WASHINGTON — Municipal analysts and other muni market participants are urging the Municipal Securities Rulemaking Board to strengthen a proposal to tighten bond-ballot campaign contribution reporting requirements for dealers.
In comment letters filed in recent days, several participants urged the board to do more to attack corruption and protect the voting public, with some suggesting there should be an outright ban on such contributions rather than disclosure requirements.
Groups representing dealers said the MSRB’s proposal could improve market transparency, but cautioned that some of the requirements in the proposal would be impractical and unnecessary.
Most participants also called for the MSRB to subject municipal advisors to the same bond-ballot campaign contribution rules as underwriters.
In draft amendments to Rule G-37 on political contributions issued in August, the MSRB recommended requiring dealers to make quarterly disclosures of the timing of bond-ballot campaign contributions, the identity of the municipal issuer selling the bonds on the ballot, and primary offerings that result from the campaign.
Dealers would need to disclose if their municipal finance employees or non-muni executives received payments or reimbursements related to a campaign. In addition, dealers would need to disclose more information about the services they provide to issuers of bonds that are subject to a ballot vote.
Rule G-37 already requires dealers to disclose contributions to bond ballot campaigns and issuer officials, as well as payments to political parties of state and local political subdivisions. Dealers can not engage in negotiated muni business with an issuer within two years if they or their muni financial professionals make a significant contribution to an issuer official who can influence the award of muni business.
Two California-based municipal advisors supported the MSRB’s proposed changes, but called on the board to do more to ensure the public has the information needed to cast informed votes on bond issues.
“If the tax-paying public is being asked to accept the burden of long-term debt ... then the public has the right to be told of the potential for economic gain to those who would influence or recommend the transaction,” Timothy Schaefer, president of Newport Beach, Calif.-based Magis Advisors, said in a letter.
Schaefer and Government Financial Strategies Inc. president Robert Doty, who also submitted comments, said municipal advisors managing bond-ballot campaigns may indirectly receive compensation from the contributions of underwriters and bond lawyers. Advisors may then recommend that the issuer hire those same firms to participate in the bond transaction.
“All of the parties have a substantial interest in receiving significant contingent compensation from the issuance of the bonds,” Doty said in an email. “The voters, however, are entirely in the dark with respect to these practices.”
Doty suggested the MSRB require underwriters to report payments “channelled through bond election campaigns” to financial and election advisors. He recommended that underwriters disclose underwriting fees if they are higher than industry norms, noting that firms sometimes roll ballot administration fees into their underwriting compensation.
Doty and Schaefer recommended the MSRB also require contributions be reported more promptly, and for the board’s online EMMA system’s search function to be improved. They said they would support similar bond-ballot rules for muni advisors.
Schaefer suggested that issuers disclose potential conflicts of interest in official statements, ensuring issuers and investors know that “financial interests” may have influenced the bond issue.
The Securities Industry and Financial Markets Association said in a letter that it supports the transparency the proposal would bring. But Leslie Norwood, SIFMA’s co-head of municipal securities, said the group has “technical concerns.”
While SIFMA supports the reporting of contributions made by dealers to bond ballot campaigns, it does not support reporting of “in kind” contributions and services dealers provide to issuers, she said. The group said “traditional public finance services,” such as quantitative analysis, are typically performed regardless of whether a bond is contingent upon a ballot initiative, and should not need to be reported.
SIFMA said dealers should not need to report the date they were engaged for work by an issuer. Issuers have varying processes by which they select dealers, the group said, and dealers may not always know when they were officially engaged.
The National Association of Independent Public Finance Advisors said the board’s disclosure-based proposal doesn’t do enough, and urged the MSRB to limit or ban underwriters’ bond-ballot contributions.
“NAIPFA is unsure how the amendments alone will benefit issuers or the public interest since the amendments do not prohibit or limit the practice,” NAIPFA president Colette Irwin-Knott said in the group’s letter.
Wayne Hammar, president of the California Association of County Treasurers and Tax Collectors, also urged the board to consider an “outright ban” on contributions by brokers, dealers and muni professionals to bond ballot measures.
Hammar noted that bond ballot contributions have posed particular problems for school district financings since 2000, when California lowered the public approval margin for bond ballot measures to 55%.
He said “pay-to-play” activities undermine “the competitive process that ensures that taxpayer money is spent in the most efficient and effective manner.”
Allen Dickerson, legal director at the Alexandria, Va.-based Center for Competitive Politics, was the only one who opposed the MSRB’s draft amendments. He called on the board to reconsider its proposal for legal reasons. Dickerson said in a letter that the proposal overlooks the “constitutional distinction” between candidate contributions and bond ballot contributions, and noted that the U.S. Supreme Court has declared limits on contributions to ballot measures unconstitutional.
“Voters themselves cannot be ‘bought’ by the advertising or campaign of those promoting a ballot measure,” he said.
Dickerson said the proposal would not prevent corruption and “would chill political participation.”