WASHINGTON — The Municipal Securities Rulemaking Board Wednesday said it’s considering whether its Rule G-37 on political contributions should require municipal securities dealers to disclose the names of political action committees controlled by bank holding companies or other affiliates.
The proposal, which the MSRB issued yesterday for public comment, would replace draft changes floated last year to require disclosure of specific contributions the PACs make to issuer officials.
At the same time, the board proposed new G-37 interpretive guidance on factors muni dealers should take into account in determining whether they control an affiliated bank or bank-holding company PAC.
The MSRB is seeking comment on the disclosure provision through Oct. 29. It asked the Securities and Exchange Commission to approve the guidance, which would take effect 60 days after the SEC signs off on it.
In agreeing to redraft the bank-PAC disclosure proposal, the MSRB is essentially seeking middle ground with industry groups that had warned the board may not have the jurisdiction to require the disclosure of such contributions, and that there are 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.
One industry official said the revised proposal sidesteps legal and operational concerns about the board’s requiring dealers to report on the contributions of PACs they do not control.
Leslie Norwood, managing director and associate general counsel at the Securities Industry and Financial Markets Association, said: “The clarifications offered today appear to be designed to further ensure the industry has clear and objective standards to ensure compliance with the rule. SIFMA is supportive of this intent. We plan to convene our G-37 task force and offer more detailed comments on the proposal during the formal comment period.”
Dave Levinthal, a spokesman for the Center for Responsive Politics here, which tracks contributions to federal officials and candidates, said the changes to the proposal are unlikely to affect the transparency of PAC contributions at the federal level because they are already a matter of public record.
But transparency is more complicated at the local level because municipalities and states have “vastly different rules and regulations governing disclosure of campaign finance information,” he said, adding that he does not know enough about the MSRB proposal to weigh how it would impact the transparency of local contributions.
The interpretive guidance comes as a number of securities firms have converted to banks or bank-holdings companies whose PACs may make contributions to issuer officials, the board said. Currently, such committee contributions are not subject to disclosure under G-37.
“The MSRB remains concerned that individuals and firms subject to Rule G-37 may seek ways around the rule through payment to, and contributions by, affiliated PACs that benefit issuer officials,” the MSRB said in its notice.
The circumvention of G-37 has been an issue of concern for the SEC, which issued a rare 21(a) report in March detailing how a former vice chairman of JPMorgan Chase Bank, who oversaw but did not work for the bank’s bond-underwriting subsidiary, made political contributions to a former California treasurer.
The report, which took no enforcement action against JPMorgan, said that a bank-holding company executive who oversees but is not an employee of a broker-dealer subsidiary’s muni unit may still be considered a “municipal finance professional” and subject to G-37’s restrictions on political contributions.
Under G-37, dealers cannot engage in negotiated municipal securities business with an issuer for two years if they, their municipal financial professionals, or MFP-controlled PACs contribute to issuer officials who can influence the award of muni bond business. However, MFPs can contribute up to $250 to any issuer official for whom they can vote. The rule also requires the quarterly disclosure of any contributions dealers make to issuer officials or candidates as well as to bond ballot election campaigns.
In evaluating whether contributions made by affiliated PACs may be subject to G-37, dealers should first determine whether the affiliated PAC would be viewed “dealer-controlled,” the MSRB said. If so, then the rule would apply to the PAC’s contributions to issuer officials, state or local political parties, and bond ballot campaigns.
In general, a dealer or MFP involved in the creation of a PAC would be viewed as controlling it, according to the board. However, strong indicators of management and control of the affiliated PAC are not “mitigated by the fact that such dealer, MFP or other person does not have exclusive, predominant or 'majority’ control of the PAC, its management, its policies, or its decisions with regard to making contributions,” the MSRB said.
“In essence, it is possible for a single PAC to be viewed as controlled by multiple different dealers if the control of such PAC is shared among such dealers...” the board said.
Even if a dealer has determined that an affiliated PAC is not dealer-controlled, the dealer must still consider whether payments made by it or its MFPs to the committee could be viewed as an indirect contribution that would be subject to G-37, the MSRB warned. Dealers should take steps, including the establishment of supervisory procedures, to ensure that contributions from non-dealer controlled PACs would not be treated as indirect contributions. The rule bars dealers from doing indirectly anything they cannot do directly under it.