WASHINGTON – The Municipal Securities Rulemaking Board filed an amendment with the Securities and Exchange Commission on Thursday to make clear that although its revised rule against pay-to-play practices does not take effect until Aug. 17, there is still a two-year lookback under the current rule for individuals who make contributions before that date and then become associated with dealers.
The MSRB's filing for the immediately effective amendment further states that dealers with which the individuals are associated may also be subject to the two-year lookback clarified in the amendment.
If an individual makes a significant contribution to an issuer official who can influence the award of underwriting or financial advisory business within the two years before being hired by or becoming associated with a dealer, that contribution could subject the dealer to a two-year ban on negotiated muni business with the issuer, the MSRB warned. The provision is already in effect for dealers, regardless of the Aug. 17 effective date for extending pay-to-play restrictions to municipal advisors, the board said.
MSRB Rule G-37 on political contributions currently prevents dealers from engaging in negotiated municipal business with an issuer for two years if the firm, one of its municipal finance professionals, or a political action committee that is controlled by the firm or an associated professional makes a significant contribution to an issuer official who can influence the award of negotiated muni bond business. The revised rule, as of Aug. 17, will extend the restriction to municipal advisors, their MA professionals and their PACs.
However, similarly to the current G-37, under the revised rule, an MFP or MAP can give a de minimis contribution of up to $250 to any candidate for whom he or she can vote without triggering the ban. There is no such exception for a firm.
The revised Rule G-37 will divide MA firms into two categories, those that act as third-party solicitors and those that do not. Under the revised rule, an MA third-party solicitor is generally an MA that solicits an issuer or other municipal entity for compensation, even if that MA also provides advice to municipal entities.
Dealers and non-dealer MAs can trigger the two-year ban in different ways.
Dealers can only be subject to the temporary ban on municipal securities business if a contribution is made to an official who can influence the selection of a dealer. Similarly, a non-solicitor MA can only be subject to a ban on municipal advisory business if a contribution is made to an official who can influence the selection of an MA.
A temporary ban on negotiated municipal advisory business would include both a ban on advising the issuer or other municipal entity on certain matters as well as soliciting the municipal entity on behalf of third-party dealers, municipal advisors, and investment advisers.
Dealers that are also MAs could also be subject to a "cross ban" on business, consistent with the type of influence held by the official to whom the contribution was made. A "cross ban" would treat a dealer-MA firm as a single economic unit. For example, if an MFP or MAP of the firm makes a contribution to an official who can influence the selection of dealers and MAs, the firm is subject to a temporary ban on both types of business. However, if an MFP or MAP of the firm makes a contribution to an official who only has influence over one type of business, the firm would be subject to a two-year ban on only that business.
The factors triggering a temporary ban on business for municipal advisor third-party solicitors differ from those for non-solicitor MAs. For MA third-party solicitors, the ban on negotiated municipal advisory business would apply if the official getting the contribution has influence over selecting MAs, dealers, or investment advisors. If a dealer hires a municipal advisor third-party solicitor, the dealer also may be subject to a two-year ban on municipal securities business if the solicitor contributed to an official who could influence the selection of dealers. Similarly, if a municipal advisor hires an MA third-party solicitor, the municipal advisor also may be subject to a ban on municipal advisory business if the solicitor contributed to an official who has influence over selecting MAs.
Three state Republican groups are currently challenging the revised rule in federal court, arguing, among other things, that it impedes their constitutional right to free speech. The case is pending in the Sixth Circuit Court of Appeals located in Cincinnati.
