WASHINGTON — Some broker-dealer firms appear to have violated the Municipal Securities Rulemaking Board’s Rule G-37 by engaging in negotiated muni business with issuers within two years after their municipal finance professionals made significant contributions to officials of those issuers, the SEC said Friday.
The SEC made the warning in an 11-page “Risk Alert” it issued to strengthen broker-dealer compliance with the rule. It is designed to prevent muni broker-dealers from engaging in pay-to-play practices under which they make political contributions to issuer officials in return for obtaining underwriting and other muni bond business.
The release of the alert appears to be timed to coincide with the revving up of political campaigns for the November elections.
“This Risk Alert is intended to help firms strengthen their compliance and risk-management efforts with regard to political contributions,” said Carlo di Florio, director of the SEC’s office of compliance, inspections and examinations. “We hope that by describing practices that our examiners have observed, we will promote compliance by helping firms to consider how each of them can most effectively meet their obligations under MSRB rules.”
Rule G-37 generally prohibits a dealer from engaging in negotiated muni securities business with an issuer for two years if it, its muni finance professionals, or its political action committees make significant contributions to officials of the issuer who can influence the awarding of bond business. The rule contains a de minimis provision, however, that permits MFPs to contribute up to $250 per election to any issuer official for whom it can vote.
But besides rule violations, SEC examiners found that some dealers that have not have been maintaining accurate or complete lists of their municipal finance professionals and may not have filed accurate or complete quarterly forms under the rule as required.
The examiners also found some firms failed to establish or implement adequate supervisory procedures to ensure compliance with G-37 or G-38, the latter of which prohibits broker-dealers from paying any nonaffiliated persons to solicit muni business on their behalf.
The alert contains detailed descriptions of G-37 and G-38 requirements as well as descriptions of some of the programs broker-dealers have put in place to comply with the rules.
For G-37, it specifies who qualifies as an MFP and notes that they retain their designations for one year after they hold the positions that caused them to be designated MFPs, under a “look-forward” provision of the rule. G-37 also contains “look-back” provisions, covering contributions of individuals for two years before they become MFPs. However for individuals who hold certain supervisory or management roles, the look-back period is only six months.
The examiners described many procedures firms put in place to ensure compliance with the rules.
They found, for example, that many firms provide regular training for municipal finance professionals on the requirements of G-37 and G-38, according to the SEC examiners. “Such training serves as an important supplement to surveillance, particularly during years in which political contributions are likely to be higher, such as presidential election years.”
Some firms require MFPs and non-MFP executive officers who also are covered by Rule G-37, to periodically certify that they understand and are meeting all of the rules’ requirements. Some dealers use the Internet or screen emails to check for unreported political contributions, the examiners said.
Many firms require pre-clearance of political contributions.
“While not required by MSRB rules, some firms have chosen to prohibit any non-de minimis political contributions by MFPs or prospective MFPs as a condition of employment, to the extent permitted by state or local law,” the SEC said.
The commission said in the alert that it “welcomes comments and suggestions about how [its examiners] can better fulfill [their] mission to promote compliance, prevent fraud, monitor risk and inform SEC policy. If you suspect or observe activity that may violate the federal securities laws or otherwise operates to harm investors, please notify us at http://www.sec.gov/complaint/info_tipscomplaint.shtml.”
The alert is the fourth this year and the sixth in a series that the SEC’s examination staff began issuing in 2011.