WASHINGTON — The Municipal Securities Rulemaking Board has entered into a ground-breaking agreement with the Internal Revenue Service under which it will provide the IRS with municipal market data and documents to help enforce tax law requirements for muni securities.
“This is the first time we’re providing data to a regulatory organization to help them enforce their laws,” MSRB executive director Lynnette Hotchkiss said in an interview.
The board, which announced the agreement Monday, currently provides assistance and data to the Securities Exchange Commission, the Financial Industry Regulatory Authority and banking regulators to help them enforce MSRB rules. Its has done this for years and its authority in the area was codified by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted in July 2010.
The MSRB also meets with regulatory with enforcement officials from these agencies to discuss muni market issues and coordinate education and outreach activities related to compliance with board rules.
In addition, the board has provided information to state attorneys general in response to subpoenas.
The MSRB launched a regulatory website in recent years that gives other federal enforcement agencies access to virtually all of its pricing, disclosure and other data, as well as documents.
Now the data and documents will be available to the IRS.
“It’s not just the data,” Hotchkiss stressed. “We’ll also be providing education on how to use the data.”
“Industry compliance with federal tax laws is fundamental to a fair and efficient municipal market,” Hotchkiss said in a release. “Investments in technology have enabled the MSRB to make municipal market data more readily available to regulators, and our agreement with the IRS will ensure that MSRB data and other support are readily available to the IRS for its enforcement activities.”
“We appreciate the assistance from the MSRB,” Joseph Grant, acting commissioner of IRS’ tax-exempt and government entities division, said in the release. “This agreement helps the IRS foster the best market conditions for both municipal bond issuers and investors.”
The board’s announcement comes after IRS officials in 2010 became concerned that the primary market prices of new Build America Bonds were trending upward. They thought this suggested the issue prices for the BABs that were certified to by market participants may have been too low. Higher prices would have meant the interest rates or coupons would be lower and the Treasury Department could have made lower subsidy payments to the issuers. IRS officials suggested issuers track the pricing of their BABs on the MSRB’s online Electronic Municipal Market Access system, or EMMA.
BABs, created under the American Recovery and Reinvestment Act and issued in 2009 and 2010, are taxable bonds with federal subsidy payments. Unlike tax-exempt bonds, which provide tax-free interest to investors, BABs require the Treasury to provide issuers with payments equal to 35% of their interest costs.
Long-standing tax rules state that “the issue price of bonds that are publicly offered is the first price at which a substantial amount of the bonds is sold to the public” and that “10% is a substantial amount.”
The rules also state that the issue price “does not change if part of the issue is later sold at a different price,” and that if there is “a bona fide public offering” of all of the bonds, the issue price can be determined “as of the sale data based on reasonable expectations regarding the initial public offering price.”
Issuers typically rely on their underwriters to certify that their bonds were offered to the public at a price equal to the initial offering price.
But IRS officials became concerned that in some BAB issues, roughly 10% of the bonds were sold at lower prices, establishing the official issue price of the bonds, and the rest of the BABs were sold later at higher prices. If the yield on the BAB issue had already been determined before the initial sale, the higher prices would drive the coupon down, suggesting the Treasury’s subsidy payments to the issuer should have been lower.
IRS officials detailed their concerns about the pricing of BABs during a teleconference sponsored by the National Association of Bond Lawyers in May 2010 and urged issuers to begin checking the pricing of their BABs on EMMA. An MSRB official spoke during the teleconference, providing a primer on how to track muni bond pricing over EMMA.
The IRS also has sent questionnaires to BAB issuers last year asking if any of their BABs traded at a price greater than the issue price prior to the delivery of the bonds on the date of issue.