MSRB to Propose Pay-to-Play Curbs on Muni Advisers

WASHINGTON — The Municipal Securities Rulemaking Board is expected early Friday to propose extensive pay-to-play restrictions for municipal advisers, the first significant rulemaking proposal for advisers since the MSRB began to oversee them on Oct. 1.

The board will seek public comments on the proposed new Rule G-42, along with related changes to the books and records rules, through Feb. 25.

The proposal comes after the MSRB already extended its Rule G-17 on fair dealing to advisers. It also is drafting a separate rule to elaborate on the fiduciary duty requirements imposed on advisers by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

While G-42 is generally modelled on the existing pay-to-play restrictions for dealers under Rule G-37, it does contain some key distinctions.

An adviser, rather than being temporarily banned from business, would be prohibited from being compensated for advisory work if it makes significant contributions to officials of a municipal entity who can influence the award of advisory work.

The compensation restrictions would begin on the date of the contribution and end two years after the adviser quits working for the municipal entity. They are designed to prevent advisers from waiting out any two-year compensation ban and then seeking further payment from the municipal entity.

Meanwhile, third-party solicitors would not be able to solicit advisory business within the two-year period after they made a contribution. They also would not be able to receive any compensation for soliciting business from a governmental unit within that two-year period.

The proposed rule would contain a two-year look-back period that would apply to contributions made after the rule’s effective date. No contributions before the effective date would trigger such a ban, except for contributions by dealer-financial advisers who are already subject to G-37.

As with G-37, advisers would be able to contribute up to $250 per election to public officials for whom they can vote election.

Specifically, the rule prohibits dealers from engaging in negotiated municipal business with an issuer if it or its muni finance professionals or muni-controlled political action committees make contributions to public officials who can award bond business. However, MFPs can contribute up to $250 to public officials for whom they can vote.

The G-42 proposal lists the types of individuals who would qualify as a municipal adviser professional. They include any employee of an advisory firm that is engaged in advisory work with a municipal entity, solicits muni business from a muni entity on its own behalf or solicits third-party business; is a supervisor of any person who is a muni adviser professional, and is, in turn, part of the supervisory chain up through and including the chief executive office; and is a member of the municipal adviser’s executive or management committee.

Among the specific questions on which the MSRB is seeking comment is whether it should scrap Rule G-38, which bans the use of consultants by dealers, now that it regulates advisers.

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