Securities Law

Eying Tax Reform, Scott Lilienthal Takes NABL's Reins

WASHINGTON — Scott Lilienthal, who will become president of the National Association of Bond Lawyers Wednesday night, says that years ago he had little interest in becoming a tax lawyer, a profession he viewed as similar to being an accountant.

But in the mid-1980s, his opinion changed when he took a tax law course at University of Maryland School of Law.

“My interest in tax was generated by having a particularly good professor,” said Lilienthal, 51, a lawyer at Hogan Lovells in Washington, D.C. “I realized its not like being an accountant. It’s focusing on tax policy and the policies underlying these rules. That’s when I thought, ‘This might be something that I’m interested in.’ ”

Twenty-five years later, tax law still engages Lilienthal.

“The thing that keeps it interesting is the fact that it is ever-changing, in terms of legislative changes we need to understand and adjust for,” he said. “There are all these regulatory changes going on ... there are always innovations in structuring that comes from the bankers.”

Lilienthal grew up in the Denver suburb of Aurora, the son of an electrical engineer and a nurse. He studied international affairs at the University of Colorado at Boulder, earning a BA in 1983, and received a law degree from University of Maryland School of Law in 1987.

He began his career as an associate for at the law firm of Miles & Stockbridge PC in Baltimore, and in 1990 joined the Internal Revenue Service’s chief counsel’s office, where he worked on a project to make arbitrage and rebate regulations more user-friendly.

In 1993, Lilienthal joined law firm Hogan & Hartson, which merged with Lovells in 2010 to become Hogan Lovells.  He works primarily on financings for governments, colleges and universities, airports and infrastructure projects in the western United States.

Lilienthal will have no shortage of challenges when he becomes NABL president.

He said NABL plans to monitor looming tax-overhaul efforts, which could threaten tax-exemption for muni bonds. The group also will pay close attention to possible budget sequestration, which Lilienthal said casts “a cloud” over Build America Bonds, and the larger “fiscal cliff,” which he fears could push the country back into recession.

Also on NABL’s radar: the Securities and Exchange Commission’s July 31 report on the muni market, in which the agency made a number of recommendations and requested legislative authority to set the content and timing of issuers’ secondary-market disclosures.

Lilienthal wants to put NABL at the forefront of any muni-related debate on Capitol Hill, and said its members can bring expertise to any discussion. But he said the group also must remain true to its roots by providing education resources on which members rely.

Lilienthal sat down with The Bond Buyer last week to discuss pressing issues the group and the market face. Following are excerpts:


BB: What are NABL’s biggest challenges?

SL: We face potentially the most-significant changes in the legal framework for our market, in terms of tax exemption, that has happened since 1986. Many of the proposals are even more fundamental than what happened in 1986. The biggest challenge is understanding what those changes might mean to the market.

In the past, proposals have been limited tax reform, like in ’86, with proposals to tighten up arbitrage rules, advance refundings and place greater limits on categories of private-activity bonds. Here, we have potential for more across-the-board restrictions.

It’s up to us to tell policymakers about the importance of the municipal markets to state and local governments, and what the impact will be.

In terms of fundamental tax reform, the general principle is to lower rates and pay for it by getting rid of deductions and exclusions.

When the exemption for state and local bonds is included on that list, there’s not always appreciation of the secondary effects that would have on state and local governments.

Two things can happen: their cost of financing could go up, or they’ll be discouraged from financing some infrastructure they need.


BB: Do you think policymakers understand those secondary effects?

SL: Some of them do, but it’s more difficult when they are presented a whole laundry list of exemptions and exclusions. The exemption for state and local governments has effects that some other items don’t. I think state and local governments are going to be making themselves heard at the national level.


BB: What are NABL’s goals for the next year?

SL: We have a lot of legislative and regulatory initiatives on the horizon. We took note of commissioner Elisse Walter’s comment that the Securities and Exchange Commission’s recent report isn’t just going to sit on a shelf, that they intend to move forward on these things. Now that they have John Cross, we interpret that as they are going to move forward.

A goal of NABL is to be well-placed to participate in a constructive way as legislative and regulatory initiatives move forward — making ourselves available to legislators and regulators, providing our technical expertise and our understanding of the market.

We want to make sure we continue to put on quality educational programs — that is the reason NABL started. We want to make sure we continue to devote resources to conferences and seminars, and also provide comments on routine regulatory matters.


BB: Are you concerned about the possible fiscal cliff or sequestration?

SL: There is concern about a fiscal cliff potentially putting the economy back into recession. The Office of Management and Budget report stated that payments on Build America Bonds could be cut if the sequester happens. That sort of confirms the worst fears some people had when BABs first appeared. Some issuers were reluctant to embrace them because of concerns that at some point the federal government could turn off the payments as a result of political decisions.

This sequester scenario has placed a cloud over that market … and they may need to look at amending some sequester-related legislation to make clear that if something like sequestration happens again, BAB payments would not be cut.


BB: Do you see BABs coming back?

SL: They almost certainly won’t come back in the same form we had before. These payments were very favorable. I think that was driven by the fact that this was part of a stimulus bill. It’s possible it could come back, but almost certainly at the lower subsidy rate that makes the federal governments’ cost for the program more balanced with tax-exempt bonds.


BB: How will the departure of John Cross, the Treasury Department’s former associate tax legislative counsel, affect Treasury issue-price guidance?

SL: A very important role in the process of getting out tax guidance is the person at Treasury responsible for tax-exempt bonds. We are very closely monitoring the status of who is assuming that position, and we hope it’s filled soon. ... It’s painful to see someone like that leave such an important position. Some projects we thought were very close to getting out, like issue price. We hope his departure doesn’t mean that is going to slow down.

BB: Is NABL urging lawyers to talk with bond counsel or underwriters about pricing?

SL: The comments we’ve heard from the IRS has had an effect on how people deal with issue-price certifications with underwriters. It’s perhaps been healthy. It’s encouraged bond lawyers and underwriters and their counsel to look more closely at the certificates and examine what they really should say. People have come up with language that both sides are comfortable with.

One reason we want guidance is to avoid unnecessary disputes between underwriters and bond counsel. Clearer guidance could eliminate potential sources of conflict between what tax lawyers think they need and what underwriters feel like they can comfortably provide.


BB: What is your reaction to John Cross’ move to the SEC?

SL: It’s positive. I thought it was a pretty bold move to take someone who has a reputation as a tax expert to head that office. They were looking for someone who understands the municipal bond market, and I think that’s what they’ve got. He’s shown a good understanding and sensitivity to how the market reacts to different things. There is some negativity to it in terms of what happens to Treasury.


BB: Cross has called for more timely ongoing financial disclosures from issuers. Do you have a stance on this issue?

SL: This is one of the more difficult issues to deal with because issuers have different resources. You can understand being frustrated with larger issuers that might have the resources to put information out faster. Many smaller issuers have much smaller staffs and fewer resources. They may not even have people who are 100% dedicated to financial statements and accounting matters. We understand the frustration. We just want to make sure it’s approached in a way that understands some issuers take longer.


BB: What in the SEC’s report concerns you most?

SL: What’s interesting is the shifting approach of the SEC — the need for additional authority to be effective in their oversight of munis. Our main concern is to make sure there is a balanced approach if they develop additional authority. We want to ensure additional rules that the SEC might come up with are approached in a balanced manner in terms of weighing the needs of investors to get adequate disclosure against the effect on issuers.

We are encouraged by statements … about wanting to take a principles-based approach, and not having rigid rules. If it’s principles-based, the way it’s implemented will be different for different types of issuers. Our securities law committee members will be trying to provide their input and help educate folks at the SEC.


BB: Are you meeting with lawmakers or officials about the SEC’s recommendations?

SL: We haven’t yet. The SEC is probably working on legislation ... that’s probably the point we would get engaged.

The SEC report encouraged industry efforts to improve disclosure. They cited NABL’s pension disclosure project. That’s one way, perhaps, to avoid more detailed and specific rules out of the SEC — by showing that the industry can get together and come up with workable frameworks that improve disclosure. That can be pointed to by the SEC as a reason they may not need as much specificity in rules.

We are also involved in a group discussing voluntary bank loans, which have been increasingly common in our market. Instead of issuing traditional, publicly offered municipal bonds, some banks are directly lending to issuers. Those don’t have the usual public offering documents, but people who hold other publicly offered bonds of that issuer would like to know about bank loans.


BB: In a perfect world, how could the federal government improve the muni market?

SL: Some tax simplification could be useful. The current statutory regime for tax-exempt bonds is kind of piecemeal. It developed over the years with new provisions layered over old provisions, not always in the most efficient way.


BB: Can you offer some predications on the muni market?

SL: We are happy some dire predictions of a couple years ago didn’t come to pass. Many of our members at the time felt those were overstated. We are hearing that our market appears to be improving just like many other aspects of the financial markets. It may be a little bit tempered with some of the uncertainty that’s creeping up with the fiscal cliff and possible legislative reforms.



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