SEC to call for Calif. IOUs treated as securities

updated 8:42 p.m. ET July 9, 2009

WASHINGTON - The recipients of billions of dollars in IOUs being issued by California soon may be able to sell them on a regulated market, following action taken Thursday by federal regulators.

Some of the nation’s largest banks say that, starting Friday, they will no longer accept the IOUs. The banks want to pressure the state to end its budget impasse, but their action could leave many businesses and families with fewer options for getting their money.

Therefore, the Securities and Exchange Commission recommended Thursday that the IOUs, which carry an annual interest rate of 3.75 percent, be regulated by the Municipal Securities Rulemaking Board as a form of municipal debt.

A regulated market for the IOUs would make it easier for individuals holding them to sell them at a fair price, analysts said.

The SEC oversees rules set by the nongovernment MSRB, which polices the municipal securities markets for fair pricing, disclosure and adherence to the requirement that the securities sold be suitable for the buyer.

The SEC said in an announcement that its staff “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 SEC said.

In addition, it said, those acting as intermediaries between buyers and sellers of the IOUs may need to register with regulators as brokers, dealers or municipal securities dealers.

With Bank of America Corp., Wells Fargo & Co., Citigroup Inc. and some regional banks in the state having said they won’t accept the IOUs for payment after Friday, attention has turned to the possibility of a secondary market to buy up the notes.

A spokesman for JPMorgan Chase & Co. left open the possibility Thursday of a change in that bank’s policy, but spokesmen for Bank of America and Wells Fargo said those banks still planned to cease honoring the notes. Citigroup had no immediate comment.

According to the California Credit Union League, more than 60 credit unions in the state will continue to accept the IOUs after Friday.

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