California IOUs can be considered securities, SEC says

Market Watch ^ | 07/09/09 | Ronald D. Orol

[TigerLikesRooster]

California IOUs can be considered securities, SEC says

Agency guidance helps create a secondary market for IOUs, helping with prices

By Ronald D. Orol, MarketWatch

WASHINGTON (MarketWatch) -- The Securities and Exchange Commission late Thursday issued guidance identifying the IOUs being issued by California as "securities," rather than just obligations of the economically troubled state.

The Golden State issued the IOUs last week to conserve cash and pay off bondholders.

"The staff of the SEC has expressed its belief that California's recently issued IOUs are 'securities' under federal securities law. As such, holders of these IOUs and those who may purchase them are protected by the provisions of the federal securities laws that prohibit fraud in the purchase or sale of securities," the agency said.

The regulator is recommending that the IOUs, which carry an annual interest rate of 3.75%, be regulated as municipal debt, a form of security, by the Municipal Securities Rulemaking Board.

Identifying the IOUs as securities creates a regulated secondary market for them, which make it easier for their holders to sell them at a fair price.

Tom Dresslar, a spokesman for California State Treasurer Bill Lockyer, lauded the SEC's announcement, saying in a statement: "The SEC has sent a pretty clear warning to folks who plan to profit by buying and reselling IOUs: If you're not registered as a municipal securities broker-dealer, you run the risk of violating federal law."

[heleny]

"The staff of the SEC has expressed its belief that California's recently issued IOUs are 'securities' under federal securities law. As such, holders of these IOUs and those who may purchase them are protected by the provisions of the federal securities laws that prohibit fraud in the purchase or sale of securities," the agency said.

Doesn't a securities issuer need to file some SEC paperwork or comply with some rules before issuing the securities? These IOU's became "securities" after they were issued, and the recipients had no choice whether they wanted to "invest" in these "securities."

[Daisyjane69]

thanks for that correction. I should have performed some due diligence before posting something from an email without independently confirming it.

We sure as heck have enough bad news (for real!) around here without me “winging it.”

*sheesh*

[SampleMan]

Bonds are paid before these IOU's, and given CA's declining credit rating, the bond yields may even be higher.

Hold on there. The new rules of bankruptcy under Obama now place bond holders at the back of the line behind unions, newly force-issued government owned stocks, and ACORN.

I don't put it past the state or federal government to arbitrarily decide that those honoring the new socialist IOUs deserve more than the old capitalist bond holders.

But thanks for the info on the IOU's interest status.