WASHINGTON — Regulatory priorities for the Treasury Department and Internal Revenue Service this year and next include proposing guidance on arbitrage investment restrictions which likely includes issue price, according to plans they released this week.
"Our expectation is that this project will include clarification on issue price and other arbitrage aspects," said Scott Lilienthal, a partner at Hogan Lovells LLP and president of the National Association of Bond Lawyers.
The long-promised issue price regulations have become a hot topic for many muni market participants and industry groups who have been seeking clarity on the definition of issue price.
Issue price is key to determining the bond yield for tax purposes. The determination of bond yield has a bearing on whether an issuer of tax-exempt bonds is meeting arbitrage requirements.
Under IRS rules, the issue price for each maturity of bonds is the first price at which a substantial amount of them are sold to the public, with 10% considered to be a substantial amount. However, the rule only applies if all bonds of a specific maturity are offered to the public at that price.
"If we can create concepts where the issue price is set and done at the date the bonds are sold, it will be a better world for all of us including the government," said Rick Ballard, a partner with Ballard Spahr LLP. "I hope they can come up with something that can work."
The agencies also plan to issue final regulations on how issuers must provide information and hold public hearings before issuing private activity bonds under the Tax Equity and Fiscal Responsibility Act of 1982 or TEFRA. On Sept. 8, 2008, the Treasury issued updated proposed regulations for TEFRA.
Both the arbitrage investment rules and the TEFRA regulations were on last year's priority guidance plan.
"The existing regulations are inflexible," Ed Oswald, a partner at Orrick, Herrington and Sutcliffe LLP, said of the TEFRA rules. "The proposed regulations allow for a public notice on an internet site and also allow in certain cases the ability to do a TEFRA after the bonds are issued in the case where the project has changed."
"The existing regs are so antiquated it leads and to issuer and borrower frustration once they become familiar with rules," Oswald added.
The agencies also plan to publish regulations on rebate overpayment under Section 148 and bond reissuance under Section 150.
In July, NABL sent a letter to the Treasury requesting to discuss with officials the perceived gap in reissuance guidance that does not cover tax-exempt bonds that issuers privately place with banks. The IRS reissuance rules issued in 1988 for qualified tender bonds and guidance issued in 2008 for auction-rate securities does not cover bonds that issuers privately place with banks, they said.
Lilienthal said he is hopeful that the guidance addresses some of the issues raised in NABL's letter.
Lastly, the two agencies plan to issue a notice on tribal economic development bond allocations under Section 7871. Earlier this year the IRS reallocated $1.8 billion of TED bonds. These bonds were allocated to tribal governments beginning in September 2009 and remain largely unissued for projects.
Townsend Hyatt, a partner at Orrick, Herrington & Sutcliffe LLP in Portland, Ore. said there seems be plenty of TED allocation available for now and the IRS' guidelines issued over the summer "were a step in the right direction towards making sure TED allocation goes towards viable projects."
"By all accounts, there hasn't been a rush of TED applications yet," Hyatt said. "Nonetheless, we've seen renewed interest from tribal borrowers in TED bonds or TED loans since the process reopened."
The American Recovery and Reinvestment Act created TEDs and authorized $2 billion of them to be issued in 2009 and 2010 to promote economic development on tribal lands.
One item not on the priority list is allocation and accounting under PAB rules, Lilienthal said. "We hope the fact that it isn't on the list doesn't mean they aren't making progress on it," he said.
