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FED ER AL RESERVE BANK O F N EW YORK Fiscal Agent of the United States June 14, 1972 To A ll Commercial Banks, and Others Concerned, in the Second Federal Reserve District: T h e fo llo w in g s ta te m e n t w a s is s u e d M a y 31 b y th e T r e a s u r y D e p a r t m e n t : T R E A S U R Y P R O P O S E S N E W R U L E S O N “ A R B IT R A G E B O N D S ,” O F F E R S S P E C IA L S E C U R IT IE S T O S T A T E , L O C A L G O V E R N M E N T S T h e T re asu ry D e p a rtm e n t to d a y a n n o u n c e d a series o f re la te d ac tio n s affectin g th e m a rk e tin g o f b o n d issues by S tate, county, and m u n ic ip a l g o v e rn m e n ts th ro u g h o u t th e co u n try . T re a s u ry ’s moves are d esig n ed to c la rify th e F e d e ra l ta x s ta tu s o f S ta te an d local b o n d issues u n d e r th e “ a rb itra g e b o n d s” provision o f th e 1969 T a x R efo rm A ct, a n d to assist S ta te an d local g o v ern m en ts in sellin g th e ir b o n d s. T h e In te rn a l R evenue C ode p ro v id es th a t in te re st p aid on b o n d s issu ed by a S tate or local g o v ern m e n t is e x e m p t from F ederal incom e ta x . H ow ever, u n d e r th e R efo rm A ct, if a S tate or local g o v ern m en t will use fu n d s from a bond issue to p u rc h a se o th e r se cu ritie s p ro v id in g a “ m a te ria lly h ig h er y ield ” th a n th e b o n d s th em selv es— th a t is, will engage in a n “ a r b itr a g e ” tra n s a c tio n — th e in te rest p aid to th e b o n d h o ld e rs will be su b je c t to F ed eral incom e tax. F o r exam ple, if a local g o v ern m e n t p la n s to issu e b o n d s a t 5 p e rc e n t a n d invest th e p ro ceed s in o b lig a tio n s yielding 7 p ercen t, th e b o n d s will g e n e ra lly be tre a te d as a rb itra g e b o n d s an d th e in terest p aid to th e b o n d h o ld e rs will be tax ab le. In to d a y ’s actions, th e T re asu ry : — Issu ed proposed a rb itra g e b o n d re g u la tio n s w hich su p p le m e n t te m p o ra ry reg u la tio n s a n n o u n c e d by th e D e p a rtm e n t on N ovem ber 12, 1970. — A m en d ed th e te m p o ra ry re g u la tio n s, p rin c ip a lly to re -d e fin e “ m a te ria lly h ig h e r y ie ld ” . — A nno u n ced issuance o f tw o sp e cia l se ries o f n o n m a rk e ta b le T re a s u ry securities ta ilo re d to th e n ee d s o f S tate an d local g o v ern m en ts, to fa c ilita te c o m p lia n c e w ith th e ap p licab le pro v isio n s o f th e T a x R efo rm Act. T h e p ro p o sed reg u la tio n s a n n o u n c e d to d a y in c o rp o ra te m o st o f th e previously a n n o u n c e d ru les, in c lu d in g g u id e lin e s for co m p u tin g th e yield on S ta te an d local b o n d s a n d on o b lig atio n s a c q u ire d w ith th e b o n d p ro c e e d s. In ad d itio n , th e new re g u la tio n s give g u id a n c e o n o th e r m a tte rs , in clu d in g : 1. How a S tate or local g o v ern m e n t c a n id e n tify th e “ p ro c e e d s ” o f a b o n d issue fo r p u rp o ses o f c o m p u tin g the yield on in v e stm e n t o f th e b o n d -ra is e d fu n d s. 2. A defin itio n o f th e “ te m p o ra ry p e r io d s ” p ro v id ed fo r in th e T a x R efo rm A ct d u r in g w hich a S ta te o r local governm ent m ay invest b o n d p ro c e e d s in o b lig a tio n s o f a m a te ria lly h ig h e r yield w ith o u t loss o f th e tax -ex em p t sta tu s o f in te re st p a id o n th e ir b o n d s. 3. T h e m eth o d o f d e te rm in in g a “ re a s o n a b ly re q u ire d reserve o r rep la ce m en t fu n d ” — also as pro v id ed for in th e R eform A ct— th a t m ay b e in v ested w ith o u t re stric tio n in o b lig atio n s p ro d u c in g a m a teria lly h ig h e r yield. 4. T h e tre a tm e n t o f ad v an ce re fu n d in g issues. T h e am en d m e n t to th e te m p o ra ry re g u la tio n s d efin e s “ m a te ria lly h ig h er yield” as m o re th a n 1 /8 o f one p e rc e n ta g e point, co m p ared to 1 /2 o f o n e p e rc e n ta g e p o in t u n d e r th e previous reg u latio n s. T his a m e n d m e n t a p p lie s to bonds issued m o re th a n 30 d ay s a fte r d a te o f p u b lic a tio n o f th e a m en d m e n ts in th e F e d e ra l R e g ister. T h e p roposed reg u la tio n s a n d a m e n d m e n t to th e te m p o ra ry re g u la tio n s will be p u b lis h ed in th e F e d e ra l R e g iste r for T h ursday, Ju n e 1, 1972, a n d w ill p ro v id e a n o p p o rtu n ity for in terested p erso n s to co m m en t on th e p ro p o sals. T reasu ry also will h old a p u b lic h e a rin g on th e p ro p o sals o n A ugust 15, 1972. In a n o th e r action, T re a s u ry o ffered new n o n m a rk e ta b le se cu rities to S tate and local g o v ernm en t b o d ies. T h e n o n m a rk e ta b le securities a re U n ite d S ta te s T re a s u ry C e rtifica tes o f In d eb ted n ess— S tate an d L ocal G o v e rn m e n t Series, an d U n ited S ta te s T re a s u ry N o tes— S ta te a n d Local G o v ern m en t Series. C ertificates will be issued for periods o f th ree, six a n d n in e m o n th s , an d o ne year. N otes will be available fo r te rm s o f 18 m o n th s to seven years. T h e in te re st ra te on th e new se c u ritie s will be e sta b lish e d by th e S tate or local g o v ern m ent, so long as th a t ra te is low er th a n th e yield on m a rk e ta b le T re a s u ry se cu ritie s o f co m p arab le m a tu ritie s. T h u s, th e new special securities will provide a c o n v e n ie n t m e a n s o f in v e stm e n t by w hich S tate and local g o v ern m en ts can avoid loss o f exem ption from F e d e ra l in c o m e ta x fo r th e in te re s t on th e ir own obligations. S u b scrip tio n s for th e new se cu ritie s, w h ich will be issu ed in b o o k -e n try form , m u st be in m u ltip les o f $5,000. A p p lic atio n for p u rc h a se o f th e c e rtific a te s a n d n o te s m ay be m a d e a t any F ederal Reserve B ank o r B ra n c h . A lthough su b sc rip tio n fo rm s will n o t b e av a ila b le im m ed iately , th e T reasu ry said th a t a p p lic a tio n s for th e new offering will be ac cep ted w ith o u t d elay , p ro v id ed th e y a re acco m p an ied by full p ay m en t an d a p p r o p ria te in stru c tio n s, in c lu d in g th e a m o u n t o f th e c e rtific a te s or n o te s d esired , th e te rm s o f m a tu rity th ereo f, th e in te re st rates, an d th e title o f th e S ta te or lo cal official a u th o riz e d to red e em th e securities. P r in te d o n th e fo llo w in g p a g e s is a c o p y o f T r e a s u r y D e p a r t m e n t C i r c u la r N o. 3 -7 2 , P u b lic D e b t S e r ie s , c o n t a in i n g th e te r m s o f t h e o f f e r i n g r e f e r r e d to in th e a b o v e s ta te m e n t. S u b s c r ip tio n s f o r th e s e c u r itie s , w h ic h w ill b e is s u e d in b o o k - e n t r y f o r m o n t h e b o o k s o f t h e B u r e a u o f th e P u b lic D e b t, T r e a s u r y D e p a r t m e n t , s h o u ld b e m a d e o n th e e n c lo s e d F o r m P D 4 1 4 4 , a n d s h o u ld b e se n t, b y S ta te a n d lo c a l g o v e r n m e n t b o d ie s , o r b y c o m m e r c ia l b a n k s o n t h e ir b e h a lf , to th e G o v e r n m e n t B o n d D iv isio n a t th e H e a d O f f ic e o f th is B a n k , o r to th e C o lle c tio n , L o a n s , a n d F is c a l A g e n c y D iv is io n a t o u r B u ffa lo B r a n c h . P a y m e n t fo r s u b s c r ip tio n s c a n n o t b e m a d e b y c r e d i t to T r e a s u r y T a x a n d L o a n A c c o u n ts . T h e iss u e d a t e o f th e s e c u r itie s w ill b e th e d a t e o n w h ic h f u n d s in fu ll p a y m e n t th e r e f o r a r e a v a ila b le a t th is B a n k o r its B ran c h . A L FR E D H AYES, President. REGULATIONS GOVERNING U.S. TREASURY CERTIFICATES OF INDEBTEDNESSSTATE AND LOCAL GOVERNMENT SERIES, AND U.S. TREASURY NOTESSTATE AND LOCAL GOVERNMENT SERIES D EPA R T M EN T CIRCULAR Public Debt Series No. 3-72 The regulations In the Department of the Treasury Circular, Public Debt Series No 3-72 (31 CFR Part 344), set forth below, are issued under the authority of 26 U.S.C. 103(d), 83 Stat. 656; 31 U.S.C. 753, 754, 754b, and 5 UJ3.C. 301. This offer of U.S. Treasury Certificates of Indebtedness—State and Local Gov ernment Series, and U.S. Treasury Notes—State and Local Government Series, relates to the fiscal policy of the United States and notice and public pro cedures thereon are unnecessary. The regulations were adopted on May 22, 1972. [ seal] J ohn K. Carlock, Fiscal A ssista n t S ecreta ry of th e T rea su ry . Sec. 844.0 344.1 844.2 344.3 344.4 344.5 O ffering o f secu rities. D escrip tion o f secu rities S u b scrip tion for p u rchase. Issu e d ate an d p aym en t. R ed em p tion . G eneral p rovision s. A uthoritt : T h e p rovision s of th is Part 344 Issued u n d er 26 U 5 .C . 1 0 3 (d ), 83 S ta t. 656; SI U.S.C. 753, 754, 754b, and 5 U.S.C. 301. § 3 4 4 .0 O fferin g o f secu rities. (a) In order to provide States, munici palities, and other government bodies described in section 103(a) (1) of the In ternal Revenue Code of 1954 and the regulations thereunder with investments tailored to their needs under those pro visions, the Secretary of the Treasury offers, under the authority of the Second Liberty Bond Act, as amended— (1) U.S. Treasury Certificates of In debtedness—State and Local Govern ment Series, and (2) U.S. Treasury Notes—State and Local Government Series, for sale to those entities. The term “gov ernment body” as used herein refers to any one of these entities. The term “securities” herein refers jointly to the certificates and notes. This offering will continue until terminated by the Secre tary of the Treasury. § 3 4 4 .1 D escrip tion o f securities. (a) General. The securities will be is sued in book-entry form on the books of the Department of the Treasury, Bureau of the Public Debt, Washington, D.C. 20226, They may not be transferred by sale, exchange, assignment, or pledge, or otherwise. (b) Terms and rates of inteerst.— (1) Certificates of indebtedness. The certif icates will be issued in multiples of $5,000 T h e D epartm ent o f the T rea su ry Washington, May22y1972 with periods of maturity fixed, at the option of the government body, for (i) 3 months, (ii) 6 months, (iii) 9 months, or (iv) 1 year. Each certificate will bear such rate of interest as the government body may designate, provided that it shall not be more than the current Treas ury rate on a comparable maturity, re duced by o n e - e ig h th of 1 percent. The applicable Treasury rates will be deter mined by the Treasury not less often than monthly, and will be available at Federal Reserve banks and Branches. Interest on the certificates will be com puted on an annual basis and will be payable at maturity with the prinicipal amount. (2) N otes. The notes will be issued in multiples of $5,000 with periods of ma turity fixed, at the option of the govern ment body, from 1 year 6 months up to and including 7 years, or for any inter vening half-yearly period. Each note will bear such rate of interest as the govern ment body may designate, provided that it shall not be more than the current Treasury rate on a comparable maturity, reduced by one-eighth of 1 percent. The applicable Treasury rates will be deter mined by the Treasury not less often than monthly, and will be available at Federal Reserve Banks and Branches. In terest on the notes will be payable on a semiannual basis by Treasury check on June 1 and December 1, and at maturity if other than June 1 or December 1. Final interest will be paid with the principal. § 3 4 4 .2 S u b s c rip tio n f o r p u rc h a s e . A government body may purchase a security under this offering by submit ting a subscription and making payment to a Federal Reserve Bank or Branch. A commercial bank may act on behalf of a government body in submitting sub scriptions. The subscription, dated and signed by an official authorized to make the purchase, must state the amount, maturity, and Interest rate of the secu rity desired, and give the title of the des ignated official authorized to redeem it. Separate subscriptions must be submitted for certificates and notes, and for secu rities of each maturity and each interest rate. g 3 4 4 .3 Issu e d ate a n d p ay m en t. T h e issue d a te o f a security w ill be th e d ate on w h ich fu n d s in fu ll p aym en t th erefor are available a t a Federal R e serve B an k or B ran ch . § 3 4 4 .4 R ed em p tio n . (a ) At maturity. A security m ay n o t be called for redemption by the Secre tary of the Treasury prior to maturity. Upon the maturity of a security, the Treasury will make payment of the prin cipal amount and interest to the owner thereof by Treasury check, or in accord ance with other prior arrangements made by the government body with the Bureau of the Public Debt. (b) Prior to m aturity. (D Securities may be redeemed at the owner’s option on 2 days’ notice after 1 month from the issue date in the case of certificates, and after 1 year from the issue date in the case of notes. Where redemption prior to maturity occurs, the interest for the en tire period the security was outstanding shall be calculated on the basis of the lesser of (i) the original interest rate at which the security was issued, or (ii) an adjusted interest rate reflecting both the shorter period during which the se curity was actually outstanding and a penalty. The adjusted interest rate is the Treasury rate which would have been in effect on the date of issuance for a marketable Treasury certificate or note maturing on the quarterly maturity date prior to redemption (in the case of cer tificates), or on the semiannual maturity period prior to redemption (in the case of n o tes), reduced in either case by a penalty which shall be the lesser of (iii) one-eighth of 1 percent times the num ber of m onths from the date of issu ance to original maturity, divided by the number of full months elapsed from the date of issue to redemption, or (iv) onefourth of 1 percent. There shall be de ducted from the redemption proceeds, if necessary, any overpayment of interest resulting from previous payments made at a higher rate based ^on the original longer period to maturity. A schedule showing the adjusted interest rates that apply to securities redeemed prior to their maturity dates will be available at the time of issuance of the securities. A notice to redeem a security prior to the maturity date must be given by the official authorized to redeem it, as shown in the subscription for purchase, to the Bureau of the Public Debt, Division of Securities Operations, Washington. D.C. 20226, by letter, wire, or telex, or by telephone confirmed by wire or telex. The telephone number is 202—964-7007, and the telex number is 892428. § 3 4 4 .5 G e n e ra l p ro v isio n s. (a) Regulations. U.S. Treasury Cer tificates of Indebtedness—State and Local Government Series, and U.S. Treasury Notes—State and Local Gov ernment Series, shall be subject to the general regulations with respect to U.S. securities, which are set forth in the D e partment of the Treasury Circular No. 300, current revision (Part 306 of this chapter), to the extent applicable. Copies of the circular may be obtained from the Bureau of the Public Debt, D i vision of Securities Operations, Wash ington, D.C. 20226, or a Federal Reserve Bank or Branch. (b) Fiscal agents. Federal Reserve Banks and Branches, as fiscal agents of the United States, are authorized to per form such services as may be requested of them by the Secretary of the Treas ury in connection with the purchase of, and transactions in, the securities. (c) Reservations. The Secretary of the Treasury reserves the right to reject any application for the purchase of se curities hereunder, in whole or in part, and to refuse to issue or permit to be issued any such securities in any case or any class or classes of cases if he deems such action to be in the public interest, and his action in any such respect shali be final. The Secretary of the Treasury may also at any time, or from time to time, supplement or amend the terms of these regulations, or of any amendments or supplements thereto. SUBSCRIPTION FOR PURCHASE AND ISSUE OF UNITED STATES TREASURY CERTIFICATE OF INDEBTEDNESS/TREASURY NOTE - STATE AND LOCAL GOVERNMENT SERIES Form PD 4144 D ept, of th e T reasu ry Dept, of . b ' t r easur y Bureau of th e P u b lic Debt USE A SEPARATE FORM FOR EACH SECURITY DESIRED To: Federal Reserve Bank or Branch a t________________________________________ PART I Pursuant to the provisions of Department of the Treasury Circular, Public Debt Series 3-72, the undersigned hereby subscribes and submits payment in full for the purchase of a: Check two boxes, one for the security desired and the other for the length of term for the security. □ UNITED STATES TREASURY CERTIFICATE OF INDEBTEDNESS - STATE AND LOCAL GOVERNMENT SERIES to mature Q 3 mos. Hj 6 mos. Q 9 mos. Q 1 year from the date of issue thereof, □ UNITED STATES TREASURY NOTE - STATE AND LOCAL GOVERNMENT SERIES to mature □ 1V2 yrs. I 1 2 yrs. Q 2 V2 yrs. [ j 3 yrs. 3M> yrs. Q 4 yrs. □ 4^ yrs. Q 5 yrs. Q 5 V2 yrs. Q ] 6 yrs. I | 6 V2 yrs. Q ] 7 yrs. from the date of issue thereof, to be issued as an entry on the books of the Bureau of the Public Debt, Department of the Treasury, in the amount and registration shown in Part II below, at the interest rate o f_____________ percent per annum (or, where the current Treasury rate on a security of comparable maturity is le ss , at such lower rate reduced by one-eighth of 1 percent). Dated th is------------------------------ day o f____________________ , 19-------. (N am e o f S ta te, M u n icip a lity or other G overn m en t B o d y ) By (T e le p h o n e — in c lu d e A rea C o d e ) (S ig n a tu re ) (T itle ) P A R T II Amount of purchase ($5,000 minimum and multiples thereof)_________________________ $ -------------------------------Name of owner___________________________________________________ _________________ _____________________ Address of owner (Include ZIP code). Address for mailing interest checks on note (If different than address shown above) T itle(s) of official(s) authorized to re quest redemption of security issued in accordance with this subscription Employer Identification Number FOR USE BY BANK IN T R A N S M IT T IN G P A Y M E N T FOR A B O V E S E C U R IT Y (If payment is submitted separately it should be accompanied by a copy of this subscription) ]] Check enclosed (N am e o f in s tit u t io n ) ]] Charge our reserve a /c (S ta te ) (C ity ) (A u th o riz e d sig n a tu re ) FOR USE OF FEDER AL RESERVE BANK S U B S C R I P T I O N NO. MATURITY DATE I SSUE D A T E FOR USE OF THE DIVISION OF SECURITIES OPERATIONS approved A C C O U N T NO. F R B WI RED Rv Rv Patp natfi • D A T E C R E D I T E D IN T R E A S . A C C T . FOR USE OF THE DIVISION OF P UB LIC DEBT ACCOUNTS D A TE POSTED (ACCTG. DATE) O WN E R N O T I F I E D Date