Now that Congressional hearings are under way on the state of regulation in the municipal securities industry, many of us are poring over the testimony of the regulators and trying to put it in perspective.
More than a few might cry out for a single source book providing a comprehensible description of existing law. Bob Fippinger's newly updated text readily answers the call.
For those who wish to examine the regulatory gaps that the various proposals might bridge, or possibly identify an existing traverse, this second edition of "The Securities Laws of Public Finance" will be a useful guide. Others engaged in the day-to-day practice of municipal finance law will find the book most useful as a resource in addressing the securities law questions arising more and more frequently out of the complex structures of today's transactions. Readers familiar with the first edition will not find the text's utility surprising.
Fippinger, whose experience and contributions in both the professional and academic world are noteworthy, begins his survey of applicable securities law with a quick review of the origins, characteristics, and types of municipal debt.
He notes, "Public finance is a debt market," though not because of the securities laws.
While not a startling revelation, singling out this "debt characteristic" makes a point that should not be lost on anyone quick to apply regulatory schemes and practices crafted primarily for an equity market. [Note, for example, that continuing disclosure obligations for corporate debt are triggered by the presence of a widely held class of equity securities; many corporate junk bond issues are free of such obligations.]
There may be other ways to skin this muni-market cat: Fippinger's text may prompt a few constructive ideas.
The distinction between debt and equity is further marked by a long-standing recognition of management [or issuer] duty to shareholders, but not to bondholders. The author notes the beginning of a sea change in this attitude, however, and explores arguments supporting its advance as well as considerations that should temper its growth.
The author reviews the current federal regulatory scheme, starting with what practitioners may find most important: the scheme of exemption from registration of securities, and securities transactions under the Securities Act of 1933, coupled with the separate securities doctrine.
Simply put, under this doctrine, a structure combining several sources of payment of a debt, such as a private activity bond guaranteed by a borrower affiliate, may contain more than one "security," each of which requires identification of an exemption from the registration provisions.
The importance of understanding the flexibility and limitations of separate security analysis becomes clear when considering the evolving varieties of derivative and hybrid securities entering today's market.
This thorough yet easy to follow explanation of separate security analysis is complemented by Chapter Three's discussion of investment companies, the Investment Company Act of 1940, trusts, blind pools, securitization, derivatives, and forwards.
The next segment of the text covers regulation of the initial offering and sale of securities, providing as background a description of the corporate offering and registration process combined with specific considerations applicable to municipal securities.
In chapters titled "Contracts and Torts from Red Herring to Closing" and "Information Dissemination Rules," the reader finds a description of the sequence of information dissemination as derived from practice under the 1933 Act, MSRB confirmation rules, and recent steps required by rule 15c2-12. The concepts of fraud and due diligence are explored in later chapters, with due diligence considered as both a duty and a defense.
This analysis then folds into an explanation of the SEC's Interpretations of Underwriters Responsibilities contained in the 15c2-12 releases.
A chapter entitled "Fraud Concepts in Public Finance" describes the common law foundation of the modern statutory cause of action, as well as the elements of a cause of action under rule 10b-5.
"Continuing Disclosure" is a chapter sandwiched between the information dissemination and due diligence sections of the text. This helpful chapter provides a review of the basics of continuing disclosure duties, then continues exploring considerations that may derive from rule 10b-5's prohibition of fraud in connection with the purchase or sale of securities in the secondary market. Voluntary disclosure efforts and trustee considerations are described and examined.
The chapter is an excellent primer for any informed discussion on continuing disclosure and, as noted earlier, may serve to prompt constructive approaches to secondary market disclosure for municipals.
Market Regulation, SEC regulation of broker dealer activity, and self regulation through the MSRB concludes the text, offering a review of existing duties and frame of reference for discussion of current topics such as suitability.
Release of the second edition earlier this summer could not have been timed better. Robert Fippinger has provided a helpful asset to the municipal securities bar generally, as well as a useful tool for those considering altering existing regulatory schemes. Time reading this second edition will be time well spent if you fall into either group.
Paul S. Maco is a partner in the Boston office of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P. C and a past Director of the National Association of Bond Lawyers. He began practicing law as a staff attorney in the SEC's Division of Enforcement.