Securities Law Deadlines

April 20, 2011

Minimum 25 day period:

Rule 15c2-12(b)(4) has a minimum 25 day period, as described in the example language below:

The City further agrees to notify the Representative of any material developments affecting the City or the Bonds of which the City becomes aware between the date of this Bond Purchase Agreement and a date that is 25 days after the later of the date of Closing or the end of the underwriting period for purposes of the Rule, notice of which date the Underwriters shall deliver to the City if later than the Closing date.  After such notification, if, in the opinion of the City and the Representative, a change would be required in the Official Statement so that it does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, then such change will be made by amendment or supplement, and the Official Statement as so amended or supplemented will be supplied to the Underwriters in reasonable quantity for distribution.

Bond-Related Expectations and Elections

April 20, 2011

Expectations – Just when you lease expect them:

The following expectations are relevant to the issuance of tax-exempt bonds.  These expectations are commonly recited in the tax compliance document executed and delivered by the issuer.

  1. Under Section 149(g) (“Hedge Bonds”), in order to prevent a bond from being characterized as a “hedge bond,” the issuer must reasonably expect that 85% of the issue’s spendable proceeds will be used within three years from the date of issuance to carry out the governmental purpose.  Note that “reasonable expectations” for Section 149 purposes not only encompasses reasonable expectations as defined in Treas. Reg. 1.148-1 but also, as modified by Section 149(f)(2)(B), that expectations as to changes in interest rates or in the provisions of the tax code (or regulations and rulings) may not be taken into account in determining whether expectations are reasonable.  Policy: to ensure reasonable sizing and timely issuance to prevent a potentially substantial drain on the Treasury.
  2. Under Section 1.148-2(e)(2) (“3-Year Temporary Yield Period”) concerning the 3-year temporary period for capital projects and qualified mortgage loans, the issuer must reasonably expect to satisfy the (a) expenditure test, (b) time test and (c) due diligence test.  The expenditure test requires that at least 85% of the net sale proceeds of the issue are allocated to expenditures on the capital projects by the end of the 3-year temporary period (this is almost like the 149(g) hedge bond definition test) (policy: to ensure prompt commencement of work).  The time test is met if the issuer incurs within 6 months of the issue date a substantial binding obligation to a third party to expend at least 5 percent of the net sale proceeds of the issue on the capital projects (policy: to assure that expenditure of bond proceeds is done within a reasonable time).  An obligation is not binding if it is subject to contingencies within the issuer’s or related party’s control.  The due diligence test is met if completion of the capital projects and the allocation of the net sale proceeds of the issue to expenditures proceed with due diligence (policy: to prevent delay of work). See also this article concerning yield restriction.
  3. Under Section 1.141-12(a) (“Remedial Actions”), the conditions should be met in order to preserve remedial actions should they be needed: (a) Reasonable expectation on the issue date that the issue will meet neither the private business tests nor the private loan financing test for the entire term of the bonds; (b) Maturity not unreasonably long (120% test); (c) Proceeds of the issue must have been expended on a governmental purpose before the date of the deliberate action.  There is a separate WordPress article describing remedial actions.


  • Election under Section 1.141-15(d) of the Regulations permits application of the 1997 regulations (refunding regulations) to bonds outstanding on May 16, 1997 or refunding bonds issued on or after May 16, 1997.
  • Election to waive the right to treat a purpose investment as a program investment.
  • Election to waive the right to invest in higher yielding investments during any temporary period.
  • Election of the issuer of a pooled financing issue to apply rebate spending exceptions separately to each conduit loan.
  • Election for purposes of the two-year spending exception from rebate to apply certain provisions based on actual facts rather than reasonable expectations.
  • Election for purposes of the two-year spending exception from rebate to exclude from available construction proceeds the earnings on a reasonably required reserve fund.
  • Election for purposes of the two-year spending exception to treat a portion of an issue as a separate construction issue from rebate.
  • Election to pay 1.5% penalty in lieu of arbitrage rebate.
  • Election to treat portions of a bond issue as separate issues.

Qualified Guarantee

April 8, 2011

(See also “Basic Arbitrage Restriction Discussion” topic for additional information concerning this subject matter)

A. General Context:

Treas. Reg. 1.148-1(c)(1) provides that replacement proceeds include, but are not limited to, sinking funds, pledged funds, and other replacement proceeds described in (c)(4), to the extent that those funds or amounts are held by or derived from a substantial beneficiary of the issue.  Thus, such funds or amounts that are not held by and not derived from a substantial beneficiary of the issuer should not be considered replacement proceeds.

A substantial beneficiary of the issue includes (1) the issuer and (2) any related party to the issuer, and (3) if the issuer is not a state, the state in which the issuer is located.  A person is not a substantial beneficiary of an issue solely because it is a guarantor under a qualified guarantee.

B.  Definition of a Qualified Guarantee:

A “qualified guarantee” is defined in Treas. Reg. 1.148-4(f).  Under such section, a guarantee is defined as a “qualified guarantee” if the guarantee satisfies each of the following requirements:

  1. Interest savings: As of the date the guarantee is obtained, the issuer must reasonably expect that the PV of the fees for the guarantee will be less than the PV of the expected interest savings on the issue as a result of the guarantee. PV is calculated using the yield on the issue, determined with regard to guarantee payments, as the discount rate.
  2. Guarantee in substance:  The arrangement must create a guarantee in substance.  It must impose secondary liability that unconditionally shifts substantially all of the credit risk for all or part of the payments, such as payments for debt service, redemption prices, or tender prices, on the guaranteed bonds. […] The guarantee may be in any form. The guarantor may not be a co-obligor. Thus, the guarantor must not expect to make any payments [other than …].  The guarantor and any related parties together must not use more than 10 percent of the proceeds of the portion of the issue allocable to the guaranteed bonds.
  3. Reasonable charge: Fees for a guarantee must not exceed a reasonable, arms’-length charge for the transfer of credit risk. The issuer may not rely on the representations of the guarantor as to this factor. Fees for services other than transfer of credit risk must be separately stated, etc.

This section of the Treasury Regulations sets forth certain other requirements, including requirements as to the allocation of qualified guarantee payments, payments coinciding with payments on the related bonds.

“Related party” is defined in Treas. Reg. 1.150-1(b). In reference to a governmental unit or a 501(c)(3) organization, a related party is any member of the same controlled group.  E.g., if the conduit borrower is a LLC the sole member of which is the guarantor (a 501(c)(3) organization), the borrower is a related party.  Therefore, the guarantor would be deemed to use more than 10 percent of the proceeds which causes the guarantee to fail the “qualified guarantee” test.  Such guarantee would then need to be crafted in such a way that it does not cause replacement proceeds problems.

C.  Bond Yield Calculations:

Under Treas. Reg. 1.148-4(f), payments for purposes of calculating yield include not only all unconditionally payable payments of principal and interest, but also all fees for qualified guarantees on the issue and amounts reasonably expected to be paid as fees for qualified guarantees of the issue.  This means that guarantee fees have the effect of increasing the yield, which is good for the issuer.    In order to calculate the bond yield, the present value of all of those payments is deemed to be the issue price.  Bond insurance premiums are treated like qualified guarantee fees for this purpose.

Note that there is a special rule for including qualified guarantee payments for variable yield issues – in such issues, any up-front and non-level guarantee payments must be allocated to each computation period.

D.  Other Matters:

Working Capital:  Payment of guarantee fees, which usually would be considered a working capital payment, is excepted from the restrictions on financing working capital.  See Treas. Reg. 1.148-6(d)(3)(ii).

Issue Price:  Qualified guarantee fees do not reduce the issue price (even though they are included in the calculation of bond yield).