Part Three: Other Considerations for Investing Bond Proceeds
Creating a successful bond proceeds reinvestment program starts with structuring a strategy that adheres to your governing documents and risk tolerances while simultaneously accounting for the ever-changing nature of your project and the market.
Arbitrage Rebate: IRS regulations set forth in Section 148(a) of the Internal Revenue Code were enacted to keep public entities from issuing bonds for reasons other than their originally intent. Arbitrage rebate regulations force any bond issuer to pay 100% tax on investment earnings of gross proceeds in excess of the bond’s arbitrage yield. Here are a few items to consider:
- In general, paying arbitrage rebate is a good thing because it means that you have earned the maximum interest income allowed during your project.
- The I.R.S. has laid out several exceptions in regards to paying arbitrage rebate. Click here to see if your bond project spending qualifies for exemptions.
- Using a reputable arbitrage rebate compliance firm will help you determine your potential liabilities.
Municipal Advisor Rule: The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Exchange Act of 1934 to add a new requirement that “Municipal Advisors” register with the SEC. The rule places a fiduciary obligation on those providing certain financial and investment advice to municipal entities. Please also condsider the following:
- You should not take advice regarding the investment of your proceeds from someone who is not a municipal advisor registered with the SEC.
- There are some exemptions in regards to registering as a municipal advisor.
- Exemptions include registered investment advisors; they already have a fiduciary responsibility.
- Additionally, your underwriter should not be giving you advice regarding the investment of proceeds as it is outside their scope of work.
- Finally, if broker dealers are not registered as municipal advisors, they cannot present investment advice but may provide information on securities they have available for purchase or sale.
Remember, prudent investment of your bond proceeds will help you work towards maximizing interest income over the life of your project. The more you earn, the lower the overall financing cost of your project.
If you would like to speak with a PUBLIC TRUST ADVISORS™ public funds investment professional regarding bond proceeds management, please email firstname.lastname@example.org and a local representative will be in touch.
*The information presented should not be used in making any investment decisions. The presentation is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration and involvement with an experienced professional engaged for the specific purpose. All comments and discussion presented are purely based on opinion and assumptions, not fact, and these assumptions may or may not be correct based on foreseen and unforeseen events. All calculations and results presented are for discussion purposes only and should not be used for making calculations and/or decisions. Any financial and/or investment decision may incur losses.