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For 11 years, San Francisco-based Orrick, Herrington & Sutcliffe’s public finance services group has advised local governments about how to stay on the right side of the tax law when issuing tax-exempt bonds. But in another sign that the lines are blurring between law firms and accounting firms, Orrick is now spinning off the non-attorney group into a separate company with the freedom to offer clients a much wider range of financial services in a niche market. For instance, “the separate company will be able to offer investment advice” and go about executing a client’s investment decisions, said Craig Underwood, managing director of the public services group. “It’s a melding of financial solutions and legal aspects” of bond issuance, he said. “We will be the bridge between bankers and lawyers.” Net profits after salaries and expenses will stream into the firm’s partnership profit pool. The company, which has not yet been given a name, will be a wholly owned subsidiary of Orrick and will be open for business Oct. 1. Underwood said the company will likely be able to offer employees partnership opportunities, which will help recruit the most talented accountants, but the firm has yet to make any decisions on how the profits of the spin-off would be split among the principals. “People coming to work,” Underwood said, “should think that they should be able to run this place.” Figures on how many municipalities seek firms for tax consulting on bond issues are hard to find. But by Underwood’s estimate, about 60 percent contract a specialty shop or an outside firm like Orrick, Chicago’s Chapman and Cutler, Omaha-based Kutak Rock or accounting firm Ernst & Young — all of which offer similar services. Orrick’s public services group has 30 employees in San Francisco, New York, Los Angeles and Dallas. They will be the new company, and all of them are slated to get a securities license. The idea to spin off had been batted around for a number of years. “We always thought it was kind of obvious that a better way to run the group was as a separate corporation,” said Roger Davis, Orrick’s public finance chairman. PROFITABLE NICHE The public finance services group emerged three years after a provision in the sweeping 1986 Tax Reform Act considerably altered the municipal bond market. But it was abuses by municipal governments that defined a niche for the group. Underwood said Orrick’s group grew steadily — adding one or two people a year — until it began to market its expertise to public officials. Under the Tax Reform Act, local governments could issue tax-exempt bonds as a low-cost capital source for projects. But a handful of local governments angered IRS officials by investing the bond proceeds at higher interest rates than those paid on the tax-exempt bonds and pocketing the difference — making federal investigators think the real reason behind the bond issue was to create investment profits. In 1989, Congress put down rules for what is called arbitrage, the buying and selling of identical securities in different markets to make a profit. The regulations required local officials to give the profit margin to the federal government. With the lines better defined, Orrick hired Underwood and other number-crunching finance professionals to create a service to help governments interpret and comply with restrictions while still getting the most bang for their buck. The group essentially offered sophisticated tax advice, but Underwood said they were careful to stay within the parameters of legal services. “We have to be careful not to give [specific] investment advice,” he said. Once the bond was issued, the job of Orrick’s tax attorneys and finance folks was over. But now the company will be able to help clients actually invest the bond proceeds, plus provide other post-issuance services. “The world we are in is very closely linked to the world we will work in,” Underwood said.

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