WASHINGTON - More than three dozen municipal broker-dealer firms are not complying with the Municipal Securities Rulemaking Board's Rule G-37 on political contributions, even though the rule has been in effect for more than a year.
An investigation by The Bond Buyer revealed that two dozen of the 155 top-ranked firms, which were involved in 354 negotiated underwritings totaling more than $26 billion, have not filed any G-37 forms with the MSRB since the rule took effect in April 1994.
In addition, at least 14 other firms filed some G-37 forms but failed to file forms for the first or second quarter of this year even though they were involved in negotiated transactions during those quarters.
These failures to file, which were confirmed by MSRB officials, may represent only a fraction of the broker-dealer firms violating the rule. The figures cover less than half of the roughly 360 broker-dealers that reported negotiated transactions to Securities Data Co. for 1995. The figures also do not include firms that did negotiated underwritings in 1994, or firms involved in negotiated financial advisory work in 1994 and 1995.
The rule, which is designed to curb pay-to-play practices in the municipal bond market, requires broker-dealers to file quarterly forms with the MSRB if they have been involved in any negotiated business - underwritings, financial advisory work, remarketings, or private placements - or if they have made any political contributions.
Firms must include information on the forms about their political contributions, the consultants they hired to obtain bond business and what consultants were paid, and their negotiated transactions.
The rule generally prohibits firms who make political contributions to issuer clients from doing noncompetitive business with those clients for two years afterwards.
Many of the firms that filed G-37 forms with the MSRB did not report making any political contributions and only 31 firms reported hiring consultants to help retain or obtain municipal bond business.
Some of the firms that The Bond Buyer found had never complied with the rule were small and may not have had any political contributions or consultants to report. But others were medium-size firms and at least one of those - Ferris, Baker Watts Inc. - acknowledged it had failed to report a small number of political contributions.
The noncomplying firms ranged from E.J. De La Rosa & Co. in Los Angeles, which was involved in 57 negotiated underwritings totaling more than $8.7 billion, and Ferris, Baker Watts in Washington, which took part in 82 such issues totaling almost $1.4 billion, to Bryn Mawr Investment Group, which was involved in one issue totaling $43.1 million, according to Securities Data. Half of the 24 firms were involved in five or fewer negotiated underwritings since the rule took effect.
Christopher Taylor, the MSRB's executive director, said Wednesday that all broker-dealer firms in the municipal market should have received a copy of Rule G-37 last year as well as issues of MSRB reports that contained the rule and guidance on how to comply with it.
"There would be no excuse for someone not knowing about the rule and not complying," Taylor said. "This sort of surprises me this late in the game."
Taylor said he is also concerned about The Bond Buyer's finding that many firms, including some major broker-dealers, are not complying with the rule's deadlines for filing G-37 forms. The rule gives a broker-dealer one month after each quarter ends to file a form. But The Bond Buyer found many firms had not filed for the second quarter 1995 as of Aug. 3, more than a month after the quarter ended on June 30.
"That's a no-no," said Taylor. "That sort of pushes it."
William McLucas, director of the Securities and Exchange Commission's enforcement division, said yesterday that the SEC "takes the filing responsibilities very seriously" and "would hope that market participants get the message" that forms must be filed.
"The filing and disclosure requirements we don't think are that burdensome and yet they are very significant steps that are consistent with the commission's perspective on shedding some more sunlight on practices in this marketplace," McLucas said.
John Pinto, an executive vice president in charge of regulation at the National Association of Securities Dealers, the self-regulatory organization for the municipal industry that is charged with enforcing MSRB rules, said the NASD wants to follow up on any reports of widespread noncompliance with Rule G-37.
"We would certainly want to open an investigation if you're finding that firms are failing to comply," he said. "I would not want any of the firms, be they in the top 100 or bottom 100, to feel that this rule, which is an important rule, is not something they need to follow."
Pinto said NASD district officials may already be investigating specific violations of Rule G-37 in examinations of broker-dealer firms. Under MSRB rules, the NASD must examine firms with municipal bond business at least once every two years. The NASD conducted special G-37 examinations of about 30 firms last year after the rule went into effect and found general compliance with the rule.
But Pinto said the NASD will "follow up from an enforcement" standpoint on reports of noncompliance and the degree of sanction for violations of the rule will "depend on the facts of each situation."
Firms that have been involved in a lot of negotiated bond business, but have never filed G-37 forms might face formal disciplinary actions, resulting in monetary sanctions and censuring, he said. "I think it's very likely given the seriousness of not filing."
On the other hand, he said, if a firm missed a filing for one quarter because the person responsible for the forms quit and the new person let it slip through the cracks: "I don't think we'd file a formal action."
"It's going to depend on whether (a firm) even made an attempt at trying to establish procedures" for complying with the rule, Pinto said. "I could see situations where, if the firm didn't even bother, that there could be not only findings for failing to comply with G-37, but also supervisory failings."
In its investigation, The Bond Buyer compared the top 155 firms ranked for negotiated underwritings in 1995 by Securities Data with MSRB documents listing firms' G-37 form filings for 1994 and 1995. The rankings for negotiated underwriters covered any firms involved in syndicates, not just lead managers, and all negotiated underwritings, including small issues, private placements, and issues for nonprofit organizations.
A partial review of the top 100 firms ranked as lead managers in negotiated underwritings turned up additional firms that had never filed G- 37 forms with the MSRB, including First Interstate Bank of California in Los Angeles, involved in 35 negotiated underwritings totaling $279.8 million, and Spelman & Co. in San Diego, involved in eight issues totaling $176.3 million, from April 1, 1994 through June 30, 1995.
Other firms that appeared to violate the rule were not included in the results of the probe because of discrepancies between the names listed by Securities Data and MSRB lists or because of their possible affiliation with other firms. For example, Mellon Bank and two of its subsidiaries, Mellon Bank Financial Markets Inc. and Scheetz Smith, all are registered with the MSRB and reported different transactions to Securities Data. But Scheetz Smith, which was involved in 31 negotiated underwritings totaling $631.2 million since April 1, 1994, had not filed any G-37 forms, while the other Mellon entities had filed some forms, but not for all quarters.
Officials at most of the firms contacted by The Bond Buyer about their failure to file G-37 forms were either stunned that the forms had not been filed or unaware of the rule.
"I'm certainly aware of the rule. But I thought the forms were being filed by our compliance division," said Adrian Teel, senior vice president and manager of public finance at Ferris, Baker Watts.
Theodore Urban, counsel to Ferris, Baker Watts said later that, "through administrative oversight, we were delinquent in filing." Urban said the firm had very few unreported political contributions.
"We have an office manager responsible for that. I thought we were complying," said Edward J. De La Rosa, president of E.J. De La Rosa. Benjamin Stern, the firm's senior vice president, indicated later, however, that he was not aware of the need to file G-37 forms.
Jonathan Thomas, chairman of Saybrook Capital Corp. in Los Angeles, said: "To the extent that we have not filed any G-37 forms as required, we will be attending to that immediately and will be correcting the situation as soon as possible."
Beth Renge, president of Renge Securities & Co. in San Francisco, said she was not aware of the rule.
Harold E. Doley Jr., chairman and head of compliance for Doley Securities Inc. in New Orleans, insisted that his firm filed a G-37 form for the $135 million negotiated underwriting the firm was involved in during the second quarter of 1995. He said the NASD had recently examined the firm and had not found any violations of Rule G-37. But the MSRB had no record of any forms filed by Doley Securities as of Aug. 23.
Some of the broker-dealer firms that filed G-37 forms appeared to misunderstand the rule. They disclosed salaried employees who worked on transactions, and those employees' salaries in some cases, even though the rule only requires disclosure of consultants that helped retain or obtain municipal bond business. In addition, some firms that listed political contributions failed to disclose the number of employees who made the contributions. Still other firms provided overly detailed description of their negotiated transactions, including pages from bond documents.
