NATIONAL ASSOCIATION OF BOND LAWYERS
Voice from the Past
Chapter 13
When we founded the National Association of Bond Lawyers in
February of 1979, we put
in the by-laws a provision to the effect that the organization
would not participate in influencing
or trying to influence legislation. Our reasoning was that we
did not want to be a lobbying
organization. Experience taught us to remove that provision.
In 1982 legislation was introduced in the House of
Representatives that would make most
municipal bond interest taxable unless the underlying bonds were
in fully registered form.
Legislation was always being introduced to mess up the tax
exemption, so few bond counsel paid
much attention to this item. We did not pay proper attention to
the fact that the sponsor was
Congressman Rostenkowski from Illinois, Chairman of Committee on
Ways and Means. Tax
legislation with this sort of sponsorship generally got
passed.
The published story behind the change in law was that with bearer
coupon bonds drug
dealers were hiding their ill-gotten gains by investing in such
obligations; the IRS and the FBI
never found about them. This is not surprising; I recall hearing
that the coupon bond was devised
in Italy, probably Florence, in the Renaissance to hide the
holder's assets from the tax collector.
The debtor could not tell the tax man whom he owned money to
because he didn't know -- he just
paid the coupons and principal of the bonds when they were
presented through the banking
system.
I also remembered a story of a man I knew in Florida who had
recently immigrated from
New York where he had worked in the municipal department of a
brokerage (it may have been
Goodbody) that went bankrupt. He told me that the reason for
this was that with the huge
increase in the number of bonds being issued, and the caliber of
the help they could get in the
cage, they kept losing track of what bonds they had. He spoke of
knowing, for example, that they
had $25,000 5% Nashville G.O. bonds due in 1999, and selling them
to a customer; then the cage
would tell him they didn't have those bonds. So he had to go out
on the open market to buy
those 1999 bonds and pay more for them than he had sold them to
his customer for. Then his
cage told him that they had some of those same bonds due in 2000,
and he would sell these bonds
to another customer. Then when it came time to deliver those
bonds, it turned out that they
showed on their face that they were due in 1999, and he had to go
out on the market again and
buy the 2000 maturity at a loss, and was still left with the
1999's. All of Wall Street and all the
other dealers in the country were facing like problems.
It occurred to me that the misfortunes of Wall Street might have
been as compelling to our
government as the good fortunes of the drug dealers, but that
harming the latter was more
popular than helping the former. Also, drug dealers are not
known for their political contributions
on the national level.
However, the new legislation would make issuers of municipal
bonds change their ways.
The Municipal Securities Rulemaking Board called a meeting of
various industry groups in
Washington to kick off this change. Don Howell, my successor as
President of NABL asked me
to represent this organization, and I, as then Chairman of the
Section of Urban, State and Local
Government Law of the American Bar Association, appointed Bernie
Friel to represent that
organization.
My recollection of the meeting is that everyone seemed to think
that whatever had to be
done was someone else's job. Bernie and I knew what our job was:
we had checked a few State
bond laws before going to Washington and confirmed our
recollections that many of them
permitted bonds to be issued only in coupon form. This meant that
our clients would have to
choose between issuing taxable bonds and not issuing bonds at all
for some purposes. By and
large, it was the older laws, such as for school, city hall,
fire, police, and utility purposes that
allowed only coupon bonds; industrial development and other less
traditional bonds were issued
under newer laws that permitted full registration. The effective
date was January 1, and the
various State legislatures would not be meeting until
Spring.
Bernie and I went back to our offices and started the formation
of a committee to survey
as many State laws as possible to see how bad the situation was.
I don't recall finding that any
State permitted all of its bonds to be issued in registered form.
A memorandum was prepared and
the Washington staff of one of the municipal organizations
managed to get an appointment with
Congressman Rostenkowski, and to get a representative from the
Treasury Department to attend
it. I was given the honor of explaining to the Chairman of the
Ways and Means Committee how
his law would thoroughly mess up most of the Nation's municipal
bond issues for about six
months. He did not receive the information graciously, and asked
why the hell I didn't mention
this fact at the hearings. As I was trying to decide between "It
wasn't my job" and "No excuse,
sir" he asked for the memorandum and asked the man from Treasury
for that Department's view.
Treasury had no objection to postponing the effective date for
six months. The Chairman said
he'd take care of the matter and we left.
The committee that had prepared the survey of State laws formed
the nucleus of a group
with representatives from NABL, the ABA, the MSRB, and the SEC.
It was headed by Ron
Ockey and Gerry Lasster and undertook to send information to all
State governments about the
need to amend their laws, and to prepare suitable amendments,
preferably in the form of one
model law for all to adopt. One caution, however, involved the
provisions found in many State
constitutions to the effect that each law shall contain but one
subject and matters related thereto,
and that every bill amending a law shall set out the law as
amended in full. Some States had
general laws pertaining to most bonds of most issuers for most
purposes, but it was more often
that a State would have separate laws for municipalities,
counties, school districts, and all the
other entities that could issue bonds. And there were separate
laws for general obligation bonds,
utility revenue bonds, excise tax revenue bonds, special
assessment bonds, special tax bonds, etc.
Would a court hold that an act that had the effect of amending
each of these laws contained more
than one subject or had to set out in full each law as amended,
or would it hold that a single
model law would do the job even though amendments by implication
are not favored? Few of us
were bold enough to assume that one model law would be enough.
It became a monumental research project to check the decisions of
the 50 State supreme
courts to come to a conclusion. As I recall, it was determined
that most States could adopt a
single law, the subject being bonds and the purpose being to give
additional powers to issuers.
There was some question about Indiana, and I believe that State
ended up amending all of its
bond laws that had required coupon bonds. I don't recall whether
any State had to call a special
session of the legislature for the purpose. In any event, all
the laws got amended, and bonds were
being issued in fully registered form by July 1.
I had thought that with the League of Cities, the Mayor's
Conference, the Municipal
Finance Officers' Association, and other such national
organizations with Washington presence
and staff to do lobbying, NABL didn't need to get into that
business. Experience showed that
our clients would have been better served if we, too, were more
involved in the National legislative process.
Manly W. Mumford