Oh Great; More Issue Price Talk

Various industry groups and issuers from around the country have re-submitted comments applauding Treasury for including the proposed political subdivision regulations among those on the chopping block, following the President’s Executive Order 13789 to eliminate burdensome tax regulations. Not surprisingly, the style of most of those submissions has been simple and thematically consistent: “Good Job. Keep Going.”

There appears to be no appetite, though, for telling Treasury that it should have included the new issue price regulations as a “significant” regulatory project that deserved a second look. You’ll recall that Treasury did not even examine the new issue price regulations to see whether they meet the President’s criteria in the Executive Order. (In other words, the issue price regulations didn’t just escape the executioner’s blade; they were never captured.) Instead, everyone seems to be of the view that it’s better to live with the “devil that we know” rather than staring into the abyss of what might be proposed and adopted next.^[1]

In some ways, that is an unfortunate position, even though it’s understandable. It’s understandable because market participants spent untold hours preparing to implement these new rules, and there is surely some pressure (at least unconscious and perhaps even conscious) not to have all of that time and money go to waste. Also, many participants are finding the transition into the new rules fairly smooth, especially for issues where on the sale date the first price at which 10% of each maturity is sold is the initial offering price, because in those situations there is no difference between the old rules and the new.  This will be the case in most situations for issuers that typically see healthy demand for their bonds. And it may be true that Treasury one day would seek to impose something even more onerous.

But it’s unfortunate because, as we have described before, it’s an open question whether the logic and approach of the rules actually helps to solve the problem that gave birth to the controversy in the first place. It would have been nice to at least have some acknowledgement from Treasury that it heard the comments about the rules and did not force the issue price rules to share the same “insignificant” distinction as the “Utility Allowances Submetering” regulations and the new rules on “Implementation of Statutory Amendments Requiring Modification of the Definition of Hard Cider.”

Also, there’s no guarantee that even if the new issue price regulations remain, they won’t be replaced with something worse. Withdrawing the issue price regulations wouldn’t lead to a vacuum; it would leave us with rules that arguably do just as well as the new rules to tackle the problems originally intended to be addressed by the new rules.

And something else, too. The literature addressing the relationship between stakeholders and regulators  is surely so full of turgid prose that it needs no help from a fourth-rate blogger, but it is odd, isn’t it, that the reaction to these regulations shows a perverse relationship between the complexity and compliance cost of regulations and the likelihood of pushback down the line: It could be that the more work that it takes to comply with a set of administrative regulations, the less likely that stakeholders are to push back and demand that the agency repeal those regulations, even when presented with a golden, seemingly once-in-a-career opportunity. The President’s Executive Order seems to be a unicorn event, and it may be that the fears of “something worse” coming along could be unfounded because of the President’s slow pace of appointing high-level policy leaders at the agencies. (Note also that this fear doesn’t seem to have stopped opponents of the proposed political subdivision regulations.)

Nuts and Bolts

In actual deals, most firms appear to be using the NABL and SIFMA models, with the expected small tweaks that flow from each firm’s particular preferences. A couple of examples that seem to crop up repeatedly: The NABL model issue price certificate contains a sentence that requires a lead underwriter to certify that in a hold the offering price situation all of the other entities that fall into the umbrella definition of an “underwriter” not only agreed to hold the offering price, but also actually held the offering price. We’ll have more to say about this later, but the existence of this sentence appears to come from a classic case of “if the Preamble is unclear, then (and only then) consult the text of the regulations.” In addition, as lead underwriters make preparations and prepare documents to ensure that they can give the issue price certifications that the NABL model requires, materials and certificates that never would have come across bond counsel’s desk are now coming to light. The feeling by bond counsel that they must “look behind” the underwriter’s certificate and examine these materials (which is certainly understandable) seems to be at odds with the way that the new issue price regulations changed the approach of prior issue price proposed regulations that would have required additional diligence by issuers and their counsel regarding issue price matters.

In addition, some counsel have made small changes to offering document disclosures regarding bonds sold with original issue premium and discount. It has typically been the practice of most bond counsel to delete the disclosure regarding OIP and OID in the “Tax Matters” section when all of the bonds were sold at par. In situations where the language remains because some or all of the bonds are sold at a premium or discount, the language often refers readers to the prices in the Official Statement. However, to account for situations where the issue price of some of the bonds does not correspond to the initial offering price and results in OIP or OID based on actual sales (or where the issue price isn’t known on the date that the disclosure is finalized), the language can be softened to say to the reader that certain of the bonds “may” have been sold with OIP or OID. Interestingly, this possibility already existed before the new issue price regulations in a situation where the issuer relied on reasonable expectations to set the offering price and the actual sales (which has always determined whether the bondholder has OIP or OID) resulted in a different price. This is one of several examples of bugs that have always existed in the system but that are only being revealed on the occasion of the new rules, even if the changes in the rules don’t directly relate to those bugs. This sort of change to the disclosure reflects the way in which the new issue price rules, at least the “general rule” conform the issue price rules with OID rules.

^{[1] After all, stranger proposals than the one in the final regulations have been proposed before.}