MSRB to Ease PAC Rule Changes

WASHINGTON — The Municipal Securities Rulemaking Board plans to propose easing draft rule changes so dealers would only have to disclose the political action committees controlled by bank-related and other affiliates and not the amounts of political contributions the PACs make to issuer officials, or the names of those who receive them.

The board decided to propose easing the draft changes at its meeting in Philadelphia Thursday and Friday, MSRB officials said yesterday in a teleconference with reporters.

MSRB members also agreed to spend more time reviewing public comments before proceeding with proposed rules designed to ensure there is broad distribution of an issuer’s securities and that dealers honor an issuer’s definition of the retail order period.

Instead, the board will proceed to file with the Securities and Exchange Commission revisions to the proposed rules that would highlight dated but still relevant interpretive guidance from 1987 and emphasize dealers’ obligations to document compliance with that guidance.

Written prior to the proliferation of retail order periods, the guidance generally states that customer orders should receive priority over syndicate orders or orders for their affiliated accounts.

But the lack of recordkeeping and record-retention rules have recently stymied regulators’ attempts to ensure that dealers adhere to their priority of orders provisions.

“We are continuing to think about and put out comprehensive guidance on retail order periods and other matters related to retail investors and their participation in the new-issue market,” said MSRB chairman Peter Clarke, managing director and vice chairman of tax-exempt capital markets at JPMorgan.

In addition to the revised bank PAC disclosure proposal, the board will soon issue guidance on what factors dealers should take into account in determining whether they control a PAC.

Under Rule G-37, most contributions dealer-controlled PACs make to issuer officials can require the dealer to ban itself for two years from engaging in negotiated business with the issuer.

MSRB general counsel Ernesto Lanza said the board has provided limited guidance on what it means to control a PAC and thinks it is important to flesh out what kind of activities might constitute control of one. In some cases, for example, a muni dealer could be viewed as controlling an affiliate’s PAC.

In agreeing to redraft the bank-PAC contribution proposal, board officials seemed to compromise with industry groups that had warned there are several valid reasons for a bank or bank-holding company PAC to contribute to issuer ­officials.

Industry groups also complained that such disclosures already are reported at the state level and that the board has failed to identify a specific “problematic dealer practice” that the disclosures would address.

An industry official at one firm said that the revised proposal sidesteps legal and operational concerns about the board’s requiring dealers to report on the disclosure of PACs they do not control.

But Clarke noted the redrafted proposal would still give market participants sufficient information to find the contribution data elsewhere.

“This disclosure could provide key information for making further inquiries through federal, state and local sources regarding political contributions made by dealer-affiliated PACs,” he said.

Originally floated in September, the bank PAC proposal is potentially significant because a number of securities firms have converted to banks or bank holding companies whose PACs may make contributions to issuer officials, according to the board. Currently, such PAC contributions are not subject to disclosure under Rule G-37.

Under related disclosure requirements that took effect April 1, dealers, their muni professionals, and political action committees must disclose the contributions they make to bond-ballot election campaigns, which raise funds to urge voters to vote to authorize bond issues in jurisdictions where voter approval is required.

The board also announced yesterday that it will soon file a proposal with the SEC to allow it to make municipal bond ratings freely available on its Electronic Municipal Market Access site.

Though Clarke said the board will seek to display the ratings in consolidated trade and disclosure information already available on EMMA,  he added that the MSRB is in varying degrees of conversations with the three major rating agencies and that much work remains to be done.

Asked how far away the board is from getting ratings on EMMA, executive director Lynnette Hotchkiss declined to guess, saying: “Legal issues have to be wrapped up, and then certainly the [information technology] issues, as well as significant testing, before anything is launched publicly.”

Market participants said recently that Moody’s Investors Service and Fitch Ratings are more open to the idea of feeding ratings directly to EMMA than ­Standard & Poor’s, which is demanding to be paid for its intellectual property.

But Clarke said he is “fully expecting” that all three rating agencies will eventually be on board.

Hotchkiss said the filing with the SEC will indicate that the ratings will only be available on EMMA if they are made available to the board for free.

“So there is a dependency there, but there is no requirement that the rating agencies participate,” she said. “We certainly hope that they will.”

Issuers currently are required to report rating changes on their securities in material event notices filed with EMMA but have complained they are never formally notified of the changes by the rating ­agencies.

College Savings Plans

In other business, the board agreed to soon publish guidance about the submission by dealers of 529 college savings plan disclosure documents to EMMA. It also will seek comment on the potential collection and dissemination of key data elements relating to 529 plan sales.

“The board expects to continue reviewing practices in the rapidly evolving 529 plan market and the potential need for guidance on third-party contributors, employer-based programs and other marketing activities unique to the 529 plan market,” the MSRB stated in a press release.

The board also said it agreed to revisions to its Series 52 exam, which qualifies municipal professionals to engage in the full complement of municipal securities activities as muni representatives.

Revisions to the exam outline and specifications will ensure that test questions remain relevant to the evolving municipal bond market, the board said.

Finally, the board announced that it will file with the SEC a request to discontinue its public access facility for viewing and copying paper versions of documents and other information collected by the MSRB.

The MSRB facility, which was established in 1990 with the initial adoption of the Municipal Securities Information Library, allows members of the public to print copies of bond documents from the board’s Alexandria, Va., offices.

But demand for the facility has waned as the documents have become available online for free through EMMA, supplanting the need for a physical location.

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