MSRB Reminds Investors, Market Professionals to Assess Terms of Build America Bonds and other Direct-Pay Bonds in Light of Federal Sequester

Date: June 12, 2013

Contact: Jennifer A. Galloway, Chief Communications Officer
                (703) 797-6600


Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) today reminded municipal securities investors, dealers and other market professionals to review the terms of Build America Bonds and other so-called “direct-pay bonds” in order to understand how federal budget cuts to bond subsidies under sequestration could affect the bonds’ market value. In some cases, issuers of the bonds may have the right to redeem the bonds under certain extraordinary redemption provisions that should be analyzed carefully.

With direct-pay bonds, issuers receive a direct credit subsidy from the federal government. A reduction in these credits due to the sequester may allow the issuer to redeem the securities early at par value, resulting in a potential loss in value for investors who may have purchased the securities at prices above par. Redemption provisions and other terms of direct-pay bonds, which may vary considerably from issue to issue, are publicly available in the bonds’ official statements.

The MSRB encourages investors to use its free Electronic Municipal Market Access (EMMA®) website to access official statements, as well as any applicable continuing disclosure documents, for direct-pay bonds. These documents can help investors and market professionals assess how specific bonds may be affected by the sequester and monitor developments relating to the bonds, including an issuer’s exercise of redemption rights.

“Investors need to understand the specific terms of any direct-pay bonds they are considering buying, selling or holding,” said MSRB Executive Director Lynnette Kelly. “Before making any investment decisions about direct-pay bonds, consult the official statement and other documents available on the EMMA website and speak with your investment professional to ensure you know the facts about when and how the bond could be redeemed by the issuer.”

The MSRB also notes that dealers have an obligation to consider the particular redemption provisions and other terms of direct-pay bonds when making pricing determinations and investment recommendations.

“The MSRB is reminding dealers of their obligations under MSRB rules to provide investors with material information about direct-pay bonds, to trade these bonds at fair prices and to make suitable investment recommendations,” Kelly said. “Dealers and other financial professionals must not assume individual bonds have the same redemption features or pricing characteristics as other bonds of the same type. Dealers must know the material features of the bonds they trade.”

The MSRB protects investors, state and local governments and other municipal entities, and the public interest by promoting a fair and efficient municipal securities market. The MSRB fulfills this mission by regulating the municipal securities firms, banks and municipal advisors that engage in municipal securities and advisory activities. To further protect market participants, the MSRB provides market transparency through its Electronic Municipal Market Access (EMMA®) website, the official repository for information on all municipal bonds. The MSRB also serves as an objective resource on the municipal market, conducts extensive education and outreach to market stakeholders, and provides market leadership on key issues. The MSRB is a self-regulatory organization governed by a 21-member board of directors that has a majority of public members, in addition to representatives of regulated entities. The MSRB is overseen by the Securities and Exchange Commission and Congress.