WASHINGTON — The Securities and Exchange Commission issued an
Some market participants were critical of the action, saying the commission merely slapped the firm on the wrist after it engaged in an egregious violation of the rule.
The report details how a former vice chairman of JPMorgan Chase Bank — who was not named but sources identified as David Coulter — solicited $10,000 for the 2002 reelection campaign of former California Treasurer Phil Angelides, who also was not named in the report. In addition, Coulter personally donated $1,000 to Angelides’ campaign and successfully solicited an additional $8,000 from the bank and three of its senior officials for it. Campaign contribution records show Coulter made the $1,000 contribution to Angelides on Sept. 30, 2002.
Angelides currently heads the Financial Crisis Inquiry Commission.
From July 2002 through September 2004, Coulter supervised JPMorgan’s entire global investment banking business, which included municipal securities underwriting in the U.S. He had authority to hire or fire employees of the investment bank, including those involved in municipal securities. He also oversaw muni transactions involving the broker-dealer arm of the bank. He was referred to as the chief executive officer of the investment bank in the press releases.
During that time he had these responsibilities and solicited and made the contributions to Angelides, Coulter was actively promoting JPMorgan Securities’ public finance services by sending a pitch letter to its customers, which included state and municipal bond issuers. The letter was included by the public finance department in at least eight responses to requests for qualifications from muni issuers between November 2002 and October 2003, the SEC said.
Under Rule G-37, anyone who solicits municipal securities business is a municipal finance professional and is therefore subject to the rule. G-37 bans broker-dealers from engaging in negotiated muni bond deals with issuers for two years if they or their municipal finance professionals make significant political contributions to an issuer official. But the rule permits MFPs to contribute up to $250 for anyone for whom they can vote.
During the two years after Coulter made and solicted the contributions for Angelides, JPMorgan participated as senior manager or co-manager in more than 50 negotiated underwritings for California state agencies or instrumentalities for which Angelides was considered an issuer official. The bond transactions totaled $15.8 billion and JP organ received $37 million in investment banking fees from them.
When a firm violates Rule G-37 it is supposed to ban itself from engaging in negotiated municipal securities business with the issuer for two years. If the firm violates the ban, it is subject to enforcement action.
But the SEC issued a 21(a) report, which typically lays out the findings of an investigation and the commission’s views regarding those findings without charging any violations.
SEC lawyers said the commission issued the 21(a) report to clarify that G-37 can apply to an official of a bank holding company affiliated with a municipal dealer if he supervises municipal securities business. The SEC had previously only said that bank holding companies are exempt from the rule’s restrictions, but left open the question of whether bank holding company executives were MFPs, they said.
“The report serves to remind the financial community that placing an executive who supervises the activities of a broker, dealer or municipal securities dealer outside of the corporate governance structure... does not prevent the application of MSRB Rule G-37 to that individual’s conduct,” the SEC said in the seven-page report.
“Firms and associated persons must adhere strictly to municipal securities pay-to-play rules,” Robert Khuzami, director of the SEC’s enforcement division, said in a release.
However, the 21(a) report comes after the SEC warned the market in an enforcement case in 2002 involving Fifth Third Securities Inc., which is affiliated with a bank, that bank officials are MFPs and therefore are covered by G-37 whenever they solicit muni business on behalf of those dealers.
SEC officials said the two cases address different components of the rule’s definition of a municipal finance professional. The JPMorgan case centers on whether someone outside the broker-dealer unit but acting like a chief executive is an MFP, while the Fifth Third case addressed whether non-executive employees of a bank affiliated with a broker-dealer who participated in muni pitches are MFPs.
But some market participants were critical of the SEC 21(a) report.
“I don’t think the rules are unclear," said a long-time market participant. "The firm should be required to stand down in municipal underwriting for a period of time until it can demonstrate that it can be in compliance with long-term rules on influence peddling.”
Christopher “Kit” Taylor, the former executive director of the MSRB who is now a financial consultant, speculated that the SEC may not have been able to bring a case because the behavior fell outside the statute of limitations.
But the case comes as practically every major securities firm has become a bank holding company, he said.
“The SEC is saying don’t play games with trying to get around the rule by having somebody in the holding company oversee the muni professionals,” Taylor said.
Coulter, who is now a managing director at Warburg Pincus LLC, a private-equity firm, could not be reached for comment.
In a press release, JPMorgan said: “The report references $9,000 in contributions made almost 8 years ago. We are pleased that this matter was resolved with the issuance of this report.”
