The two broker-dealer trade groups are taking opposite stances on the Municipal Securities Rulemaking Board's proposal to require dealers to disclose contributions to bond ballot campaign committees to the MSRB.
The Securities Industry and Financial Markets Association, which represents the industry's largest firms,
"It is of utmost importance to the municipal securities broker-dealer community to continue its efforts to eliminate even the slightest perception of impropriety that may exist regarding its obtaining and maintaining municipal securities business," SIFMA wrote in a comment letter filed with the MSRB Friday.
But in a separate letter to the board, the Regional Bond Dealers Association, which represents about 30 regional firms throughout the country, is
The RBDA argues that dealers are already disclosing such contributions at the state and local level and that bond ballot contributions are far different from political contributions made to elected officials.
"Contributions to campaigns for political office suggest an element of pay-to-play that does not exist for contributions to bond ballot campaigns, where no individual politician benefits directly form the outcome of the ballot election," the RBDA wrote, contending that a Colorado state court decision backs up these claims.
But SIFMA said there are no uniform disclosure methodologies or ways to obtain transparency on bond ballot campaign contributions and that uniform disclosure of them "would reap benefits that outweigh any additional compliance burdens and costs." The group also noted that municipal dealers are held to stricter pay-to-play standards than any other participant in the muni market "or any other participant in any industry."
The comments were on MSRB draft amendments to Rule G-37 on political contributions that would require dealers to disclose bond ballot campaign contributions in quarterly filings to the board.
The proposal, however, would except dealer contributions of $250 or less made to committees pushing bond ballot initiatives for which they can vote, mirroring a similar de minimis contribution level in G-37 for political 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 contribute to issuer officials who can influence the award of muni bond business.
Currently, there are no restrictions or disclosure requirements for dealers that contribute to these bond ballot campaign committees, which are formed to raise money for ballot initiatives in states like California, where voter approval is required for bond sales.
Some market participants have become concerned about such contributions, particularly with regard to school district financings in states like California, contending that dealers have to contribute to be eligible for the award of the underwriting business.
In California a proposition was adopted in 2000 that lowered to 55% from 66% the amount of voter support needed to approve a bond ballot measure. That proposition ushered in a period of more donations from underwriting firms because bond ballot measures were more likely to pass and dealers saw a better return on their investment, according to market participants.
"Is it having a deleterious effect on the market? Yes, because people, unwilling to give as a rule, are having a hard time competing" for bond business, one source said.
The proposal comes about eight months after a group of prominent dealers, including a former MSRB chairman, urged the board to sharply curtail such contributions. The board responded at the time by saying there was not enough data to show whether such contributions should be curtailed.
To collect more information on the practice, the MSRB drafted the disclosure rules in June. They would have to be submitted to the Securities and Exchange Commission for further comment and approval before they could be implemented.
The RBDA took a similar tack as Baum, arguing in its letter that providing assistance to issuers on bond ballot campaigns is a service that is tied to bringing bonds to market. It is no different than work an underwriter might perform in negotiated bond sales, such as helping to size an issue, structure repayment schedules, or providing "a long menu of other services necessary to bring bonds to market," the association said.
In addition, the RBDA said it is not aware of circumstances where dealers have committed to contributing to bond ballot campaigns in advance of being chosen to underwrite bond issues.
The RBDA also took issue with a provision of the changes that would require dealers to include in their disclosures the value of "in-kind services" provided to bond ballot campaigns, arguing it would be "extraordinarily difficult" for dealers to segregate these services from others tied to the underwriting of bonds and to place a value on them.
SIFMA, however, maintained that any in-kind contributions, "such as polling services and other outside election consultants that a firm pays for on behalf of a committee," should be treated the same as cash contributions under the rule.
However, it said that the use of in-house resources should not have to be reported, because the valuation of the resources may be very difficult and the services may overlap and be confused with traditional investment banking services provided. SIFMA also asked the board to pair the changes to G-37 with new amendments to Rule G-8 on recordkeeping.
