WASHINGTON — Dismissing criticism from market groups, the Municipal Securities Rulemaking Board has moved forward with a proposal that would require muni securities dealers, as well as their finance professionals and political action committees, to disclose most contributions they make to bond ballot election campaigns.
In a 90-page document filed Friday with the Securities and Exchange Commission, the board proposed changes to its Rule G-37 on political contributions and Rule G-8 on books and records that were originally drafted in June.
The rule changes would, for the first time, require disclosure of contributions above $250 made to these committees, which are formed to raise money for ballot initiatives in states like California where voter approval is required for bond sales.
The MSRB asked that the rule changes become effective and apply to contributions made on or after the first business Monday five days after the SEC approves them. Before the SEC weighs in on the changes, however, they will be subject to another round of public comments.
In its filing, the MSRB refuted concerns raised by market groups, including the Regional Bond Dealers Association, which had opposed the changes entirely, and the Securities Industry and Financial Markets Association, which was generally supportive.
Both the RBDA and SIFMA said that so-called in-kind, or non-cash donations, should not be reported because the valuation of such services may be difficult to ascertain. Rule G-37 currently defines contributions to encompass both cash and non-cash donations. In the context of bond ballot initiatives, non-cash contributions could include the use of an in-house election consultant or assistance with the distribution of pro-ballot measure flyers, market participants said.
But the MSRB said it would not carve out these kinds of non-cash contributions from reporting because their disclosure “will allow public scrutiny of such contributions and the potential connection between such contributions and the awarding of municipal securities business.”
It also rejected arguments that the rule changes would infringe on market participants’ First Amendment freedom of speech rights, on the grounds that they would only require disclosure and would not actually prohibit contributions.
“Disclosure obligations do not present the same constitutional issues as do direct or indirect prohibitions or limitations on contributions,” the board said.
Leslie Norwood, managing director and associate general counsel at SIFMA, said the Wall Street group is pleased that the MSRB moved forward with the changes because “we believe it is of the utmost importance for the municipal broker-dealer community to continue efforts to eliminate even the slightest perception of impropriety that may exist” in the market.
However, she said SIFMA continues to have concerns about non-cash contributions and “will be examining that issue for potential further comment to the SEC.”
RBDA chief executive officer Michael Nicholas said his group appreciates the MSRB’s taking into account its views, continues to believe that these types of contributions do not constitute pay-to-play, and appreciates that the board is not going so far as to apply G-37 restrictions to the contributions.
Meanwhile, Robert Doty, president of financial adviser American Governmental Financial Services Co., said there are a number of nondealer FAs that “buy their way into business” by making contributions to bond elections committees.
“That illustrates why it is so important for nondealer FAs to be regulated,” he said, as would be required by financial regulatory reform bills pending in the Senate and House.
Specifically, the board’s proposal would require dealers, their municipal finance professionals and PACs to disclose all bond ballot contributions, except those for $250 or less made to committees pushing bond ballot initiatives for which they can vote. However, dealers would be required to keep internal records of contributions below $250.
If the rule changes are approved, the information collected through the disclosures may lead the MSRB to consider imposing restrictions on such contributions, the board said.
The MSRB action was sparked by a letter last December from the heads of public finance at three of the largest Wall Street firms that said Rule G-37’s restrictions should, out of an abundance of caution, be expanded to include contributions to ballot campaigns so that dealers have the same restrictions as are imposed on contributions to issuer officials.
Under G-37, dealers cannot engage in negotiated municipal securities business with an issuer for two years if they or their muni financial professionals contribute to issuer officials who can influence the awarding of bond business. However, they can contribute up to $250 to any issuer official for whom they can vote.
A separate G-37 proposal that would require the reporting of dealer-affiliated bank and bank holding company PAC contributions to issuer officials is still pending before the board.
