As reported by the Bond Buyer, a new provision in the financial regulatory reform law would require the issuer of asset-backed securities to retain at least 5% of the debt issued. While this provision was added to deter actions that spurred the recent financial crisis, it was written so broadly that it could be interpreted to apply to certain municipal bond transactions. The term municipal refers to every bond that may be issued by a state or local government. The concern is that the application of this new provision to municipal bonds is not consistent with the way municipal issuers function.
While debt sold “in the public interest” or debt sold by states or localities are among the types of ABS eligible for possible full or partial exemptions from the 5% provision, the Securities and Exchange Commission has wide latitude in writing carve-outs, and must do so jointly with federal banking regulators.
Richard Sigal of Hawkins Delafield & Wood LLP, who recently spoke during a meeting of the National Association of State Treasurers’, stated that he would like to see the SEC “clearly exempt muni asset-backed securities.” Others are not as concerned. Susan Gaffney, director of the Government Finance Officers Association’s federal liaison center, said: “We don’t believe that munis are effected by this provision, but as the SEC seeks comments on this section, we’ll be seeking clarification to ensure that munis are not caught up in this.”