WASHINGTON - Public finance executives at the three largest underwriters for negotiated transactions are urging the Municipal Securities Rulemaking Board to consider amending its Rule G-37 on political contributions to restrict broker-dealer contributions to campaign committees that urge voters to approve muni bond issues.
The two-paragraph letter, which was sent to the board on Dec. 15, argues 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.
The letter was signed by Frank Chin, managing director and co-head of public finance at Citi; Mark Melio, managing director and head of investment banking in the tax-exempt capital markets department at JPMorgan; and Stratford Shields, managing director and head of public finance at Morgan Stanley. Chin left the MSRB at the end of October after serving for the past year as its chairman.
"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 three said in the letter.
The letter comes as a series of complaints have been made in recent years about contributions in connection with bond ballot measures. Voter approval is required before bonds can be sold in many state and local jurisdictions.
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.
Chin, Melio, and Shields either did not return phone calls or declined to comment further on the letter.
MSRB executive director Lynnette Hotchkiss said that the board has set up a committee that is currently reviewing all of its G rules, including the G-37 concern raised in the letter.
"The committee is looking at that very issue," she said, adding that it was on the board's agenda before the letter came in.
Though MSRB sources have not said when, or even if, their G-rule review will prompt them to propose changes to any of the rules, the issue of expanding G-37 to encompass contributions to ballot initiatives goes back years.
Christopher Taylor, who served as executive director of the board from 1978 to 2007, said that the problem was not previously deemed sufficiently systemic as to warrant board action. But he said it is widely known that some issuers have explicitly told broker-dealers that they must contribute to ballot initiatives or else they will not be appointed underwriter.
"That's certainly a version of pay-to-play, but more on the extortion side than bribery," Taylor said.
A market participant who asked for anonymity said that solicitations for broker-dealers to contribute to such measures have become much more aggressive in the past few years.
"There have been very aggressive fundraising efforts for these bond ballot initiatives and the MSRB should get out in front of this and try to eliminate their perception of pay-to-play," the source said.
Taylor and other sources said that the problem extends far beyond broker-dealer contributions. Other transaction participants, such as bond counsel and financial advisers, also are solicited by issuers for contributions, though the board only has regulatory authority over municipal broker-dealers.
At least one bond attorney has warned about the practice for years. In 2002, John Hartenstein, a partner at Orrick, Herrington & Sutcliffe LLP in San Francisco, told the MSRB in a three-page comment letter that the dealers who contribute the most to such campaigns are usually the ones chosen to participate in the bond financing.
"It seems like a positive step that the investment banks involved in these elections are also looking for an MSRB response to this problem," he said yesterday.
The issue also was highlighted by Martha Mahan Haines, the Securities and Exchange Commission's municipal securities chief, four years ago. In a 2005 speech, Haines said staff were seeing "some pretty blatant pay-to-play activities" going on in this area, which the rule is designed to prohibit.
At that time, she said some issuers were actually asking dealers, in requests for proposals for underwriters, how much they would be willing to contribute to a ballot initiative for a bond issue, implying that the selection of underwriters would be contingent on this issue. Haines was not immediately available for comment yesterday.
