On May 2, 2011, the United States Treasury Department announced that it was suspending, on May 6 until further notice, the issuance of U.S. Treasury State and Local Government Series (SLGS) securities. New subscriptions for SLGS securities will not be accepted until the suspension is lifted.

The inability to subscribe for SLGS securities may prevent compliance with the terms of certain escrow agreements, including those that require proceeds of maturing investments to be reinvested in SLGS securities with below-market interest rates. In some cases, noncompliance, if not otherwise addressed, may adversely affect the tax-exempt status of the obligations that financed the purchase of the escrow investments, the obligations that are secured by the escrow, or both sets of obligations.

The IRS, in Rev. Proc. 95-47, 1995-2 C.B. 417, established a procedure for making payments to the United States to reduce the yield on investments held in certain escrows when SLGS securities cannot be purchased for that purpose, due to the suspension of sales. One of the required actions involves making a payment to the United States within 180 days of purchasing an alternate investment for the escrow. Certain of the required actions must be taken prior to or in connection with the purchase of the alternate investment.

Of course, different escrow agreements may have different requirements, including in some cases the presentation of a new bond-counsel opinion. Parties with questions about the actions needed to protect the tax-exempt status of affected obligations are advised to consult with experienced bond counsel.