Q: What are the major challenges facing the municipal bond industry?
A: Well, in some ways it's unfortunate, but the main challenges are in areas that I know about but don't specialize in. They come from what I call, for better or worse, the potential for regulation from various sources because of the perceived abuses in the municipal bond market.
Q: Do you think Congress will legislate new restrictions for bonds?
A: I really don't know whether we're going to get legislation or not. I trust, however, that the [National Association of Bond Lawyers] will participate in the debate.
Q: What will the association's position be?
A: As lawyers, we will try and help shape both the explanation of the problems and the discussion of potential solutions. One of the great difficulties we've had so far is sort of lumping several different perceived problems together and assuming, perhaps incorrectly, that the answer to all of these problems is more disclosure.
Take, for example, political contributions. There's a big brouhaha about political contributions. When you boil it down, the issue is whether somebody is making a contribution to secure business. Let's assume that that's the case. I would ask the question as to whether. that's of any concern to the investor. It's not an investor issue. It's an issuer issue. The investor could care less.
Q: The Municipal Securities Rulemaking Board is supposed to adopt a rule prohibiting bond firms from making political contributions to obtain business.
A: One of the things that lawyers can say to people is that if you adopt standards that are subjective, they're bound not to work. Maybe, instead, you want to adopt a rule that says you should not make contributions, or that you should not make contributions over a certain amount, or that you should disclose your contributions and let whoever reads the disclosure form decide whether you've made them to secure business.
Q: Much of the focus has been on broker-dealers. What about the lawyers? I remember one lawyer saying several years ago that he would like to be banned from making political contributions.
A: Everybody would love to have someone say "you can't do this," because they'll save some money. I mean, that's silly. It seems to me that you have to have a measured response. I think we should first ask, what is the problem?
Let's look at some of the other things that are going on - the allegations that people have been unjustly rewarded in bond syndicates or that financial advisers are hooked up with underwriters. There you have, it seems to me, a clearly identifiable situation. It's not a question of whether or not you gave something for something else. You're in conflict. Those situations are clearly conflict situations. And if, and to the extent, the laws are inadequate to deal with them now, they ought to be beefed up. Again, I would point out, that is not an investor issue. It is not an issue or a problem whose solution is in some [Securities and Exchange Commission-]mandated disclosure form.
Q: There has been a lot of discussion lately about whether the Tower amendment should be repealed. What do you think.?
A: I don't know anything about the politics of the repeal of the Tower amendment. All I can say to you is that, unless and until a cost-benefit analysis is done and you determine what benefit you want to derive from the repeal of Tower and how much it is going to cost, you cannot make an intelligent decision as to whether you're in favor of it or not.
If you repeal Tower, municipal issuers are going to have to come up with X number of additional pages of stuff in their official statements. And the question is: do the investors want it and is it important enough to raise the costs for issuers providing it?
The investor is interested in two things: getting his principal back and earning his bargained-for rate of interest. He wants to get paid.
There are two kinds of bond issues an investor might buy. One is, say, from the Commonwealth of Massachusetts - an issuer that goes into the marketplace every two or three months. Does the investor need some kind of mandated secondary market disclosure? Of course not. He can just go pick up the most recent offering statement.
The investor also could have bought a bond from the City of Podunk, an issuer who borrows only once every five years. The City of Podunk doesn't even have sophisticated financial statements other than when it goes to the bond market. And if it is required to provide information it otherwise doesn't produce, it is going to incur a cost.
The MSRB is saying, "Look, we're not going to let you, mutual fund, buy that bond unless you demand at the outset from the City of Podunk that it provide you with updated financial information." There is nothing wrong with that, nothing wrong. But there's no market for those bonds in the classic sense. If someone wants to sell them or trade them or value them and they don't have updated financial information, it is conceivable that the sharks will take advantage of the minnows.
Q: In what way?
A: I'll give you the real trigger to secondary market disclosure concerns. It has nothing to do with the financial circumstances of the issuer. It has to do with early redemptions. If someone knows that a bond is going to be redeemed early and someone else doesn't, the guy who knows has an advantage. I believe that to the extent that secondary market disclosure reform, if you will, focuses on something like that, it's entirely legitimate. But to the extent that it willy-nilly says that every Middlesex village and town has to provide updated financial information in cases where the bonds, as a practical matter, never trade, you've got to analyze whether it's worth it. And moreover you have to tell me what it is they are supposed to disclose.
Q: What about tax regulation and the new arbitrage rules?
A: I like the new arbitrage rules. I don't think they're perfect, but I'm extremely impressed with the accessibility of the people who have been working on these rules and that they've opened up the process to people who have worked in the industry. I think they are much less skeptical that private practitioners want to have a system that works well and are not just a bunch of schemers. looking for an edge on everything.
Q. What are your views on the new bond enforcement program?
A: I think that you cannot yell for 15 years about needing an independent arbiter and then once they decide to do it, turn around and say you oughtn't to have done it. I think we all have to expect increased enforcement will have an overall beneficial effect on the industry. Having said that, if it's your client that's being audited, believe me, it's no picnic.
Q: Should the Internal Revenue Service's exempt organizations group be in charge of bond enforcement?
A: Well, they are the guys who are out in the field. Given the way the IRS and Treasury are structured, it's logical. I just hope that they verse themselves in the law and lore of municipal bonds.
Q: As the new president of the National Association of Bond Lawyers, do you have an agenda or goals for the group.?
A: As I indicated. I think that we have to deal with this whole area of what I will call securities regulations. I see NABL's general raison d'etre as continuing to be educational and so I'm going to focus on the seminars. I am going to devote myself to getting some new volunteers to participate, some of the newer and younger people in the industry. On the tax side, I expect several things to happen during the course of the year - such as arbitrage announcements concerning derivatives, private-activity bond regulations, the definition of sewage - and we're going to stay involved.
Q: What do you think of municipal derivatives?
A: I think that they're going to be widely employed, that the government is going to come to grips with some of the technical issues and issue regulations that we can live with. People have to understand the risks associated with these instruments. But there's no question in my mind that if all we're talking about, in simple terms, is trying to target particular buyers with something that's tailored to their needs, with the result that it is cheaper to the borrower, that's something we all have to support.
Q: and A:
Neil P. Arkuss, a tax lawyer with Palmer & Dodge in Boston, is fond of saying that lawyers are "risk describers," not "risk takers."
It's not surprising then that Arkuss as the new president of the National Association of Bond Lawyers wants the group to play a more active role in describing both the problems that confront the industry and the pitfalls of a quick regulatory fix.
For almost two decades, Arkuss has been at Palmer & Dodge, the top-ranked bond counsel firm in the nation. His broad-based bond practice spans a period in which most of the legislative and regulatory restrictions on bonds have been adopted.
Arkuss, 48, is known in the bond industry for his straightforward, common-sense approach to issues. He is also known for his sense of humor.
In a speech last year in San Diego, Arkuss poked fun at the "tortured specificity" of the proposed arbitrage rules. One rule specified that issuers electing to pay a penalty must write "Includes Notice of Election To Pay Penalty" at the top margin of a bond form in upper-case letters underlined in red ink. Arkuss mused about the dire consequences of writing the note in lower-case letters or underlining it in green. That prompted one federal official to joke later that from now on rules would be written to withstand the "Arkuss test" - a public roasting.
Arkuss has also good-naturedly needled federal regulators for years about the need to provide more arbitrage guidance on negative pledge funds - cash or other assets that are used to bolster the credit-worthiness of an issuer or borrower. Guidance material was finally published earlier this year.
Arkuss has not been successful, however, in getting the regulators to repeal the Tax Equity and Fiscal Responsibility Act of 1982, or TEFRA, requirements that issuers post bearing notices and bold public hearings on proposed private-activity bond issues. Arkuss calls the requirements burdensome and unnecessary.
According to friends, Arkuss' expertise in municipal bonds is exceeded only by his knowledge of sports and rock-and-roll songs of the 1950s and 1960s.
In a recent interview with staff reporter Lynn Stevens Hume, Arkuss discussed the problems facing the municipal bond industry.