CHICAGO - A quick federal "regulatory fix" is not the solution to the problems confronting the municipal bond industry, Neil P. Arkuss, the new president of the National Association of Bond Lawyers, said here last night.
Arkuss, a lawyer with Palmer & Dodge in Boston, told members of the group meeting here that federal and industry regulatory agencies, congressional committees, and state officials appear to be "homing in for the ~regulatory fix'" to address a number of perceived problems in the municipal bond market.
The problems range from the use of political contributions to secure business, to the unreasonable compensation of favored bond firms and the need for issuers to provide secondary market disclosure. Arkuss cautioned against lumping these together and assuming that federally mandated increased disclosure is the solution to them. "It strikes me, for example, that issues stemming from unethical conduct on the part of public finance professionals are a completely separate kettle of fish from the issues surrounding the need for secondary market disclosure," Arkuss told the lawyers.
Arkuss said it is important to remember that "the purpose of disclosure rules is to help investors make informed investment decisions" and that "increasing the amount of disclosure to serve other purposes is destined to be costly, at best, and a complete failure, at worst. "
Issues that revolve around the services that underwriters, bond counsel, financial advisors, and other professionals provide governmental issuers should not be of concern to the federal government, Arkuss said. These should be issuer concerns, not federal concerns. Most of the problems confronting the industry can be addressed by state and local issuers rather than through new federal legislation or regulations, he said.
Arkuss said he plans to ask NABL to establish a task force to help analyze the problems confronting the industry and to suggest solutions.
In most cases bond lawyers can help issuers develop procedures or criteria to avoid abusive situations, he said.
For example, lawyers can help issuers develop procedures for procuring the services of underwriters, bond counsel, and other professionals who will ferret out the potential for abuse in the area of political contributions. States could also consider developing standards, Arkuss said.
"The use of political contributions to obtain underwriting, bond counsel, or other professional engagements from state and local governments is an abuse" that must be dealt with, he said. But proposals to require that such contributions be disclosed to investors "are badly misdirected," because they threaten to "overload the disclosure process and further obscure the important information the investor really needs, " he said.
Some market observers believe another possible solution to the political contribution Problem would be to force issuers to sell bonds through competitive bidding rather than on a negotiated basis, he said.
"This solution has loads of surface appeal because the competitive process precludes favoritism," Arkuss said, adding, however, that most industry officials know that not all transactions should be sold competitively.
He called on NABL to help state and local governments draft model criteria that they can use to determine whether bonds should be sold through competitive bidding or through a negotiated basis.
Arkuss said NABL can develop documents that help ensure there is no abusive, under-the-table relationship between the financial adviser and the underwriter in a bond transaction..
"A financial adviser rendering advice with respect to the sale of the bonds to underwriters should have no arrangement to participate directly or indirectly in the uriderwriter's profit. from that transaction." he said.
In addition, he said, a financial adviser should disclose to the issuer whether he has fee-sharing arrangements with underwriters in other transactions.
Arkuss add bond lawyers can help issuers develop procurement documents that would help avoid situations in which unreasonably high compensation would be paid to favored bond firms. "The payment Of unreasonable compensation to a favored firm. whether it is simple cronyism or something more subtle, is unethical and erodes the public trust," he said.
Turning to disclosure, Arkuss said that It would be a mistake to mandate secondary market disclosure across the board" because this would necessitate the development of a laundry list of information that must be disclosed, some of which would not always be useful to investors.
"Institutional investors and underwriters can require secondary market disclosure without any new law by insisting on contract provisions that specify the data to be reported if they believe that such disclosure would be cost-effective, " Arkuss said. NABL "should encourage this process" by developing model bond document provisions that issuers could use in this regard.
Arkuss said he believes most investors want information about whether bonds are likely to be called, rather than about the issuer's creditworthiness. The Municipal Securities Rulemaking Board should do more to encourage the disclosure of call information, he said.
"Only if this voluntary process falls should a legal mandate be considered, and then it should be limited to this particular problem," he said.
Arkuss said he opposes the repeal of the Tower Amendment because this would result in a legal mandate for across-the-board secondary market disclosure.
