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G-37 Change Weighed

WASHINGTON - The Municipal Securities Rulemaking Board is expected this week to discuss whether to change its Rule G-37 to restrict broker-dealer contributions to campaign committees that urge voters to approve ballot measures for new muni bond issues.

At a meeting to be held Wednesday through Friday in New Orleans, the board also may consider how to proceed with its proposal that regulators and lawmakers bring brokers of guaranteed investment contracts and financial advisers that are not currently subject to any oversight under federal regulation.

The MSRB's discussion on contributions for bond ballot measures will address a series of complaints in recent years about contributions made to campaign committees that promote voter approval of bond ballot measures. Voter approval is required in many state and local jurisdictions. And critics claim broker-dealers that contribute heavily to the ballot measures for new bonds often are given key roles in the bond transactions.

Public finance executives at the three largest underwriters for negotiated transactions - Citi, JPMorgan, and Morgan Stanley - last month wrote a letter to the MSRB arguing that the rule's restrictions on contributions to such ballot campaigns should mirror the restrictions on broker-dealer contributions to issuer officials and should cover banks, municipal finance professionals, and associated political action committees, as well as broker-dealers.

"Out of an abundance of caution to the perception that making such a contribution could cause an underwriter to be selected and to help ensure that the playing field is leveled for all underwriters, we strongly urge you to consider this amendment," the letter said.

Some market participants contend that the bond ballot contribution problem is most prevalent for school district financings, especially in states like California, where, in 2000, a proposition was adopted lowering to 55% from 66% the amount of voter approval needed to approve a bond ballot measure. There were over a dozen state-wide bond ballot measures in 2008, according to data collected by the National Institute on Money in State Politics, although no comprehensive data exists on these measures.

Martha Mahan Haines, the Securities and Exchange Commission' municipal securities chief, warned in 2005 that the SEC was seeing "some pretty blatant pay-to-play activities" going on in this area, which the rule is designed to prohibit. But market participants say that these contributions are becoming more widespread.

Under G-37, dealers cannot engage in negotiated municipal securities business with an issuer for two years if they or their municipal financial professionals - known as MFPs - contribute to issuer officials who can influence the award of muni bond business. MFPs, however, can contribute up to $250 to any issuer official for whom they can vote.

The board's review of the ballot initiative issue also comes amid a year-long internal review of all of its "G" rules.

"We are going to endeavour to look at all of the G Rules and make appropriate changes if necessary or propose amendments just to make sure that they remain appropriate for the changing market," said MSRB executive director Lynnette Hotchkiss.

Meanwhile, it was not clear yesterday how the board might proceed in terms of urging the Obama administration and the new Congress to regulate such market participants. But the discussion will follow up a statement the MSRB released earlier that said it was concerned that ongoing federal investigations of investment advisers and other muni market participants have created "widespread confusion over how the market is regulated."

"Specifically, we believe that these currently unregulated participants - such as guaranteed investment contracts (GICs) brokers and the various financial advisers - should be brought under federal regulation in order that all segments, and not only broker-dealers, meet the high standards a fair municipal market that protects investors requires," the board said in its statement.

Hotchkiss said yesterday that the board has received an "incredibly positive response" to the statement.

"I don't know if that means though that the folks who might disagree with that position don't say anything, but the people that we have heard from have been universally supportive," she said. She did not say how federal regulators have responded to it, only that conversations with such regulators are ongoing.

The board also plans this week to discuss the continual roll out of its Short-term Obligation Rate Transparency system, which will collect information on auction-rate securities and variable-rate demand obligations and display the data on EMMA. Phase one of the project calls for market participants to begin submitting basic ARS reset information beginning Thursday and basic VRDO remarketing data by April 1.

Hotchkiss said that the board is currently discussing how to design the second phase of SHORT, which will include bidding information for both types of securities and launch later this year. A third phase will include program documents for ARS and remarketing materials for VRDOs.

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