WASHINGTON - The Municipal Securities Rulemaking Board reminded dealers yesterday that its Rule G-37 ban on political contributions applies to dealers soliciting business involving Build America Bonds, as well as other types of taxable tax-credit bonds.
Despite their taxable status, BABs are considered municipal securities because they are sold by states and localities and are therefore subject to MSRB rules, including those on fair practices, conflicts of interest, and restrictions on political contributions meant to prohibit dealers from engaging in pay-to-play practices.
The MSRB said that at some board-regulated firms, employees typically not involved with tax-exempt bonds may participate in presentations to municipal issuers designed to generate taxable bond business, and therefore may become municipal finance professionals subject to G-37.
BABs are taxable bonds that give issuers the option of either receiving payments from the federal government or directing the government to provide tax credits to investors.
But BAB solicitations by any employee "may in many cases trigger a ban on business with the issuer if that employee contributed to an official of the issuer within the prior two years," the board said in a statement.
"Dealers need to ensure that they adhere to the requirements laid out in our Rule G-37 when seeking to undertake Build America Bond-related business," MSRB executive director Lynnette Hotchkiss said in a release. "With municipalities taking advantage of the Build America Bond program, the board thought it important to remind dealers that the solicitation provisions of G-37 extend to all employees of dealers, and that includes rules on political contributions."
Under G-37, which has been in effect since April 1994, a dealer may not engage in negotiated municipal securities business with an issuer for two years if it or its municipal finance professionals make significant political contributions to officials of that issuer who influence the awarding of bond business. MFPs, however, can contribute up to $250 to any issuer official for whom they can vote.
Because the rule also has a two-year look-back provision, individuals soliciting BAB business may trigger the ban if they made political contributions to issuer officials outside the $250 exception within two years of the solicitation, even if they were not MFPs at that time.
"Political contributions made by such personnel to an [issuer official they] solicited ... within the two years prior to the solicitation would need to be examined by the dealer to determine whether the two-year ban on municipal securities business ... is triggered," the MSRB said in its notice.
Asked if this would cause new compliance headaches for dealer firms, MSRB general counsel Ernesto Lanza said: "This is an issue that firms have had to deal with ever since the rule has been in place, it's just important that they understand it applies in this context."
Yesterday's notice comes about a month after the board clarified to dealers that its rules apply to BABs, which were authorized in the $787 billion stimulus package enacted in February.
In its notice, the board hailed G-37 as a is a "seminal regulation," noting that New York Attorney General Andrew Cuomo is reportedly seeking to establish prohibitions modeled on the rule in connection with suspected pay-to-play activities involving public pension funds in his state. In addition, Securities and Exchange Commission officials said they plan to propose new rules for investment advisers based on the rule. The SEC proposed such a measure in 1999 but never implemented it, bowing to congressional and industry opposition.