Regulators Near Pact on ‘Yield-Burn’ Issue

Federal regulators are near an agreement that would protect municipal bondholders from losing their tax exemption in “yield-burning” cases and make brokerages that allegedly cheated the federal Treasury liable for lost tax revenue. The Securities and Exchange Commission is examining at least half a dozen brokerages in its probe of possible yield burning--when brokerages allegedly overcharged states or cities for securities used in municipal refinancings. In refinancings, a state or city retires old debt by issuing new, lower-interest bonds. The Internal Revenue Service has said tax-exempt muni bonds sold to investors in those cases could be declared taxable. Because municipal bonds get much of their value from their tax-exempt status, the loss of an exemption could cause their value to plummet. John Phillips, head of the Washington-based law firm Phillips & Cohen, estimated that yield burning may have cost the Treasury about $1 billion, and he said it could cost the securities industry two to three times that amount to settle potential legal liabilities.