1. The members of the Association will insure only obligations which are exempt from registration under Section 5 of the Act by virtue of Section 3 (a) (2) of the Act.

2. The members of the Association will insure only obligations upon which interest is exempt from federal income taxation pursuant to Section 103 (a) (1) of the Intemal Revenue Code of 1954, as amended.

3. MISC is and will continue to be licensed as an agent for fidelity and surety insurance by, and is and will continue to be subject to the regulation of, the Insurance Department of the State of New York, and prior to conducting business in other states, it will subject itself to the regulation of appropriate administrative authorities performing like functions in such states.

4. The Association, prior to conducting business in any state, will become qualified to conduct business as a joint underwriting association in such state, and will subject itself to the regulation of the insurance department or other administrative authority performing like functions in such state.

5. Each member of the Association is licensed to conduct business as an insurance company in those states in which the Association will be qualified, and is subject to the regulation of the insurance department or other administrative authority performing like functions in each of such states.

6. All insurance policies will be issued in accordance with Regulation No. 61 of the Insurance Department of the State of New York relating to insurance of municipal bonds (Exhibit 3), and in accordance with any similar rules and regulations which may be adopted in other states in which policies are issued.

7. All policies will be sold to, and the premiums will be paid by, the municipal issuer or the initial underwriter of the issue.

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8. Policies will not be offered or sold to individual investors, nor will investors be required or permitted to make any payments for insurance.

9. All premiums will be paid at the time of issuance of the policies, and no payments in future years will be required.

10. Policies will insure only the payment of the principal of and interest on insured municipal obligations when due, and a default in the payment of such principal or interest on the part of the issuer will not permit the holders of insured municipal obligations to accelerate future prescribed principal and interest payments.

11. Policies will not protect the holders of insured municipal obligations against losses which may be suffered as a result of a decline in the market value of their holdings.

12. Each member of the Association has agreed that in the event of default on an insured municipal obligation, it will supply its proportionate share of the amount which, when added to the proportionate shares of the other members of the Association and any amount supplied by the issuer, will be sufficient to pay the principal and interest then due. The proportionate share of liability which will be assumed by each member of the Association will be equal to the member's proportionate interest in the Association at the time the commitment for the insurance was entered into. Each member of the Association contemplates entering into a re-insurance agreement with the American Re-Insurance Company whereby a portion of

the liability assured by each member will be ceded to the reinsurer. The cession of such portion of liability will not release any member from its primary obligation to bear its proportionate share of liability set forth in the policy...

13. Any payments made by the members of the Association will be made to an escrow agent (which typically will be the paying agent designated by the issuer to make payments of the principal of and interest on the municipal obligations).

14. Insurance payments by the members of the Association will not relieve the issuer of its duty to pay on defaulted municipal obligations. In order to receive payment from the escrow agent, the holders of defaulted obligations will be required to assign to the members of the Association any rights which they may have against the issuer and to surrender the bonds or applicable coupons. The issuer will therefore be obligated to the members of the Association for defaulted payments, and will continue to be obligated to make principal and interest payments in future years to the individual investors.

15. All policies will be backed by adequate reserves, as prescribed by the Insurance Department of the State of. New York and by the administrative authorities performing like functions in other states in which business is conducted.

16. Amounts payable in the event of default are measurable in fixed dollar terms, and in no way are dependent upon or related to investments made by the members of the Association.

17. In the event of default, the members of the Association will be subject to the claims of the escrow. agent or the individual holders of insured municipal obligations.

18. Insurance to be issued by the members of the Association covers only the duties of those otherwise obliged, and does not relieve them of their obligations.

Based upon the foregoing, it is our opinion that the exemption provided for municipal obligations by Section 3(a) (2) of the Act would not be impaired by the fact that payment of the principal of and interest on such obligations were insured. Obligations payable out of revenues from a specified municipal facility, such as a municipal waterworks, customarily make provision for payment of the principal and interest from proceeds of insurance recoveries resulting from damage to the facility, and such provisions have been held not to change the exempt status of the obligations. In the case of the insurance.proposed.to.be issued by the members of the Association and sold by MISC, the fundamental character of the municipal obligation remains unaltered. The issuer has an unconditional and continuing obligation to pay the principal and interest, and if the insurers are called upon to make payments, they have the right to recover such payments from the issuer. Investors in. insured municipal obligations still look to the issuer for payment of their principal and interest, but the insurance provides them with additional protection · in the event the issuer becomes unable to make payments on its obligations as due.

It is also our opinion that the insurance to be issued by the members of the Association and sold by MISC is a customary and accepted form of insurance to which the exemption in Section 3 (a) (8) of the Act is applicable. Guaranty insurance has been defined as "a contract whereby one,

for consideration, agrees to indemnify another against loss by nonpayment of notes." Black's Law Dictionary (4th Ed. Rev. 1968), p. 943. Similarly, policies guaranteeing payment of obligations by mortgagors had been held by the United States Supreme Court to be insurance policies before the Act was adopted. Bowers v. Lawyers Mortgage Co., 285 U.S. 182, 189 (1932); United States v. Home Title Ins. Co., 285 U.S. 191, 195 (1932). Thus, it is our opinion that guaranty insurance is a traditional form of insurance, and that the policies proposed to be issued by the members of the Association are bona fide insurance policies to which the exemption of Section 3 (a) (8) of the Act is applicable.

The policies to be issued by the members of the Association and sold by MISC are clearly distinguishable from insurance policies in which the return to the insured depends upon the investment experience of the insurer, or policies which are sold to individual investors in order to guarantee the future market value of mutual funds or other-investment portfolios.

There is also authority to the effect that insurance policies are exempt from all of the provisions of the Act because they are not "securities" within the meaning of Section 2(1) of the Act (see 1 L. Loss, Securities Regulation 497 (2d Ed. 1961)), and to the effect that Section 2(b) of the McCarran-Ferguson Act, 15 U.S.C. $1012 (b), precludes the Securities Act of 1933 from being applied to the registration or regulation of insurance policies (see S.E.C. v. Variable Annuity Life Insurance Co., 379 U.S. 65, 67. (1959)). We feel that these points are meritorious, but in view of the reasonably clear exemption provided by Section 3(a) (8) of the Act, we feel that extended discussion thereof is unnecessary at this time.

In accordance with Release No. 33-5127, we are enclosing an original and three copies of this letter with