WASHINGTON -- GIC finders have emerged as the newest players in the municipal market, but some bond lawyers say they are merely disguised GIC brokers trying to hide their fees and avoid arbitrage restrictions.
The GIC finder, according to the lawyers, finds new business for providers of guaranteed investment contracts. GIC finders may operate independently or they may work for one or more providers of the contracts, but they get paid only if they succeed in bringing a GIC provider new business.
Some bond lawyers contend that GIC finders are very different from GIC brokers--firms typically hired by issuers or GIC providers to obtain bids on a guaranteed investment contract. For arbitrage purposes, they say, the fees paid to GIC finders should be ignored.
Other lawyers contend, however, that GIC finders are nothing more than camouflaged GIC brokers trying to hid their fees and to avoid new arbitrage restrictions.
Arbitrage rules issued by the Treasury and Internal Revenue Service in June require that all but five basis points of a GIC broker's fee be counted as additional investment earnings in arbitrage calculations, regardless of whether the fee is paid by the issuer or the GIC provider. The rules do not say anything about GIC finders.
Treasury and Internal Revenue Service officials said this week that they have not addressed the issue of how to treat the fees paid to GIC finders, since they only recently discovered that GIC finders exist.
One federal regulatory official said that a key question in any analysis of the issue is whether a GIC finder's fee would inflate the price of the issuer's investment and, as a result, artificially lower the yield of the investment. The underlying concern, he said, is that a GIC provider might inflate the price of an investment to cover a fee paid to a GIC finder. A higher price would result in a lower yield and would raise questions about whether the investment was really acquired at a fair market value. Arbitrage rules require issuers to purchase investments at fair market value.
Another regulatory official said the key question is whether GIC finders are actually GIC brokers whose fees would have to be taken into account in arbitrage calculations.
The issue of GIC finders first surfaced publicly at a meeting of the American Bar Association's tax-exempt financing committee two weeks ago.
Henry S. Klaiman, a partner with Brown & Wood in New York, told the group that he had recently learned, after the closing of a tax-exempt bond transaction, that a fee had been paid to a GIC finder. He asked if such fees must be included in arbitrage calculations. He did not identify any of the parties in the transaction.
Most of the lawyers at the meeting said such fees would have to be treated as additional investment earnings in arbitrage calculations, but there appeared to be some confusion. But several of them said later they thought Klaiman was talking about a GIC broker, not a GIC finder.
After the meeting, Klaiman said he was talking about a GIC finder. Klaiman said that, in his view, a GIC finder may be different from a GIC broker, but that one must examine the facts of a particular financing to make the determination.
If the GIC finder is not really a party to the transaction and is paid only if he succeeds in bringing new business to the GIC provider, it is possible his fees could be ignored for arbitrage purposes, Klaiman said.
Another lawyer, who asked not to be identified, said that some firms calling themselves GIC finders are nothing more than GIC brokers disguising themselves to avoid arbitrage restrictions.
"I think what's going on here is that some of the brokers are tying to convince the providers not to disclose their fees. They're arguing that they are a GIC finder working for a GIC provider rather than a GIC broker working for an issuer," he said.
While a few bond lawyers said they discovered GIC finders in tax-exempt bond transactions, some GIC brokers said either they had never heard the term "GIC finder" or did not know what it meant.
"I've never heard the terminology before," said Mary A. Packer, president of PackerKane & Co. in New York. "It sounds like a play on words to me," she said, adding that she thought it would be tough to distinguish a GIC finder from a GIC broker.
"It's not a term I've heard before," said James W. O'Connor, managing director of FSA Fund Services Associates in Los Angeles.
Robert H. Rasmussen, director of East Coast operations for Los Angeles-based Chambers, Dunhill Rubin & Co. said, "I've heard the term used, actually by some people in my company. I've heard it brought up. But I don't know what it means."
