Arbitrage Rebate & Continuing Disclosure
When bond proceeds are invested in higher-yielding assets, the resulting excess—known as arbitrage earnings—can trigger IRS scrutiny. If not properly monitored, these earnings may cause the bonds to be classified as arbitrage bonds, potentially losing their tax-exempt status.
Two key sets of IRS rules govern this area:
• Yield Restriction Rules under IRC Section 148(a)
• Rebate Rules under IRC Section 148(f)
Issuers may be required to perform periodic calculations to determine whether a yield reduction payment or rebate payment is necessary to maintain compliance.
While the concept of rebating excess earnings to the U.S. Treasury may seem simple, the underlying regulations are highly nuanced. Key areas include:
• Exceptions to Rebate (e.g., small issuer, spending exceptions, bona fide debt service funds)
• Refundings and Transferred Proceeds
• Commingled Fund Allocation
• Replacement Proceeds
• Universal Cap Analysis
• Investment Valuation Methods
• Record Retention Requirements
• Temporary Periods and Materially Higher Yields
• IRS Form 8038-T (Rebate and Yield Restriction Payments)
• IRS Form 8038-R (Refund Requests)
With the HilltopSecurities team by your side, we help issuers retain the maximum earnings permitted under IRS regulations—while making arbitrage compliance straightforward, stress-free, and easy to manage.
HilltopSecurities has been providing continuing disclosure services to our clients for over 25 years. In fact, we are one of the few financial advisory firms in the United States with a dedicated disclosure practice, enabling us to focus on the disclosure needs of our public finance clients.
While most other continuing disclosure services firms simply notify public finance issuers of pending filing dates, we work closely with clients to help them prepare and file the appropriate reports. This unique approach saves our clients both time and resources while helping ensure they remain in compliance with Rule 15c2-12.
To reduce the amount of time our public finance clients spend on fulfilling complex disclosure requirements, we provide seamless turn-key continuing disclosure services, including:
• Reviewing past continuing disclosure obligations and filings to determine current filing status
• Automatic tracking of issuers’ disclosure requirements and associated deadlines
• Preparing and filing annual and quarterly reports
• Monitoring for certain material events and preparing and filing required notices
Beyond calculations and deadlines, HilltopSecurities is committed to educating our clients. We believe that understanding the “why” behind the rules is just as important as meeting the requirements. Our experienced arbitrage and disclosure team is always available to answer questions and provide guidance.
We offer seminars focused on arbitrage rebate and post-issuance compliance. If you are interested in attending a seminar or receiving updates, please contact us at muniservices@hilltopsecurities.com.