Issuers often engage with a variety of legal advisors as part of the financing team when undertaking the issuance of municipal bonds. It is important for issuers to understand the different roles that specific types of counsel may play in a transaction in order to minimize potential risks such as increased costs as well as conflicts of interest as a result of communication efforts by the issuer. Some of the most common legal roles in bond transactions are that of issuer counsel, bond counsel, underwriter counsel, disclosure counsel, and special tax counsel.
In order to minimize the risks of increased costs or conflicts of interest, GFOA recommends that issuers be aware of the different roles played by the types of counsel involved in a bond transaction. The role of each is outlined below, although is also important to understand that some roles can be filled by different or multiple parties depending on the situation.
Issuers often include their own legal counsel, i.e. a city attorney, general counsel, county counsel, etc. in their financing team due to their special expertise with state and local bond authorization statutes and rules. Investors need assurance that an issuer has followed all legally required steps prior to the issuance of bonds, including compliance with state and local election, meeting, filing, disclosure laws, and other regulations or actions related to the borrowing. It is often important that the issuer counsel review disclosure, bond sale, and other legal documents associated with transactions to ensure that the representations, commitments, and obligations in the bond documents do not conflict with the issuer’s other policies and rules and to assist the issuer in determining the accuracy and completeness of material information.
Usually in concert with recognized bond counsel, they advise in a legal capacity prior to the actual issuance of a legal opinion on bond issues. While issuer’s counsel may perform many of the same or similar legal functions of bond counsel, they do not act as recognized bond counsel. In cases where an issuer does not have an issuer’s counsel, recognized Bond Counsel may be required to perform these duties for the jurisdiction.
Role Before and During the Bond Issuance Process
Bond Counsel is an important member of the debt issuance team who is retained by the Issuer but represents the interests of the bondholders. Bond Counsel provides a legal opinion that:
- Issuer is authorized to issue proposed municipal securities and has met all legal and procedural requirements necessary for issuance.
- If applicable, interest on the proposed securities will be excluded from gross income of the bondholders (Federal and/or State and/or local)
In order to provide and document these legal opinions, Bond Counsel provides services including analyzing the legality of the project and security structure and drafting documents including the bond indentures, resolutions, ordinances, tax certificates, ballot language, public notice, and other documents needed for the transaction. In addition, Bond Counsel often handles disclosure related items such as drafting or reviewing documents such as the official statement, continuing disclosure agreements (CDAs), notices of sale or intention to sell, and preparation or review of negative assurance on the official statement – sometimes referred to as a SEC Rule 10b-5 opinion. Bond counsel may also assist with the due diligence process leading up to the issuance of the bonds including a review of past compliance with continuing disclosure agreements and may review the issuer’s Comprehensive Annual Financial Report, website, and other information to ensure consistency and appropriateness of information provided to the market.
As discussed in the GFOA Best Practice: Selecting Bond Counsel, GFOA recommends that a competitive selection process is used in selecting firms for Bond Counsel, Disclosure Counsel, and Tax Counsel. Fee arrangements may include fixed fee or hourly fees, with or without caps. Fees may be contingent upon the sale of bonds, although caution should be exercised in these types of arrangements that there are not incentives to inappropriately issue bonds.
Role Following the Bond Issuance Process
In addition to the services provided during a bond transaction, bond counsel may also assist issuers with post-issuance compliance policies and procedures, audits or inquiries from the IRS or SEC, and corrective actions when violations are found. Bond Counsel may also assist with annual filings or material event filings.
In negotiated sales, private placements or direct purchases, the underwriter (or placement agent or purchaser) may retain their own counsel. Such counsel assists the underwriter in meeting its legal responsibilities in a bond transaction. This may include drafting or reviewing documents such as the bond purchase agreement, official statements, disclosure documents, Blue Sky memoranda, the agreement among underwriters, negative assurance, and other various documents. The underwriter’s counsel will review various aspects of the bond transaction to assist the underwriter in meeting its due diligence obligation and will negotiate the purchase agreement on behalf of the Underwriter. Underwriter’s counsel fees are often paid from the expense component of the underwriter’s gross spread. Issuers should be mindful of this significant expense and reach agreement early in the sale process over the fee to be charged by underwriter’s counsel.
As discussed in the GFOA Best Practice: Issuer’s Role in Selection of Underwriter’s Counsel Best Practice,GFOA recommends that issuers minimize their involvement in the selection of underwriter’s counsel. Issuers should have a role in ensuring that underwriter’s counsel is competent, has no conflicts of interest, and that costs are reasonable. However, issuers should understand that the underwriter ultimately bears responsibility for the adequacy of its own counsel.
While underwriter’s counsel has sometimes been tasked with the preparation of disclosure documents, including the official statement, in negotiated transactions, GFOA recommends that issuers rely upon their bond counsel, disclosure counsel, or municipal advisor to oversee preparation of these key documents, as these professionals are selected by the issuer and can assist with responsibilities after the transaction. GFOA further recommends that issuers clearly communicate with the various legal advisors to determine the scope of services to be provided by each to avoid duplication or omission of key services. Issuers should discuss any potential conflicts of interest with the team, especially if one firm is playing multiple roles in a bond transaction.
Role Before and During the Bond Issuance Process
A separate Disclosure Counsel is sometimes retained by a government to assist with federal securities law and disclosure documents related to public bond issuances. This may include, but is not limited to, drafting or reviewing documents such as the official statement, continuing disclosure agreements (CDAs), notices of sale or intention to sell, and preparation of negative assurance on the official statement. In addition to the documents, disclosure counsel may also assist with the due diligence process leading up to the issuance of the bonds including a review of past compliance with continuing disclosure agreements and may review the issuer’s Comprehensive Annual Financial Report, website, and other information to ensure consistency and appropriateness of information provided to the market. These services are often provided by bond counsel, but issuers may choose to hire a separate disclosure counsel in situations where their bond counsel firm lacks the necessary securities law expertise or in situations where there are unique and/or complex disclosure issues to navigate in the bond transaction.
Role Following the Bond Issuance Process
Following issuance of bonds, governments are responsible for managing agreed upon post-issuance compliance responsibilities, including compliance with CDAs as well as federal and state tax law and regulations. Disclosure Counsel may be retained for periods following issuance of bonds to coordinate annual filings with the issuer and to confirm that the content and timeliness of the filings satisfy the requirements of the CDAs. In addition, disclosure counsel may assist with other material event filings and may assist issuers in any enforcement proceedings with the SEC, IRS, or other regulatory bodies. Disclosure counsel may also review or draft policies and/or procedures related to post-issuance compliance.
SPECIAL TAX COUNSEL
Issuers sometimes retain a special tax counsel to provide expertise with respect to tax law on a bond transaction. While this is a function often provided by bond counsel, issuers may consider a special tax counsel in situations where their bond counsel firm lacks the necessary tax expertise or in situations where there are unique and/or complex tax issues to navigate in the bond transaction. Services provided during bond issuance may include preparation of the formal tax opinion, review of the official statement, and assistance with IRS private letter rulings. After the bonds are issued special tax counsel may also assist with IRS audits and if any tax violations have occurred, may assist with any remediation procedures such as the IRS Voluntary Closing Agreement Program (VCAP). Issuers may wish to consider retaining a separate law firm if an audit brings into question a tax opinion previously provided by special tax counsel.
For private placements, direct purchases, bank loans, and letter of credit and standby agreements, a bank often retains their own counsel to prepare various legal documents associated with the financing transaction. Document preparation, including the loan agreement, continuing covenant agreement, and/or credit enhancement agreement, generally occurs after an issuer conducts a solicitation and selects a bank based on it having the best proposed term sheet.
In certain variable-rate transactions, bank counsel may also draft letter(s) of credit and/or standby purchase agreements on behalf of the bank. These agreements, including covenants placed on the government not included in the original term sheet, are negotiable and should be carefully reviewed by the government and its municipal advisors. Bank counsel fees are often paid by the government involved in the transaction.