J.P. Morgan Securities Inc. has temporarily banned itself from serving as underwriter on negotiated municipal securities transactions for New York State under Rule G-37, after an employee inadvertently triggered the ban by making a $1000 contribution to the gubernatorial campaign of Eliot Spitzer, the state’s attorney general, sources said yesterday.
But the firm is asking federal regulators for a waiver from the ban.
A two-year ban on muni business with the state — which would span from November 2005, when the contribution was made, to November 2007 — would be a huge blow to the firm.
J.P. Morgan was ranked eighth in 2005 among lead underwriters and fourth among co-underwriters for negotiated municipal securities transactions for New York and its authorities, serving as senior or co-manager on 46 deals totaling more than $2 billion, according to Thomson Financial. Although the firm snared only 6.5% of the New York market last year, it captured 18.4% and 28.0% of that market in 2004 and 2003, respectively, Thomson’s data showed.
Under the Municipal Securities Rulemaking Board rule, a dealer is prohibited from engaging in any negotiated municipal underwriting of financial advisory business with an issuer for two years if it or one of its municipal finance professionals makes a significant political contribution to an official of the issuer who can influence the award of bond business. The rule covers any person running for a state or local bond-related office, as well the official holding the position, even if the person seeking the office is not ultimately elected.
Michael Dorfsman, J.P. Morgan’s vice president of media relations, confirmed yesterday that the firm is voluntarily banning itself from underwriting any negotiated deals for the state and is seeking a waiver from the G-37 ban from NASD, which enforces MSRB rules.
He stressed that the firm uncovered the contribution through its compliance procedures and immediately alerted federal regulators.
Dorfsman would not identify the person at the firm who made the $1000 contribution to Spitzer in November. But sources said he had been in charge of fixed-income trading in North America at the firm prior to 2005 and had been classified as a municipal finance professional in that role because his jurisdiction included municipal bond trading, as well as the trading of other fixed-income securities.
The employee took a leave of absence from the firm for most of 2005 for personal reasons, but returned in September to become head of global relationships, a position in which he develops and maintains relationships with institutional investors, according to sources.
The employee is not characterized as a municipal finance professional in his current position. But under a look-forward provision in Rule G-37, supervisory and management-level municipal finance professionals retain their MFP classification for one year after they leave a muni-related position. The purpose of the provision is to make sure that a manager does not leave a muni-related position and then immediately make political contributions that might benefit the firm’s muni business, according to MSRB officials.
J.P. Morgan “has requested a waiver from the G-37 temporary ban on grounds that this was an inadvertent oversight and the employee has never been involved in soliciting municipal securities business,” Dorfsman said.
G-37 allows NASD to grant waivers from the ban if they are “consistent with the public interest, the protection of investors, and the purposes of [the] rule.”
In considering waiver requests, NASD is supposed to take several factors into account, including whether the firm: developed and implemented procedures reasonably designed to ensure compliance with the rule prior to the making of the contribution; had no knowledge of the contribution; took steps to obtain a return of the money; and took other remedial measures.
NASD also is supposed to consider “the contributor’s apparent intent or motive in making the contribution … as evidenced by the facts and circumstances.”
The J.P. Morgan employee who made the contribution to Spitzer sought and obtained a refund, Dorfsman said. J.P. Morgan has reported the contribution on a fourth-quarter G-37/G-38 form that it has sent to the MSRB and is in the process of informing issuers in New York about the temporary ban on business, he said.
Robert Whalen contributed to this story.
