CDFA Spotlight: Bond Counsel Selection By Stan Provus

Preface

This article reviews how issuers should go about selecting bond counsel. Bond counsel is a key professional in any municipal bond transaction. In many respects, bond counsel is the quarterback of a municipal bond sale, beyond directly performing the services reviewed in this article, an issuer’s bond counsel also coordinates the roles of other professionals such as trustees and underwriters.

Role of Bond Counsel

Bond counsel is one of the key participants involved with issuing debt and is usually selected in the very early stages of the process. The role of counsel varies depending on the complexity of the issue. Bond counsel assembles all relevant materials into a Transcript of Proceedings, which is used as a permanent record or reference. The Transcript of Proceedings details all the steps in the issuance and the terms and conditions of the payment and security arrangements.

In addition, bond counsel carries out the following tasks, among others:
· Prepares and oversees bond proceedings;
· Gets required government approval;
· Ensures that the issuer meets all the legal requirements and authorization of the bond offering;
· Discloses and analyzes all relevant legal proceedings that may have a bearing on the validity of the offering;
· Interprets relevant regulations and laws and assists in structuring the issue;
· Writes key financing documents

One of the key documents written by bond counsel is the bond opinion. A bond opinion is a legal opinion that covers two main issues:

1. It ensures that the bonds are legal, valid and binding obligations of the issuer; and

2. It verifies the tax status of the debt; that is, interest on the bonds is exempt from federal income taxes (as well as state and local taxes in some cases).

Selection and Evaluation of Bond Counsel

The highly specialized professional services rendered by bond counsel are essential to the implementation of an Issuers' financing programs. Although there is no single correct approach, the selection and evaluation process should enable an Issuer to identify law firms likely to perform competently and efficiently and thereby protect and promote the Issuer's interests. While price is one of several major factors for Issuers to consider, it should not be the overriding factor, since lack of other qualifications (experience, quality of personnel to handle the matter, etc.) could create unwanted delays and subject the Issuer to unnecessary risks, particularly in light of stepped-up enforcement activities of the SEC and the IRS directed against Issuers.

The selection process should begin with a Request for Proposal (RFP). Issuers also publish Request for Qualifications (RFQ). The RFQ enables the Issuer to receive from bond counsel firms statements of their qualifications and defers fee considerations until after a careful and studied evaluation of qualifications. After a group of well-qualified bond counsel firms has been chosen from the original responses, the Issuer may solicit more specific proposals from those firms addressing fees, financing structure, staffing, and other terms for the particular engagement.

The RFP needs to include all of the types of information reviewed in this article. The goal of the selection process should be to select the most qualified firm or individual counsel at the best possible price, which may or may not be the lowest price offered by firms responding to your RFP. The selection process should be made as competitive as possible. The RFP/RFQ should include all the appropriate criteria for the selection process. In addition to following an Issuer's adopted hiring procedures, state and local laws need to be examined to determine what requirements of any general procurement laws may be applicable.

RFP Process

Issuer’s should maintain a list of qualified bond counsel professionals as a database for RFPs. This may include firms an Issuer has engaged in the past with good results as well as others who have requested to be on the RFP list. In addition, the “Red Book”--- "The Bond Buyer's Municipal Marketplace" (more commonly known as the "Red Book") lists nationally recognized bond counsels by location.

RFPs today may be distributed in a variety of ways. They may be advertised in Bond Buyer and/or sent directly to firms via email or snail mail (most are sent by email today). The RFP may also be posted on an issuer’s web site. If you send the RFP via email it is a good idea to attach a return receipt for the notice to ensure professionals receive it. RFP responses are also routinely submitted by email today.

Before an issuer sends out an RFP, it must decide what information it wants to receive from respondents and how proposals will be evaluated and ranked. The ranking process may or may not include personal interviews with the highest ranked firms. The ranking process or proposal scoring system should detail the weight given to various selection factors based on the written proposal; e.g. assign points to selection factors. In addition, it minimizes subjectivity in the scoring process if an issuer uses a scoring guide to assign points for selection factors. For example, one selection factor might be experience with similar bond issues. The scoring guide can assign points for this factor based on the dollar volume or number of similar deals.

Prior to sending out the RFP, the issuer must also decide the organizational structure for the selection process. Many issuers create Selection Committees to review and rank proposals as well as conduct personal interviews. Selection Committees may include both staff and board members.

Content of RFPs

This section presents major sections and sample language for a bond counsel RFP. The sample language is in italics. The sample language is reasonably general. Other sections such as who is available to answer questions, where, how, and when to submit responses, and related information is omitted. In an actual RFP, an Issuer would customize these sections with more specific information about the bond issue(s) the Issuer contemplates doing either in the near future or over a more extended period of time.

Scope of Services

This section should describe all professional services the issuer expects the bond counsel to perform. For example:

Bond Counsel shall provide all necessary legal services necessary to issue the Bonds, including but not limited to: (1) providing an objective legal opinion with respect to the authorization and issuance of debt obligations and whether interest paid is tax-exempt under federal and/or state laws and regulations; (2) preparing authorizing documents and any other document needed in connection with the issuance of the Bonds, including closing documents and transcripts; (3) reviewing use of proceeds to ensure compliance with applicable state and/or federal law and regulations; (4) preparing all documents and materials necessary to comply with all applicable "continuing disclosure" requirements for transactions; (5) participating, if requested, in activities associated with rating agency and/or bond insurer reviews; (6) offering continuing legal advice, as needed, on issues related to the sale of the Bonds, any issues that arise post-sale, the trustee administration of obligations, and in particular, any actions necessary to ensure that interest will continue to be tax-exempt; and (7) providing other legal opinions or advice as required.

Oral Presentations

The issuer reserves the right to invite the respondents to make oral presentations. Currently, the issuer does not expect to require oral presentations. If oral presentations are required, the issuer reserves the right to limit the number of oral presentations and will set forth presentation guidelines at that time.

Effective Period of Responses

Responses must remain in effect until the respondent withdraws the response in writing, a contract is executed, or the RFP is canceled, whichever occurs first.

Right of Rejection; Waiver

Notwithstanding any other provisions of this RFP, the issuer reserves the right to reject any or all Responses in its sole discretion, to waive any irregularity or informality in a Response, and to accept or reject any item or combination of items, when to do so would be in the Issuer’s interest.

The Response

The purpose of this section is to state the terms and conditions that will govern the Response. The firm's name and address should be on each page of the Response.

1. Cover Letter
Your firm should include a cover letter with the name and contact information of the person or persons authorized to represent the respondent regarding all matters related to the Response.

2. Statement of Qualifications
All firms must have a minimum three years of municipal finance experience serving as bond counsel and disclosure counsel with respect to public finance transactions.
Briefly state the qualifications of the firm (the "Description"). The issuer requests that the
Description be as short as possible, preferably no more than two pages. To the extent pertinent information is available on the Internet, the Description may cross-reference to such information. The Description should include the following:

Identify the individual(s) who will manage (individually or collectively, the "Manager") this financing on a day-to-day basis. Describe the Manager's background or include a web address that contains such information. Define the Manager's position within the firm and indicate the degree to which the Manager will be able to commit the firm’s resources to the issuer. Finally, describe the Manager's availability and the Manager's other commitments and how those commitments might impact the Manager's availability.
Identify other professionals and members of your firm who will be assigned to work on this project. Describe each member's role and responsibilities and the aspects of each member's background relevant to this transaction. Briefly describe your firm's qualifications, including a short list of relevant transactions. Include any other information that your firm considers essential to a fair evaluation of your firm's experience and capabilities.

Include a statement that your firm and key professionals do not have or anticipate having a potential conflict of interest with the issuer. Include a statement by a person or persons authorized by your firm clearly indicating that this Statement of Qualifications is binding.
Include a statement binding your firm during the term of the Contract to maintain in full force and effect professional liability insurance covering, inter alia, securities- and malpractice-related claims (the "Insurance"). Please provide a description of the coverage (including amount) of the Insurance. Acknowledge that if selected as bond counsel, your firm will provide to us proof of such Insurance immediately upon request. Please list any pending claims or disputes relating to prior opinions as counsel in any municipal finance transaction. The issuer reserves the right to request references after submission of the Response.

Also provide two-investment banker and two issuer references for which the attorney(s) who will provide services provided approving opinions within the past two years.

3. Price Proposal
There are many ways to request price information. In single, relatively small IDB transactions, we believe it is a good idea to describe the deal in as much detail as possible and then ask for hourly rates and expenses as well as a maximum fee. For example, please provide your hourly rates, expenses, and a maximum fee for a $5 million qualified small issue, variable-rate demand obligation bond (low floater), secured by at least an “A” rated bank Letter of Credit.

An Issuer may also ask for a schedule of fees based on potential issues of from $1 million to $50 million and also provide the assumptions upon which to base fees such as the number, average size, and types of bond issues.

Here is another example of a request for pricing information: Briefly submit a price proposal (the "Price Proposal") that will describe the basis for bond counsel compensation for the transaction. It is requested that the Price Proposal be as short as possible, preferably no more than one page. The Price Proposal may be based on the size and type of the issue, hourly rates, "blended" hourly rates of the several lawyers to be involved (if applicable), or a set maximum fee. In addition, respondents have the option of including a discussion of any methods of compensation or budgeting they have employed in the past with other similar issuers.

The RFP evaluation criteria may or may not assign points based on price. Some issuers do this, while others do not. Regardless of whether the response evaluation criteria include pricing, it is very helpful to get pricing information for final negotiations of bond counsel fees. Some issuers include a statement along these lines: Prior to the award of the Contract, the issuer intends to enter into negotiations concerning a fee structure, which provides the best overall value to the issuer. If an agreement cannot be reached
with the highest ranked firm, negotiations will be attempted with the other firms.

4. Evaluation Criteria

Response evaluation criteria and related ranking points include:

1.General quality of response (10)
2. Qualifications of Attorney (15)
3. Qualifications/depth/strength of firm (10)—this factor may not be as important for smaller, plain vanilla deals
4. Experience with similar transactions, particularly the assigned attorney(s) (10)
5. Experience with state statutes and bond law (20)
6. Federal tax law experience (20)
7. Ability to meet schedules, due diligence, reference check (15)
8. Cost. Proposed fees will not be part of the evaluation criteria but the issuer reserves the right to negotiate fees with the highest ranked respondent(s).

Some issuers choose to be less specific in assigning points in the RFP itself. For example: factors to be used in evaluating the responses will include, but are not limited to, the following:

1. The ability to provide the requested services.
2. Proposed fees and compensation.
3. Qualifications of staff to be assigned to engagement.
4. Quality and conciseness of responses.
5. Quality of references, if requested.

Fees and compensation will be an important factor in the evaluation of responses. However, the issuer will select the Response that demonstrates the” best value” overall, including proposed alternatives, and meets the objectives of the issuer.

The issuer is not required to select the low-cost respondent. The issuer reserves the right to negotiate a change in any element of the Contract or any part of the RFP.

Conclusion

Bond counsel selection is an extremely important part of the bond issuance process. Issuers should make the selection process as competitive as possible. The process should be fair and very defensible. The following references provide quality information about bond counsel selection:

A Guide to Selecting Financial Advisors and Underwriters: Writing RFPs and
Evaluating Proposals, Patricia A. Tigue, GFOA, 1997.

"Model Engagement Letters," National Association of Bond Lawyers, 1998.

“The Selection and Evaluation of Bond Counsel” National Association of Bond
Lawyers, 1998.

Professional Selection Policy, Arkansas Development Finance Authority, 2006

This article is intended to provide accurate and authoritative information in regard to the subject matter covered. The author and CDFA are not herein engaged in rendering legal, accounting or other professional services, nor does it intend that the material included herein be relied upon to the exclusion of outside counsel. CDFA is not responsible for the accuracy of the information provided in this fact sheet. The information provided has been collected from a variety of sources. Those seeking to conduct complex financial deals using the tools mentioned in this document are encouraged to seek the advice of a skilled legal/consulting professional.