Discrepancies in the Securities and Exchange Commission rulebook are boxing out Native American Tribes interested in issuing tax-exempt debt in public markets.
"Tribal governments have not been included in the security-registration exemption for federal, state, and local governments, despite having the authority to issue bonds, including the authority to issue tax-exempt bonds since 1983," writes Andrew Huff, and Vanessa Palmer of the Federal Reserve Bank of Minneapolis.
Huff is the senior policy and legal advisor at the Minneapolis Fed's Center for Indian Country Development and a Chippewa Cree Tribal member.
Palmer is the division data director for community development and engagement at the Federal Reserve Bank of Minneapolis.
The comments come from modeling and
Per the report, "Tribes are likely to face higher costs for issuing bonds in the public market than other governments in the United States face."
The roots of the situation trace back to Section 5 of the Securities Act of 1933 which requires that all securities offered or sold in the United States, including bonds, must either be registered with the SEC or qualify for a registration exemption.
Section 3 of the act exempts federal, state, and local government bonds because information on these issuers and issuances is readily accessible to investors.
Tribal governments have been able to issue tax exempt bonds since 1983 but because they don't qualify for the exemption, they have to pay the SEC to register the securities.
In addition to the fees, registration typically requires legal and accounting expertise to stay within compliance.
The Tribes can work around the registration by issuing bonds in the private market using what's known as a Section 4 exemption.
Private placements generally pay higher interest rates and are offered to select investors.
The Minneapolis Federal Reserve's analysis models three scenarios that compare the costs of registering a public offering with the SEC, using private placement for an unregistered offering, and an unregistered public offering.
An SEC registered bond issue produces the highest cost of issuance and underwriting, totaling out at $2.3 million, based on a theoretical $19.9 million bond.
A private placement comes in with estimated total costs of $1.1 million to $1.4 million. The costs presume a premium interest rate attached to a private offering.
The cost of an unregistered offering is estimated between $200,000 and $1.5 million.
"Private placement may in some instances be more cost-effective than a registered public offering, even when accounting for the interest rate premium of 50 to 75 basis points paid by Tribes when privately placing bonds," per the report.
Questions of fairness about SEC regulations and tax issues are an ongoing issue on Capitol Hill as the Tribes and their champions lobby to be treated as equally as states and municipalities.
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