WASHINGTON — The National Association of Bond Lawyers has many ongoing projects, including completing an analysis of the long-term implications of a self-reporting disclosure enforcement program, commenting on a key report on the municipal market, and providing regulators with its views on tax issues, said its incoming president Antonio "Tony" Martini.
Martini talked about these projects in a wide-ranging interview last week. A partner at Edwards Wildman Palmer LLP in Boston, Martini will become NABL president Wednesday afternoon at the group's annual meeting during its Bond Attorneys' Workshop in Chicago. He will succeed Allen Robertson, an attorney at Robinson Bradshaw & Hinson in Charlotte, N.C
NABL plans to release a "higher-plane analysis" of the long-term implications of the Securities and Exchange Commission's Municipalities Continuing Disclosure Cooperation initiative. The analysis may or may not be coupled with an in-depth look at the SEC's 2012 comprehensive Report on the Municipal Securities Market, Martini said.
The MCDC allows both issuers and underwriters to get favorable settlements by voluntarily reporting instances in the past five years in which they sold or underwrote bonds with materially misleading official statements. The dealer self-reporting deadline was just after midnight Sept. 9, but issuers still have until Dec. 1 to participate under a delayed deadline the SEC announced out July 31.
Although the SEC's Rule 15c2-12 has been around for nearly 20 years, Martini said, the enforcement landscape has changed considerably over the past five years. Many muni finance lawyers point to a March 2012 SEC risk alert that warned about deficient dealer practices complying with 15c2-12 as a turning point for how the market looks at muni enforcement.
"The regulatory focus and the regime as a whole have really gotten a lot more attention," Martini said. "And maybe it is time, as some have suggested, to hit the pause button and reflect a little bit."
Martini said the opportunity to do a reflective analysis of the MCDC may tie into a longer run goal of NABL 's securities law and disclosure committee, which is to take the SEC up on its invitation for the group to comment on the 2012 muni market report. That report suggested a number of major muni market transparency and other reforms, including creating a best execution rule for munis that is pending now.
"That has never fallen off the committee's radar screen," he said.
NABL also may hold another teleconference on the MCDC, Martini said.
The MCDC is a major area where NABL can play a role providing expert analysis of a program that has captured the attention of securities lawyers, dealers, and issuers, he said. The program quickly became a major focus for several major industry groups, including NABL, after the SEC announced it in March.
NABL has previously released guidance on materiality with respect to the MCDC and held webinars on the program, but there may still be some ground the bond lawyers group could cover, Martini said.
"There's a lot there from a procedural perspective," Martini said, noting that issuers face considerations in self-reporting that dealers do not.
"How do you get through an open, governmental process to decide formally to participate in MCDC?" Martini asked. "There are open meeting laws, meetings and hearings of city councils," he said.
"It might be worth having a dialogue on," he said, although the NABL activity on the initiative is still in a more informal, initial stage.
Tax and Other Projects
Martini said the Treasury Department and the Internal Revenue Service still seem to be considering the next steps on issue price - the most controversial piece of the proposed arbitrage rules that they released just before the 2013 Bond Attorneys' Workshop.
Under the current rules, the issue price for each maturity of bonds publicly offered is the first price at which a substantial amount of the bonds is reasonably expected to be sold to the public, with substantial defined as 10%. However, the proposed rules would eliminate the reasonable expectations standard and instead base the determination of issue price on actual sales of the bonds. They include a safe harbor under which the issue price would be the price at which the first 25% of the bonds are actually sold to the public.
NABL and other market groups have expressed their concerns with the proposed rules, which they believe are unworkable. Martini said he thinks Treasury and the IRS are taking market participants' comments into consideration.
"I think we're in a mode right now where they're still actively considering next steps and we're just kind-of standing by," he said. For the time being, "we're in a status-quo mode," he added.
Meanwhile, NABL is working on providing Treasury and the IRS with commentary about the valuation of investments allocated to an issue, which was a portion of the proposed arbitrage rules. NABL is undertaking this project because the regulators have asked the group for additional thoughts on this topic, Martini said.
"We've certainly felt like we'd be enthusiastic about taking them up on their offer to provide additional commentary and seeing if, by doing so, we could improve the state of the art in terms of what IRS and Treasury ultimately do with these other aspects of the proposed arb regs," he said. NABL finds the non-issue price portion of the regulations to generally be helpful, he added.
Another tax project NABL has in the works is on the treatment of partnerships with straight-up allocations under private-activity bond rules.
Generally under tax-accounting principles, partnerships are treated as standalone entities and not governmental entities. This would mean that if a government and a private company used a partnership vehicle to facilitate the development and operation of a building they would both use, tax-exempt bonds could not be used to finance the portion of the building that would be used for governmental purposes.
Under federal tax law, bonds generally are private-activity bonds if more than 10% of the facility is used for private business use and more than 10% of the debt service is paid for from private payments. Private-activity bonds can only be tax exempt if they are used for certain purposes.
In the preamble to the proposed allocation and accounting regulations released in 2006, Treasury and the IRS said they were considering not viewing partnerships as separate private business entities for purposes of the PAB rules in cases where each partnership item - such as income, gains and losses, and credits - is divided on the same basis as the entities' interest in the partnership, and the shares remain constant. They asked for public comment on whether it would be useful to treat this type of partnership favorably.
More recently, this topic has come up in conversations between the regulators and NABL, with Treasury and the IRS inviting NABL to comment on the simple partnership issue. NABL is drafting a paper that will support treating the type of partnership mentioned in the preamble to the proposed regulations as not a separate, private entity.
Additionally, NABL is trying to figure out how to further a dialogue with Treasury on the proposed regulations on public approval requirements for PABs, released in 2008, as well as on the issue of management contracts.
In their 2014-2015 priority guidance plan, Treasury and the IRS said they plan to finalize the public approval regulations and work on a project that would update guidance on when management contracts do not result in private business use.
Both the partnership and management contract issues have become particularly important recently because of President Obama's health care reform law, which encourages partnerships between hospitals and third-party health service providers, Martini said.
"Obviously, Obamacare is creating probably an incentive for [Treasury and the IRS] to refresh their focus on these themes as they affect the bond market," he said.
On the tax enforcement side, Rebecca Harrigal, director of the IRS tax-exempt bond office, has asked NABL if the group has any suggestions for additions to the Internal Revenue Manual on direct-pay bonds and the voluntary closing agreement process. Martini said. TEB appears to be interested in providing updated and additional guidance to their field agents in those areas.
NABL has also been working with the Government Finance Officers Association on a post-issuance compliance project. Martini said he anticipates NABL's tax committee will push to release that sometime in the next year.
NABL's general law and practice committee is working on projects that provide overviews about debt placed directly with banks and guaranteed investment contracts and similar types of agreements.
Tax Reform
The bond lawyers' group also plans to stay focused on preserving the tax exemption of muni bond interest. Many experts think that comprehensive tax reform is unlikely to be enacted before the 2016 presidential election. But prior to that election, Congress may want to do away with some tax expenditures in order to offset additional federal spending. The tax exemption for municipal bonds is one of the largest tax expenditures, so it could come up in a discussion about offsets, Martini said.
To withstand any threats to the muni exemption in the short-term and to be well-positioned in the long run, NABL needs to continue having discussions with policymakers and other membership groups about how tax-exempt bonds benefit the economy, he said.
"We want to do what we can within NABL to ensure that there is a broad and deep access to the market for the benefit of issuers, for NABL's membership's clientele," he said. "And that really does mean, by and large, ensuring that we're able to maintain the tax-exempt market."
NABL believes that tax-exempt bonds are critical to the muni market and while Build America Bonds and other types of tax-advantaged bonds have their place in the market, they should not replace tax-exempts, Martini added.
Martini also wants NABL to continue to focus on engaging with policymakers, regulators and other market participants and groups during the next twelve months.
"I think it's important for NABL to be out there in the world and to be speaking to other participants as frequently as possible in order to make the points that we feel are important to make, and to keep service to NABL membership in focus," Martini said.
Martini said it's important for NABL to develop and maintain relationships with people at the SEC, the Municipal Securities Rulemaking Board, the IRS and the Treasury and talk with the regulators about policy and technical issues. Particularly, he wants NABL to foster a relationship with Kent Hiteshew, the director of Treasury's relatively new state and local finance office.
"I think he's just very thoughtful and hopefully he'll develop into and evolve into a really effective voice for the market as a whole within Treasury," Martini said. He also wants to continue to be in touch with groups such as the Government Finance Officers Association, the Securities Industry and Financial Markets Association and the National Association of State Treasurers.
Martini has been working in private law practice for 22 years. He didn't always intend to be a public finance lawyer.
He grew up mostly in upstate New York, received his bachelor's degree from Union College in 1986 and earned his law degree from Columbia University in 1991. After graduating law school, he spent a year as a clerk for the Honorable Jerome Farris, a judge on the U.S. Court of Appeals for the Ninth Circuit in Seattle.
Following his second year of law school, Martini was a summer associate at Orrick, Herrington and Sutcliffe in San Francisco. He doesn't recall doing any public finance work that summer, but liked the firm and decided to return after completing his clerkship.
As late as the end of his clerkship, Martini thought he would be a securities litigator. He said he did some securities litigation work when he arrived to Orrick post-clerkship, but also dabbled in other areas. At the time, the firm had a program that allowed newly arriving associates to work in any area they wanted to for a while.
Orrick is a full-service firm with many great lawyers, but it is "a standout in the public finance field," he said. "The people they had doing that kind of work were among the very best in the country." he said, adding that he had to think seriously about the opportunity and then "one thing led to another."
Martini stayed at Orrick in California until 1998, when he and his wife decided they wanted to move back to the east coast to be closer to family. He took a job in Boston at Palmer & Dodge, a legacy firm of Edwards Wildman Palmer.
"I've been thrilled to be associated with Palmer & Dodge for all these years," he said. "We have a great practice historically of preeminent, New England-based public finance practice, though we reach out beyond New England in a lot of respects."
Martini has enjoyed working in public finance law.
"If it had not been fun or hadn't created some positive reinforcement in my mind, in the early days back at Orrick, I wouldn't have stuck with it," he said. "But I fundamentally thought this is a field where you're doing good, as well as practicing on the cutting edge of law practice, and there's a lot of intellectual stimulation in the tax aspects of the practice, working with some of the best lawyers and so it was all very fortunate for me and I've never looked back."
Martini has been on the NABL board since 2009 and is looking forward to become the organization's president and serving its membership.
"I'm very excited to take over as president and be at the helm of NABL in the 2014-2015 board year," he said.
Providing educational offerings is one of NABL's core functions, and the organization will continue to provide direct service to its members through events such as its annual ethics teleconference. NABL's education and member services committee is also undertaking a project to revamp the group's website, Martini said.
The incoming NABL president also wants to find ways to reenergize a dialogue within the group about diversity issues. The Bond Attorneys' Workshop has included a diversity luncheon for a number of years, and this year's speaker at that lunch will be Ruth Ellen Fitch, a retired public finance partner from Palmer & Dodge and the first black woman to become a partner at a major Boston law firm.
