Ex-Legal

What is Ex-Legal?

Ex-Legal is a municipal bond that is delivered without a bond law firm's legal opinion printed on it.

Understanding Ex-Legal

An investor should approach ex-legal bonds with a greater degree of caution because of their lack of explicit legal endorsement. Most municipal bonds have the legal opinion of a bond law firm, or bond attorney, printed directly on them.

Bond law firms are engaged to provide an objective legal opinion with respect to the validity of bonds and other subjects, particularly the tax treatment of interest on municipal bonds. The opinion, usually required by both issuers and investors, is an objective judgment rather than the partisan position of the advocate and serves to validate the municipal security.

The bond opinion usually confirms:

• that the bonds have been duly authorized and executed by and are valid and binding obligations of the issuer
• the source of payment or security for the bonds
• whether and to what extent interest on the bonds is exempt from federal income taxes and from other taxes, if any, imposed by the state of issue.

Bond attorneys may issue an unqualified legal opinion on a municipal bond where there are no reservations relating to the issue. This is the best opinion an issuer of municipal securities can obtain.

An ex-legal bond, by contrast, has not been checked to ensure that it has followed all applicable laws in the course of issue. In some cases, a bond has been reviewed and the bond attorney has refused to endorse it. As a result, ex-legal bonds are more highly exposed to legal risk than other bonds.

What Causes an Ex-Legal Bond

Some bond law firms were uncomfortable issuing legal opinions on the tax-free status of municipal bonds while tax reform legislation was working its way through Congress in the fall of 2017. Bond attorneys find it more desirable to issue opinions based on existing laws and regulations rather than relying on their own interpretations.   

Ex-legal bonds may receive a legal opinion, sometimes referred to as a "reasoned opinion," that is conditional or otherwise subject to qualifications. A legal opinion generally is not considered to be qualified if it is subject to customary assumptions, limitations and qualifications or if the opinion is otherwise explained.

In the municipal securities market, legal opinions have traditionally been unqualified. Bond attorneys may render an "unqualified" opinion regarding the validity and tax exemption of bonds if they are "firmly convinced" that, under the law in effect on the date of the opinion, the highest court of the relevant jurisdiction, acting reasonably and properly briefed on the issues, would reach the legal conclusions stated in the opinion.