WASHINGTON — The Municipal Securities Rulemaking Board has filed a new proposed rule with the Securities and Exchange Commission that would prevent municipal advisors from engaging in pay-to-play practices, making political contributions to state and local government officials to influence the award of advisory business.

The proposed Rule G-42, which is modeled after Rule G-37 for dealers but contains some key distinctions, would not take effect until six months after the SEC approves final registration rules that define the term “municipal advisor.” The commission also would have to publish the proposed rule for public comments and approve it before it took effect.

Muni advisor contributions made before the effective date of the rule would not result in a ban on business for compensation.

Once G-42 is approved, dealer-financial advisors would be subject to it rather than Rule G-37. But G-37 would continue to apply to dealers involved in underwriting, remarketing, and private placements of munis.

Both rules are designed to prevent pay-to-play practices, but while G-37 would temporarily bar dealers from engaging in negotiated business for making certain political contributions, G-42 would temporarily bar advisors from receiving compensation.

“Pay-to-play activities have no place in municipal finance and can distort and undermine fairness in the process by which government business is awarded,” said board executive director Lynnette Hotchkiss. “The MSRB’s proposed rules will help reduce the undue influence of political contributions in the selection of municipal advisors and the firms they represent.”

The proposed Rule G-42 would apply to firms that advise state and local governments and public pension plans on municipal securities and financial products, including derivatives, as well as advisors that solicit pension fund or other business from municipal entities for third parties.

Under the proposed rule, muni advisors would be barred from receiving compensation for advisory business with issuers or other “municipal entities” for a certain period of time if they, their muni advisor professionals, or MAPs, or political action committees make non-de minimis political contributions to state or local officials with authority to hire them.

The ban on compensation would begin on the date the contribution was made and would extend until two years after the advisory work with the government was terminated.

The ban on compensation would be potentially long because the advisor has a fiduciary duty to the issuer or other muni entity and may not be able to simply cease giving advice, sources said.

The MSRB also would not want the advisor to have to wait out a set period of time, such as two years, and then get paid, they said.

In addition, muni advisor firms or MAPs who make political contributions to solicit third-party business from a pension fund or other municipal entity would be barred from receiving compensation for two years and also would be prohibited from receiving compensation for previous solicitations.

This provision is designed to prevent pension-related scandals like those involving former New York Comptroller Alan Hevesi and former Connecticut Treasurer Paul Silvester.

The proposed rule would provide a de minimis exception similar to the one in Rule G-37 for dealers, in that MAPs would be allowed to contribute up to $250 per election — primary, general or both — to anyone for whom they could vote. The exception would not apply to muni advisor firms.

Muni advisor firms would have to file quarterly forms with the MSRB disclosing all non-de minimis contributions made to officials of an issuer, pension fund or other muni entity; payments made to political parties of states and political subdivisions; contributions to bond ballot campaigns by firms, MAPs, non-MAP executive officers and PACs; advisory business with issuers and other muni entities; and business awarded to third parties as a result of solicitations.

The proposed rule would automatically exempt a muni advisor firm from the ban on compensation if it discovers a contribution of $250 or less that should not have been made and seeks return of the contribution within 60 calendar days from when it was discovered. The firm would be entitled to two such exemptions per year, but only if they did not involve the same MAP.

Firms also would be able to apply to the SEC for exemptions from the ban on compensation.

The commission would have to take into account many factors, including whether an exemption would be consistent with the public interest and the protection of investors and muni entities.

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