Bond Accountability Commission 2 Recommendations Page 32

to those changing demographics in the market, which may require reaching out to new investors, especially in the case of taxable bonds, such as BABs, foreign investors,30 life insurance companies and pension funds. 31 Since issuers now have the option to elect direct payments from the federal government (rather than selling instruments that give investors a federal income tax credit), foreign investors, life insurance companies and pension funds will be similarly important to CMSD. Those new investors to municipal securities need education.32

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Illustrating the emerging importance of foreign investors for U.S. taxable municipal securities, a recent article cited a prospectus for a BABs investment fund offered in French and English to Canadian investors. According to the article, Canadian funds are able to convert to some extent taxable U.S. municipal securities payments into tax-exempt income in Canada. The article states— [T]he launch was the most concrete illustration yet of the foreign investors who reportedly have emerged to buy BABs. “It makes perfect sense for a Canadian investor,” said Darren Cabral, vice president at Connor, Clark & Lunn, citing U.S. municipal default rates well below those on comparably rated corporate bonds and a “fairly attractive yield.” Because of the legal structure of mutual fund trusts in Canada, the monthly dividends paid on the fund will mostly be tax-exempt, according to the Canadian law firm McCarthy Tetrault LLP, which was counsel on the initial public offering. Seymour, “Build America Bonds—Parlez-Vous BABs? A Fund Wants to Know” (Bond Buyer Online Feb. 24, 2010). See also McGrail, “International Buyers Boost Muni Holdings 50% on Build America” (Bloomberg.com March 13, 2010) (“Foreign investors boosted their holdings of U.S. municipal debt by about 50 percent in 2009, to $60.6 billion, in the first year of Build America Bonds, according to data from the Federal Reserve. The overall market for muni debt increased 4.8 percent … . ‘The vast majority of that is BABs,’ said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC … .”)

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See, e.g., McDonald, “New York to Sell Build America Bonds as Taxable Paper Rallies” (Bloomberg.com Jan. 26, 2010) (“The New York City Municipal Water Finance Authority … plans to sell $400 million of Build America Bonds. … Alan Anders, New York City’s debt manager and chief executive officer of the city’s water finance authority, said 35 life insurance companies bought the Build America Bonds the authority sold in October. He said in comments after the sale at a meeting of the Securities Industry and Financial Markets Association that banks need to do a better job of broadening the market for the taxable securities to investors such as pension funds.”)

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See Albano, “Teaching Investors the ABC’s of BABs” (Bond Buyer Online March 29, 2010) (“Even as the market for Build America Bonds has evolved over the past 12 months, underwriters, bankers, and analysts are still schooling investors and issuers about the taxable securities using various approaches. … Large or small, participants say the three main classes of buyers of the economic stimulus credit—