Disclosure Roles of Counsel in State and Local Government Securities Offerings
(Second Edition)
A project sponsored by: Subcommittee on Municipal and Governmental Obligations, Committee on Federal Regulation of Securities, American Bar Association Section of Business Law; American Bar Association Section of Urban, State, and Local Government Law; National Association of Band Lawyers
367 pages
The National Association of Bond Lawyers and two sections of the American Bar Association (the section of urban, state, and local government law and the section of business law's subcommittee on municipal and government obligations) have published the second edition of the "Disclosure Roles of Counsel in State and Local Government Securities Offerings."
The first edition, published in 1987, discussed the roles of various lawyers in public finance transactions and their disclosure responsibilities and addressed a number of difficult topics involving opinions and relations among lawyers. The second edition expands this treatment of the role of lawyers but also provides a thoughtful and thought-provoking summary of securities law disclosure issues setting a context for consideration of lawyers' obligations. This larger context deserves emphasis because the book in its second edition commands the attention of an audience much larger than those who are interested primarily in the standards of conduct for lawyers participating in a transaction.
The second edition provides a readable summary of the most significant securities law disclosure issues confronting each person involved in the distribution of municipal securities. It is therefore a valuable source of information for issuers, investment bankers, trustees, credit providers, auditors, financial advisers, and others in the municipal securities industry. Furthermore, the book is written with a clarity of style that allows it to be read in its entirety and not simply treated as a source of reference. The book's purpose, to confront issues related to the responsibilities of lawyers, does not lessen its interest lot nonlawyers; it anything, it provides a useful guide for the approaches taken by lawyers and explains many of the premises from which lawyers reason.
Lawyers, in turn, should appreciate the approach taken to the many difficult and controversial issues that constantly challenge their intellectual skills. Difficult issues that can be divisive are not avoided nor are they treated simplistically. Instead, the approach taken throughout the book is to discuss various viewpoints of lawyers on difficult issues in what may best be described as a scholarly presentation. This will often lead to an appreciation for the necessity to evaluate facts and circumstances of differing situations with an ability to reach varying results depending on the context of the distribution. For example, the troublesome issues related to disclosure of information about credit enhancers is presented in a manner that equips the reader to be flexible to the circumstances and provides a number of solutions to problematic negotiations.
If the presentation of competing viewpoints often leads to an appreciation of various perspectives, the authors' approach will often help the reader formulate the basis for a position to be taken. For example, it is difficult to come away from the discussion of the appropriateness of issuer selection of underwriter's counsel without recognizing the cogency of the argument that underwriter's counsel should not be selected by the issuer. Both points of view are respectfully presented, but it was difficult, at least for this reader, not to find the reasoning for underwriter selection of its own counsel to be the more persuasive.
The book is organized into 10 parts with attached appendices of source materials, including the March 9, 1994, interpretative releases of the Securities and Exchange Commission together with a number of rules of the Municipal Securities Rulemaking Board that relate to disclosure. After an introduction and overview. Part II of the book introduces the responsibilities of lawyers in primary offerings by discussing the roles of the various participants represented by counsel. Client relationships are presented in a manner that leads to issues of client orientation, potential conflicts, and obligations for disclosure inherent in representation of particular clients.
Part III is a summary of the many structures of security and credit in public finance as a backdrop for detailed discussions of disclosure and diligence obligations in Parts IV, V, and VI. During the course of Part III, sensitive disclosure issues are exposed for various financing structures. For example, credit enhancement is likely to shift the right to control remedies, including acceleration, from the trustee and bondholders to the credit enhancer. The enforcement and timing of remedies by the credit enhancer may not coincide with choices that a bondholder would make under various market conditions, and the implications of these rights suggest the necessity for careful disclosure analysis.
Part IV compares the disclosure process in public finance with the registration process in corporate finance under the guidance of the SEC's Regulation S-K and S-X. The authors stimulate consideration of the relative liability of clients and lawyers in the unguided system of public finance disclosure and the structured system of corporate disclosure. Standards of care in public finance are summarized, and difficult issues of disclaimers in lawyers' engagement letters, division of assignments among lawyers, and reliance on other lawyers are discussed not only as a matter of security law but also under formal opinions on ethics and professional responsibilities issued by the American Bar Association. The shifting of opinion on responsibility is distinguished from the shifting of liability under the securities laws.
Disclosure responsibilities lead to the consideration in Pan V of practical methods for conducting due diligence in light of applicable standards of care. The presentation in Pan III on the multiplicity of credit structures in public finance leads the authors in Pan V to warn against a checklist mentality on verification procedures. Referring to the source of repayment, they urge that "the nature of that source usually dichates the procedures robe followed in investigating the accuracy and sufficiency of disclosure." Practical advice is given for due diligence in the major categories of public finance, including derivative products, and useful comparisons are made between disclosure principles for unrated municipal securities and congressional mandates under the Penny Stock Reform Act of 1990.
Part VI contains a thoughtful review of disclosure and diligence issues in transactions employing credit enhancements. As suggested above, the authors present sufficient alternative approaches to avoid the standoff that often occurs among the participants, and the reader is provided with a number of negotiating strategies.
Part VII provides a discussion of controversial issues of secondary market disclosure. For anyone desiring a readable 30-page summary of this topic, the second edition will prove to be highly informative. The authors present a useful framework of analysis by distinguishing debt from equity and political corporations from business corporations. The incentives and disincentives for voluntary secondary market disclosure are outlined, and the role of counsel in rendering post-issuance disclosure advice is summarized in the context of the American Bar Association's model rules of professional conduct:
"Thus, while a lawyer's duty is to clearly explain legal requirements or their absence, where a legal duty does not exist, counsel may choose to note other considerations that may assist the client in making a decision .... Once an issuer client has determined to provide secondary market information, counsel can help develop a disclosure program designed to meet the constraints of the issuer while making sure that the proper information will get to the marketplace in a timely and accurate fashion."
Parts VIII and IX guide lawyers in the drafting of legal opinions for various types of credits. For nonlawyer readers this is especially useful in understanding the implications of various formulations of opinions.
Relying on the opinions of others, the addressing of opinions, and cross-referencing issues are discussed. The opinions of firms other than bond counsel are treated as well as the tendency for issuers to employ special disclosure counsel when bond counsel has expertise in validity and tax matters but not necessarily in securities law issues.
The authors of the second edition include leading members of the securities law of public finance bar, and the careful deliberations they have held for several years are reflected in the quality of the product they have produced. In their recent interpretative releases, the SEC pays lip service to the diversity of public finance but fails to follow through with regulatory proposals that demonstrate an understanding of the municipal securities marketplace. The practicing lawyers who have written the second edition thoroughly understand the difference between corporate finance and public finance, and that knowledge is consistently applied to the difficult issues confronted in the book.
The drafting group for the second edition was made up of: Patrick K. Amy of Miles & Stockbridge; Amy K. Dunbar of the National Association of Bond Lawyers; John M. Gardner of Ballard Spahr Andrews & Ingersoll; Jeffrey S. Green of the Port Authority of New York and New Jersey; Lewis C. Home Jr. of Powell, Goldstein, Frazer & Murphy; Stanley Keller of Palmer & Dodge; Andrew R. Kintzinger of Briggs & Morgan; Paul S. Maco of Mintz, Levin, Cohn, Fen-is, Glovsky & Popeo; William J. Noth of Ahlers, Cooney, Dorweiler, Haynie, Smith & Allbee; Edward L. Pittman of U.S. Boston Capital Corp.; Robert Dean Pope, Hunton & Williams; and Frederic L. Weber, Fulbright & Jaworski.
Summarizing a body of law governing lawyers within a few years is a remarkable achievement emphasized by the difficulty other groups of lawyers, including the American Law Institute, have experienced in similar efforts. The practicing public finance bar owes the authors of the second edition a debt of gratitude for the time they have devoted to improving the quality of lawyers' representation of their clients.
