The Department of the Treasury recently published a notice of proposed rulemaking, with request for comments, to make substantial revisions to the regulations governing subscriptions, cancellations, redemptions, and modifications of subscriptions relating to State and Local Government Series (SLGS) securities. These revisions would make the SLGS program significantly less flexible and attractive to issuers. The Treasury has expressed concern with certain practices of issuers that, in effect, use the SLGS program as a cost free option and which Treasury considers to be contrary to the purpose of the SLGS program. To be considered, comments must be received by Bureau of the Public Debt by November 1, 2004.
Although the proposed changes generally will not be effective until after the publication of final regulations, the possibility that the effective date will be shortly after November 1 makes consideration of the proposals important in current planning. Furthermore, one of the proposed changes would require all SLGS transactions to be done through the computerized SLGSafe system, rather than by mail or facsimile, so Treasury advises all subscribers who are not currently SLGSafe service users to submit an application for SLGSafe as soon as possible.
Treasury also plans make the rates specified in the daily SLGS rate table more current. The SLGS rate table released to the public by 10 a.m., Eastern time, each business day, will use the current day's SLGS rates. In the rare instances when Treasury is unable to post the current day's SLGS rates by 10 a.m., the SLGS rate table for the previous business day will apply.
Among the most significant proposed changes are the following:
1. Redemptions to Increase Yield. Prohibit the investment of any amount received from the redemption before maturity of a SLGS Time Deposit security at a yield that exceeds the yield used to determine the amount of redemption proceeds for such Time Deposit security.
2. SLGS Purchases to Increase Yield. Prohibit the purchase of a SLGS security with any amount received from the sale or redemption (at the option of the holder) before maturity of any marketable security, if the yield on such SLGS security being purchased exceeds the yield at which such marketable security is sold or redeemed.
3. Required Certifications. Upon starting a subscription for a SLGS security, a subscriber would be required to certify that: (a) if the issuer is purchasing a SLGS security with the proceeds of the sale or redemption (at the option of the holder) before maturity of any marketable security, the yield on such SLGS security does not exceed the yield at which such marketable security was sold or redeemed; and (b) if the issuer is purchasing a SLGS security with proceeds of the redemption before maturity of a Time Deposit security, the yield on the SLGS security being purchased does not exceed the yield used to determine the amount of redemption proceeds for such redeemed Time Deposit security. Upon submission of a request for redemption before maturity of a Time Deposit security, the issuer would be required to certify that no amount received from the redemption will be invested at a yield that exceeds the yield used to determine the amount of redemption proceeds for such Time Deposit security.
4. Mandatory Use of SLGSafe. All transactions, including certifications, confirmations, subscriptions, and redemptions, must flow exclusively through SLGSafe; subscriptions may be submitted by fax or mail only to the extent it is established to the satisfaction of the Bureau of Public Debt that good cause exists to submit subscriptions by such means.
5. Cancellations. Cancellations of SLGS subscriptions would be prohibited unless the subscriber establishes, to the satisfaction of Treasury, that the cancellation is required for reasons unrelated to the use of the SLGS program to create a cost-free option. The applicable SLGS rate table would be the table in effect on the business day in which the subscription process was begun. The penalty for an impermissible failure to take delivery of SLGS securities would remain unchanged: six months ineligibility to subscribe for SLGS securities.
6. Changes in Principal Amount. Changes in the aggregate principal amount originally specified in a subscription for both Time and Demand Deposit securities would be limited to ten percent, with elimination of the $10 million permitted change for Time Deposit securities and the ability to change without penalty the principal amount of Demand Deposit securities.
7. Definition of "Yield". For purposes of the certifications, in comparing the yield of a SLGS security to the yield of a marketable debt instrument, the yield of the marketable debt instrument would be computed using the same compounding intervals and financial conventions used to compute interest on the SLGS security, with no adjustment for credit quality.
8. Deadlines. Reduce the number of hours during which SLGSafe subscriptions, requests for early redemption of Time Deposit securities, and requests for redemptions of Demand Deposit securities will be received to business days from 10 a.m. to 6 p.m., Eastern time. All changes to a Time Deposit subscription would have to be made by 3 p.m., Eastern Time, on the issue date.
9. Governmental Purpose Required; Maturity Limit. Prohibit the purchase of a SLGS security with a maturity longer than is reasonably necessary to accomplish a governmental purpose of the issuer.
10. Issue Date Fixed. Once an issuer selects an issue date for Time and Demand Deposit securities, the subscription cannot be amended to change the issue date.
11. Certification of Issuer Authorization of Bonds. Upon starting a SLGS subscription, the issuer must certify that it has authorized the issuance of the state or local bonds, and a description of the municipal bond issue must be provided in SLGSafe.
12. Long-Term SLGS Rates. Although Treasury does not anticipate revising its SLGS rate methodology at this time, the regulations would permit Treasury to establish SLGS rates by using suitable proxies and/or a different rate-setting methodology where SLGS rates are needed for maturities not issued by Treasury.
13. Notices of Redemption. Increase the notification period for SLGS investors to redeem their Time Deposit securities from 10 days to 14 days.
14. Purchase Only from Gross Proceeds. SLGS securities may be purchased only from amounts that constitute gross proceeds of an issue, and not simply, as currently is permitted, to assist in complying with applicable provisions of the Internal Revenue Code relating to the tax exemption of interest.
15. Late Payment Assessments. SLGS securities will not be issued until such time as Treasury receives payment of any late payment assessments.
16. Additional Inquiry by Treasury. Treasury may review any transaction to ensure compliance with the regulations, including requiring an issuer to provide additional information relating to SLGS transactions, and Treasury may determine an appropriate remedy under the circumstances.
17. Special Zero Interest Securities. The early redemption provisions in the existing regulations apply to special zero interest securities issued before October 28, 1996.