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