President Donald Trump
Market groups are mulling whether to push for issue price rules to be examined under President Trump's Executive Order on Identifying and Reducing Tax Regulatory Burdens Bloomberg News

WASHINGTON – Some market participants think the Treasury Department should include the issue price rules in its review of significant rules adopted since early last year that may be overly complex or burdensome and should be delayed, revised or repealed.

President Trump requested the review of burdensome rules in an executive order issued on Friday, April 21.

“This raises a question about whether the issue price rules should be reviewed under that executive order,” said Mike Bailey, an attorney at Foley & Lardner in Chicago.

Muni market participants “like one part of the rule – the definition of underwriters. The rest of it you can throw in the garbage,” said a lawyer who did not want to be identified. “There are just a lot of questions that haven’t been resolved with these rules.”

Issue price determines the yield on bonds and whether an issuer is complying with arbitrage rebate or yield restriction requirements, among other things. Under rules that had been in place for years, the issue price of each maturity of bonds that is publicly offered was generally the first price at which a substantial amount, defined as 10%, was reasonably expected to be sold to the public. But tax regulators found that in a number of cases the “reasonably expected” prices were not the prices at which the bonds were actually sold and 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.

In early December of last year, the Treasury and Internal Revenue Service finalized new issue price rules under which the issue price will be the price at which the first 10% of a maturity of bonds is actually sold to the public. If 10% of a maturity is not sold, a special rule can be used under which the issue price is the initial offering price (IOP) as long as the underwriters hold the IOP for five business days after the sale date. The five-day "hold-the-offering-price" requirement was designed to prevent pricing abuses such as flipping. The rules require the lead underwriter to certify the IOP to the issuer, as well as provide documentation, such as the pricing wire. Each underwriter in a syndicate must agree in writing that it will not offer or sell the bonds at a price higher than the IOP for five business days after the sale date.

The rules contain an exemption for competitive sales under which an issuer may treat the reasonably expected IOP of the bonds to be the issue price if the issuer obtains a certification from the winning underwriter bidder as to the reasonably expected IOP upon which it based its bid. But this exemption is conditioned on, among other things, the issuer receiving at least three bids from separate underwriters and awarding the bonds to the bidder who offers the highest price or lowest interest cost.

The final rules have led dealers and bond lawyer groups to create a whole new set of bond documents for the market. The Securities Industry and Financial Markets Association has even come up with a new concept that would allow dealers and issuers to agree on revocable or non-revocable bids in competitive sales, with agreements on non-revocable bids expected to cost issuers more.

Tom Vander Molen, a lawyer at Dorsey & Whitney in Minneapolis who heads the National Association of Bond Lawyers’ tax committee said, “There have been members who have suggested we take a position that issue price be included in the Trump review, but NABL hasn’t taken a position on that yet.”

Stefano Taverna, an attorney at McCall, Parkhurst & Horton in Dallas who heads the American Bar Association Taxation Section’s tax-exempt financing committee, asked whether the issue price rules should be reviewed, said, “That’s a good question. I have the same question because it imposes new requirements.” He said he has put in a call to Treasury Department officials asking if the rules are candidates for the review.

“We’re analyzing the executive order and talking to our membership,” said John Vahey, Bond Dealers of America’s managing director of federal policy. “We’ll be reaching out to Treasury about the impact of the executive order,” he added.

SIFMA officials declined to comment.

Tax lawyers said they think the executive order is primarily aimed at so-called corporate inversion and earnings stripping rules that Treasury issued last April to prevent U.S. companies from taking a foreign address through a merger with a smaller firm or by some other means, and then engaging in transactions to lower their taxes. Those rules were controversial and opposed by many corporations.

But a key issue in determining whether tax rules will be included in the review under the executive order is whether they are “significant.” The order directs Treasury to review “all significant tax regulations” issued by Treasury on or after Jan. 1, 2016 that: “impose an undue financial burden on U.S. taxpayers; add undue complexity to the federal tax laws; or exceed the statutory authority of the Internal Revenue Service.”

Treasury associate tax legislative counsel John Cross said, “It’s uncertain what standard will be applied to determine what regulations are significant under this executive order.”

Matthias Edrich, a partner at Kutak Rock in Denver, doesn’t think the issue price rules will fall under the review. “I think everyone’s working on understanding and implementing those rules,” he said.

One potentially complicating factor is that the issue price rules take effect on June 7.

The executive order directs Treasury, in consultation with the administrator of the Office of Management and Budget’s Office of Information and Regulatory Affairs, to list the “significant tax regulations” that appear to be problematic under the order in an interim report completed no later than 60 days from April 21. That would fall after the June 7 effective date.

Treasury must then submit another report to the president within 150 days after April 21 that recommends “specific actions to mitigate the burden imposed by [the] regulations.” The report is to be published in the Federal Register. The order says the Treasury secretary is to either delay, suspend, modify or rescind the rules and within 10 days after those actions are finalized publish a summary in the Federal Register.

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