THE SHORT ANSWER
Specifications reach at least three reasonably competitive providers; at least three bids must come from providers with no material financial interest in the issue, including one from a reasonably competitive provider; a guaranteed investment contract goes to the highest-yielding bid, others to the lowest-cost bid. Meeting Treasury Regulation 1.148-5(d)(6)(iii) treats a guaranteed investment contract's or yield-restricted defeasance escrow investment's purchase price as fair market value on the purchase date.
Bond-proceeds investments such as guaranteed investment contracts, repurchase agreements and forward purchase agreements are competitively bid when the issuer sends the same written specifications to potential providers in time to respond, receives their bids by the bid due date, and awards the highest-yielding bid for a guaranteed investment contract or the lowest-cost bid for other investments under Treasury Regulation 1.148-5(d)(6)(iii).
The Securities and Exchange Commission has described these products as instruments tailored to a municipality's specific collateral and spend-down needs, and in its litigation release in the Wachovia matter it called competitive bidding run by bidding agents the most common way to establish fair market value.
This page walks through why the rules exist, the steps from specifications to certifications, who may bid, timing against the bond closing, and what the issuer keeps afterward, within the broader guide to investing bond proceeds.
Why competitive bidding is required to meet the fair-market-value safe harbor
Competitive bidding is the route Treasury's regulations give an issuer for treating the purchase price of a guaranteed investment contract, or of an investment bought for a yield-restricted defeasance escrow, as fair market value.
Treasury Regulation 1.148-5(d)(6)(i) defines fair market value as the price a willing buyer would pay a willing seller in a bona fide arm's-length transaction, generally on the trade date.
The same paragraph provides that an investment that is not of a type traded on an established securities market, within the meaning of section 1273, is rebuttably presumed not to be bought or sold at fair market value.
The bidding safe harbor in Treasury Regulation 1.148-5(d)(6)(iii) supplies the route back for a guaranteed investment contract, or for an investment bought for a yield-restricted defeasance escrow: the purchase price is treated as fair market value on the purchase date if all of its requirements are satisfied, requirements that fall into five groups, a bona fide solicitation, qualifying bids, winning-bid rules, a provider certification and record retention.
Two categories reach fair market value without a bid: Treasury obligations bought directly from the United States Treasury, including State and Local Government Series securities, are treated as bought at fair market value on the purchase date, and fixed-rate certificates of deposit with a fixed payment schedule and a substantial early-withdrawal penalty take a separate test in 1.148-5(d)(6)(ii), under which the yield must be at least the yield on comparable Treasuries and at least the provider's highest published yield on comparable public CDs.
By December 2011 the SEC had brought a series of bid-rigging cases over municipal reinvestment products, and it said more than $743 million had been recovered from financial institutions in these settlements and that 18 individuals had been indicted or had pled guilty.
The SEC also said the conduct deprived municipalities of the conclusive presumption that reinvestment instruments were purchased at fair market value, and its litigation release in the Wachovia matter said it jeopardized the tax-exempt status of billions of dollars in municipal securities.
In the Wachovia case the SEC charged that at least 58 transactions in 25 states and Puerto Rico were rigged through "last looks," in which a provider received competing-bid information from the bidding agent, and "set-ups," in which the agent deliberately obtained non-winning bids from other providers.
The safe harbor's conditions answer these practices, barring any exclusive last look and requiring a no-collusion, no-courtesy-bid representation.
The five groups are examined requirement by requirement on the fair market value safe harbor page.
Step by step: specs → solicitation → bids → award → certifications
A competitive award moves through five stages, and the safe harbor attaches its own requirement to each: written specifications, solicitation, receipt of bids, award, and certifications and records.
| Stage | What Treasury Regulation 1.148-5(d)(6)(iii) requires | Paragraph |
|---|---|---|
| 1. Specifications | Written specs sent to providers in time to respond, covering all material terms and only commercially reasonable terms, with the no-collusion representation | (A)(1)–(4) |
| 2. Solicitation | Terms reflecting the expected deposit and drawdown schedule for a guaranteed investment contract, an equal opportunity to bid for every potential provider, at least three reasonably competitive providers solicited | (A)(5)–(7) |
| 3. Bids | At least three bids received from providers with no material financial interest in the issue, at least one from a reasonably competitive provider | (B)(1)–(2) |
| 4. Award | The highest-yielding bona fide bid for a guaranteed investment contract, determined net of any broker's fees, or the lowest-cost bona fide bid for other investments, including broker's fees, not above the most efficient all-SLGS portfolio | (C)(1)–(2) |
| 5. Certifications and records | A provider certification of administrative costs, records kept with the bond documents until three years after the last bond is redeemed | (D)–(E) |
The solicitation begins with written bid specifications, sent to potential providers in time to respond, in electronic or paper form, that include all material terms, meaning any term that may directly or indirectly affect the yield or cost of the investment, and only commercially reasonable terms.
The specifications must also state that submitting a bid is a representation that the provider did not consult any other potential provider about its bid, set the bid without regard to other agreements with the issuer or anyone else, and submit no courtesy bid.
For a guaranteed investment contract, the terms of the solicitation must take into account the issuer's reasonably expected deposit and drawdown schedule for the amounts to be invested.
For investments bought for a yield-restricted defeasance escrow, the hold-firm period must be no longer than reasonably required.
What a complete specification package contains is covered in depth on the bid specifications page.
On the solicitation side, at least three reasonably competitive providers must be solicited, and a reasonably competitive provider is one with an established industry reputation as a competitive provider of the type of investments being purchased.
Every potential provider must also have an equal opportunity to bid: no potential provider may be given an opportunity to review other bids that is not equally given to all potential providers, barring any exclusive last look.
The issuer may run this process itself or use an agent: GFOA's refunding best practice describes an escrow bidding agent that solicits bids for open-market escrow securities, a role a municipal advisor may be able to fill, with the mechanics on the role of a Bidding Agent page.
To satisfy the bid requirement, the issuer must receive at least three bids from solicited providers with no material financial interest in the issue, and at least one bid must come from a reasonably competitive provider.
The material-financial-interest test reaches into the financing team: the regulation deems the lead underwriter in a negotiated underwriting transaction to have a material financial interest in the issue until 15 days after the issue date, and treats any entity acting as financial advisor on the investment purchase when specifications go out, and related parties of such providers, the same way.
If fewer than three qualifying bids arrive, the regulation does not prescribe what happens next, and the fewer-than-three-bids page covers that case.
For a guaranteed investment contract, the winning bid must be the highest-yielding bona fide bid, determined net of any broker's fees.
For other investments, the winning bid must be the lowest-cost bona fide bid including broker's fees, and it may not exceed the cost of the most efficient all-SLGS portfolio when the bids are due, measured by portfolio or investment by investment.
If Treasury has suspended SLGS sales on the date the issuer agrees to buy, the comparison against the most efficient all-SLGS portfolio is not required, and the investments are eligible for yield reduction payments under the suspension rule.
How bids are compared on rate and non-rate terms is covered on the evaluating bids page.
On certification, the provider of the investment, or the obligor on a guaranteed investment contract, must certify the administrative costs it pays or expects to pay to third parties in supplying the investment.
The certification carries weight in the enforcement record: the Justice Department's brief in the UBS prosecution says the convicted traders had falsely certified compliance with the Treasury regulations, and three former UBS executives were sentenced to 18, 27 and 16 months and fined $1 million, $400,000 and $300,000, in convictions the Second Circuit affirmed.
What gets delivered after a specific award is covered on the certifications page.
How state law adds to the federal steps
State law can layer additional bidding conditions on top of the federal requirements, and six examples show how differently they are built.
| State | Bidding or procurement rule | Citation |
|---|---|---|
| Texas | For a guaranteed investment contract to qualify, the bond order, ordinance or resolution must specifically authorize it, at least three bids must come from separate providers with no material financial interest in the bonds, the highest-yielding qualifying bid must be bought, the price must reflect the reasonably expected drawdown schedule, and the provider must certify the administrative costs reasonably expected to be paid to third parties | Tex. Gov't Code §2256.015(c) |
| Florida | The investment policy must require staff to competitively bid securities when feasible and appropriate and to select the bid that best meets the policy's investment objectives, unless law requires otherwise | Fla. Stat. §218.415(12) |
| Georgia | In selecting among avenues of investment or among institutional bids for deposits, the highest rate of return is the objective, given equivalent conditions of safety and liquidity | O.C.G.A. §36-83-4(c) |
| Arizona | Certificates of deposit must be bought from the eligible depository bidding the highest permissible rate, amounts over $100,000 may not be awarded below 103% of the equivalent bond yield on similar-term Treasury bills, and bid records are kept for two years | A.R.S. §35-323(B), (F) |
| New Jersey | Each local unit's annually approved cash management plan governs its investments, which must be made on a competitive basis insofar as practicable | N.J.S.A. 40A:5-14 |
| Colorado | Public entities adopt criteria designating eligible broker-dealers for term securities, with bond-proceeds investments expressly excepted from that requirement | C.R.S. §24-75-601.1(2.3) |
The Texas conditions are state procurement law running alongside the federal safe harbor in Treasury Regulation 1.148-5(d)(6)(iii), separate requirements rather than one merged rule.
Florida's standard is the bid that best meets the policy's investment objectives, which the statute does not equate with the highest yield, and the policy requirement itself does not apply to funds related to the issuance of debt where another policy or indenture already governs those funds.
Georgia's objective sits in its general local investment authority, O.C.G.A. §36-83-4; for bond proceeds specifically, the state's provision is O.C.G.A. §36-82-7.
Arizona's bidding rule covers certificates of deposit, not investment agreements.
New Jersey's statute requires a competitive basis insofar as practicable but does not define the term or fix a number of bids.
Colorado's exception leaves its broker-dealer criteria for term securities outside bond-proceeds investments; the same section requires a firm that sells an instrument short of the criteria to buy it back on demand within one business day.
State-by-state detail is in the state guide.
Who can bid
The safe harbor counts bids only from providers that meet its requirements, and the first two restrictions below turn on the bidder's role in the financing.
The first is a material financial interest in the issue, which the regulation attaches to the lead underwriter of a negotiated deal until 15 days after the issue date, to any entity acting as financial advisor on the investment purchase when the specifications go out, and to related parties of such providers.
An underwriter, as the MSRB glossary defines the term, is a municipal securities dealer that purchases a new issue from the issuer for resale in a primary offering, through negotiation or competitive bid.
The second restriction runs against the issuer's own side: if the issuer uses an agent to conduct the bidding process, the agent must not have bid to provide the investment.
The third requires at least one of the qualifying bids to come from a reasonably competitive provider, as defined above.
The roles of provider and bidding agent have drawn enforcement: the SEC charged UBS with rigging at least 100 municipal reinvestment transactions in 36 states from 2000 to 2004, alleging that it acted both as a provider of reinvestment products and, rigging bids for other providers, as a bidding agent, and that it routed undisclosed payments to bidding agents through interest rate swaps; UBS agreed to pay $47.2 million to the SEC and $113 million in parallel cases, $160 million in total, to settle.
How the Bidding Agent's fee is set is covered on the Bidding Agent fees page.
Timing relative to bond closing
The safe harbor measures events on specific days: the purchase date, on which a price that meets the safe harbor is treated as fair market value, and the bid due date, on which the SLGS cost comparison is measured.
In a negotiated financing, the lead underwriter is treated as having a material financial interest in the issue until 15 days after the issue date, so it cannot be one of the qualifying bidders for an investment awarded inside that window.
For guaranteed investment contracts, the solicitation terms must take into account the issuer's reasonably expected deposit and drawdown schedule, so the issuer needs that schedule settled before specifications go out.
Market references are set day by day: Treasury's official yield curve is a par yield curve built with a monotone convex method from indicative bid-side quotes on the most recently auctioned securities, collected by the Federal Reserve Bank of New York at or near 3:30 p.m. each trading day.
When to run a bid relative to pricing, closing and the draw schedule is the subject of the timing page.
What the issuer receives at the end
The issuer ends with an executed investment purchased on the awarded terms and a record that supports the safe harbor's treatment of the price.
The record side is specific: Treasury Regulation 1.148-5(d)(6)(iii)(E) requires the issuer to retain records with the bond documents until three years after the last outstanding bond is redeemed.
The records named there are:
- The investment contract or purchase agreement.
- The receipt for the amount paid, together with any administrative costs and the provider certification.
- The bid solicitation form, with an explanation of any deviations from it.
- The submitter, time, date and result of each bid.
- For purchases other than guaranteed investment contracts, the cost of the most efficient all-SLGS portfolio when the bids were due.
Together they are the file the safe harbor requires the issuer to keep, and they carry the purchase from award into the bond documents.
mGIC's third service area covers this handoff: documentation and settlement, coordinating with the provider's counsel and the financing team and delivering the Bidding Agent and provider certifications to bond counsel, finishing with a compliance file.
The full record set is unpacked on the compliance file page.
GFOA's best practice on bond proceeds recommends an investment policy ensuring legal and regulatory requirements are met, fair market value bids are received when required by tax law and state or local laws, and issuer objectives are attained.
If you want this sequence run independently on your issue, you can use mGIC as Bidding Agent or ask for a free, no-obligation reinvestment review through the same contact page.
Final determinations about whether an issue's bidding meets the federal and state requirements belong to bond counsel and tax counsel.
In this section
- How Should an Issuer Compare Investment Bids for Bond Proceeds?How to evaluate and compare GIC bids for bond proceeds: rate comparison on a common basis, non-rate terms, provider credit, documentation and the award.
- What Goes Into Bid Specifications for a Bond-Proceeds Investment?What goes into bid specifications for a GIC or repo: the fund and drawdown schedule, permitted investments, collateral and downgrade terms, and bid dates.
- When to Bid Bond-Proceeds Investments: Before or After Closing?When to bid a GIC or other bond-proceeds investment: bidding before or after bond pricing, forward-settling rate locks, SLGS deadlines and closing timing.
- What Is a Bidding Agent for Bond-Proceeds Investments?What a Bidding Agent does for a bond issuer: bid specifications, provider solicitation, bid comparison, certifications, independence rules and who pays the fee.
- How Are Bidding Agent Fees Set and Who Pays Them?How bidding agent fees are set and who pays them: the provider-paid fee, the broker's-commission safe harbor amounts, and the disclosure rules that apply.
- Provider and Bidding Agent Certifications for Bond CounselPost-bid certifications for bond proceeds: the provider's administrative-costs certification, the Bidding Agent certificate and how long bid records are kept.
- The Reinvestment Compliance File: What Issuers Should KeepPost-issuance compliance records for a bond-proceeds investment: the arbitrage safe-harbor file, MSRB G-8 and G-9 advisor records, and how long to keep each.
- What Happens When a Bond-Proceeds Investment Draws Fewer Than Three Bids?What happens when a GIC draws fewer than three bids: why bid fields come up short, what the three-bid rule means for the safe harbor, and how a re-bid works.
- What Does the Fair-Market-Value Safe Harbor Require for a GIC or Repo?What the fair market value safe harbor under Treasury Regulation 1.148-5 requires for a GIC or repo: solicitation rules, the three-bid rule, certifications.
Frequently asked questions
Does the safe harbor require three bids received, or only three providers solicited?
Both, as separate requirements. Treasury Regulation 1.148-5(d)(6)(iii)(A)(7) requires at least three reasonably competitive providers to be solicited, and (B)(1) and (B)(2) require the issuer to receive at least three bids from providers with no material financial interest in the issue, at least one from a reasonably competitive provider.
What happens if only two qualifying bids come in?
On those facts the safe harbor's bid requirement is not met, and the regulation does not prescribe a substitute process. Falling short of the safe harbor means the issuer loses its fair-market-value treatment for the price, which is not the same as a finding that the price was unfair.
Can the bond underwriter also bid on the investment?
A lead underwriter in a negotiated underwriting transaction is deemed to have a material financial interest in the issue until 15 days after the issue date, so it cannot be one of the qualifying bidders during that window. The MSRB glossary defines an underwriter as a dealer that buys a new issue from the issuer for resale through negotiation or competitive bid.
Is an issuer required to use a bidding agent?
The federal rules are written conditionally: the regulation's bid requirement applies if the issuer uses an agent to conduct the bidding process, and on that premise the agent must not have bid to provide the investment. Nothing in the safe harbor as laid out on this page requires an issuer to engage one. GFOA notes that a municipal advisor, if engaged, may be able to act as an escrow bidding agent.
What does the provider's certification cover?
Under Treasury Regulation 1.148-5(d)(6)(iii)(D), the provider of the investment, or the guaranteed investment contract obligor, certifies the administrative costs it pays or expects to pay to third parties in connection with supplying the investment.
Sources
- 26 CFR 1.148-5, Yield and valuation of investments
- SEC Litigation Release No. 22183, SEC v. Wachovia Bank, N.A. (Dec. 8, 2011)
- SEC Press Release 2011-105, UBS bidding settlement (May 4, 2011)
- SEC Press Release 2011-276, GE Funding Capital Market Services settlement (Dec. 23, 2011)
- Brief for the United States in Opposition, Heinz v. United States, No. 15-432
- GFOA, Investment and Management of Bond Proceeds
- GFOA, Refunding Municipal Bonds
- MSRB Glossary of Municipal Securities Terms, Underwriter
- U.S. Treasury, Treasury Yield Curve Methodology
- Texas Government Code §2256.015
- Florida Statutes §218.415
- Colorado Revised Statutes §24-75-601.1
- Arizona Revised Statutes §35-323
- P.L.2018, c.40 (A3122), amending N.J.S.A. 40A:5-14
- O.C.G.A. §36-83-4
This page is general educational information about municipal finance and federal and state rules as of the date shown. It is not legal, tax or investment advice, and it is not a recommendation about any particular investment. Product availability, legality and suitability depend on the issuer, jurisdiction, governing documents and transaction-specific facts. Final legal and tax determinations remain with the issuer's bond counsel, tax counsel and other advisors.
