Dodd-Frank Act and Its Impact on the Municipal Issuers, Underwriters, and Advisors

By Melerhenry, Todd | South Dakota Law Review, Winter 2019 | Go to article overview

Dodd-Frank Act and Its Impact on the Municipal Issuers, Underwriters, and Advisors


Melerhenry, Todd, South Dakota Law Review


I. INTRODUCTION

The municipal bond attorney practice in South Dakota can be traced back to the Boyce-Greeley Building in Sioux Falls. In 1932, George J. Danforth and Holton Davenport leased the southwest corner of the fourth floor of the Boyce-Greeley Building. (1) Shortly thereafter, George J. Danforth, Jr., joined the firm and later became South Dakota's first bond attorney. Since the late 1940s, Danforth & Danforth acted as bond counsel for most South Dakota municipalities. In 1987, Mark Meierhenry and I moved into the fourth floor of the Boyce-Greeley building where we shared office space with Danforth, Danforth & Johnson. (2) Having more time than billable hours, we had great discussions with Mr. Danforth about the history of the practice of law in Sioux Falls and the history of South Dakota's municipal bond practice. (3)

Gefke & Company was the only South Dakota investment banking firm in the state from the 1940s through the 1960s. (4) Fred Gefke, president of Gefke & Company, financed his underwriting of municipal bonds with The First National Bank in Sioux Falls. He obtained a loan, travelled the state, and underwrote city and school bonds. He returned to Sioux Falls and sold the bonds.

Mr. Danforth, as the only South Dakota bond attorney, often would travel with Fred Gefke doing municipal bond business. Traveling across South Dakota in the 1940s was a time-consuming process. Many roads were not paved, and in wet seasons, the traveler would have to back-track to avoid various unsurpassable water holes on the road. (5) There were times that the two would hunt while traveling. One would sit on the hood and shoot pheasants, and the other would drive.

During one of these return trips from western South Dakota, Mr. Danforth and Fred Gefke stopped in Kadoka for gas. The gas station attendant in coveralls came out to fill their car with gas. He asked what the two fellows did. Fred explained that he purchased and sold municipal bonds, and that Danforth was a bond attorney. The man said that it was a fortuitous meeting since he was the mayor, explaining that he had Kadoka bonds locked in his desk drawer for sale. (6) Gefke bought the bonds, threw them in the trunk, and continued on to Sioux Falls. The days of pheasant hunting while bond buying, however, are gone. Today, the bond market is larger, more complex, and highly regulated.

II. BACKGROUND

A. THE MUNICIPAL BONDS

The United States' municipal securities market had "over one million different municipal bonds outstanding" in 2011. (7) In South Dakota, there are 66 counties, (8) 310 cities and towns, (9) 149 school districts, (10) and many other governmental subdivisions. (11) These government issuers borrow money to finance capital projects and improvements when they cannot or should not be financed exclusively from current operating budgets. (12) The borrowings are evidenced by bonds, certificates, notes, and finance leases.

The process for financing projects typically includes these events: (1) Issuer defines the project; (2) Issuer retains professionals (bond counsel, (13) municipal advisor (14) and/or underwriter (15)); (3) Issuer determines the source of payment (general obligation, revenue, tax, special assessment); (16) (4) Issuer determines type of sale (public (17) or negotiated); (5) Issuer passes resolution or ordinance calling election; (6) Issuer holds election where required; (18) (7) Issuer passes resolution setting forth terms and conditions of the bonds; (8) In public offerings, distribution of the official statement; (19) (9) Bonds (20) are sold; and (10) Bonds are issued. (21)

Parties involved in the bonding process can be divided into two camps: (1) issuer's side, and (2) underwriter's side. The following parties could appear in a negotiated sale:

Issuer's Side             Underwriter's Side
Municipal Issuer (22)     Underwriter(s) (23)
Bond Counsel (24)         Trustee (25)
Municipal Advisor (26)    Credit Enhancer (27)
Issuer's General Counsel  Underwriter Counsel (28)
                          Disclosure Counsel (29)
                          Selling Group Counsel (30)
                          Credit Enhancer Counsel (31)
                          Feasibility Consultant (32)
                          Auditor (33)
                          Trustee's Counsel (34)

The key difference is that on the issuer's side, the bond counsel, municipal advisor, and general counsel statutorily owe the issuer a fiduciary duty. …

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