The Supreme Court's 2010 ruling in a political contributions case should alleviate concerns by the Municipal Securities Rulemaking Board that additional regulation of bond ballot campaign contributions could violate First Amendment's free speech protections, according to an independent muni advisors group.
The National Association of Independent Public Finance Advisors is several organizations and individuals that filed letters with the Securities and Exchange Commission in recent days responding to MSRB proposed rule changes that would require dealers to disclose more information about contributions to issuers' bond ballot campaigns.
The proposed changes to Rule G-37 on political contributions and Rule G-8 on books and records, filed with the SEC in February, would require dealers to make quarterly disclosures of bond ballot contributions, the bond issues to which the contributions were related, and the dates they were hired.
The proposals were an effort by the board to collect more data and help it evaluate the "correlation between bond ballot contributions and the awarding of underwriting business," MSRB executive director Lynnette Kelly said last year.
G-37 already requires dealers to disclose contributions to bond ballot campaigns. It also requires dealers to disclose contributions to certain issuer officials. Under G-37, dealers are prohibited from engaging in negotiated muni bond business with an issuer for two years if they or their municipal finance professionals contribute to issuer officials who could influence the award of muni bond business. However, MFPs can contribute up to $250 per primary and general election to anyone for whom they could vote.
NAIPFA's letter, signed by president Jeanine Rodgers Caruso, warned the proposed additional disclosures would be too lax because they would not curtail quid pro quo arrangements in which underwriters and muni advisors are hired by issuers after contributing to the issuers' bond ballot campaign.
The letter called attention to an MSRB press release saying the board "must carefully evaluate the First Amendment issues" that could arise from contribution restrictions.
But NAIPFA said the high court's ruling in Citizens United v. Federal Election Commission case makes those concerns unwarranted.
The government already has authority to regulate "direct" political contributions, but the court ruled that it cannot restrict corporations' or unions' "indirect" contributions if there is no evidence of actual or perceived quid pro quo. The court added that contributions are "direct" if coordinated with the candidate.
NAIPFA's letter said elected officials often coordinate bond ballot campaign committees, soliciting members and steering the committee's activities. Officials also often solicit contributions during meetings with financial firms, the group said.
Therefore, the contributions are "direct" and can be regulated, NAIPFA argued.
Also, there's plenty of evidence of quid pro quo, NAIPFA added, referencing analyses conducted several media outlets, including The Bond Buyer, which found nearly all underwriters that contributed to campaigns later worked on the deals.
Underwriters' and advisors' contributions should be prohibited or limited to $200 per election, the group said, adding quarterly disclosures offer no benefit. "In all likelihood an election will [conclude] before the disclosures are even made public, which will diminish whatever informative value such disclosures may have to the voting public," the group said.
Another letter from Robert Doty written for consulting firm AGFS and independent advisory firm Government Financial Strategies Inc., called the proposal a "constructive and moderate response to issues associated with underwriter contributions to bond elections."
Doty said the changes will give the MSRB data to study additional action.
Support for the proposal also came from Ellen Miller, head of The Sunlight Foundation, a nonprofit group that supports increased transparency. Miller said "improving public disclosure of bond ballot campaign contributions is fundamental to helping citizens be better informed about possible conflicts of interest and any 'pay-to-play' schemes that might be occurring in the underwriting of municipal bonds."
Dealers did not submit comments to the SEC, but Bond Dealers of America chief executive Mike Nicholas told The Bond Buyer that transparency and disclosure is the best means to ensure the fairness of bond ballot campaigns. "As long as everybody knows who's helping fund what, that solves potential issues that the MSRB or SEC would be concerned about," he said.
Nicholas added that the entire muni bond community, including dealers, advisors and lawyers, often contribute to the campaigns, and that the campaigns are in the best interests of issuers.
The Securities Industry and Financial Markets Association previously said the proposal could improve transparency but contained impractical provisions. The group did not support reporting "in kind" contributions, and noted that some services are performed regardless of whether a bond is contingent upon a ballot vote.
Dealers should also not need to report the date they were hired because issuers have varying processes for selecting dealers and dealers may not always know when they were engaged, SIFMA added.