SAVANNAH, Ga. — The Treasury Department is planning to propose regulations on issue price and other arbitrage-related issues, including long-term working capital grants, John Cross 3d, Treasury’s associate tax legislative counsel, told bond lawyers meeting here Thursday.
Speaking at the National Association of Bond Lawyers’ annual Tax and Securities Law Institute, Cross wouldn’t specify when the regulations would be released, but said the Treasury is “near completion and it’s going through the review process.”
“We recognize that it is a very important issue for the municipal bond market,” Cross said during a panel on hot topics. “Without getting into the details the goals are to provider a clearer, more certain standard and to recognize developments towards more price transparency in the market. No one can look at the existing regulatory regime and conclude that all works just fine under the current environment, so we are going to try and improve it.”
However, some participants at the conference were not convinced that regulations on issue price would in fact be released anytime soon.
NABL president Kristin Franceschi, a partner at DLA Piper in Baltimore, said the Treasury has been promising regulations for years. “I hope they come out really soon,” she said, adding that issuers and financial advisers should be the ones looking at pricing, not lawyers.
“We need to see regulations to clarify this,” said Perry Israel, an attorney in Sacramento. Perry agreed with Franceschi that lawyers should not have to look at prices on the Municipal Securities Rulemaking Board’s online EMMA system to determine if munis were initially offered at prices that raise questions about tax-law compliance.
Issue price is key to determining the bond yield for tax purposes, which has a bearing on whether an issuer of tax-exempt bonds is meeting arbitrage requirements or whether an issuer of a taxable Build America Bond is receiving an appropriately sized federal subsidy payment.
Internal Revenue Service rules specify that the issue price for each maturity of tax-exempt bonds is the first price at which a substantial amount of the bonds is sold to the public, with 10% considered to be a substantial amount.
Steve Chamberlin, manager of compliance and program management for the IRS’ tax-exempt bond office, said issuers should consider following the Government Finance Officers Association’s best practices guidelines for pricing on a negotiated sale to avoid problems. Those guidelines were issued in October 2010.
“There really is a lot of good information in there,” he said. “I think what issuers will find is that if they really look to those guidelines and implement them in their practices, they’re probably going to end up avoiding the types of anomalies that are catching our attention and prompting us to want to explore further to understand what happened during the public offering process.”
Chamberlin said the GFOA best practices also will ensure issuers get the best price.
GFOA lists 11 recommendations in their best practices, including communicating to the underwriter specific goals to be achieved in the pricing of bonds and expectations regarding the roles of each member of the financing team. It also urges issuers to take steps during the underwriter selection process and before final pricing to manage the compensation to underwriters.
On a separate matter, Chamberlin said that as part of the IRS’ work plan for 2012 they may be sending out electronic versions of their questionnaires on qualified school construction bonds this spring.
Chamberlin said the IRS is working with outside vendors to explore the possibility of providing electronic questionnaires and is hoping it will work. The IRS is trying to structure the questionnaires so issuers can access a website, enter a code to identify themselves and then submit the data. The goal is to try to make the process less burdensome for issuers, he said.