MSRB to Offer Draft Changes to G-37

WASHINGTON - The Municipal Securities Rulemaking Board today will release and seek public comments on draft changes to its Rule G-37 on political contributions that would require dealers to disclose contributions they make to campaign committees pushing bond ballot initiatives.

The move comes about six months after a group of prominent dealers, including a former MSRB chairman, urged the board to sharply curtail the contributions. The board responded at that time by saying there was not enough data to show how big the problem is and whether it should be curtailed.

Currently, there are no restrictions or disclosure requirements for dealers that contribute to these committees, which are formed to raise money for bond ballot initiatives in states like California where voter approval is required for bond sales.

But under the draft rule changes, dealers would be required to disclose such contributions in quarterly filings to the MSRB, except those of $250 or less made to committees pushing bond ballot initiatives for which they can vote. If the rule changes are approved, the information collected through the disclosures may lead the MSRB to consider imposing restrictions on such contributions. The board asked that comments be submitted to it by Aug. 7.

"The board believes that public disclosure of bond ballot contributions would shine needed light on this area of the municipal securities business," said executive director Lynnette Hotchkiss. "The board is concerned that the private nature of such political contributions by dealers is negatively affecting the integrity of the market. By making these donations public, their potential effects can be fully known."

The MSRB action was sparked in part by a December letter from the heads of public finance at three of the largest Wall Street firms: Frank Chin, a former MSRB chairman and the head of public finance at Citi, as well as Mark Melio at JPMorgan and Stratford Shields, managing director and head of public finance at Morgan Stanley. They said that Rule G-37's restrictions should, out of an abundance of caution, be expanded to include contributions to ballot campaigns so that dealers have the same restrictions as are imposed on contributions to issuer officials.

Under G-37, dealers cannot engage in negotiated municipal securities business with an issuer for two years if they or their municipal financial professionals, or MFPs, contribute to issuer officials who can influence the award of muni bond business. However, they can contribute up to $250 to any issuer official for whom they can vote.

The dealers' letter also said that any ballot campaign restrictions should cover banks, municipal finance professionals and associated political actions committees, as well as broker-dealers.

Several market participants have noted that the problem, especially in California, revolves around small and medium-sized school districts and community college issuers that have set up committees to pay for pro-ballot advertising, which can be costly.

In an interview Friday, MSRB general counsel Ernesto Lanza and associate general counsel Leslie Carey said that the board has spent a lot of time searching for information about state and local bond ballot contributions, but has not found much. In addition to the December letter, Lanza noted that the draft changes were partly motivated by a review of all the board's G rules, which cover dealer conduct.

Generally, the board is seeking comment on whether contributions to these committees result in actual pay-to-play practices or merely give the perception of pay-to-play, "both of which can negatively affect the integrity of the municipal market," the notice will say.

The board also wants comments on whether in-kind contributions are frequently used and if they should be treated differently from cash contributions. In addition, the board asked whether dealers are solicited to make contributions by campaign committees or issuers and how such solicitations are made.

For reprint and licensing requests for this article, click here.
Bankruptcy
MORE FROM BOND BUYER