Securities Law

MSRB Seeks More Disclosure on Bond Ballot Contributions

WASHINGTON — The Municipal Securities Rulemaking Board proposed rule changes Wednesday that would require dealers to disclose more details about their contributions to bond ballot campaigns.

The proposed changes to Rule G-37 would also apply to contributions made by dealers’ municipal finance professionals, non-muni executive officers and political action committees.

The MSRB would require dealers to make quarterly disclosures of the timing of contributions, the identity of the municipal issuer selling the bonds on the ballot and any primary offerings that result from the campaign in which the dealer is involved. Dealers also would need to disclose if their municipal finance employees or non-muni executive officers received payments or reimbursements related to a campaign to which the dealer contributed.

Rule G-37 on political contributions already requires that dealers disclose contributions to bond ballot campaigns and issuer officials, as well as payments to political parties of state and local political subdivisions.

MSRB executive director Lynnette Kelly said the additional disclosure would help the board understand the correlation between bond ballot contributions and the awarding of underwriting business. The MSRB said it has heard that market participants, including issuers, sometimes reach “informal understandings” about contributions, and that issuers may sometimes retain business partners based on the contributions.

“Daylight is an effective disinfectant,” said Government Financial Strategies Inc. president Lori Raineri. Muni bond “pricing gets muddled” when practices like bond ballot contributions aren’t disclosed, she said.

Robert Doty, president of Sacramento, Calif.-based consulting firm AGFS, said bond ballot contributions are “desperately in need of attention” from regulators. He agreed transaction participants sometimes have “understandings and arrangements” that business partners will be chosen based on contributions.

Los Angeles County public finance director Douglas Baron declined to comment on specifics of the proposal, but said his office supports additional disclosure of bond ballot contributions. He said some contributions are inappropriate regardless of whether they are disclosed. “If you stand to benefit by being awarded a contract, there is at the very least an appearance of a conflict of interest,” he said.

Timothy Schaefer, founder of Newport Beach, Calif.-based municipal advisory firm Magis Advisors, said, “It’s about time,” when asked about the MSRB’s proposal. Schaefer has concerns about financial advisors too, saying some issuers ask them to hire third parties to work on bond ballot campaigns and then roll the fees of those third parties into the advisors’ fees.

Bond Dealers of America said it supports transparency of political contributions and will work to develop “a reasonable solution that doesn’t inordinately increase the burdens on dealers, and yet also addresses any suggestion of impropriety.” It noted that dealers already must disclose contributions to bond ballots.

Leslie Norwood, co-head of municipal securities at the Securities Industry and Financial Markets Association, said SIFMA is reviewing the proposal but “supports transparency that would eliminate any perception of improprieties.” It supported 2010 changes that required dealers to disclose bond ballot contributions, she said.

The MSRB’s action follows a Jan. 13 story in The Bond Buyer that found dealers contributed more than $700,000 to 41 of the California school board measures that voters approved in 2010. In every case but one, dealers that contributed to an approved bond referendum ended up as lead manager or co-manager, according to MSRB and campaign finance documents.

In a May 24 story, The Bond Buyer found that financial advisors were serving as campaign consultants for bond ballot initiatives and then serving as financial advisors on the resulting bond deals.

The MSRB proposed bond ballot campaign contribution disclosure requirements for muni advisors, but withdrew them until the Securities and Exchange Commission finalizes the definition of muni advisor.

Public comments on the MSRB’s proposal are due Sept. 17.



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