The Treasury Department proposed rules yesterday that would modernize and significantly ease the requirements for municipal issuers to obtain public approval for private-activity bond-financed projects.
In the changes, the Treasury and Internal Revenue Service address several practical problems aired by market participants regarding how issuers provide information and put together public hearings required under the Tax Equity and Fiscal Responsibility Act of 1982 for private-activity bonds, market participants said.
"The proposed regulations reflect an attempt by the IRS to update public notice regulations written in the early 1980s, before the age of the Internet," said Ed Oswald, a partner at Orrick, Herrington & Sutcliffe LLP here. "The regulations reflect a positive first step in that direction, and I would expect that the IRS will get lots of feedback on them during the public comment period."
A public hearing on the proposed rules has been scheduled for Jan. 26, 2009, and the Treasury is accepting comments on them until Dec. 8.
On the modernization front, the proposed regulations would allow an issuer to provide a public notice of a public hearing on its Web site if it regularly posts such information online, and also if it provides an alternative method of informing members of the public without computer access. The proposed regulations also would allow issuers to receive public comments electronically.
Citing "the current market environment and the increasing importance of electronic communication," the proposed regulations also would halve the time between the notice of a public hearing and the actual event to seven from 14 days. Furthermore, the proposed regulations state that if no parties notify the issuer they wish to speak at a public hearing, it can be cancelled.
In addition to modernizing the regulations, bond lawyers said it appears the Treasury has taken into account several common questions raised by issuers trying to meet public approval requirements.
"I think they've made a great attempt to ... address a number of practical concerns," said Carol L. Lew, a shareholder at Stradling Yocca Carlson Rauth in Newport Beach, Calif. "They're attempting to make them more flexible given the current market and the way state and local government entities operate today."
Lew was part of the National Association of Bond Lawyers working group that drafted a comment letter to Treasury seeking changes to the regulations.
One change she highlighted was the development of a brand new two-step approval process, designed for pooled loan financing projects that often lack specifics at the time they seek public approval.
Under the proposed system, an issuer would obtain public approval based on the stated maximum principal amount of bonds to be issued and a general description of the types of facilities that will be financed with the loans.
Then, after the issuance of the bonds but before the first loan is originated, a supplemental public approval would be obtained based on the specific information - such as the locations of the facilities - that has emerged since the last approval session.
"This is a great step," Lew said. "They should be applauded for coming up with the practical solution."
Similarly, the proposed regulations do not require issuers of mortgage revenue and qualified student loan bonds to provide all the specifics detailed in the existing public approval rules. Instead, the issuers will have to provide the maximum stated principal amount of bonds for each project. Issuers of mortgage revenue bonds will have to detail the rough geographic jurisdiction of the financed residences and student loan issuers will have to describe the type of student loan program being financed.
In addition, the regulations would establish two "safe harbors" that allow issuers to determine if "substantial" deviations have occurred in a planned financing since public approval was gained. In such cases, they would have to reobtain public approval.
Under the proposed rules, changes would be considered insubstantial if the difference in the amount of proceeds actually used versus the amount publicly approved is not more than 5% and if the role of owner or principal user of the project changes to a related party. These changes would not require a second public approval process.
While largely supportive of the proposed rules, Michael Bailey, a partner at Foley & Lardner LLP in Chicago, said he wants them to be made retroactive to all private-activity bond issues. Under the current language, it appears the proposed regulations will not take effect until they are finalized, and will apply only to bonds issued after they are finalized.
"The proposed regulations would be even more helpful if they provided an indication that issuers and borrowers could rely upon them now," he said. "In certain cases, the IRS has indicated that issuers could rely on proposed regulations after the date of publication of the proposed regulations."