MSRB Eyes Muni Angle for Libor Mess

SAN FRANCISCO — Municipal Securities Rulemaking Board officials said Tuesday the board is looking into the Libor scandal to see how it may affect the municipal bond industry.

“We’re looking at Libor and the impact of the rate-rigging process there and the impact on state and local governments,” Lynnette Kelly, executive director of the MSRB, said on the sidelines of a conference here.

“We don’t necessarily have a direct role in the Libor scandal,” she said, adding that MSRB staff is looking to see if “there are bigger issues in the municipal market” that stem from it.

Several firms have been accused of manipulating Libor, the London Interbank Offered Rate, a benchmark interest rate for hundreds of trillions of dollars of financial products, including muni-related interest rates swaps.

The firms are alleged to have kept Libor artificially low to give the impression their borrowing costs were not being affected as the financial crisis unfolded.

“Whenever there are large issues, we always look at sort of what our role is, and the disclosure is the key,” MSRB chairman Alan Polsky said during the interview.

The MSRB joins several state attorneys general and local regulatory agencies that have decided to take a look at the impact of the Libor scandal.

British bank regulators last month fined Barclays more than $450 million for submitting false rates for Libor. The scandal led to the resignation of Robert Diamond as the bank’s chief executive officer. Royal Bank of Scotland Group Plc, UBS AG, Lloyds Banking Group Plc and Deutsche Bank AG are among lenders facing inquiries over alleged rigging of Libor, according to Bloomberg News.

The two MSRB officials also said the board will continue to examine bond-ballot campaign contributions by underwriters and municipal advisers, as some market participants continue to suggest they contribute to “pay-to-play” practices, especially with regard to school bond issues in California.    The concern is that firms that contribute get roles in the bond deals.

Polsky said the MSRB, which currently only requires broker-dealers to disclose such contributions, plans to continue to discuss the issue and look at the data it has collected over almost two years to see if there is a nexus between the contributions and obtaining muni bond business. A review by     The Bond Buyer of 2010 campaign contribution by underwriters to school-bond ballot campaigns in California found nearly a perfect correlation between contributions and their work on the bond deals that followed successful elections.

The MSRB offered similar restrictions on contributions by financial advisors, also called municipal advisors, to bond-ballot election campaigns in a new proposed rule — Rule G-42 — last August, but temporarily withdrew it until the Securities and Exchange Commission finalizes its definition of a municipal advisor in its registration rules.

“We’ll be talking about it more at our upcoming meetings,” Polsky said. “We want to look at it more closely.”

Kelly said the board has also been watching the role of municipal advisers in bond ballot campaigns.

“This is considered to be protective speech under the Constitution,” Kelly said. “You don’t just say, ‘You can’t do that.’ It has to be very deliberative.”

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Law and regulation California
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