WASHINGTON - Uncertainty over the Treasury's Circular 230 proposal, which would subjecttax-exempt bond opinions to the same rules as tax shelter opinions, has sparked hugedebates among lawyers over what, if any, disclosures or provisions should be included inoffering documents and bond purchase agreements.
The controversy has prompted the National Association of Bond Lawyers to set up ateleconference Thursday to air the issues under debate.
"We're just trying to heighten the awareness of the issues and what's going on in themarketplace," said Kenneth Artin, a lawyer at Bryant, Miller & Olive PA in Orlando, whois putting together the teleconference along with Douglas Rollow, a lawyer at BallardSpahr Andrews & Ingersoll LLP in Philadelphia.
"We can't give any answers," Artin said. "All we can do is bring everybody up to thesame level of awareness."
"We're just airing the issues - what is this thing, how does it affect deal dynamics,what sort of disclosures are being made, what do you say in the bond purchase agreement,and what do you say in the official statement," Rollow said. "We're not in the businessof telling people what they should be doing or not doing. We're just going to providesome examples of what people have done."
The teleconference will include not only NABL members but also Richard Kolman, amanaging director and co-head of the municipal bond department at Goldman, Sachs & Co.who chairs The Bond Market Association's municipal securities division, and KeithLawson, senior counsel at the Investment Company Institute. The meeting comes as lawyersare spending a lot of time wrestling with, and trying to advise clients on, Circular 230disclosure issues.
"There is a great amount of confusion," said James Richardson, a lawyer with Chapman andCutler LLP in Chicago which just issued a special edition of its public financenewsletter on Circular 230 issues.
"It is a preoccupation of a lot of practitioners," said David Caprera, a lawyer at KutakRock LLP in Denver. "I'm spending a ton of time on this. I'm probably spending half myday talking to issuers or underwriters or buyers about this," he said.
"It has the market totally confused. It's being handled in many different ways," saidHoward Zucker, a partner at Hawkins, Delafield & Wood LLP. "The amount of unproductivetime that is being spent on this issue by otherwise productive people is a shame. Thisis a perfect example of why the Internal Revenue Service should put out a release sayingthat they are working on revising the rule, that it will be prospectively effective andthat market participants will have plenty of time to adjust to it."
Under the Treasury proposal, tax-exempt bond opinions would have to describe allrelevant facts, the law related to those facts, and the material federal tax issues thatform the basis for the conclusion that the bonds are tax-exempt. A material federal taxissue is defined as a "federal tax issue for which the Internal Revenue Service has areasonable basis for a successful challenge and the resolution of which could have asignificant impact." If bond counsel discusses material tax issues in the opinion, itmust also discuss the likelihood that the taxpayer will prevail on the merits.
Lawyers who fail to comply with the rule could be censured, suspended, or barred frompracticing before the Internal Revenue Service - something that could lead to state barsanctions as well. "It's no small thing to run the risk of disbarment," Richardson said.
Municipal market groups, all of which have opposed the proposal, complain that if it isapproved it could force bond lawyers to write lengthy detailed bond opinions, raiselegal fees for issuers, drive up interest rates, and possibly even throw into questionthe marketability of the bonds.
Bond counsel are worried that if Treasury approves the proposal and makes it immediatelyeffective, issuers and underwriters that have already pre-sold or sold bonds under apreliminary official statement containing the current standard unqualified bond opinionwill have to completely rewrite the tax opinion before the transaction is closed. Theyare heatedly debating what, if any, disclosures should be made about this issue in apreliminary official statement.
"There is a real split among major firms" Caprera said.
"I don't believe there's any law firm in the country where all of the lawyers agree,"Richardson said.
A survey of more than a dozen lawyers this week revealed that there are currently threemajor disclosure stances on Circular 230, with the two top-ranked bond counsel andunderwriter's counsel firms in the nation at opposite poles.
In one camp is Hawkins and other firms that contend disclosure is not necessary becausethe Treasury will probably give the market time to adjust to any proposal it approves.
In the middle group are other bond counsel firms that want to disclose the proposal andthe fact that, if approved, it may delay the closing of a transaction but who also wantto stress that no one knows what will happen with the proposal or the bond opinion.
Richardson said Chapman falls into both of the first two categories.
In the other camp is Orrick, Herrington & Sutcliffe LLP and other firms that recommenddisclosing the proposal and say that if adopted, it may lead to changes in the taxopinion. In their disclosures, they actually give an example of new language that mayhave to be included in a bond opinion.
The lawyers in all of these groups, however, stress that while they are providing thisadvice to clients, they are willing to do whatever the client wants in terms ofdisclosure.
The uncertainty over Circular 230 has posed major problems for issuers involved inadvance refunding transactions because they typically have to buy State and LocalGovernment Series securities for the refunding escrow prior to the closing of thetransaction. It also causes problems for single-family mortgage bond transactions, inwhich issuers typically have to commit to buying mortgages before the deal closes.
"Refundings are a problem," Richardson agreed.
In addition to the disclosure debates, there are wrestling matches over what provisionsshould be included in the bond purchase agreement, the agreement under which theunderwriter agrees to take delivery of the bonds. Some issuers are insisting on languagethat would force the underwriter to take delivery of the bonds if Treasury approves itsCircular 230 proposal.
In one new-money nonprofit health care bond issue expected to price next week thatsources did not want identified, the bond purchase agreement states the underwriter willreceive "the opinion dated the date of the closing, of bond counsel to the effect thatthe interest on the Series 2004 bonds is excludable from gross include for federalincome tax purposes, which opinion may include additional disclosures (beyond thoseincluded in Appendix X to the Official Statement) if such opinion is subject to IRSCircular 230."
In other transactions, the underwriters are insisting on obtaining language that wouldgive them the right to refuse delivery of the bonds if the Circular 230 proposal isapproved and the rewritten tax opinion causes investors to balk at buying the bonds.Some underwriters are demanding this in deals with the Orrick-type disclosures so thatthey clearly have an "out" from buying the bonds even though they have been put onnotice, in the preliminary official statement, that the bond opinion language may bechanged if the Treasury proposal is approved.
A draft sample of this language states, "The underwriters may terminate this purchasecontract by notifying the [issuer] of their election to do so if, after its executionand prior to the closing, the market price or marketability of the bonds shall have beenmaterially adversely affected, in the reasonable judgment of the underwriters, by ...the following." The "following" includes legislative or regulatory action that makestax-exempt bond opinions subject to Circular 230.
Caprera, however, pointed out that many underwriters may be reluctant to exercise such aprovision for fear that they "might not get invited to the dance next time" by theissuer.
