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MSRB Addresses Rule G-37

WASHINGTON - The Municipal Securities Rulemaking Board yesterday issued draft amendments to its Rule G-37 that would require banks and bank holding companies to disclose on a quarterly basis the contributions that their political action committees make to municipal issuer officials.

"The MSRB is concerned about the perception that bank and bank holding company PAC contributions could influence the awarding of municipal securities business to bank-affiliated dealers," MSRB executive director Lynnette Hotchkiss, said in a statement.

The draft amendments come as a number of securities firms have converted to banks or bank holdings companies whose PACs may make contributions to issuer officials, the board said. Currently, such PAC contributions are not subject to disclosure under G-37.

The board, which asked market participants to provide comments by Oct. 30, stressed that the draft amendments would only require the disclosure of PAC contributions and would not restrict them.

Under G-37, which also requires disclosures of contributions, dealers cannot engage in negotiated municipal securities business with an issuer for two years if they, their municipal financial professionals, or MFP-controlled PACs contribute to issuer officials who can influence the award of muni bond business. However, MFPs can contribute up to $250 to any issuer official for whom they can vote.

The board had first raised the possibility, in 2002, of requiring bank and bank holding companies to disclose PAC contributions to issuers, the MSRB said in its notice yesterday.

In response, some commentators argued that there was no evidence that these PAC contributions were being made to secure municipal securities business for an affiliated dealer.

"These commentators emphasized that banks and bank holding companies have legitimate concerns of banking institutions and their employees that are independent of municipal securities business," the board wrote.

But other commentators claimed that exempting the PAC contributions from G-37's requirements provided a loophole that presented an opportunity to undermine the effectiveness of the rule and placed traditional dealer firms at a disadvantage.

Over the years, market participants have expressed concerns to the MSRB that a dealer or MFP may be able to obtain favor by merely noting that political contributions have been made by an affiliated bank or bank-holding company PAC.

One market participant said yesterday that it is unclear why the board sought only to require the disclosures from bank and bank holding companies, when other firms, such as insurance companies, historically have also operated dealers that underwrite munis.

Asked about these remarks, MSRB general counsel Ernesto Lanza said they may reflect a "fair point" and encouraged comments on the issue.

Yesterday's proposal follows separate draft amendments to G-37 that the board released in June that would require dealers to disclose contributions to bond ballot election campaign committees. Currently, there are no restrictions or disclosure requirements for dealers that contribute to these committees, which are formed to raise money for bond ballot initiatives in states like California where voter approval is required for bond sales.

But under draft rule changes, dealers would be required to disclose such contributions in quarterly filings to the MSRB, except those of $250 or less made to committees pushing bond ballot initiatives for which dealers can vote.

The board received mixed responses from market participants on the ballot measure disclosure proposal and plans to consider them when it meets for its quarterly meeting at its Alexandria, Va., headquarters next month.

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