The Municipal Securities Rulemaking Board warned investors Wednesday to be aware of the terms of certain types of direct-pay municipal bonds to better understand if they are affected by the federal budget sequestration.
The alert also reminds broker-dealers and municipal securities dealers of their customer protection obligations under MSRB rules in connection with customer transactions relating to direct-pay bonds.
The MSRB notes that because the terms of direct-pay bonds “may vary considerably from issue to issue, investors, dealers and other market professionals should know the facts about their particular direct-pay bonds and should not make investment or pricing decisions based solely on other direct-pay bonds which may have dissimilar features or on generalized characterizations reported in the press or in other published reports.”
As a result of the sequestration that took effect March 1, the Internal Revenue Service reduced refundable credits payable to issuers with respect to their Build America Bonds (BABs), Qualified School Construction Bonds (QSCBs), Qualified Zone Academy Bonds (QZABs), New Clean Renewable Energy Bonds (New CREBs) and Qualified Energy Conservation Bonds (QECBs) for which the issuer elected to receive a direct credit subsidy from the federal government, collectively known as “direct-pay bonds.”
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“While reductions in subsidy payments resulting from sequestration directly affect the issuers of direct-pay bonds, these reductions also have the potential to affect investors buying, selling and holding direct-pay bonds for which such subsidy payments have been reduced,” MSRB says.