that the original proceedings as they were of record might have had it right; if so, we would say, please send us a certified copy of the minutes as actually of record. It was surprising how often our surmise proved correct, and the actual proceedings did conform to the ballot. Once in a great while this did not work. Then I researched the law about the power of a governing body to amend its minutes to make them speak the truth: i.e., the real intent of the governing body. The law proved pretty accommodating in this respect. At least once a governing body came to the conclusion that what it had really intended, when calling a bond election, was to submit the same proposition as was on the ballot; amending the proceedings calling the election made it unnecessary to call a new election. On one occasion, the notice of bond election prescribed by the proceedings was not published. There was plenty of publicity about the election, in the press and elsewhere, and the election carried handily, but nevertheless it was hardly a valid election. However, the State Supreme Court had held that the Legislature could cure any defects in the giving of notice, even though the election itself was required by the State Constitution. I was not popular with the governing body when I told them that they had to get an act of the Legislature, but they preferred this to holding the election again. All the letters and forms we sent out bore a punch mark, either the letter “J” for Jay Altfilish or “H” for Henry Cutler. These two senior partners had quit examining every letter and form personally, but the punch marks still identified the pages that we sent out, so that any forms returned without the punch mark were a cause for suspicion. Little paper Hs and Js littered our floors like confetti before each night's cleaning crew arrived. One feature of World War II was the lack of building materials for local water and sewer systems. It was well into the 1950s when I got a call from a lawyer for a rural sewer district who wanted to know what to do with the proceeds of bonds that had been voted and issued for sewer purposes before the war. The shortage of materials to build the sewer system prevented the district from spending the proceeds for the voted purpose, but the district had continued to levy and collect taxes to pay the bonds and now they were all retired. The usual rule is that unused bond proceeds should be used to pay off the bonds, but this could not apply here. I asked if the sewer system had

been built after materials became available, and was told that the bond proceeds were insufficient because of inflation, so the district still had no sewers. My response was that the only thing that could be done with the bond proceeds would be to pay part of the cost of a new sewer system, with the rest to be paid from the proceeds of a new bond issue. I don't recall any other time when I advised a client that the law required it to issue bonds.

Manly W. Mumford


TAX DEVELOPMENTS AT THE CROSSROADS Introduction This past quarter had a flurry of activity on several tax fronts that affect tax-exempt bonds. On the tax legis-lative front, a lang-uishing economic stimulus tax legis-lative bill became law and it included a couple of significant tax-exempt bond provisions targeted to help New York City to recover from the September 11, 2001, terrorist disaster. On the tax regulatory front, two notable sets of proposed regulations were issued on discrete topics. One set of proposed regulations addresses the defini-tion of a refunding issue under Section 150 and pro-vides special rules for acquisition financing bonds in certain circumstances in which buyers and sellers have certain affiliations above a 5% threshold. These proposed rules largely represent an effort to address issues that arose in some major IRS audits of qualified 501(c)(3) bonds under Section 145 for Section 501(c)(3) nonprofit hospital acquisition financings ("hospital acquisition financings"). These proposed regulations generated some lively discussion at the NABL Washington Seminar. In a witty analogy, Michael Bailey called these rules the "cat-dog" rules. They address acquisitions (cats?) that look like refundings (dogs?). In turn, Bruce Serchuk of the IRS said he preferred to call them the "dog-cat" rules instead. It was unclear whether Bruce preferred dogs, preferred refundings, viewed refundings as dogs, viewed hospital acquisition financings as dogs, or some combination. We will examine this issue of pet preferences further herein. A second set of proposed regulations provides rules on investment prepayment transactions for arbitrage purposes under Code Section 148 and also for private loan purposes under Code Section 141. These proposed rules also largely represent an effort to address issues that arose in IRS audits. Here, the IRS audits involved prepayments for gas supply

contracts. In a surprising reversal, these proposed regulations treat gas prepayment transactions more favorably than anything else. Earlier, the IRS expressed concern about gas prepayment transactions in the introduction to 1999 proposed regulations. The author has one possible theory to explain this change, involving a tour bus, which we will explore herein. On the IRS Chief Counsel's office front, the Senate confirmed the nomination of B. John Williams as the new IRS Chief Counsel. He announced that one high priority in the IRS Chief Counsel’s office will be to focus more on providing general public tax guidance and to focus less on resolving disputes through audits or litigation. The new IRS Chief Counsel also is looking at ways to streamline the private letter ruling process. These are encouraging signs. During this past quarter, the IRS Chief Counsel’s office issued a few private letter rulings and other guidance items of modest scope. On the IRS audit front, Mark Scott, the IRS's national Director for Tax-Exempt Bonds, announced a new initiative to provide an expedited "mediation" process to resolve factual issues in IRS audits promptly. Finally, for a little added excitement, with the U.S. Treasury approaching its debt limit, the Bureau of Public Debt suspended new subscriptions for U.S. Treasury State and Local Government Series program investments ("SLGs"). SLGs investments are used for arbitrage yield restriction purposes. This suspension was effective May 15, 2002. While issuers and tax lawyers pondered the effects of this action on pending SLGs subscriptions in the pipeline, providers of open market guaranteed investment contracts were gleeful. Hopefully, by the time this column comes out, the U.S. Treasury debt limit will have been raised and the SLGs program will be back in business.

Legislation Economic stimulus tax legislation enacted. In the last tax column, the author gazed perceptively into the crystal ball and predicted an "unseemly death" for the economic stimulus tax legislative package. Needless to say, this tax bill was resurrected and enacted into law. On March 9, 2002, President Bush signed the Job Creation and Worker Assistance Act of 2002, H.R. 3090, Pub. L. No. 107-147, 116 Stat. 21 (2002) (the "2002 Tax Act").

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The 2002 Tax Act includes two significant tax-exempt bond provisions targeted to help New York City to recover from the September 11, 2001, terrorist disaster. First, it adds new Section 1400L(d) to the Code to authorize the issuance of $8 billion in total tax-exempt private activity bonds called "qualified New York Liberty Bonds" for certain qualified projects (e.g., office buildings), located in certain designated areas within New York City. New York Liberty Bonds generally are subject to the private activity bond requirements, but they are exempt from certain rules. Notably, they are exempt from alterna-tive minimum tax under Code Section 57(a)(5). Second, the 2002 Tax Act adds a new Section 1400L(e) to the Code to authorize New York City and certain authorities to issue up to $9 billion in additional advance refundings of governmental bonds and certain qualified 501(c)(3) bonds used to finance facilities generally located within New York City. The tax-exempt bonds authorized by both of these two special provisions must be issued before January 1, 2005. Given the narrow local application of these two New York City assistance provisions, we will not discuss them in detail here. It is a general positive sign, though, when Congress extends tax-exempt bonds to new circumstances as an incentive to assist State and local governments in addressing challenging infrastructure needs. In addition, the 2002 Tax Act also includes one limited public finance provision of general interest. Specifically, Section 608 of the Act extends the just-expired taxable tax credit bond program for qualified zone academy bonds ("QZABs") under Code Section 1397E for an additional two years. Thus, $400 million in total annual QZABs may be issued nationally in 2002 and 2003. Regulations Proposed Acquisition Financing Regulations Background and existing regulatory framework. Before describing the proposed acquisition financing regulations, some background on the basic context and the existing regulatory framework may be helpful. To be or not to be a refunding, that is the main question. So what is the goal and why does it matter? For tax-exempt governmental issues and qualified 501(c)(3) bond issues under Section 145, the goal

typically is to be an acquisition or, stated differently, to avoid being a refunding, for several reasons. In general, the tax rules for refundings are more restrictive than for acquisitions. Code Section 149(d) permits only one advance refunding of eligible tax-exempt bonds (and none for most private activity bonds besides qualified 501(c)(3) bonds). Refunding treatment may preclude tax-exempt bond financing altogether. In addition, in an acquisition, the buyer "spends" the new tax-exempt bond proceeds for arbitrage purposes when it pays the purchase price to the seller. By contrast, in a refunding, the obligor on the refunding bonds spends the refunding bond proceeds when it pays debt service on the old bonds. Also, in an acquisition, the seller’s use of the buyer's tax-exempt bond proceeds received as the purchase price to set up defeasance investments to provide for payment of the seller’s old tax-exempt bonds will be a sinking fund for the seller’s tax-exempt bonds. As such a sinking fund, the defeasance investments will be replacement proceeds of the seller's tax-exempt bonds and will be subject to arbitrage investment yield restriction


[Making Good Disclosure ad] at the yield on the seller’s tax-exempt bonds (as contrasted with the yield on the refunding bonds in a refunding). This may provide an investment advantage or disadvantage depending on the interest rates on the two sets of tax-exempt bonds. Thus, if the interest rate on the seller’s tax-exempt bonds is higher than on the buyer’s tax-exempt bonds, acquisition treatment will allow for a higher arbitrage yield restriction, and vice-versa. On the other hand, in other circumstances, issuers may prefer refundings over acquisitions. It is the old adage that where you stand depends on where you sit. The main reason for preferring refunding treatment is that it may preserve eligibility for one of the current refunding transition rules to various subsequent, more restrictive tax legislative provisions on tax-exempt bonds. In this regard, issuers of tax-exempt bonds for pre-1986 low-income residential rental housing projects typically prefer refunding treatment to avail themselves of the current refunding transition rules to the Tax Reform Act of 1986 to preserve more favorable, pre-1986 low-income set-aside restrictions. Refunding treatment may also avoid statewide volume cap requirements and restrictions on financing the acquisition of existing property.

Existing refunding definition and the same obligor rule. Existing Reg. §1.150-1(d)(1) defines a "refunding issue" broadly to include a bond issue in which the proceeds are used to pay debt service on another bond issue. Importantly, however, a series of special rules and exceptions under Reg. §1.150-1(d)(2) serve to narrow the broad general refunding definition in appropriate circumstances. The key concept used to distinguish between refundings and acquisitions is whether the affected bonds have the same "obligor" or different obligors. Specifically, under Reg. §1.150-1(d)(2)(i), tax-exempt bond issues are refundings only if they have the same obligor and, correspondingly, are acquisitions or non-refundings if they have different obligors (the "same obligor rule"). In each case, this determination takes into account related parties to the actual obligors and generally treats the conduit borrower as the obligor of a conduit issue. To illustrate, suppose a buyer uses tax-exempt bonds to acquire a facility from a totally unrelated seller. Suppose further that the seller, in turn, uses the proceeds received as the purchase price from the buyer to pay off the seller’s own tax-exempt bonds for that facility. In the broadest sense, it looks like the proceeds of the buyer’s tax-exempt bonds are used to


pay debt service on the seller’s bonds and thus to refund the seller’s bonds. Since the obligors on the buyer’s tax-exempt bonds and the seller’s tax-exempt bonds are different, however, the same obligor rule serves the important function of narrowing the refunding definition to treat this transaction as an acquisition. Existing 6-month acquisition rule. To add another wrinkle to the example above, suppose that, instead of issuing new tax-exempt bonds to pay the purchase price, the buyer assumes the seller’s existing tax-exempt bonds and then refinances those bonds some time later. Is that later refinancing an acquisition issue or a refunding issue? Reg. §1.150-1(d)(2)(v) answers this question with a special "bright-line" asset acquisition rule. This rule treats certain as-sumptions and refinancings of tax-exempt bonds in connection with an "asset acquisition" involving unrelated parties (excluding certain corporate reorganizations under Code Section 381(a)) that occur within six months before or after the acquisition as acquisition financings rather than refundings (the "six-month acquisition rule"). This bright-line rule grew fuzzier as the IRS audits on hospital acquisition financings progressed. Existing related party definition. Keep in mind that the same obligor rule in the refunding definition takes into account related parties to actual obligors. Reg. §1.150-1(c)(1) defines related parties for tax-exempt bond purposes. For private corporations and partnerships, related party status generally is based on a commonly used "more than 50%" equity owner-ship or control standard under Code Section 144(a)(3). For governmental entities and Section 501(c)(3) nonprofit organizations, related party status is based on a "controlled group" standard that focuses on control over governance or funds without specifying a quantum measure of control. Here, despite the lack of specificity, there appears to be no intent or tax policy reason to use a control threshold for governmental entities and 501(c)(3) organizations other than a majority control standard similar to that used for business entities.

The nonprofit hospital acquisition financing audits. For the past couple of years, a number of major IRS audits have been pending on qualified 501(c)(3) bond issues that were intended to qualify as acquisitions rather than refundings. (By way of full disclosure, the author has been representing a nonprofit hospital organization in one of these audits that affects about $1 billion in tax-exempt bonds on which the author’s law firm served as bond counsel.). These hospital

acquisition financing transactions have some common characteristics and a range of different facts and financing structures.

A common business purpose was a business need in a struggling health care industry to create or combine into larger health care organizations. Another common characteristic was some degree, but less than a controlling degree, of affiliation between the buyers and the sellers. These transactions have the flavor of consolidations.

Some of these transactions were simultaneous while others used the six-month acquisition rule. Some of these transactions involved direct acquisitions of hospital tangible assets (e.g., land, buildings and equipment) while others involved indirect acquisitions of such assets through acquisition of controlling "membership interests" in seller Section 501(c)(3) nonprofit organizations that owned the underlying tangible assets. These hospital acquisition financings also involved use of various different tax accounting methods for purposes of spending the tax-exempt bond proceeds. One accounting method used was a "specific tracing" method to trace tax-exempt bond proceeds to acquire those assets eligible for qualified 501(c)(3) bonds under Code Section 145. Another accounting method used was a so-called "step-in-the-shoes" accounting method to trace the tax-exempt acquisition bond proceeds to those assets originally financed by the seller’s tax-exempt bonds. The step-in-the-shoes accounting method is a refunding accounting principle under old Reg. §1.103-7(d). Reg. §1.141-(6)(a) and Reg.§1.148-6(d) generally permit any reasonable, consistently applied accounting method for tax-exempt bonds. In the absence of books and records sufficient to establish an accounting method, Reg. §1.148-6(a)(3) provides that a specific tracing method is the required default accounting method. Several tax issues involved in these IRS audits merit general mention. One general tax issue is whether the form of the acquisition transaction (direct tangible asset purchase, indirect asset purchase through membership interest purchase, or otherwise) either affects acquisition treatment or impacts permissible accounting methods. Another tax issue relating to the form of an acquisition transaction is whether the purchase of a membership interest in a Section 501(c)(3) nonprofit


organization constitutes an "asset acquisition" for purposes of qualifying for the special six-month acquisition rule. A related tax issue is whether or not membership interest acquisition dictates use of a particular accounting method. Another general tax issue is what accounting methods are permissible in hospital acquisition financings. Candidates include: (1) a specific tracing method to trace tax-exempt bond proceeds to targeted qualified assets; (2) a pro rata method to allocate the tax-exempt bond proceeds ratably to all acquired assets; and (3) a refunding-like "step-in-the-shoes" accounting method to trace tax-exempt bond proceeds to assets financed by the original seller's re-financed tax-exempt bonds.

Another tax issue involves whether the tax-free corporate reorganization rules under Code Section 381(a) apply to Section 501(c)(3) nonprofit organizations at all or to what extent. Still another tax issue involves how exactly to apply the related party rules to Section 501(c)(3) nonprofit organiza-tions and governmental entities.

Mere mention of these tax issues gives the author a big headache. These tax issues also have given affected hospitals and the IRS big headaches for the past couple of years.

Hospital acquisition financing closing agreement program. In conjunction with the issuance of the Proposed Acquisition Financing Regulations described below, the IRS issued IRS Announcement 2002-43, 2002-16 I.R.B. 792 (April 22, 2002), in which it announced a closing agreement program to resolve the pending hospital acquisition financing audits. This program is available until December 31, 2002. This An-nouncement provides in part that the IRS is "providing this program because it recognizes the policy reasons for the hospital affiliation transactions and the uncertainty in applying the allocation rules and has a desire to quickly and fairly resolve the examinations of the refinancing bonds."

This Announcement provides two options to resolve an audit. Under the first option, the issuer must pay an amount equal to 30% of a measure of the arbitrage profits on the escrow investments used to repay the seller's refinanced bonds. For this purpose, the arbitrage profits are determined in a special way by assuming that the applicable arbitrage yield is the yield on the refinancing bonds (rather than the yield on seller's bonds, as would be the case for a sinking

fund for the seller's bonds). One issue that has arisen is what assumption for the future yield on variable rate bonds applies in computing this 30% penalty amount. Under the second option, an issuer basically must use the step-in-the-shoes accounting method to treat the proceeds of the refinancing bonds as used to finance the same assets or purposes as were financed with the proceeds of the seller's refinanced bonds. In addition, under this option, the seller must restructure the refinancing bonds in a manner that complies with applicable tax-exempt bond rules that are impacted by this accounting method. The proposed acquisition financing regulations in general. The proposed acquisition financing regulations on tax-exempt bonds under Code Section 150 were issued on April 10, 2002, at Prop. Reg. §1.150-1(a)(2)(iii), (d)(2)(ii), and (d)(2)(v), 67 F.R. 17309 (April 10, 2002) (the "Proposed Acquisition Financing Regulations"). These regulations are proposed to apply prospectively to tax-exempt bonds sold on or after the date of publication of final regulations in the Federal Register. Issuers, however, may rely in whole, but not in part, on the proposed regulations for bonds sold after April 10, 2002, and before the effective date of the final regula-tions. Public comments are due by July 9, 2002. An IRS public hearing will be held on July 30, 2002. The description of the Proposed Acquisition Financing Regulations herein is necessarily somewhat simplified, if that is not an oxymoron here. A discussion of some technical tax issues is beyond the scope of this tax column. In addition, interpretative tax issues may arise as practitioners gain a greater understanding of the intent of these rules and begin to apply them in different contexts. In general, the Proposed Acquisition Financing Regulations retain the same obligor rule and the six-month acquisition rule, with refinements. ("Refinements" is a code word used to dodge the question of whether certain provisions are clarifications of existing rules or substantive changes to existing rules.) The Proposed Acquisition Financing Regulations include some helpful clarifications and refinements that address many issues that arose in the IRS audits of hospital acquisition financings. Timing of related party testing. One clarification helpfully provides that the time for determining related party status under the same obligor rule is


immediately before the transaction. This clarification aims to resolve favorably for issuers a somewhat silly possible IRS theory that related party status should be determined continuously under the refunding definition. That theory would have gutted the six-month acquisition rule entirely, since any time after a buyer assumes a seller’s old tax-exempt bonds, the buyer not only will be a related party to the obligor on the assumed seller bonds, but also will be the actual obligor on those assumed bonds. This intended helpful clarification may require a further technical change to address fully the foregoing point. Broad acquisition transactions. In a significant helpful refinement, the Proposed Acquisition Financing Regulations provide that a broad range of forms of acquisitions called "acquisition transactions" are eligible for the six-month acquisition rule. In particular, Prop. Reg. §1.150-1(d)(2)(ii)(C) provides that an acquisition transaction is any transaction in which a person acquires from an unrelated party any of the following: (1) assets (other than an equity interest in an entity); (2) stock of a corporation with a valid Section 338 election to treat the stock acquisition as an asset acquisition; or (3) control of a governmental unit or a Section 501(c)(3) nonprofit organization through acquisitions of stock, membership interests, or otherwise. Affiliated person transactions. The Proposed Acquisition Financing Regulations introduce a new hair-trigger concept of "affiliated persons." Prop. Reg. §1.150-1(d)(2)(E) defines the term "affiliated persons" very broadly to include persons if: (1) at any time during the period six months prior to the transaction, more than 5% of the voting power of the governing body of either person is in the aggregate vested in the other person and its directors, officers, owners, and employees; or (2) during the one-year period beginning six months before the transaction, the governing body of the acquiring person (or any person that controls the acquiring person) is modified or established to reflect (directly or indirectly) representation of the interests of the acquired person or the person from whom assets are acquired or there is an agreement, understanding, or arrangement relating to such a modification or establishment during that one-year period. In short, to avoid affiliated person status between a buyer and a seller, governing body affiliation should be virtually nil. Special conditions to acquisition treatment for affiliated person transactions. For transactions between affiliated persons, Prop. Reg. §1.150-1(d)(2)(D) provides two special conditions to acquisition treatment. First, the

refinanced tax-exempt bond issue must be called at the first call date (or, if immediately callable, it must be redeemed within 90 days after the issue date of the refinancing issue). Second, the refinancing bonds must use the step-in-the-shoes accounting method and treat the refinancing bonds as used to finance the same assets as financed with the refinanced bonds for all purposes of the tax-exempt bond provisions of the Code. From a tax policy perspective, these two conditions aim to control the burden on the tax-exempt market for covered affiliated person transactions. The first call condition limits the extent to which tax-exempt acquisition financing bonds and a seller’s tax-exempt bonds can remain on the market at the same time. The step-in-the-shoes accounting condition basically limits maturity extensions for bonds that are constrained by the 120% economic life constraint on maturities under Code Section 147(b). In the case of a plain vanilla tax-exempt bond-financed acquisition between a totally unaffiliated buyer and seller (i.e., persons who are not affiliated persons under the 5% affiliated person definition), the two referenced conditions to acquisition treatment are inapplicable. Thus, for these plain vanilla acquisitions, it is unnecessary either to call the refinanced bonds at the first call date or to use the step-in-the-shoes accounting method to qualify for acquisition treatment. Let's revisit the cat-dog rule analogy mentioned in the introduction. The proposed treatment of affiliated person transactions has a hybrid flavor. On the positive side, the proposed treatment of these transactions leaves intact the preferred cat-like feature of acquisition character. Thus, acquisition financings that satisfy the required two conditions are acquisi-tions in character and avoid the consequences of provisions that apply only to refunding issues, such as the Code Section 149(d) one-advance refunding restriction. On the negative side, this proposed treatment of affiliated person transactions introduces some disfavored dog-like or refunding-like restrictions through the first call requirement and the step-in-the-shoes accounting requirement. Of course, on the flip side, if an issuer prefers true refunding treatment, the issuer may try to flunk the conditions to acquisition treatment. Reverse acquisitions. Another special rule under Prop. Reg. §1.150-1(d)(2)(ii)(F) treats certain so-called "reverse acquisitions" automatically as refundings. A covered reverse acquisition is a transaction in which the obligor of a refinanced issue has or obtains majority control over an obligor on a


refinancing issue. The reason for the particular focus on this fact pattern has eluded the author. Related party standard for Section 501(c)(3) organizations. The Proposed Acquisition Financing Regulations clarify, albeit obliquely through an example, that related party status for a Section 501(c)(3) organization requires "more than 50%" or majority measure of board control. The final rules should add an explicit statement that this majority control standard applies to Section 501(c)(3) organizations and governmental units within the controlled group definition under Reg. §1.150-1(e). Corporate reorganization rules. The Proposed Acquisition Financing Regulations generally expand the effect of certain tax-free corporate reorganizations under Code Section 381(a) to cause related party status not only under the six-month acquisition rule, as under the existing rules, but also under the same obligor rule. In a conspicuous silence, the Proposed Acquisition Financing Regulations fail to provide any guidance on a well-known ambiguous tax question regarding whether the corporate reorganization provisions apply to Section 501(c)(3) nonprofit organizations at all or to what extent. Further observations. On balance, the Proposed Acquisition Financing Regulations provide some helpful clarifications and refinements and should be fairly workable for prospective transactions. One observation is that the drafters of these rules had hospital acquisition financings on their minds. Completely different analytic approaches could have been taken. In considering the broader impact of these rules, practitioners should review them with the law of unintended consequences in mind and consider their broader implications. Proposed Prepayment Regulations In general. The proposed prepayment regulations on the definition of investment-type property for arbi-trage investment purposes under Code Section 148 and a parallel provision on private loans under Code Section 141 applicable to tax-exempt bonds were issued on April 17, 2002, at Prop. Reg. §§1.141-5(c)(2)(ii) and (iii) and 1.148-1(e), 67 F.R. 18835 (April 17, 2002) (the "Proposed Prepayment Regula-tions"). These regulations are proposed to apply prospectively to tax-exempt bonds sold on or after the date of publication of final regulations in the Federal Register. Issuers, however, may rely in whole, but not in part, on the proposed regulations for bonds sold after April 17, 2002, and before the effective date

of the final regulations. Public comments are due by July 9, 2002. An IRS public hearing will be held on July 30, 2002. In general, the Proposed Prepayment Regu-lations address the topic that, as an economic matter, any prepayment for a good or service involves a time value of money component. Thus, arbitrage potential exists economically whenever a tax-exempt bond financed prepayment involves an interest rate inherent in the prepayment that is higher than the yield on the tax-exempt bonds. Not surprisingly, therefore, under existing Reg. §1.148-1(e)(2)(i) and the unchanged proposal, the general definition of investment-type property covered by arbitrage restrictions broadly includes prepayments if a principal purpose of prepaying is to receive an investment return based on the time value of money. The debate, therefore, in the Proposed Prepayment Regulations involves the very difficult issue of drawing workable and administrable lines for exceptions to the treatment of prepayments as investment-type property Tightened substantial business purpose exception. The Proposed Prepayment Regulations tighten the substantial business purpose exception to the investment-type property definition for prepayments to eliminate a previous "commercially reasonable" basis for a prepayment. The proposed tighter version of the substantial business purpose exception under Prop. Reg. §1.148-1(e)(2)(i)(A) provides that a prepayment does not give rise to investment-type property if the "primary purpose for the prepayment is to accomplish one or more substantial business purposes that (1) are unrelated to any investment return based on the time value of money; and (2) cannot be accomplished without the prepayment." The candidates for meeting this exception would seem to be narrow indeed. Customary prepayment exception. The Proposed Prepayment Regulations leave intact the existing customary prepayment exception to the investment-type property exception. This exception under Prop. Reg. §1.148-1(e)(2)(i)(B) covers prepayments on substantially the same terms by a substantial percentage of persons who are similarly situated to the issuer but who are not beneficiaries of tax-exempt bond financing. The IRS declined to provide any guidance sought to give a little mathematical meat to this customary prepayment exception to enhance its certainty and usability. Instead, the IRS left the application of this exception on a facts and circumstances basis.


New short-term 90-day prepayment exception. Prop. Reg. §1.148-1(e)(2)(i)(C) adds a modest new short-term prepayment exception. This new exception covers any prepayment made within 90 days of the date of delivery to the issuer of all of the property or services for which the prepayment is made. New gas prepayment exception. Prop. Reg. §1.148-1(e)(2)(i)(D) and (e)(2)(ii) adds a significant new prepayment exception for qualified prepayments for natural gas supply. A gas prepayment meets this exception if it satisfies the following requirements. First, it must be made by a governmentally owned utility to purchase a supply of natural gas. Second, at least 95% of the natural gas purchased with the prepayment generally must be consumed by retail customers in a municipal utility's defined service area. For this purpose, a municipal utility's service area includes any area throughout which the municipal utility provided gas transmission or distribution service throughout the five-year historic period ending on the issue date of the tax-exempt bonds, and contiguous areas. A municipal utility's service area also includes any area where the municipality is obligated to provide service under Federal or state law. One issue that has arisen concerning this 95% service area requirement is the common business need to sell excess supply outside a service area in the spot market from time to time. After the zinger in the 1999 proposed regulations that cast doubt on swaps used with gas prepayments, the Proposed Prepayment Regulations include a provision that approves certain independent commodity swap contracts in connection with gas prepayments. An eligible commodity swap contract may be entered into between the issuer and an unrelated party (other than the gas supplier) or between the gas supplier and an unrelated party (other than the issuer). An eligible commodity swap contract is an independent contract if the obligation to perform under the swap contract is not dependent on performance by any person under another contract (e.g. , a gas supply contract or another swap contract). One issue that has been identified concerning this commodity swap provision is the common business need to be able to terminate a commodity swap used to hedge a risk on gas supply costs if the party to the swap no longer has the related gas supply contract. Treasury and the IRS have indicated that part of the policy basis for the gas prepayment exception

involves a recognition of the need for these arrangements in a deregulated environment. One obvious additional question is whether the deregulated electricity environment warrants extending this exception at least to the electricity area. IRS Commissioner-authorized prepayments. Prop. Reg. §1.148-1(e)(2)(iii) authorizes the IRS Commissioner to provide additional prepayment exceptions through published guidance. The tour bus effect. To follow up on a comment in the introduction, one might wonder why gas prepayments fared so well under the Proposed Prepayment Regulations. The reason for this possibly might have something to do with the IRS public hearing on the 1999 version of these regulations. After this IRS public hearing, the author walked out the door with a prominent tax lawyer, Mitch Rapaport, who proceeded to get on a giant tour bus with a horde of gas prepayment industry representatives who had attended this hearing en masse. Perhaps NABL should rent a fleet of monster trucks to send representatives to future IRS public hearings on tax regulations. Revenue Rulings, Revenue Procedures, and Notices Section 143: U.S. and area median gross incomes. In IRS Rev. Proc. 2002-24, 2002-17 I.R.B. 798 (April 29, 2002), the IRS provided new figures on U.S. and area median gross incomes for use in applying certain income tests in qualified mortgage bond financings under Code Section 143 (and also mortgage credit certificates). Specifically, for purposes of the housing cost/income ratio under Code Section 143(f)(5), the U.S. median gross in-come is $54,400 and the area median gross incomes are those released by HUD on April 6, 2001. These revised figures generally apply to mortgage commitments made beginning January 31, 2002. Section 148: 13-month TRANs safe harbor. In IRS Rev. Proc. 2002-31, 2002-19 I.R.B. 916 (May 13, 2002), the IRS finalized a 13-month arbitrage maturity safe harbor for TRANs in the same form as proposed in IRS Notice 2001-49, 2001-34 I.R.B. 188 (August 20, 2001). (For a discussion of IRS Notice 2001-49, see the tax column in the September 1, 2001, issue of The Bond Lawyer®.) This safe harbor treats TRANs as having a maturity that is no longer than reasonably necessary to accomplish their gov-ernmental purpose if their final maturity is not later


than the end of the applicable temporary unrestricted investment period for which the TRANs qualify under Reg. §1.148-2(e)(3)(i) or (ii). For most TRANs, this basically means that they can have a 13-month maturity if the issuer reasonably expects to spend the proceeds of the TRANs within that period. A continuing mystery here is how to reconcile this new 13-month maturity safe harbor with the existing two-year regulatory maturity safe harbor for restricted working capital expenditure financings under Reg. §1.148-1(c)(4)(i)(B)(1) for certain related arbitrage purposes. Section 1397E: QZAB Volume Cap. In IRS Rev. Proc. 2002-25, 2002-17 I.R.B. 800 (April 29, 2002), the IRS provides the maximum face amount of QZABs that may be issued by each State under Section 1397E in 2002. The total national QZAB volume cap for 2002 is $400 million. Private Letter Rulings, Technical Advice Memoranda, Field Service Advices, and Technical Assistances [Note: PLRs and TAMs are IRS national office final determinations of legal positions on specific cases provided to taxpayers in PLRs and to IRS field agents in TAMs. FSAs are non-final determinations from the IRS national office to IRS field agents on case-specific matters during audit case development that may be based on an incomplete review of facts of specific cases. TAs provide technical assistance from the IRS national office to IRS field agents on legal positions on non-case-specific matters.] Section 103: General Unidentified changes in program. In a ruling that was so redacted as to be useless, PLR 200209005 (October 22, 2001), the IRS ruled that unidentified changes to a loan program would not cause the applicable tax-exempt bonds to fail to be described in a particular state law provision that covered the program. Section 141: Private Business Tests State university fitness and recreation center. In PLR 200211003 (December 18, 2001), the IRS confronted some great facts involving every imaginable kind of use and user that might be considered for a State university-owned multipurpose fitness and recreation center. Most users met the private business use exception under Code Section 141(b)(6)(B) that applies to that alien species called "natural persons."

Other uses met the general public use exception to private business use under Reg. §1.141-3(c)(1). Briefly, the general public use exception applies if a facility both is intended to be available and, in fact, is reasonably available for use on the same basis by nonbusiness users either at no charge or at generally applicable rates. Other uses involved governmental beneficiaries. In PLR 200211003, the IRS concluded favorably that the uses presented caused no private business use under Code Section 141. It was especially comforting to see that this ruling covered the use of the "personal trainers" and the "juice bar." Joining an independent system operator. In PLR 200211022 (December 14, 2001), the IRS ruled that a certain joint action electric power agency's actions associated with becoming a member of an independent system operator or "ISO" for electric transmission operations would not constitute a deliberate action that would cause its affected tax-exempt bonds to be

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private activity bonds under Code Section 141. The IRS based its conclusion on the special rule under Temp. Reg. §1.141-7T(f)(5)(ii) that contemplates this circumstance. Section 146: Volume Cap Late carryforward elections. In PLR 200211026 (December 14, 2001), the IRS granted relief to permit an issuer to make a late election on IRS Form 8328 to carry forward unused private activity bond volume cap under Code Section 146(f). In a twist, in PLR 200212022 (December 20, 2001), the IRS permitted one issuer to void one such election and to allow a different proper issuer to make the carryforward election instead. Section 148: Arbitrage Extraordinary working capital expenditures. In PLR 200210006 (September 28, 2001), the IRS ruled that certain working capital expenditures financed with 13-month notes were "extraordinary working capital items" under Reg. §1.148-6(d)(3)(ii)(B) that qualified for an exception to the restrictive bond-proceeds-spent-last accounting rule that applies generally to restricted working capital expenditures. Extraordinary working capital items include extraordinary, non-recurring items that are not customarily payable from current revenues (e.g., casualty losses or extraordinary legal judgements in excess of reasonable insurance coverage). In addition, in reliance on its authority to waive regulatory provisions under Reg. §1.148-10(g), the IRS ruled that the extraordinary working capital expenditures here qualified for a three-year temporary period exception to yield restriction which ordinarily only applies to capital projects. This ruling appeared to involve a financing associated with the September 11, 2001, terrorist disaster. One wonders why the parties thought they needed a ruling to decide that the expenditures were extraordinary. Small issuer rebate exception and pooled financings. In TAM 200214005 (November 7, 2001), the IRS advised that a particular pooled bond issue for school districts failed to qualify for the $5 million small issuer exception to arbitrage rebate under Code Section 148(f)(4)(D). In short, the IRS thought this transaction was abusive. Among other things, the IRS expressed concerns about the absence of demand surveys and the prospect of the use of bond proceeds outside the relevant small issuer jurisdiction. The IRS concluded that the transaction violated the anti-abuse rule involving "formed or availed of" entities

used to circumvent the small issuer rebate exception under Code Section 148(f)(4)(D)(ii) and Reg. §1.148-8(c)(2)(iii)(A). In addition, TAM 200214005 appeared to present a tax issue involving the definition of a single bond issue under Reg. §1.150-1(c). Recall that one fairly bright-line way to divide tax-exempt bonds into separate bond issues is by selling the relevant bonds at least 15 days apart. Although the facts were unclear, it appeared that TAM 200214005 involved a series of different bond issues sold 15 days apart. The IRS indicated that, in light of the anti-abuse rule basis for its conclusion, it expressed no opinion as to whether the program bonds constituted a single bond issue under Reg. §1.150-1(c). In general, it would be troubling if the IRS were to cast doubt on the bright-line nature of the 15-day separate sale date basis for achieving separate bond issues in most circumstances. This 15-day rule is of course a common planning tool. Investments. In FSA 200209003 (August 14, 2001), the IRS addressed an investment arrangement involving a forward supply contract and an "option" right purchased by an issuer in connection with a refunding escrow. The option entitled the issuer to sell a portion of the securities in the refunding escrow under certain conditions. The issuer bid out this investment arrangement. The issuer apparently argued that the investment arrangement was either a guaranteed investment contract under Reg. §1.148-1(b) or a direct purchase of U.S. Treasury securities for the refunding escrow coupled with a "married" option to sell those U.S. Treasury securities. (A "married" option is in contrast to a more liberal option that just lives together with another investment.) In FSA 200209003, the IRS discussed this investment arrangement at length and expressed considerable skepticism about it. The IRS questioned whether the forward supply agreement was a guaranteed investment contract. The IRS also questioned whether the escrow sale right purchased by the issuer properly constituted an option for Federal tax purposes. This FSA has an interesting technical discussion of option tax analysis. A few general observations are in order here. Of course, any investment product warrants careful review of its economic substance. Many common investment products involve hybrid characteristics. It would seem that they probably should be considered guaranteed investment contracts under a clear broad


definition. One concern about this FSA is that it fails to appreciate that the state of the law on the scope of the definition of a guaranteed investment contract and its relation to other investments associated with refunding escrows is, at best, a swamp of uncertainty. One factor that exacerbates this problem is the regulatory effort to make fine distinctions between different kinds of investments for purposes of permissible broker bidding fee arrangements. A more uniform safe harbor for broker fees for all investments would reduce the need to distinguish different kinds of investments. Another observation is that a sound basis exists under Code Section 1233(c) to treat "married options" that are purchased at the same time as underlying investments as part of an integrated investment for Federal tax purposes. One straightforward example in the tax-exempt bond area involves the use of a married put option pur-chased by an issuer with respect to debt service reserve fund investments for liquidity and principal preservation purposes. Related Tax Areas Forms of guidance. In IRS Rev. Proc. 2002-30, 2002-24 I.R.B.1 (June 17, 2002), the IRS provides a pilot program for a new kind of tax guidance called "Technical Expedited Advice Memorandums" or "TEAMs." The purpose of TEAMs would be to expedite certain aspects of the TAMs process and to eliminate certain requirements relating to IRS-taxpayer agreements on facts that tend to delay or frustrate the process. The intent would be to use TEAMs to provide better technical guidance largely in lieu of less developed Field Service Advices. The stated goals for TEAMs sounds like a positive development. Having said that, the author cannot help but ponder which is worse — yet another form of IRS guidance or the corny acronym. Did a former investment banker find gainful employment at the IRS? Section 42: low income housing tax credit: 50% basis test. In IRS Rev. Rul. 2002-21, 2002-17 I.R.B. 793 (April 29, 2002), the IRS addressed the Section 42(h)(2)(B) basis test, which provides generally that if 50% or more of the aggregate basis of any building and the land on which it is located is financed by tax-exempt bonds that are taken into account under the Section 146 state private activity bond volume cap, then no separate Section 42 state low income housing tax credit volume cap allocation is necessary for costs eligible for the low income housing tax credit. In IRS Rev. Proc. 2002-21, the IRS ruled favorably that, for purposes of this 50% aggregate basis test, "investment

proceeds" of tax-exempt bonds count as tax-exempt bond proceeds subject to the Section 146 volume cap towards satisfying the 50% aggregate basis test under Code Section 42(h)(4)(B). This public ruling follows the approach taken by the IRS in a series of similar earlier private letter rulings (see PLRs 200109011 to 200109014 (November 22, 2000)). (For a discussion of these earlier rulings, see the tax column in the June 1, 2001, issue of The Bond Lawyer®.) As previously suggested, this favorable ruling seems to make the wrong comparison. Code Section 146 requires tax-exempt private activity bond volume cap allocations for a measure of bond proceeds equal to "issue price" or "sale proceeds" of the tax-exempt bonds at issuance, without regard to future investment proceeds. Since this Code Section 42 low income housing tax credit piggybacks directly off the Code Section 146 bond volume cap allocation, it should use the same measure of bond proceeds.


["The owner's manual" ad] Section 42: low-income housing tax credit: effect of redeeming tax-exempt bonds. In three identical private letter rulings in PLR 200219030 (February 11, 2002), PLR 20022011 (February 12, 2002), and PLR 200220020 (February 14, 2002), the IRS ruled that the redemption of tax-exempt bonds at any time after the tax-exempt bond financed project is placed in service will not disqualify the project from eligibility for the low-income housing tax credit under Code Section 42(h)(4)(B) based on tax-exempt bond financ-ing. IRS Audit Program Notes

New mediation program announced. The IRS audit group for tax-exempt bonds and the IRS Appeals office informally announced a new mediation program for tax-exempt bond audits. Highlights of some of the rough parameters of the mediation pro-gram are described below. The program would be available initially to resolve factual issues only. The actual issuer and the IRS audit field manager would select factual topics for mediation jointly. The pro-gram would occur at the stage after a preliminary determination letter of taxability in an IRS audit of tax-exempt bonds and before the normal appeals


process. The IRS Appeals office would pay for the mediation. Most notably, the program would involve a commitment to resolve factual issues under mediation within about 45-60 days, which is warp speed for the Government. The mediation program sounds like a positive development. Audit program subject areas and developments. During the past quarter, there have been various develop-ments on IRS audit initiatives. The IRS has completed its random correspondence audits of 51 advance refundings selected to see whether SLGs reinvestments were being done. It found no particular problems with SLGs reinvestments, but it did find a few more yield-burning issues. The IRS has initiated about 30 random audits of single-family and multifamily housing programs, and some sewer bond audits. The IRS continues to expand its audits of pooled bond financings, including TRANs pools. The IRS has entered into yield-burning settlements with about five investment banks covering about 90 bond issues aggregating about $1.3 billion. The IRS has closed several gas prepayment audits and tobacco securitization audits without change. The IRS's voluntary closing agreement program continues to expand both in topics involved and volume. About 35 cases have used the program since October, 2001. The IRS has new audit guidelines for tax-exempt bonds in the works. Maytag repairman. Finally, on a lighter note, Charles Anderson, the IRS audit group’s national Manager of Tax-Exempt Bond Field Operations (and a well-known shrinking violet), lamented at the NABL Washington Seminar that his IRS audit group had resolved so many tax-exempt bond audits that he was beginning to feel like the "Maytag repairman." Perhaps if any of you have broken washing machines, you could enlist Charlie's repair services to keep him busy. John J. Cross III Hawkins, Delafield & Wood [email protected] June 4, 2002 LEGAL ASSISTANTS' CORNER THE NABL FUNDAMENTALS SEMINAR AND OTHER THINGS..... The usual signs of Spring are all around us. Ah, the flowers are blooming, trees are budding, grills are being hauled out of garages for that first barbecue of

the season, and the hum of lawnmowers can be heard every-where. Yes, Spring has arrived, and one constant symbol at this time of year for many of us is the annual NABL Fundamentals Seminar. Held in Denver, this year’s edition of the Fundamentals Seminar was successful and, as usual, created a solid base for new attorneys, legal assistants and other participants in the municipal finance industry. Struc-tured presentations commingled with an atmosphere that creates relaxed personal interaction provide the perfect balance for a seminar that has, since its inception, guided and educated municipal finance lawyers and legal assistants as well as others involved in the industry. At first glance, one may characterize this as just another seminar offering basic and fundamental aspects to new lawyers. Let’s face it, new lawyers are practically bombarded with notices of seminars as they begin the transition into their chosen field of law. The legal assistant also is afforded opportunities to attend many of the seminars offered to lawyers as well as programs specifically developed and present-ed for the legal assistant. So, what is the big deal (you ask)? The big deal is simply the abstract practice of municipal bond law. One may question the word “abstract,” but those brave enough to choose bond law as a career learn quickly that they learned very little about this field in college or law school. In a search of law schools, there seems that as of the cur-rent date there has yet to be introduced a course entitled anything like “Municipal Bonds - 101.” But, on a positive note, to the rescue of those in need is the National Association of Bond Lawyers. Individuals involved in municipal bond law are fortunate to have an organization such as this which provides opportunities for education as well as offering various meeting venues for its members to share new information and ideas. The faculty for these seminars include members of NABL who are qualified not only by experience and education, but possess a complete and thorough knowledge of the

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municipal bond industry. One of the aspects of NABL that is truly innovative is the opportunities that are afforded the legal assistant. NABL has offered the legal assistant a chance to become a part of the organization, not only receiving updates on general securities information and educational opportunities, but also participation in the Fundamentals Seminar. Many legal assistants working in the industry recognize this as a very positive step in the progression of the legal assistant profession in the last twenty-five years. NABL provides legal assistants and other non-lawyer partici-pants with a panel of experienced legal assistants which, like their counterpart faculty comprised of lawyers, consists of persons with a wide scope of expertise in municipal financing as well as many years of actual experience. One interesting fact uncovered at the most recent seminar is that among the four legal assistants who comprise the teaching faculty, their years of experience combined added up to over 100. Suffice it to say, we will just leave this statistic alone and not proceed with any further comment! A very useful and positive result of the Fundamentals Seminar are comments and ideas received from the evaluation forms provided by the attendees. The faculty, as well as the NABL staff, are able to implement many of the ideas and suggestions by improving the programs and presentations as well as continually finding new ways to offer the most current materials and information to its membership. These evaluation forms are also utilized by the Legal Assistants Committee and are the basis for many of the ideas and topics used year to year. Through the guidance and support of NABL, the Legal Assistants Committee has been able to establish a continued presence within the Association as well as provide the legal assistant members certain services geared toward their specialized duties. The sessions provide the legal assistant with information about basic bond financings as well as setting forth the steps required for a successful closing, all presented from the viewpoint of the legal assistant. Through the use of an open question and answer format, the participants have the opportunity to attend a structured presentation as well as to discuss specific questions with the faculty and provide input with other participants. It is essential for the legal assistant to keep current with changes on a day-to-day basis in the bond markets as well as receiving follow-up on new

statutes and rulings. The NABL Website (www.nabl.org) continues to be a source for all members of NABL for much of this information and the Legal Assistants Committee has made it possible through their link to the Website to address many of the sites which are geared to the legal assistant. The legal assistant is also sent the official quarterly publi-cation of NABL, The Bond Lawyer®. Along with all of those witty comments, the Legal Assistants' Corner offers topical items of interest and benefit to the legal assistant. What do we have to look forward to? NABL continues to provide new and inventive ways to educate its members, and the Legal Assistants Committee, striving to keep up with the rest of the Association, will not be left behind. The classes presented for the legal assistant at the Fundamentals Seminar cover a wide spectrum of information, but as is the case in any seminar or class, there are many topics which are not covered in detail, and a need exists for more detailed educational options. NABL, as well as the Legal Assistants Committee, is aware of this need and is working on plans to provide additional opportunities for continuing legal education for the legal assistant. Short teleconference calls involving lawyer and legal assistant teams covering specific topics is an option which, hopefully, is not far away. Many topics have been suggested for presentation in this manner. Teleconferences, as all know, are convenient and indeed less expensive. An on-going project of the Legal Assistants Committee is a Handbook specifically for the legal assistant involved in municipal bond law. The first edition hopefully soon will be hot off the press and available to members in the near future. The Handbook will provide not only new information and materials, but also will supplement information offered by the Fundamentals Seminar. With the ability to reach more people all of the time in so many different ways, the Legal Assistants Committee is striving to create a more efficient communication base to reach all of its members. Everyone’s ideas are appreciated, and the Committee would be glad to discuss those ideas with any of the members. The best way to serve the membership is to build on the suggestions and ideas received from the members. We have many times been asked why we are in


this type of law, and we all must admit that we have heard those comments from others involved in other fields (and we will not name any specific names although litigation does come to mind).... We should look at our profession as an elite club of educated and professional people, who not only strive for the highest quality and expertise, but who also have an association such as NABL to support our efforts and promote the ideals under which we strive.

I guess we have it pretty good. Nancy Mendenhall Committee on Legal Assistants May 9, 2002

LETTER TO THE EDITOR Dear Editor Kiel: Upon receipt of

The Bond Lawyer, I always turn to your Notes in search of lascivious limericks (I am blessed with pornographic memory). I was surprised to discover that I had been outted as openly retired. Alas, it is true. After 40 years at King & Spalding combing the backs of trust indentures for misplaced commas and the like, I have stopped selling my life in six minute increments. Happily, King & Spalding, in recognition of the verity of the maxim that "no one's life is completely worthless; you can always serve as a bad example," allows codger partners to remain on the grounds for ten years following their retirement. So I can be found in these precincts for years to come in the company of our other retired partners (motto: "Forgotten but not gone"). I have always been proud to be among those gallant practitioners who, at the drop of a fee, are willing to throw themselves into the path of a major financing so as to insure that no borrower or lender should be without adequate legal counsel, and to those who say that bond lawyers are at the dullest end of the legal profession's spectrum, I say, "Huh?" Thanks for the mention and the memory.

With warmest regards to you and all under your protection, I am Just an old song nobody sings anymore, Robert L. Steed BOOK REVIEW The Virginian, by Harvard Law School graduate Owen Wister (Macmillan, 1902, with illustrations by Charles M. Russell and Frederic Remington), is the first best cowboy novel ever. Featuring a dedication to the author's friend Theodore Roosevelt, this relentlessly witty tome reveals, through the eyes of an Eastern tenderfoot, the soon-to-be-lost culture of the real cowboy, who dotes on hard work, tall tales, discreet womanizing, and occasional rebellion. Lawyer Wister ventured into both religion ("One God and fifteen religions.... That's a right smart of religions for just one God.") and philosophy ("The eye of a man is the prince of deadly weapons." ... "It's not a brave man that's dangerous. It's the cowards that scare me." ... "It is the absent who are always guilty."), leavened with some cowboy-meets-New England-schoolmarm foolishness. And the ending is a happy one. EDITOR'S NOTES On August 8, Sharon Stanton White, who for many years wrote her "Shared Tax Observations" for this publication, was the first female President of the Association (1986-1987), and received the Bernard P. Friel Medal in 1993, will receive the Jefferson Fordham Lifetime Achievement Award from the American Bar Association's Section of State and Local Government. The Fordham Award was created in 1998. John Cross and the General Tax Matters Committee crew (Charles Cardall, Jeffrey McHugh, Mitchell Rapaport, and others) have produced a substantial, elegant, and thoughtful set of recommendations for simplifying the Internal Revenue Code (and Regulations thereunder) as it relates to tax-exempt bonds. If it's not published supra, it should show up on the Website in due course. In fact, it is a sort of advanced lesson plan for

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many of the tax issues that practitioners face with frequency, so even if you think you don't care about tax simplification, you'd be well-advised to read it. In The Honored Society (Simon & Schuster, Inc., 2001), mob scion Michael Gambino (now retired at 36) says: "When the Family needed to move money to different countries, I couldn't take two or three million dollars on a plane, but I could carry bearer bonds in my briefcase and make the deposit to a Swiss bank. I bought these bonds through the brokerage house after I brought in almost a dozen guys on the Stock Exchange floor. I had them buy up a million dollars in bearer bonds and threw them some cash. They called all over the world to find them. It was a great way to launder money. Of course, the government started to figure that out, too, and there are far fewer bearer bonds in circulation now." For the foreseeable future, there will be no more letters from Bob and Dalia Baker in Albania. They are back in Cleveland, where he is now the Finance Director and they are looking after their recently-widowed daughter and her babies. The season of nominations for officers and members of the Board of Directors, and for recipients of the Bernard P. Friel Medal, is hard upon us. Elsewhere in this issue, you'll find specifics as to how to nominate. I hope you'll see fit to spend some time contributing to one or both of these processes. The Friel Medal was conceived in 1982, and we've almost run through the twenty-five medals originally commissioned; more are on order, as are more of the cherry boxes in which they are presented. The first batch of medals — designed by Ray Tanner, of Covington, Kentucky, and modelled on the Association's original eagle seal — was cast in an old foundry hard by the banks of the Cuyahoga River in Cleveland. Ray and I did a July road trip to check on the arrangements. I remember seeing several very sweaty people, wearing not much, in a sort of medieval setting, hefting hot bronze-loaded ladles from place to place. We saved wax impressions of the medal (this technology dates to Benvenuto Cellini), and it is one of these that is to be used to make the next generation of Friel Medals. The last few medals from the original casting runs now reside in a safe deposit box in Chicago. Your editor does not do pitches for products or services, but there's something strange and wonderful out there, and its name is eBay (www.ebay.com).

Bond-wise, I found a 1945 edition of the Red Book. (You saw the avails of that $3.00 purchase when we reprinted, with the permission of The Bond Buyer, the "Municipal Bond Attorneys" section in the June 1, 2000, issue.) I have so far made sixty-seven purchases from eBay vendors, have never been defrauded, and have been disappointed only two or three times. Roughly eight million items are for sale on this site on any given day. You can use it as an appraisal service: just type in a short description of what you already own, and you'll see what owners of the comparable object are asking or getting for it. What you can't yet do is create a "want" list. eBay is policed via its feedback system. After each transaction is concluded, the buyer and seller have the opportunity (but not the obligation) to comment on the transaction. Comments are tabulated and remembered; when you click on a prospective seller's (or buyer's) "feedback," you can see whether he or she or it has disappointed, and govern yourself accordingly. I have perhaps addressed this before, but if you have room for them, do brushpiles. They reduce the quantum of stuff you have to put out at the curb, and they provide terrific habitat for any number of benign animals. (We routinely add our Christmas trees to our brushpiles.) In time, the brushpile, like a lame-duck Congressperson, will wither down to a tolerable size, and can be added to indefinitely. Try it. Here in Cincinnati (to be found under "dripping nose" in some encyclopedias) we've welcomed Spring (but no fawns as yet) and trust you have, too. In tornado season, the trees that were merely decorative twenty years ago now threaten to oppress the house and snuff out the grass, but who would dare slay a tree that has so far done no wrong? Well, good luck with yours, but consider that he who provides shade (a friend) can also crush your garage (an enemy). I hope that's a tad metaphorical.

Visit your Website: www.nabl.org


QUARTERLY LIMERICKS Editor's Note: Orin was in a bit of a snit when his contribution was cut, last quarter, to balance the issue. He was, however, much mollified by the outpouring of e-mails and telephone calls protesting his absence. I Arthur L.'s not comfy with Harvey Pitt (Clinton money guy vs. pro with kit). So Junior gripes And takes lame swipes At a beard who ain't no counterfeit. Orin Macgruder II There once was a reader named Friel Who voiced a quite wonderful spiel Describing a cast Of Presidents Past; We quite liked his NABLing zeal. We wonder if Bernie has more. We ponder the depths of his lore. And knows he some news? Some laughter and blues? Some rumor and gossip and gore? But maybe it's best not to know. The HASBEENS should really stay so. Or else, you can see, They'd no longer be Mere "once-weres" — more: "rarin' to go!" John P. Jones QUARTERLY NON-LIMERICKS I Arthur, Old Junior, We're missing you no, No fulminations: Markets will flow. Arthur, Old Junior — Slick Willie's good friend — Avoid Harlem office, Reputation may mend. Arthur, Old Junior,

Down on the farm, Posture in pasture, No cause for alarm. II Citron, Enron, two bad "rons;" Pros they were and now they're cons, Or amateurs and object lessons: Save us from the seminar sessions. III Down in fair Houston, Enron and Lay Hang those heads over; See who will pay. Roses love sunshine, Enron loved deals. Andersen blessed 'em; Andersen squeals.


NABL has a JOB BANK for members and public sector lawyers seeking employment opportunities with private law firms. Contact Executive Director Ken Luurs at 312/648-9590 or e-mail nabl@ nabl.org. The National Association of Bond Lawyers is the bar association for those engaged in the practice of the law of municipal finance. Only NABL nurtures that practice. NABL was invented by and for bond lawyers. Member-driven — not staff-driven — it faithfully serves bond lawyers in all 50 states and the territories via The Bond Lawyer® and NABLNET Alerts.

Officer and Director Candidates Sought Members who wish to be considered for nomination as officers or directors of the Association, or who wish to propose other members for nomination, are invited to con-tact 2002 Nominating Committee Chair Im-mediate Past President J. Hobson Presley, Jr., Maynard, Cooper & Gale, P.C., 2400 Am-South/ Harbert Plaza, 1901 Sixth Avenue North, Birmingham, AL 35203-2602 (e-mail [email protected]). Members may also contact other Committee members: William J. Noth, Cynthia M. Weed, Foster J. Clark, or Kathleen Crum McKinney. Submissions should be received by July 15.

MEMBERSHIP SERVICES Education Program The Association conducts seminars and workshops dealing with matters of interest to the bond law community. Still ahead in 2002:

¨ September 18, 19 and 20: Bond Attorneys' Workshop, Chicago — for lawyers with more than three years of bond experience — the preeminent annual gathering of bond lawyers, covering virtually all aspects of municipal bond law

These events offer members opportunities to exchange ideas about law and practice with fellow practitioners. For more information, call or e-mail Executive Director Kenneth J. Luurs at 312/648-9590 or [email protected]. Law Reform: Committee Participation Through its Committees on General Tax Matters and Securities Law and Disclosure, as well as ad hoc committees and task forces, the Association regularly testifies and files written comments about proposed tax, securities, and other federal legislation and regulations, and acts as an amicus curiae in judicial and administrative proceedings of general interest to the membership. (Amicus curiae guidelines are available from the Executive Director.) NABL members are invited to participate in committee activities. The Association also works closely with public interest groups and industry organizations on matters of mutual interest. Office of Governmental Affairs In Washington, Director of Governmental Affairs William L. Larsen represents the Association in federal regulatory and legislative matters. The Director cooperates with state and local government groups, congressional and regulatory staffs, the Association's substantive committees, and individual members to help inform and educate Congress and federal regulatory agencies about public finance issues. Members may contact the Director at 202/682-1498 (e-mail [email protected]), or at 601 Thirteenth Street, N.W., Suite 800 South, Washington, DC 20005-3875, to discuss legislative and regulatory issues, request copies of current public finance proposals before Congress or regulatory agencies, and obtain NABL comments on proposed securities and tax regulations. He also maintains — via NABLNET Alerts — e-mail contact with members on timely issues. Other Membership Services and Benefits § Subscription to The Bond Lawyer®; § The Association's renowned website: www.nabl.org; § Preferential admission to the Association's educational programs at substantially reduced rates

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

and Local Government Securities Offerings, Second Edition; Federal Taxation of Municipal Bonds (through LexisNexis); Blue Sky Regulation of Municipal Securities; and seminar course books;

§ Free access to the Association's Job Bank through which members can receive job listings and firms can seek members interested in employment opportunities;

§ No charge for placement in The Bond Lawyer® of brief notices of employment opportunities avail-able or sought;

§ Members who are new subscribers to The Bond Buyer receive discounts on subscriptions to the paper and online versions;

§ Budget Rent-A-Car discount; and (most importantly) § Opportunities to cross-pollinate with fellow members.