LIST OF COMMENTERS responding to PROPOSED RULMAKING STATE AND LOCAL GOVERNMENT SERIES SECURITIES Published July 26, 1996 COMMENTER

: The San Joaquin Hills Transportation Corridor Agency American Bar Association Arter Hadden Haynes & Miller National Association of Bond Lawyers Sherman & Howard L.L.C. * * * * *

COMMENT LETTERS BEGIN HERE * * * * *

Comment # 1 -- The San Joaquin Hills Transportation Corridor Agency

August 19, 1996 Mr. Fred Pyatt Division of Special Investments Bureau of the Public Debt Department of the Treasury 200 3rd Street Parkersburg, WV 26101-0396 Re: Regulations Governing United States Treasury Certificates of Indebtedness, Treasury Notes and Treasury Bonds - State and Local Government Series (SLGs) - Extension of Bond Maturity Limit Beyond Thirty Years Ladies and Gentlemen: Introduction The San Joaquin Hills Transportation Corridor Agency (the "Agency") is a political subdivision formed by ten California cities and the County of Orange to provide toll roads in Southern California. The Agency is grateful for the positive and extensive proposed changes in the offering of SLGs as provided in the proposed rule for SLGs, 31 CFR Part 344, as published in the Federal Register on July 26, 1996 (the "Proposed Rule"). The Proposed Rule demonstrates a heightened sensitivity to the financing needs of state and local governments (including their need to comply with the Internal Revenue Code). However, the Proposed Rule does not address certain needs of the Agency; and, this letter is to request

that either the Proposed Rule be revised to permit the Department of the Treasury to issue SLGs with a term to maturity in excess of thirty years or that the Agency be otherwise permitted to purchase such SLGs. To effectuate its governmental purpose, in 1993 the Agency issued $1,169,576,848.05 of Toll Road Revenue Bonds (the "Prior Bonds") to construct a transportation corridor (the "Project"). For cash flow purposes, certain (but not all) of the Prior Bonds were issued with maturities in excess of thirty years (the longest Prior Bond matures on January 1, 2033); certain of the Prior Bond maturities (including certain of those Prior Bonds with maturities in excess of thirty years) are noncallable. In the judgment of the Agency and its financial consultants, this structure provided the least expensive financing of the Project as of the date of structuring and pricing of the Prior Bonds. Noncallable tax-exempt bonds with maturities in excess of thirty years have been utilized for other revenue bond projects, such as public power and airport projects. The Project is now nearing completion and the Agency anticipates advance refunding the Prior Bonds in the near future to appropriately tailor cashflows to meet the current needs of the Agency and to possibly achieve savings. Such a refunding transaction would include the purchase of securities to fund a defeasance escrow for the Prior Bonds, including those Prior Bonds with maturities in excess of 30 years. The Agency has carefully examined possible defeasance securities for a Prior Bond escrow. The Prior Bond documents generally provide that defeasance securities only include direct obligations of the United States of America. Unless this request is granted, the Agency does not expect that there will be available defeasance securities with terms to maturity in excess of thirty years to fund its escrow. Because of this fact, if the request described herein is not granted, the Agency expects that it will have to purchase defeasance securities which mature several years prior to the last payment date in the Prior Bond escrow. For defeasance purposes, the Agency cannot assume that, after the defeasance securities mature, it will purchase additional securities that yield above 0.00%. Consequently, the Agency will have to invest more monies to fund the Prior Bond defeasance requirements to offset the "lost" earnings it could not achieve because current defeasance securities, such as SLGs, have a term to maturity not greater than thirty years. Based on current market conditions, the Agency anticipates spending as much as an additional fifty million dollars to fund its escrow because of this fact. This additional cost is expected to be funded by the sales proceeds of an additional fifty million principal amount of tax-exempt refunding bonds. The Agency has carefully analyzed all currently available escrow structures to avoid the above-described result. Purchasing zero coupon SLGs to "blend down" its escrow (after the currently available defeasance securities mature) is not a practical alternative given the Prior Bond yield and the current market rates for SLGs (i.e., the current market rates for SLGs do not necessitate the Agency "blending down" its escrow for the period of time between when currently available defeasance securities mature and the end of the escrow). The Agency has also determined that it is impractical to assume that "float contracts" or obligations of the Resolution Funding Corporation would be available to fund the Agency's escrow because of its term to maturity. The Agency

has also examined purchasing "specially tailored" agency securities. However, those securities are not defeasance securities and the Agency has been advised by bond counsel that those securities raise issues regarding "market pricing" under Section 148 o f the Internal Revenue Code. Request The Agency believes that the only practical alternative to fund a cost effective defeasance escrow for the Prior Bonds is to utilize SLGs with maturities in excess of thirty years, and the Agency hereby requests that those securities be made available. The maximum maturity necessary for the Agency's present needs would not be in excess of thirty-six and a half years. If it is difficult to price SLGs with a maturity in excess of thirty years, the Agency would agree to accept the same pricing (e.g., interest rate) for those maturities as a thirty year SLG. If the above-described SLGs are offered, the Agency would expect to save as much as one hundred and fifty million dollars of additional debt service on the expected additional fifty million of tax-exempt bonds it would be forced to issue to fund the additional escrow cost described above. If the Agency's request is granted, all parties will benefit: the federal government (which borrows Agency's money at rates less than the then prevailing market rate and also benefits from less tax-exempt bonds being issued), the Agency (which will have more funds available to apply for public purposes), and the public (which ultimately pays for the Agency's costs). The Agency notes that its request is similar in concept to a change in the Proposed Rule permitting zero coupon SLGs with maturities of less than thirty days. Every penny counts in California. Please help us in fulfilling our governmental purpose at the least cost to the public by granting our request and permitting the issuance of SLGs with a term to maturity in excess of thirty years. If you have any questions, please contact our bond counsel, Carol L. Lew of Stradling, Yocca, Carlson & Rauth at (714) 725-4237 or the undersigned at (714) 436-9800. Best regards, Colleen Clark Director of Finance cc: Ms. Linda Schakel; Department of the Treasury Carol Lew, Esq., Stradling Yocca; Carlson & Rauth W. D. Kreutzen, TCA

________________________________________________________________________ _______ Comment # 2 -- American Bar Association

COMMENTS ON PROPOSED RULEMAKING: REGULATIONS GOVERNING UNITED STATES TREASURY CERTIFICATES OF INDEBTEDNESS, TREASURY NOTES, AND TREASURY BONDS -- STATE AND LOCAL GOVERNMENT SERIES ("SLGS"), 31 CFR PART 344

(DEPARTMENT OF THE TREASURY CIRCULAR, PUBLIC DEBT SERIES NO. 3-72) The following comments and recommendations express the individual views of the members of the Section of Taxation who prepared them and do not represent the position of the American Bar Association or the Section of Taxation. These comments and recommendations were prepared by members of the Committee on Tax-Exempt Financing. Primary responsibility was taken by Valerie Pearsall Roberts, chair of the Task Force on Refunding Bonds. Coordinating responsibility was taken by Linda L. D'Onofrio, Chair of the Committee. Comments were submitted by David L. Miller. These comments were reviewed by William M. Loafman of the Section's Committee on Government Submissions, and by George C. Howell, III, the Council Director for the Committee on Tax-Exempt Financing. Although many of the members of the Section of Taxation who participated in preparing these comments and recommendations have clients who would be affected by the federal tax principles addressed, or have advised clients on the application of such principles, no such member (or the firm or organization to which such member belongs) has been engaged by a client to make a governmental submission with respect to or otherwise influence the development or outcome of, the specific subject matter of these comments. Contact Persons: D'Onofrio Dated: Valerie Pearsall Roberts (212) 837-6080 August 26, 1996 Linda L.

(212) 326-8356

I. EXECUTIVE SUMMARY The Members of the American Bar Association Tax Section Committee on Tax-Exempt Financing (the "Members") applaud the Department of the Treasury ("Treasury") for its Proposed Rule: Regulations Governing United States Treasury Certificates of Indebtedness, Treasury Notes, and Treasury Bonds -- State and Local Government Series ("SLGS"), 31 CFR PART 344 (Department of the Treasury Circular, Public Debt Series No. 372) (the "Proposed Regulations"). We take this opportunity to comment on the contents of the Proposed Regulations. As an initial matter, we heartily commend Department of the Treasury ("Treasury") for its thoughtful and responsive approach to solving many of the problems existing under the current SLGS regulations. We support each and every one of the changes contained in the Proposed Regulations : they will make the SLGS program far more responsive to issuers' needs and will likely result in a dramatic increase in the use of SLGS. II. COMMENTS ON SPECIFIC PROPOSED CHANGES AND ON ISSUES TO BE RECONSIDERED AT A LATER DATE. We applaud Treasury and the Bureau of Public Debt (the "Bureau") for their willingness to consider comments made by the Members in their May 30, 1996 report (the "May 30, 1996 Comments") on the Advance Notice of Proposed Rulemaking: Regulations Governing United States Treasury Certificates of Indebtedness, Treasury Notes, and Treasury Bonds -State and Local Government Series, 31 CFR Part 344 (Department of the Treasury Circular, Public Debt Series No. 3-72) (the "Notice"). In the May 30, 1996 Comments, the Members requested several

modifications in addition to the proposed changes described in the Notice. In response to those comments, the preamble to the Proposed Regulations provides that the Treasury and the Bureau will consider (at a later date) regulations which would permit (1) issuance of deep discount SLGS bearing no current interest (similar to stripped Treasury securities, or STRIPs); (2) direct downloading of SLGS subscriptions enabling issuers to avoid the tedious procedure of typing onto carbonless forms all information pertaining to each SLGS including interest rate, issue date, first interest payment date, final maturity date and principal amount; and (3) the transferability of SLGS. We commend Treasury and the Bureau for their willingness to consider regulations addressing those requests at a later date. In addition, we commend Treasury and the Bureau for clarifying that (1) the arbitrage and rebate regulations of the Treasury Regulations Sections are more appropriate authority than the SLGS regulations for enforcing yield restriction and rebate rules, and (2) the state or local issuer (rather than the trustee bank or the conduit borrower) is the owner of the SLGS, so that transferability of SLGS is generally permitted between various bond issues of that state or local issuer. In this report, we specifically comment on (1) the apparent elimination of the "mailbox rule"; (2) Treasury's right to refuse to issue SLGS or to revoke outstanding subscriptions of SLGS; and (3) technical points such as clarification of the use of fax machines to file SLGS subscriptions. A. Elimination of the Mailbox Rule. Under both the current and Proposed Regulations, the maximum interest rates for SLGS are determined daily. Under the current regulations, the day's maximum interest rates can be "locked in" by filing a SLGS subscription on that date. Issuers have relied almost invariably on the "mailbox rule" especially when pricing is completed after normal business hours. Under that rule, a subscription sent via certified or registered mail is deemed filed on the date postmarked regardless of when received. Many issuers send an initial subscription by registered mail to lock in the day's interest rate and a duplicate via fax or overnight carrier to alert the Bureau, as soon as possible, of the principal amount of SLGS requested. The Proposed Regulations decrease the time required between the initial subscription for SLGS and the issue date from 15 days to 5 days (or 7 days depending on the principal amount of the subscription), and would lock in the maximum interest rates on the date the initial subscription is received by the Bureau, thus effectively eliminating the mailbox rule. The current SLGS regulations, section 344.2(b) for time deposit securities provides in pertinent part: "The applicable rate table for any subscription is the one in effect on the date the initial subscription is telecopied, if transmitted by facsimile equipment, postmarked, if mailed or carrier date stamped, if the initial subscription is delivered by another carrier." The Proposed Regulations provide: "The applicable rate table for any subscription is the one in effect on the date the initial subscription is received at Public Debt." At the recent ABA annual meeting, a representative of the Treasury Department explained that the reason for this change is that the new shorter filing periods (5 or 7 days, as the case may be) made this modification necessary due to the processing time required by the Bureau. We believe that there are two distinct functions of an initial SLGS subscription: (1) to lock in the interest rate applicable to the day

the subscription is filed, and (2) to advise the Bureau as to the principal amount of SLGS to be issued on any date. Although we sympathize with the Bureau's processing needs, we believe that an issuer's ability to lock in a specific day's interest rate is crucial for a refunding or escrow restructuring. Absent the ability to lock in the SLGS rate on the pricing date many issuers will choose to purchase open market securities to lock in the required yield. We strongly advocate retention of the mailbox rule for purposes of locking in the interest rate. In the event a fax is not received by the Bureau prior to midnight on the pricing date, the issuer's proof of certified or registered mailing of the subscription should serve to lock in the rate. The ability to rely on the mailbox rule is an issue of overwhelming importance. Locking in the interest rates available on the day of pricing cannot be made dependent upon the Bureau's receipt of the initial subscription on that date. Nor would pricing 8 or more days prior to the issue date compensate for inability to rely on the mailbox rule since the essence of the problem is that an issuer cannot guarantee that the Bureau will receive the subscription on the same day it is submitted. Furthermore, issuers surveyed have encountered great difficulty in confirming that subscriptions have been received by the Bureau. As noted in section C, hereof, even a confirmation generated by the sender's fax machine is no guarante e of receipt by the Bureau. In addition, elimination of the mailbox rule will be a burden on the smaller trustees, financial advisors and others who may not have full access to fax machines but, who, nevertheless, want to lock in a given maximum interest rate. We are also concerned that the rule puts too much reliance on a particular technology and query what happens if there is a power outage in Parkersburg or if so many issuers are attempting to fax SLGS subscriptions to Parkersburg simultaneously that a fax is not received by the Bureau on a timely basis. Retaining the mailbox rule keeps a safety valve in the process for such failures in the fax technology. Accordingly, we strongly urge retention of the mailbox rule at least for the purpose of locking in the pricing day's interest rates. The mailbox rule should be retained as an option for issuers which do not choose to use the "actual receipt" rule. Our proposal would require a two step initial filing by issuers wishing to rely on the mailbox rule. To accommodate the Bureau's need for 7 days (or 5 days) notice, the regulations should permit the issuer to lock in the maximum interest rate by mailing the initial subscription, in reliance on the mailbox rule, so long as a copy of the initial subscription form (clearly marked to indicate it is a duplicate of the mailed subscription) together with proof of mailing is separately sent by means reasonably designed to arrive at the Bureau 7 days (or 5 days) prior to the issue date (e.g., fax, federal express, overnight mail or hand delivery). We believe the optional two step filing procedure for issuers wishing to rely on the mailbox rule should provide the Bureau with sufficient advance notice. If there is a need for greater assurance of actual receipt, we would urge the Bureau to establish reasonable procedures to confirm its receipt of subscriptions. B. Treasury's Right to Refuse to Issue SLGS and to Revoke Outstanding Subscriptions. The current regulations provide certain "reservations" at Section 344.1(f) as follows: "The Secretary of the Treasury reserves the right... (1) To reject any application for the purchase of securities under this offering;

(2) To refuse to issue any such securities in any case or any class(es) of cases; and (3) To revoke the issuance of any security, and to declare the subscriber ineligible thereafter to subscribe for any securities under this offering, if any security is issued on the basis of an improper certification or other misrepresentation by the subscriber, other than as a result of an inadvertent error, if the Secretary deems such action to be in the public interest." The Proposed Regulations at Section 344.1(f) provide: The Secretary of the Treasury reserves the right... (1) To reject any application for the purchase of securities under this offering; (2) To refuse to issue any such securities in any case or any class(es) of cases; and (3) To revoke the issuance of any security, and to declare the subscriber ineligible thereafter to subscribe for any securities under this offering, if: (i) any security is issued on the basis of an improper certification or other misrepresentation by the subscriber (other than as a result of an inadvertent error), (ii) the issuance of any security is in conjunction with a violation of the tax regulations as determined by the Internal Revenue Service, or (iii) the Secretary deems such action to be in the public interest. (This limited right to revoke for misrepresentations and improper certifications was first made part of the SLGS regulations in 1986. Prior to that time, the Secretary could only refuse to issue the securities.) The Proposed Regulations modify the rule of Section 344.1(f)(3), primarily in the addition of subsection 3(ii) (reserving the Treasury's right to refuse issuance of or to revoke issued SLGS if the issuance of any security is in conjunction with a violation of the tax regulations as determined by the Internal Revenue Service ("IRS")), and the independence of subsection 3(iii) reserving the Treasury's right to refuse issuance of or to revoke issued SLGS if the Secretary deems such action to be in the public interest regardless of whether there has been a misrepresentation or violation of the tax regulations. Currently, the Secretary can refuse issuance of or can revoke issuance of SLGS only if there is a misrepresentation or improper certification and the Secretary deems revocation to be in the public interest. This is an understandable standard that bond counsel have found acceptable. The new language adds two very ambiguous categories that may lead to a refusal to issue or to a revocation. It is unclear wh ether an IRS determination of taxability of an advance refunding constitutes a "violation" that will also lead to revocation of SLG investments. Even more nebulous is the standard for the open-ended refusal/revocation of subsection 3(iii) if the Secretary deems such action to be in the public interest. The importance of this issue in the context of advance refundings cannot be overemphasized. "Defeasance" is part of the contract between the holder of the refunded bond and the issuer. Typically the defeasance clause of the contract requires the issuer to post non-callable U.S. Treasury securities with unconditional cashflow sufficient to pay debt service (and call premium) on the refunded bonds. Non-callable open market securities have no possibility of revocation after issuance. It should be the intent of the SLGS program to offer securities of the same quality. If there is even a hypothetical possibility that the issuer will have its SLGS revoked by the Secretary under an ambiguous standard, bond

counsel and trustees will be unable to conclude that interest bearing SLGS constitute defeasance securities. We are concerned that establishing a SLGS program that creates more uncertainty as to defeasance with SLGS (than would exist with a portfolio of open market securities) seriously undermines Treasury's and the Bureau's goal of providing a SLGS program which is responsive to issuers' needs and which will be widely used for the investment of bond proceeds, especially for advance refunding escrows. In its present form, the Proposed Regulation creates a significant incentive for issuers to design advance refunding escrows using open market Treasuries rather than SLGS. Accordingly, we recommend that the Proposed Regulations be modified to reinstate the existing limited language on refusal to issue and on revocation. Perhaps the changes to the revocation provisions were made to conform those provisions with the Bureau's decision to eliminate almost all "certifications." It would be far better to have some form of general certification, with revocation limited to improper certifications, than to eliminate the two-pronged test required by the current regulations and permit refusal to issue or revocation based on a nebulous standard. As an alternative to the refusal to issue or the revocation of previously issued SLGS, Treasury might consider imposing a monetary penalty or a bar to the issuer's future purchase of SLGS for a specified time period. C. Technical Comments on the Transmission of SLGS Subscriptions. The Proposed Regulations Section 344.3(b)(1) specifically permit subscriptions to be transmitted to the Bureau by fax, carrier service or U.S. Postal Service. A faxed subscription must be followed by submission of the original subscription received by the Bureau no later than the issue date. At the ABA meeting on August 2, 1996, a Treasury Official assured us that the Bureau's fax machines at Parkersburg operate 24 hours per day. Nonetheless, we believe there should be some clarification in the Proposed Regulations as to the rules to be applied to receipt of faxed subscriptions, since it is likely that less than 100% of faxes transmitted will be timely received at Parkersburg due to: (1) transmission problems; (2) fax machine congestion; (3) mechanical problems; and (4) other unforeseen problems. For example, an issuer may fax an initial subscription and the issuer's fax machine may indicate receipt of that subscription at Parkersburg. However, if there was a paper jam in the receiving machine, the Bureau would not have received the subscription, and the issuer might not be entitled to rely on that day's SLGS interest rates. Since certainty in locking in the rates is crucial in a refunding or escrow restructuring, we request additional clarification of the rules applicable to receipt of subscriptions. ________________________________________________________________________ _ Comment # 3 - Arter Hadden Haynes & Miller

August 26, 1996 Comments of David L. Miller on proposed SLGs Regulations I am an attorney specializing in advance refunding bond transactions. I represent many issuers, investment bankers and

financial advisors in such transactions. In such transactions, my firm typically is responsible for filing SLGs for these clients. Over the last 22 years we have been involved in more than a thousand SLG filings for issuers in every state in the Union. Congratulations on a job well done. The new regulations give much needed flexibility to issuers. It is especially useful that the new rules have repealed the all-or-none rule, making it possible for issuers to use the SLGs program in conjunction with a portfolio of open markets, and the opening of the program to the investment of gross proceeds that are subject only to rebate. The new regulations make a serious error in expanding the authority of the Secretary to revoke subscriptions. To comply with the underlying bond documents, municipal advance refundings must provide an escrow of Treasury securities that are non-callable, irrevocable and which provide absolute assurance to the bondholder that the principal and interest on the portfolio will be paid. Non-callable open market Treasury securities provide that assurance. SLGs must provide similar assurance. I understand that both NABL and the Committee on Tax-exempt Financing of the Tax Section of the ABA have furnished comments in this regard. The comments both identify the same problem, but they differ slightly in their recommended solution (My comments are based on draft versions of their comments. I have not seen their final versions). NABL would fix the problem by having a clearer standard for revocation stated in the text of the regulation. (for example, by revising Section 344.1(f)(3) to read "To revoke the issuance of any security, and to declare the subscriber ineligible thereafter to subscribe for any securities under this offering if the subscription is inconsistent with the requirements of this regulation and the Secretary deems such action to be in the public interest." The NABL proposal works only if NABLs other requested clarification as to the types of funds that may be invested in SLGs. This would require change to Section 344.0 to reference a clear standard such as a possible new 344.0(d) (and renumber current (d) to (e)) "a government body may purchase securities under this offering with any amounts which may assist the government body in complying with applicable provisions of the Internal Revenue Code relating to the tax-exemption of its debt." The ABA approach to the problem would be to re-instate the previous language of Section 344.1(f)(3) to read "To revoke the issuance of any security, and to declare the subscriber ineligible thereafter to subscribe for any securities under this offering if the security is issued on the basis of an improper certification or other misrepresentation by the subscriber, other than the result of inadvertent error, if the Secretary deems such action to be in the public interest." The ABA approach would also require the reinstitution of one "certification" of the issuer that the amounts invested consist solely of "gross proceeds" of the issue. The form of the initial subscription in Section 344.3(b)would have to be modified to contain that certification. Either the NABL approach or the ABA approach would be effective. The ABA approach may create a greater degree of certainty that the NABL approach because it specifically includes a reference to "inadvertent error," and the concept of "gross proceeds" is clearly understood by the bond community.

I also support the ABA suggestion that the elimination of the mailbox rule puts too great a reliance on the fax technology. The proposed regulations have properly identified a need for the Bureau of Public Debt to receive subscriptions at least five-to-seven days before purchase. This is a legitimate concern of the Bureau. However, from the issuer's perspective, it is also important to know that the interest rate table in effect for the day the subscription is prepared applies to the subscription. Issuers should be able to use mail as alternative to fax to fix the interest rate table, in circumstances where they are unable, for any reason, to get a fax through to Parkersburg. Fax technology has some safeguards to determine if a transmission has been received. Typically, a sending fax machine gets an error message if the receiving machine does not pick up or if the line gets disconnected prior to completion of the transmission. However, there is no way for the sender to tell if the document received into the digital memory of the receiving machine is actually printed by that machine or is not otherwise destroyed before being seen. On a number of occasions we have found in our own mail room that fax transmissions get "lost," primarily because the printer jams or loses memory for some reason. The regulations should deal with the possibility of such a failure, or of a general inability to get through to Parkersburg on the fax line. The solution to this process is for the Bureau to have an affirmative confirmation procedure for fax subscriptions, with the fall-back of a mail filing if no confirmation of the fax is available. The best procedure would be for the Bureau to automati cally fax or phone a confirmation that a subscription has been received, but another possible approach would be for the regulations to state specifically that a subscriber can telephone a specific phone number to receive oral confirmation of a fax filing. I also encourage the Bureau to put the daily SLGs interest rate table on the World Wide Web. The Bureau is doing an excellent job of utilizing the web to make its regulations and comments thereon available to internet users. The Web would be an easier and more cost-effective way for investment bankers, issuers and trustees to get current SLG rates. In this regard I would also note that the proposed change to only a 5 basis point rate differential will make it more likely that the Bureau will on some occasion actually change the table in the middle of the day due to sharp market movements. Having the rates available on the Web would greatly facilitate the distribution of such rate tables. Respectfully submitted, David L. Miller Arter Hadden Haynes and Miller 1801 K St. NW Washington, DC 20006 DMiller@ArterHadden.com ________________________________________________________________________ ____ Comment #4 - National Association of Bond Lawyers

NABL COMMENTS ON PROPOSED SLGS REGULATIONS August 26, 1996 Division of Special Investments Bureau of the Public Debt, Department of the Treasury 200 3rd Street P.O. Box 396 Parkersburg, WV 26101-0396 Ladies and Gentlemen: On July 26, 1996, the Department of the Treasury published in the Federal Register proposed changes to the current regulations (the "Proposed Regulations") governing United States Treasury Certificates of Indebtedness, Notes and Bonds of the State and Local Government Series ("SLGS"). The Proposed Regulations invite public comments to be received by the Bureau of the Public Debt on or before August 26, 1996. This submission represents the comments prepared by the Arbitrage and Rebate Committee of the National Association of Bond Lawyers ("NABL"). In short, the purpose of this letter is to express the gratitude of NABL to those individuals at the Treasury and Bureau of the Public Debt for the considerable effort expended in making the SLGS program more attractive and flexible for state and local governments and to encourage the Treasury to adopt the Proposed Regulations substantially in their current form (with several technical modifications as noted below) expeditiously. With one exception as noted below, the Proposed Regulations represent the development of a program which should prove to be both workable from the perspective of issuers of tax-exempt obligations and consistent with federal policy objectives. NABL was incorporated as an Illinois nonprofit corporation on February 5, 1979 for the purposes of educating its members and others in the law relating to state and municipal bonds and other obligations, providing a forum for the exchange of ideas as to law and practice, improving the state of the art in the field, providing advice and comment at the federal, state and local levels with respect to legislation, regulations, rulings and other actions, or proposals therefor, affecting state and municipal obligations, and providing advice and comment with regard to state and municipal obligations in proceedings before courts and administrative bodies through briefs and memoranda as a friend of the court or agency. NABL has over 2,900 members. These comments were prepared in accordance with NABL's purposes. The comment letter was drafted by David A. Caprera. The chair of the Arbitrage and Rebate Committee was David A. Walton. Members who participated in the preparation of these comments included Robert W. Buck, David J. Cholst, Arthur M. Miller, and David L. Miller. While not all members of the subcommittee concurred in each of these comments, the comments represent the consensus of the participants. We would welcome the opportunity to discuss the comments set forth below with representatives of the Treasury and the Bureau of the Public Debt and to attempt to answer any questions that these comments may raise.

While the subcommittee believes that the Proposed Regulations, if adopted in their entirety, would result in an improved SLGS program, there is one significant change and a couple of minor technical modifications which we believe would serve the joint interests of all parties affected. The subcommittee is concerned that if the Proposed Regulations are adopted without addressing the problem noted below regarding the Secretary of the Treasury's right to revoke previously issued SLGS, the program might prove unsuitable for certain advance refunding and other defeasance escrows. However, in no way do we wish to suggest by the comments set out below that we are disappointed or dissatisfied with the other changes being proposed. Quite to the contrary, the subcommittee appreciates the comprehensive improvements to the SLGS program made in the Proposed Regulations. Our primary concern and the source of our proposed modification derives from the change to the current regulations which would greatly expand the authority of the Secretary of the Treasury to revoke the issuance of SLGS. Section 344.1(f) of the Proposed Regulations reserves the right of the Secretary of the Treasury to revoke the issuance of any SLGS if its issuance "is in conjunction with a violation of the tax regulations, as determined by the Internal Revenue Service," or "if the Secretary deems such action to be in the public interest." This power to revoke is much more expansive and general than is that contained in the current regulations which provides for revocation as a result of "an improper certification or other misrepresentation," "other than as a result of an inadvertent error," and "if the Secretary deems such action to be in the public interest." The Proposed Regulations eliminate most certifications required by the current regulations. While we concur with the decision to eliminate these certifications as unnecessary, it must be recognized that the certification requirement creates substantive rules that must be met for the valid issuance of SLGS. (Additionally, the certification requirement may provide the United States with certain criminal penalties for persons who attempt to subscribe in violation of the regulations.) In the case that the SLGS certification is untrue (i.e., the substantive rules for the issuance of SLGS are violated), under current law, issued SLGS can be revoked and SLGS applications dishonored. Under current law, the Bureau of the Public Debt could choose not to revoke such SLGS or dishonor such subscription notwithstanding a finding that the SLGS subscription contained an untrue certification. The Bureau of the Public Debt might determine that the SLGS certification is false, but it is in the interest of the United States to leave the SLGS outstanding because SLGS might have a below market interest rate. If a payment on issued SLGS is ever missed because of a putative revocation, the SLGS owner would have the right, under current law, to challenge the revocation in the Court of Claims by suing on the Bond, Note or Certificate of Indebtedness. If the SLGS owner proved to the satisfaction of the Court of Claims (presumably by a preponderance of the evidence) that the SLGS certifications were not false, then the SLGS would not be revoked and any nonpayment would be a default. The new language adds two ambiguous categories that may lead to revocation. Does an Internal Revenue Service determination of taxability of an obligation constitute a "violation" that will also lead to revocation of SLGS investments? What is the standard for the even

more open-ended "the Secretary deems such action to be in the pubic interest" when not modified by the other requirements as a result of the use of the conjunctive "or" in place of the current word "and"? The importance of this issue, particularly in the context of advance refundings, cannot be overemphasized. "Defeasance" is part of the contract between the holder of the refunded bond and the issuer. Typically, the defeasance clause of the contract requires the issuer to post non-callable U.S. Treasury securities with unconditional cashflow sufficient to pay off the refunded bonds. When bonds are defeased, typically all collateral securing the bonds (other than the Treasury securities) is released and the issuer's obligation to pay principal and interest is extinguished. Thus, open market securities used to defease bonds must be non-callable obligations with no realistic possibility that they will default or be revoked after issuance. The SLGS program must offer securities of this same quality. If there is even a hypothetical possibility that the issuer will have its SLGS revoked by the Secretary under an ambiguous standard, bond counsel and trustees may not be able to conclude that interest bearing SLGS qualify for defeasances. Setting up a SLGS program that creates more uncertainty as to defeasance with SLGS than would exist with a portfolio of open market securities blended down with zero rate SLGS will undercut the important improvements otherwise provided for in the Proposed Regulations. Accordingly, we request that the Treasury limit the authority of the Secretary to revoke the issuance of SLGS only to circumstances where the issuance of such SLGS is inconsistent with the requirements of the Proposed Regulations and the Secretary determines that revocation as a result of such inconsistency is in the public interest. Our first technical modification relates to the types of funds that may be invested in SLGS under the Proposed Regulations. As noted, the Proposed Regulations eliminate most of the certifications of the subscriber which have been required to be contained with the final subscription for SLGS. One of these certifications is that "the total investment consists only of proceeds (including amounts treated as proceeds) of a tax-exempt bond issue which are subject to yield restrictions under section 141-150 of the Internal Revenue Code during the entire period of investment." The elimination of the above-quoted language creates an ambiguity as to the amounts which will be eligible for SLGS investment. The Proposed Regulations make reference to several different and potentially contradictory descriptions of the amounts which may be invested in SLGS. The Summary describes "proceeds (or amounts treated as proceeds) which are subject to yield restrictions or arbitrage rebate requirements." In describing "Proposal No. 6," the Proposed Regulations make reference first to "funds subject to rebate as well as yield restrictions" and then to "all gross proceeds." Finally, in section 344.0(a), the Proposed Regulations refer to "investments which allow [issuers of tax-exempt securities] to comply with yield restrictions and arbitrage rebate provisions." An ambiguity arises because the terms used to describe amounts which may be invested in SLGS may have conflicting meanings under Income Tax Regulations governing tax-exempt obligations and because the

certification of subscribers clarifying what amounts are to be invested would not be required. Section 1.148-1(b) of the Income Tax Regulations treats "proceeds" as included within a larger class of "gross proceeds." There are amounts the investment of which may need to be monitored and restricted in order to ensure compliance with the tax-exempt bond requirements of the Internal Revenue Code even though they may be neither "proceeds" nor "gross proceeds" (e.g., funds such as depreciation reserve funds or operating funds described in Rev. Rul. 78348 or 78-349; proceeds of certain taxable advance refunding bonds issued in conjunction with tax-exempt bonds; amounts which, for periods of time, cease to be treated as gross proceeds as a result of the operation of the "universal cap" or "transferred proceeds rules " of sections 1.148-6(b)(2) and 1.148-9(c) of the Income Tax Regulations). Furthermore, sometimes it is not clear whether particular amounts are gross proceeds of an issue. If an issuer, out of an excess of caution, decides to invest certain moneys in SLGS because they may be gross proceeds, that issuer should not be penalized if it is later determined that those moneys are not gross proceeds. In addition, while the terms "proceeds" and "gross proceeds" are defined in the current regulations applicable to obligations issued after June 30, 1993, there also remains a need to provide SLGS for investment of amounts issued under prior regulations where such terms may not be similarly used or applied. Finally, the formulation of section 344.0(a) excludes certain amounts for which SLGS should be available, such as amounts subject to a rebate exception and invested for a temporary period, but which are bond proceeds although not subject to yield restrictions or arbitrage rebate provisions. In order to define more precisely the amounts that may be used to purchase SLGS and to remove any ambiguities, we encourage the Treasury to adopt consistent terminology throughout the Proposed Regulations utilizing language within section 344.0(a) which makes clear that SLGS may be purchased with any amounts that constitute gross proceeds of an issue or any other amounts which may assist an issuer of tax-exempt bonds in complying with applicable provisions of the Internal Revenue Code relating to such tax exemption. Language to this effect would satisfy the concerns which we have identified. Our second (and final) technical modification relates to the application of the six-month penalty for non-settlement to state and local government units, particularly when such entities act as issuers of obligations the proceeds of which are loaned to conduit borrowers. Section 344.0(b) defines "government body" in terms of state and local governmental issuers. Section 344.1(h) imposes a penalty for noncompliance on "any government body." Under the current regulations, the noncompliance penalty applies to "subscribers," an undefined term but which in practice included bankers, trustees and conduit obligors. Our concern with this change is that a government body acting as a conduit issuer (i.e., an issuer who loans bond proceeds to another borrowing entity) may be precluded from subscribing for SLGS for a period of six months as a result of the noncompliance of the conduit obligor (i.e., the party receiving the benefit of the borrowing and typically responsible for investment and rebate compliance). Most states have state loan programs for various purposes such as housing, health care and education which service multiple conduit obligors. Such programs are subject to various constraints under the Internal Revenue

Code, but generally have been recognized by the Congress and the Treasury as appropriate and often cost-effective. However, if any one conduit obligor's failure to comply could subject all conduit obligors under such a program to a six-month "freeze-out," then no conduit obligor could structure its plan of investment based on the assumption that SLGS would be available to it as needed. This would app ear to be placing a penalty where none is deserved and creating real compliance problems for certain conduit obligors facing investment and rebate constraints. To create a split in the market use of the SLGS program between conduit issuers and all other issuers seems an unfortunate result both in terms of compliance costs for conduit borrowers and in potential market reaction to the different security behind advance refundings of conduit and non-conduit borrowers. Given the current controversy over "yield burning," conduit borrowers are potentially being denied an important compliance and cost-savings tool. In such circumstances, we believe that, solely for purposes of the six-month penalty, conduit obligors and not the government body be considered to be the subscriber on whom the penalty is imposed. Such a change would also prevent a noncomplying conduit obligor from resubscribing during a six-month penalty period through a different government body. In this regard, we suggest that, for purposes of section 344.1(h), the term "government body" be given the same meaning as the term "obligor" under section 1.150-1(d)(2)(ii)(B) of the Income Tax Regulations. We believe that this represents the correct policy to be applied in cases of noncompliance and urge that you consider such a change to the Proposed Regulations. Notwithstanding the three suggested changes identified above, we hope that the Proposed Regulations are adopted in final form in an expeditious manner. These Proposed Regulations, when made final, should serve to enhance greatly the Bureau of the Public Debt's SLGS program and increase the circumstances where SLGS are the preferred investment vehicle to be used by state and local governments. Respectfully submitted by: The Arbitrage and Rebate Committee By: David A. Caprera ________________________________________________________________________ _______ Comment # 5 - Sherman & Howard L.L.C. August 30, 1996 Division of Special Investments Bureau of the Public Debt Department of the Treasury 200 Third Street P. O. Box 396 Parkersburg, W. Virginia 26101-0396

VIA EXPRESS MAIL AND INTERNET Attn: Brad Pyatt Division of Special Investments at fpyatt@bpd.treas.gov Dear Sir: This letter contains United States Treasury Certificates of -- State and Local Government Series, which published in the Federal Register on July comments on the proposed regulations governing Indebtedness, Treasury Notes and Treasury Bonds are proposed amendments to 31CFR part 344, as 26, 1996.

We have two comments on the proposed regulations. 1. Postmarks. Section 344.3(b)(1) requires that subscriptions be received by Public Debt either 5 or 7 days before the issue date, depending on the size of the subscription and Section 344.2(b) provides that interest rate is fixed by the maximum rate in effect on the date the subscription is received . We believe it is important to allow the filing deadline to be met and the interest rate to be fixed by referenced to a postmark date, as in the case in the existing regulations, in addition to a receipt date. State and local government series securities are frequently acquired in connection with advance refunding bond issuances. Typically, on a day certain, a sale is held for the advance refunding bonds and the yield on those bonds is determined based on the price at which those bonds are sold to the public, as is required by Section 148 of the Internal Revenue Code. Once that yield is known, in the case of an advance refunding bond, an escrow which is to be acquired with the proceeds of the advance refunding bond can be structured and typically purchased. Because of market volatility, it is important to contract to purchase and fix the interest rate on the securities being acquired on the same day that the interest rate is fixed on the bonds which are being sold. Otherwise, if there is an abrupt overnight change in interest rates, it may be that the amount of bonds sold will not be adequate to satisfy the advance refunding, or even that the advance refunding is not an economical transaction. Consequently, it is the practice in this industry to contractually lock in interest rates on the obligations being acquired on the same day that interest rates are locked in on the bonds.

Because of this, it is important to be certain on the date that the bonds are sold that interest rates are fixed for the SLGS. Our typical practice in doing this under the existing SLGS regulations is to both facsimile a copy of our initial SLGS subscription to the Bureau of Public Debt, and to send a copy of that subscription via United States Postal Service Express Mail, return receipt requested. We do not have a way to confirm whether or not the facsimile was received by Public Debt, and as you know, problems can happen with facsimiles, such as they run out of paper or there is a power failure, etc. When we also send our subscriptions by Express Mail and get a postmark on the Express Mail, however, we have a certain and secure way of proving, should it ever be necessary, that we submitted a subscription on the date of our bond sale, and therefore should be able to use the SLGS interest rate tables that were in effect for that date. The regulations at 344.2(b) and 344.3(b)(1) forecloses us from using this postmark to fix the interest rate. As is stated above, we believe it is important to keep this alternative. We suggest that the regulations be changed as follows. follows: A. Change the 4th sentence of Reg. 344.2(b) to read as

The applicable rate table for any subscription is the one in effect on earlier of: (i) the date the subscription is received at Public Debt; or (ii) the date the subscription was mailed if it was mailed using United States Postal Service Express Mail service, return receipt requested. B. follows: An initial subscription, either on a designated Treasury form or in letter form, stating the principal amount to be invested and the issue date must be either: (i) received by Public Debt; or (ii) mailed by United States Postal Service Mail service, return receipt requested Express Amend section 344.3(b)(1), first sentence, to read as

at least 5 business days before the issue date for subscriptions of $10,000,000 or less, and at least 7 business days before the issue date for subscriptions of over $10,000,000. . . . 2. Subscription date for 0" interest into SLGS. One of the regulations discussed above, 344.3(b) also requires that subscriptions may not be received more than 60 days prior to the issue date. Frequently in escrows with advance refunding

issues as described above, there is a need to acquire zero interest rate SLGS on dates interest is received from the proceeds of other SLGS. Sometimes this can be as often as quarterly, depending on the structure of the escrow, and under the existing and the proposed regulations, the escrow agent would be required to file a new subscription for SLGS for these zero interest SLGS four times a year. This seems like an unnecessary amount of paperwork for zero interest rate SLGS, and it seems to us that it would be less burdensome to both Public Debt and to SLGS subscribers if they could do, e.g., annual subscriptions. This interest rate is not one that is affected by a market interest rate changes. To achieve this result, we would suggest that the last clause in the first sentence of 344.3(b)(1) be changed to read as follows: . . . but in no event will subscriptions be received more than (i) 1 year prior to the issue date in the case of subscriptions for SLGS that bear interest at a 0% per annum rate, and (ii) 60 days prior to the issue date in the case of all other subscriptions. We appreciate your attention to this letter. Sincerely,

John O. Swendseid JOS/dm g:\wp\docs \01000jos.96\pubdebt.ltr