WASHINGTON – The Treasury Department is still working toward finalizing issue price rules before the end of the calendar year, a Treasury official told The Bond Buyer this week.
"We're still actively working on them and we're hoping to get them out," said John Cross, a Treasury associate tax legislative counsel. "There are a lot of competing priorities but we still aim and hope to get out final issue price regulations because it's been an issue of uncertainty." The rules are at the top of Treasury's tax-exempt bond priority guidance plan for 2016-2017.
Cross said Treasury officials are "carefully" considering an accommodation or a special rule for competitive sales, on which Treasury received the most significant amount of written comments. Both dealers and issuers have called for a safe harbor or special rules for bonds sold in competitive deals.
Emily Brock, director of the Government Finance Officers Association's federal liaison center, said the group told Treasury that because competitive sales force dealers to compete for underwriting bonds all at once at the last minute, there is little opportunity for pricing abuses and that the proposed rules would make it hard to do such sales. GFOA hopes Treasury takes its comments into account in the final rules.
"The way that the proposed rule was written, it would have made it more difficult for governments to execute a competitive sale," said Brock, who believes issue price rules are "imminent." "As we have communicated to IRS/Treasury … the competitive bid process is the purest way of establishing the market price of the bonds, and the proposed regulations should not change the way that the issue price is determined for such issues."
Cross said in October at the National Association of Bond Lawyers' Bond Attorneys' Workshop that issue price regulations were the next item he expects to be completed in the department's 2016-17 guidance plan, which runs through June 2017. He did not provide an estimated timeframe for their completion, but added that Treasury and IRS were "actively" working on them at the time.
Issue price is important because it is used to help determine the yield on bonds and whether an issuer is complying with arbitrage rebate or yield restriction requirements, as well as whether federal subsidy payments for direct-pay bonds such as Build America Bonds are appropriate.
Under existing rules, the issue price of each maturity of bonds that are publicly offered is generally the first price at which a substantial amount, defined as 10%, are reasonably expected to be sold to the public.
But tax regulators became concerned that some dealers were "flipping" bonds -- selling them to another dealer or institutional investor who then sold them again almost simultaneously, with the prices continually rising before the bonds were eventually sold to retail investors. They felt the stated "reasonably expected" issue prices for bonds were not representative of the prices at which the bonds were actually sold.
To address their concerns, the Treasury and Internal Revenue Service proposed issue price rules in 2013, scrapping the reasonable expectations standard and basing the determination of issue price on actual sales.
The rules were strongly criticized as unworkable, partly because of concerns that sometimes 10% of maturity doesn't sell right away.
Treasury and the IRS reproposed the rules in June 2015. They are similar to the proposed rules in that the issue price of a maturity would generally be the price at which the first 10% of the bonds are actually sold to the public.
However, the reproposed rules add provisions that say if 10% of a maturity is not sold by the sale date, the issue price would be the offering price of the bonds sold to the public, as long as the lead or sole underwriter certifies to the issuer that no underwriter filled an order from the public after the sale date and before the issue date at a higher price.
Cross has said that the 2015 proposal was well-received and that Treasury will consider its public comments when working on finalized rules.
John Vahey, managing director of federal policy for Bond Dealers of America, said the group has submitted three comment letters to Treasury: one for each proposal as well as a supplementary letter following the second letter.
"From a policy standpoint, BDA has actively engaged with Treasury and IRS staff," Vahey said. "It's been a productive dialogue around policy recommendations for issue price proposals."
Treasury and IRS released their 2016-2017 guidance plan in August, which includes six tax-exempt bond-related projects that the agencies plan to allocate resources toward through June of next year.
Cross said in August, soon after the priority guidance plan was released, that issue price regulations were second in line behind updating management contract procedures.
A revenue procedure updating conditions under which a management contract does not result in private business use was released in September, bumping issue price to the top of the agencies' agenda.
