SIFMA Writes to Volcker Regulators to Describe Tender Option Bond Joint Venture Structure Under the Volcker Rule (with Stromfeld Comment)

SIFMA submitted a letter to the Board of Governors of the Federal Reserve System, FDIC, the Office of the Comptroller of the Currency, the SEC, and the CFTC (the "Agencies"), informing the Agencies of the intention of certain financial institutions that are members of SIFMA to utilize joint ventures, as defined in Section __.10(c)(3) of the Volcker Rule, to share the income, gain, and loss on municipal bonds or other tax-exempt securities, commonly referred to as "tender option bond" programs.

According to the letter, participants in joint ventures of this kind may include a banking entity or one of its affiliates subject to the Volcker Rule, but the program will be structured to meet the joint venture exemption in the Volcker Rule regulations and the bonds will be securities that a banking entity or its affiliates are permitted to hold under the Bank Holding Company Act. A Term Sheet describing the characteristics of the tender option bond joint venture accompanies the letter.

Stromfeld Comment: For decades, issuers and investors in the municipal bond market have faced an imbalance between the supply of tax-exempt bonds (which are generally issued as long-term fixed rate instruments) and the demand by money market funds for short-term tax-exempt investments. Tender option bond programs help bridge this imbalance by repackaging the bonds without destroying the pass-through treatment of the tax-exempt interest. Unfortunately, the programs rely upon exemptions from the Investment Company Act that cause them to be "covered funds" under the Volcker Rule. Comments made by the financial industry on the proposed Volcker Rule explained that these programs do not present any of the abuses that were meant to be captured by the Volcker Rule. Nevertheless, regulators could not find a statutory basis to grant the programs a specific exemption. They did signal, however, that a tender option bond vehicle may not be a covered fund. The SIFMA letter articulates the rationale for treating these programs, with some modifications, as joint ventures within the meaning of the Volcker Rule and, therefore, not "covered funds." This approach is an important step in providing clarity for all participants in this market and avoiding what the regulators recognized as the "potential economic burden" on financing by municipalities.

See: SIFMA Letter to the Agencies; Cadwalader Volcker Rule Comment Letter.See generally: CWT C&F Memo: A Critical Analysis of the Potenti al Impact of the Volcker Rule on Municipal Bonds; CWT C&F Memo: The Volcker Rule’s Impact on Banking Entities’ Ownership and Sponsorship of Structured Finance and Securitization Transactions; CWT C&F Memo: The Volcker Rule's Impact on Foreign Banking Organizations; Cabinet Volcker Rule Materials.For questions or more information, please contact Scott Cammarn, Lary Stromfeld or Ivan Loncar.