Securities Law

Some Dealers Seek Pay to Play Ban

Twelve dealer firms are asking the Municipal Securities Rulemaking Board to adopt further restrictions on bond ballot contributions by broker-dealers, and each of those firms has pledged a two-year moratorium on making any such contributions related to bonds they seek to underwrite.

A July 26 letter to the MSRB signed by the 12 firms asks the board to use the two years to amend its Rule G-37 on political contributions to treat bond ballot contributions more similarly to the restrictions against making political contributions to issuer officials.

Under G-37, a dealer may not engage in negotiated muni securities business within two years of a contribution to an issuer official made by the firm, a municipal finance professional at the firm, a person affiliated with the firm, or a political action committee controlled by the firm. For bond ballot contributions, dealers must only make quarterly disclosures detailing their contributions.

The signatories represent many of the top national underwriting firms, including Barclays Capital, Morgan Stanley & Co. LLC, Merrill Lynch, Pierce, Fenner & Smith, Inc.,Citi, Wells Fargo Securities LLC., First Southwest, Goldman Sachs, JP Morgan Securities LLC, Loop Capital Markets LLC, , Siebert, Brandford Shank & Co. LLC, Janney Montgomery Scott LLC and BMO Capital Markets, Inc.

A Bond Buyer review last year of 2010 contributions to bond ballot campaigns by broker-dealers showed a near-perfect correlation between the contributions the firms made to California school bond ballot initiatives and their subsequent underwriting of the bonds. While not illegal or prohibited under current rules, some market participants have long harbored concerns about the apparent "pay to play" structure of these deals. Some of the Wall Street firms have been pushing for these changes since 2008.

"While the MSRB continues to collect data on bond ballot campaign contributions, we believe that more decisive action is required on this important issue," the letter reads. "Under certain circumstances this widely perceived pay-to-play practice has the potential to damage the integrity of the municipal marketplace."

The firms all pledge, as part of a "Voluntary Initiative on Bond Ballot Contributions," not to make contributions to bond ballot measures which they will then seek to underwrite until July 26 2015. Though this is a purely voluntary action by these firms, if the MSRB agrees to amend its Rule G-37 as the firms ask, this would effectively prevent firms from underwriting bonds after contributing to the ballot initiative for the bonds. The restrictions should also apply to banks and municipal finance professionals, the letter states, with the caveat that MFPs would still be able to contribute up to $250 to campaigns in which he or she is eligible to vote, also similar to G-37.

Several of the firms who underwrite California school district bonds after contributing to ballot initiatives were not signatories to the letter, including Piper Jaffray, De La Rosa, Stone & Youngberg, George K. Baum and RBC Capital Markets. But a source familiar with the situation said the letter was not widely circulated, and that many firms were not offered a chance to sign. The letter, which was signed by First Southwest vice chairman Mike Bartolotta and Morgan Stanley managing director Stratford Shields, states that other firms are invited to join the voluntary initiative, and that the group will update the MSRB on any additions.

MSRB executive director Lynnette Kelly said last year that the additional quarterly disclosures approved in 2012 would help the board understand the correlation between bond ballot contributions and the awarding of underwriting business. The MSRB has acknowledged hearing that market participants, including issuers, sometimes reach "informal understandings" about contributions, and that issuers may sometimes retain business based on the contributions.

The firms that underwrite bonds after contributing to their ballot campaigns have generally denied a link, pointing out that they are often hired before any contributions are made and that other types of municipal professionals are not required to disclose their contributions.




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