Every day, our more than 2,300 members work to instill confidence in the investing public that the municipal bonds they purchase are valid under the laws and rules that govern our markets.

The validity of a bond issue is critical to issuers, bondholders, underwriters, and counsel. Invalid bonds may not be repaid, and bondholders may risk losing the entirety of the debt service. They may also risk tax-exempt status since city and county obligations that have been issued without the required approvals are not tax-exempt even if they are enforceable on an estoppel or implied contract theory.[1]

Protecting our Municipal Markets

The practice of submitting state and municipal bonds to independent counsel for an opinion regarding their validity grew out of market turmoil in the late 1870s and early 1880s. Some municipalities and counties believed that the construction of a railroad or canal through their corporate limits would significantly increase assessed valuations within their limits. These communities issued bonds to finance related projects— often in amounts equal to, or even in excess of, their entire assessed valuations.

The result was inevitable. Widespread defaults occurred.

It was later discovered that many of the bonds were illegally issued, and courts ruled that many millions of dollars in bonds were invalid. The effect on municipal credit was alarming, and it became difficult to sell municipal bonds.

In order to assure investors in public securities that bonds were legally issued, dealers of municipal bonds began employing lawyers of outstanding reputation in the field of municipal law to specifically examine the proceedings under which the bonds were authorized to be issued and to render an opinion as to the validity of the bonds.

The experiment succeeded. The investing public had confidence in the ability and integrity of these lawyers and would purchase bonds if their validity was approved by these lawyers, giving rise to an area of legal practice that continues today.[2]

[1] Power Equip. Co. v. United States, 748 F.2d 1130 (6th Cir. 1984).

[2] David M. Mood, Fundamentals of Investment Banking (Prentice-Hall, 1946) and National Association of Bond Lawyers, Bond Lawyers and Bond Law: An Oral History (Frederick O. Kiel ed., 1992).

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