MSRB Planning to Revise Rule G-37

WASHINGTON — The Municipal Securities Rulemaking Board plans to soon propose revising its Rule G-37 on political contributions to require municipal securities dealers, their muni professionals, and political action committees to disclose the political contributions they make to bond ballot election campaigns, the board announced yesterday, following its quarterly meeting last week.

The MSRB expects to file a rule change with the Securities and Exchange Commission within the “next couple of months,” executive director Lynnette Hotchkiss told reporters during a conference call. The proposed revision would then have to be approved by the SEC before becoming effective.

“With this rule proposal, we will for the first time ever be able to assess the prevalence of this activity, and it will provide evidence to the board on whether or not any future action needs to be taken,” Hotchkiss said.

The announcement comes after the board floated a draft proposal in June that would require dealers to report contributions of $250 or more made to committees pushing bond ballot initiatives, similar to its Rule G-37, which requires dealers to disclose contributions made to issuer officials.

Both the proposed revision and G-37 are designed to prevent dealers from engaging in pay-to-play practices by using contributions to obtain muni business. But the proposed revision stops short of fully mirroring G-37’s ­prohibition on most dealer contributions to issuer officials. The board said it would study the bond ballot contribution disclosures and determine later if it should restrict such contributions.

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

As with the G-37, the MSRB’s proposal includes a carve-out under which dealers would not have to disclose a muni professional’s bond election contribution above $250 if the professional could vote for the bond issue. Currently, there are no disclosure requirements or other restrictions for dealers that contribute to bond ballot campaign committees, which are formed to raise money for ballot initiatives in states like California, where voter approval is required for bond sales.

Some market participants have become concerned about such contributions, particularly with regard to school district financings in the Golden State, contending that dealers have to contribute to be eligible for the award of the underwriting business.

One market participant said that small dealer firms, which have tended to oppose disclosure requirements, believe they need to make contributions to stand out against larger dealers vying for the same offerings.

Though aggregate data is scarce, a 2000 California proposition that lowered the amount of voter support needed to approve a bond ballot measure is thought to have ushered in a period of more donations from underwriting firms in the state because the measures are more likely to pass and dealers see a better return on their investment, market sources said.

The board’s proposal seeks to strike something of a compromise between a proposal made late last year by a group of prominent dealers, including a former MSRB chairman, who urged the board to prohibit such contributions and those who opposed the idea of a prohibition.

Leslie Norwood, managing director and associate general counsel at the Securities Industry and Financial Markets Association, which strongly favored the disclosure proposal, hailed the board’s action. She said SIFMA believes it is important to eliminate even the slightest perception of impropriety. She added that the group is looking forward to reading the MSRB’s filing once it is filed with the SEC.

Michael Nicholas, chief executive officer of the Regional Bond Dealers Association, said the group is grateful the MSRB took into consideration its comments against the proposal, but that it looks forward to working with the board on “thoughtful application of this additional disclosure.” RBDA had complained that such contributions already are disclosed at the state and local level and that there is no evidence that pay-to-play practices with regard to bond elections.

The board also agreed to file with the SEC a proposal designed to improve the distribution of new bonds and ensure underwriters follow issuer instructions such as to give retail investors first priority for the bonds. Under the proposal, which was floated in August, new-issue underwriting mangers or syndicates,” unless otherwise agreed to with the issuer,” would be required to give priority to customer orders over orders for their own accounts or orders for affiliates or related accounts.

Meanwhile, MSRB chairman Peter Clarke said the board is still discussing a proposal to give special placement on its Electronic Municipal Market Access site to issuers that agree to four voluntary disclosure undertakings, including submitting their annual financial documents within 120 days of the end of their fiscal years.

Several issuers and issuer groups have strongly criticized the proposal, which they contend would be costly, difficult for issuers to implement, and unfairly harmful to the issuers who cannot comply.

Asked if the board would consider softening its 120-day deadline in light of issuer opposition, Hotchkiss saidit has reviewed the comment letters it has received on the proposal and that the next step is for it to discuss the issue with the SEC. “We expect to have something to say in the next month or so, as soon as we can have those conversations with the SEC,” she said.

The proposal was made in mid-July to coincide with the SEC’s proposed changes to its Rule 15c2-12 on disclosure, which would update and enhance the types of bond-related continuing disclosures made by issuers. SEC staff have said that they hope to complete work on that proposal by the end of the year, and that they would likely consider the 15c2-12 changes put in place concurrently with the MSRB’s proposals.

The board also discussed a legislative to alter its composition to make it a majority-public self-regulatory organization. Clarke stressed that the 15-member board, which is dominated by 10 dealer officials, has a “proud history” of protecting investors through effective rules and information transparency.”

“We look forward to providing input to Congress and the SEC on the question of how best to ensure that investors are protected and that the public continues to benefit from a fair and efficient municipal market,” he said.

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