What Does the Fair-Market-Value Safe Harbor Require for a GIC or Repo?

The fair-market-value safe harbor is the bidding structure in Treasury Regulation §1.148-5(d)(6)(iii) under which the purchase price of a guaranteed investment contract, or of an investment bought for a yield-restricted defeasance escrow, is treated as fair market value on the purchase date.

For a repurchase agreement, the question turns on the definition in Treasury Regulation §1.148-1(b), under which a guaranteed investment contract includes any nonpurpose investment with specifically negotiated withdrawal or reinvestment provisions and a specifically negotiated interest rate; whether a particular repo falls within it is a determination for bond counsel.

This page takes each requirement in turn; the process around them is covered in the guide to competitive bidding.

GFOA's best practice on bond proceeds frames the goal: an investment policy should ensure that fair market value bids are received when required by tax law and by state or local laws.

Why investments must be bought at fair market value

The reason is the starting presumption in Treasury Regulation §1.148-5(d)(6)(i): an investment that is not of a type traded on an established securities market is rebuttably presumed to be acquired or disposed of for a price that is not equal to its fair market value.

Fair market value itself is the price a willing buyer would pay a willing seller in a bona fide arm's-length transaction, generally on the trade date.

That presumption is why guaranteed investment contract purchases rely on the bidding safe harbor, which also covers investments bought for yield-restricted defeasance escrows (Treas. Reg. §1.148-5(d)(6)(iii)).

The stakes appear in the SEC's bid-rigging cases: the agency said corrupted bidding deprived municipalities of the conclusive presumption that reinvestment instruments were purchased at fair market value.

The SEC's actions against five providers ran from December 2010 through December 2011:

The conduct column reports the SEC's allegations and findings in actions that were settled without admissions.

In the Banc of America and Wachovia actions, the SEC said the products included guaranteed investment contracts, repurchase agreements and forward purchase agreements.

The SEC said more than $743 million had been recovered from financial institutions in these settlements by December 23, 2011, and 18 individuals had been indicted or had pled guilty.

The safe harbor is the other side: when every requirement is met, the purchase price is treated as fair market value on the purchase date (Treas. Reg. §1.148-5(d)(6)(iii)).

The five requirements, and where each comes from, are:

Two narrower routes skip bidding entirely.

Treasury obligations bought directly from the Treasury, including State and Local Government Series securities, are treated as bought at fair market value on the purchase date at their purchase price, and on later dates a SLGS is valued at its redemption price for that date (Treas. Reg. §1.148-5(d)(6)(i)).

A fixed-rate certificate of deposit with a fixed payment schedule and a substantial early-withdrawal penalty is treated as bought at fair market value if its yield is at least the yield on reasonably comparable direct obligations of the United States and at least the provider's highest published yield on comparable public CDs (Treas. Reg. §1.148-5(d)(6)(ii)).

Bona fide solicitation requirements

The first requirement is a bona fide solicitation: written bid specifications timely sent to potential providers, containing all material terms and only commercially reasonable terms; electronic form is permitted (Treas. Reg. §1.148-5(d)(6)(iii)(A)).

The regulation defines a material term as one that may directly or indirectly affect the yield or the cost of the investment.

The bid specifications must state that submitting a bid is a representation that the provider did not consult with any other potential provider about its bid, that the bid was set without regard to other agreements with the issuer or anyone else, and that it is not a courtesy bid (Treas. Reg. §1.148-5(d)(6)(iii)(A)(3)).

All potential providers must also have an equal opportunity to bid: if any provider may review other bids before bidding, all must be able to, so no provider can receive an exclusive last look (Treas. Reg. §1.148-5(d)(6)(iii)(A)(6)).

For guaranteed investment contracts, the terms of the solicitation must take into account the issuer's reasonably expected deposit and drawdown schedule for the amounts to be invested (Treas. Reg. §1.148-5(d)(6)(iii)(A)(5)).

For yield-restricted defeasance escrows, the hold-firm period in the specifications must be no longer than reasonably required.

The full anatomy of bid specifications, from the rate quotation form to credit and collateral terms, is on the bid specifications page.

The three-bid requirement and qualifying providers

Treasury Regulation §1.148-5(d)(6)(iii)(B) requires the issuer to receive at least three bids from solicited providers with no material financial interest in the issue, and at least one of those bids must come from a reasonably competitive provider.

The solicitation side carries its own count: at least three reasonably competitive providers, meaning providers with an established industry reputation as competitive providers of that type of investment, must be solicited (Treas. Reg. §1.148-5(d)(6)(iii)(A)(7)).

The two counts are separate, so soliciting three providers does not by itself satisfy the requirement to receive three bids.

An agent that runs the bidding may not itself bid to provide the investment (Treas. Reg. §1.148-5(d)(6)(iii)(B)(3)).

The material-financial-interest rule reaches the issuer's own financing team: 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 (Treas. Reg. §1.148-5(d)(6)(iii)(B)).

The MSRB glossary defines an underwriter as a municipal securities dealer that purchases a new issue of municipal securities from the issuer for resale in a primary offering.

An entity acting as financial advisor on the investment purchase when the specifications go out also has a material financial interest, as do related parties of such providers.

When a solicitation draws fewer than three bids, the safe harbor is not met, and the regulation itself prescribes no substitute.

Highest-yielding bid rule

For a guaranteed investment contract, the winning bid must be the highest-yielding bona fide bid, determined net of any broker's fees (Treas. Reg. §1.148-5(d)(6)(iii)(C)).

For other investments, such as escrow securities, the winning bid must instead be the lowest-cost bona fide bid including broker's fees, and it may cost no more than the most efficient all-SLGS portfolio.

That SLGS comparison is made when bids are due, it is not required if SLGS sales are suspended that day, and the lowest cost may be measured by portfolio or investment by investment.

The bid-rigging cases targeted this step: the SEC charged J.P. Morgan Securities with improperly winning bids by entering into secret arrangements with bidding agents to get an illegal last look at competitors' bids.

Once bids are in hand, comparing them on rate and non-rate terms is the subject of the evaluating bids page.

Required certifications and record retention

The fourth requirement is a certification from the provider of the investment, or the GIC obligor, of the administrative costs it pays or expects to pay to third parties in connection with supplying the investment (Treas. Reg. §1.148-5(d)(6)(iii)(D)).

The fifth is retention: the issuer keeps the specified records with the bond documents until 3 years after the last outstanding bond is redeemed (Treas. Reg. §1.148-5(d)(6)(iii)(E)).

The records the regulation names are:

• the contract or purchase agreement,
• the receipt for the amount paid, with any administrative costs and the provider certification,
• each bid's submitter, time, date and result,
• the bid solicitation form, with an explanation of any deviations,
• and, for non-GIC purchases, the cost of the most efficient SLGS portfolio when bids were due.

For refunding escrows, GFOA describes the surrounding roles: an escrow agent, typically a commercial bank, holds the escrow investments, and a verification agent, typically a CPA firm, confirms that the escrow is sufficient and, where yield is limited, that escrow yield does not exceed the permitted yield.

GFOA notes that a municipal advisor, if engaged, may be able to act as the escrow bidding agent.

The regulation's certification requirement is the provider's administrative-costs certification; a Bidding Agent certificate is market practice rather than a requirement of §1.148-5(d)(6)(iii).

What the Bidding Agent and provider certifications delivered to bond counsel at closing look like in practice is covered on the certifications page.

What happens if the safe harbor is missed

Missing any requirement means the purchase price is not treated as fair market value under the safe harbor; it does not automatically mean the price was unfair.

The underlying presumption is rebuttable, so fair market value can in principle be established by other evidence.

The enforcement record shows what a corrupted process costs: the SEC said the misconduct deprived municipalities of the conclusive presumption described above, and the agency's litigation release said it jeopardized the tax-exempt status of billions of dollars in municipal securities.

The criminal track ran alongside the civil one: former UBS executives Peter Ghavami, Gary Heinz and Michael Welty were convicted of wire fraud and/or conspiracy to commit wire fraud for rigging bids on municipal investment contracts, sentenced to 18, 27 and 16 months and fined $1 million, $400,000 and $300,000, and the Second Circuit affirmed.

The Justice Department's brief in that case says the traders also falsely certified compliance with Treasury regulations.

UBS itself entered a non-prosecution agreement with the Justice Department on May 4, 2011, accepting responsibility for employees who rigged bids in violation of the Sherman Act, and the department's brief says UBS, JP Morgan and Bank of America together paid $525 million in civil fines and restitution.

The escrow side has its own history in yield burning: on April 6, 2000, the SEC announced 10 actions against 10 entities and one individual over refunding offerings, including a settlement in which Dain Rauscher agreed to pay about $13 million to the U.S. Treasury and certain issuers to settle yield-burning claims.

For an upcoming GIC or full-flex repurchase agreement, you can use mGIC as Bidding Agent: mGIC writes the bid specifications, solicits qualified providers, manages questions, receives and compares bids on rate and non-rate terms, and delivers the certifications to bond counsel.

mGIC's fee is paid by the winning provider rather than the issuer, and it is disclosed.

Final determinations about whether a purchase meets the safe harbor belong to bond counsel and tax counsel.

Last updated 2026-10-06.

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.