4.8.3.1 Fair Market Value Rules
One fundamental requirement of all of the yield related limitations (e.g., the arbitrage yield restriction, the rebate requirement) is that non purpose investments must be purchased by issuers at a fair market value price. Without this fair market value requirement, issuers could simply direct prohibited investment profits, or profits that would otherwise be paid to the federal government, to entities other than the United States. The process of purchasing investments at an inflated price, known as “yield burning,” has received significant attention and enforcement efforts from federal authorities. Issuers must be careful to comply with the fair market value requirement. Reliance on a fair market value certificate of the seller of securities, in circumstances where the seller will profit from an inflated price and the issuer will not be harmed, is inherently suspect. The Regulations provide a safe harbor for determining the fair market value of certain acquisitions of investments, which generally requires a bidding process and at least three bids from qualified providers of the investment securities.
The federal government has established a special program through the Bureau of Public Debt in which issuers can purchase special U.S. Treasury obligations State and Local Government Series (SLGS) at or below market yields in order to comply with the arbitrage yield restriction. Purchase of SLGS is deemed to have been at fair market value.