WASHINGTON - The Municipal Securities Rulemaking Board issued guidance Friday reminding dealers that its rules apply to Build America Bonds authorized in the $787 billion stimulus package, even though BABs are taxable and may be sold through dealers' corporate bond desks.
BABs, as well as other tax-credit bonds, are considered municipal securities because they are issued by state and local governments, so the MSRB rules apply, including rules on fair practices, political contributions, and conflicts of interest, among others.
"Our rules apply to all municipal securities, it doesn't have anything to do with the tax-exempt status of those securities," MSRB executive director Lynnette Hotchkiss said in an interview. "We want to make it clear that the dealers know that the rules apply."
In a statement, MSRB chairman Ronald Stack said that the board is also seeking to ensure that investors are protected by existing MSRB rules regulating dealer activities.
"Municipal bond investors should expect the same high standards of dealer conduct with respect to Build America Bonds as they do for all other municipal securities," said Stack, who is managing director and head of public finance at Barclays Capital.
Hotchkiss said the MSRB is not aware of widespread confusion about the applicability of its rules, but has received some inquiries for clarification.
"We've certainly had some calls, but anytime you have a municipal security that's a little bit different, people have some questions," she said.
As an example, the guidance said that even though many BABs may be sold by dealers' taxable desks, Rule G-27 on supervision requires that municipal securities principals must supervise all muni activities, including those sales.
Dealers in the secondary market, the board said, should note that G-14 on trade reporting requires that all transactions of munis must be reported to the MSRB within certain prescribed time periods, 15 minutes for most securities.
Meanwhile, primary market dealers should note that currently Rule G-36 requires underwriters to submit official statements to the MSRB, accompanied by a completed Form G-36, for most primary offerings of municipal securities.
Dealers also have OS delivery responsibilities to customers under Rule G-32, though the board noted that proposed changes to G-32, if implemented by the Securities and Exchange Commission, will require underwriters to satisfy that responsibility electronically by filing the OS's to the MSRB's Electronic Municipal Market Access system.
Leslie Norwood, managing director and associate general counsel at the Securities Industry and Financial Markets Association, said in a brief interview that there were some implementation issues tied to BABs that needed to be addressed to make sure the MSRB rules are complied with, though she was not aware of any widespread problems.
But she said SIFMA appreciates the MSRB's attention to new products in the market. "We're continuing to look to implementation issues that may need to be addressed" by the Internal Revenue Service, the Treasury Department, the MSRB, and the Depository Trust & Clearing Corp., she said.
Under the BAB program, issuers can sell the taxable bonds in exchange for either a direct cash subsidy from the federal government or a tax credit that may be directed to investors. The tax credit subsequently may be "stripped" and sold to other investors.
In addition to BABs, other tax credit bonds, including those newly created by the stimulus law, are also municipal securities subject to MSRB rules. They include: recovery zone economic development bonds, qualified school construction bonds, clean renewable energy bonds, new clean renewable energy bonds, Midwestern tax-credit bonds, energy conservation bonds, and qualified zone academy bonds.
The MSRB stressed in its guidance that it is not addressing the securities law characterization of the tax credit components of BABs or other tax credit bonds, whether the credits are used by investors in the bonds or stripped and sold to other investors.