California IOUs - To be traded? 10:10PM

From Yahoo SEC: Treat California IOUs as securities SEC calls for California IOUs to be regulated as securities * By Marcy Gordon, AP Business Writer * On Thursday July 9, 2009, 9:05 pm EDT WASHINGTON (AP) -- The recipients of billions of dollars in promissory notes 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 promissory notes. 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 promissory notes, 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 promissory notes 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 promissory notes, called IOUs for the phrase "I owe you" -- 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 promissory notes 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 promissory notes after Friday. The Federal Reserve, meanwhile, advised bank customers with a promissory note that they should first check with their bank to make sure it will be accepted for deposit and whether any fees could be incurred. A regulated market for the promissory notes "makes it even more advantageous" for individuals holding them, who could sell them at a fair price, said Paul Maco, an attorney at Vinson & Elkins in Washington who was a director of the SEC's Office of Municipal Securities. The price they receive may be discounted in accordance with the market's perception of the risk of the state repaying the notes, but it would be an orderly market price, he said. As California legislators haggle over how to close a $26.3 billion budget deficit, the state is expected to send out $3.3 billion in IOUs this month to an array of individuals, small businesses and local governments. It marks the first time since 1992, and only the second time since the Great Depression, that California has sent out notes promising repayment at a later date instead of paying its bills on time. California Attorney General Jerry Brown has said the IOUs are valid and binding obligations of the state, a characterization that experts say qualifies them as municipal securities. Federal bank regulators, including the Federal Reserve and the Federal Deposit Insurance Corp., told banks in guidance issued Wednesday that they should exercise "the same prudent judgment and sound risk management practices" regarding the IOUs as they would with any other state debt securities. Copyright © 2009 The Associated Press. All rights reserved. The information contained in the AP News report may not be published, broadcast, rewritten, or redistributed without the prior written authority of The Associated Press.

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This was breaking news on CNBC at 2:50PM. I have looked for details since. If finally found it's way to the media again. 6 hours later.