Now comes word that the federal government has stepped in to regulate warrant trading. The Municipal Securities Rulemaking Board, an entity overseen by the Securities and Exhcange Commission, stated its opinion late last week that the California warrants are "municipal securities" subject to certain federal securities laws.
Warrants will be subject to federal securities-fraud laws. "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," according to the SEC's statement. Make sure to be aware of all registration, disclosure, and documentation requirements before effecting a warrant sale.
Brokering a warrant transaction will require registration. The MSRB opinion says that "persons acting as intermediaries between buyers and sellers of the warrants may need to register as brokers, dealers or municipal securities dealers." Undoubtedly a few unscrupulous "brokers" will appear this summer offering to buy warrants at deep discounts. So if you or a client wish to sell your warrants to a dealer or broker, do your due diligence: ensure that the buyer is aware of the MSRB rules and is properly registered as a municipal securities borker or dealer.
Beware the pitfalls of the inefficient market. Some sort of a marketplace for California registered warrants will undoubtedly spring up, and while the MSRB's decision is meant to ensure some level of fairness in that marketplace, the efficiencies and the transparency of a large, liquid market like a major stock exchange will not exist to the same degree. Make sure you shop around carefully, inquiring as to prices and fees, before agreeing to a sale.
- California IOUs: Rules Around Selling Them and Possible Concerns (FindLaw's Free Enterprise)
- Frequently Asked Questions About Registered Warrants (IOUs) (California State Controller's Office)
- Municipal Securities Rulemaking Board Press Release
- Looking to Sell a California IOU? Read This First (L.A. Times)