MSRB Provides Guidance on Pay to Play Rules

Date: June 9, 2009

Contact:           Jennifer A. Galloway, Chief Communications Officer
                       (703) 797-6600


Alexandria, VA - The Municipal Securities Rulemaking Board (MSRB) today reminded municipal securities dealers about its rule on political contributions, specifically the rule's application to dealer employees soliciting Build America Bond business.

At some MSRB-regulated firms, employees that typically do not engage in municipal securities business may participate in presentations to municipal issuers to generate business related to Build America Bonds.  With its notice today, the MSRB is seeking to ensure that regulated dealers are fully aware that solicitation of an issuer for municipal securities business by any employee, including persons not otherwise routinely involved in the dealer's municipal securities activities, may in many cases trigger a ban on business with the issuer if that employee contributed to an official of the issuer within the prior two years.   

"The MSRB's pay-to-play prohibition has been a critical and groundbreaking tool to help preserve the integrity of the municipal securities market," said Lynnette Kelly Hotchkiss, Executive Director of the MSRB.  "Dealers need to ensure that they adhere to the requirements laid out in our Rule G-37 when seeking to undertake Build America Bond-related business," she said. "With municipalities taking advantage of the Build America Bond program, the Board thought it important to remind dealers that the solicitation provisions of G-37 extend to all employees of dealers, and that includes rules on political contributions."

While the tax treatment of Build America Bonds may differ from the typical tax-exempt municipal bond, they nonetheless are municipal securities and are therefore governed by all MSRB investor protection and other rules on dealers' municipal securities activities.  These MSRB rules include rules on fair practice, suitability of recommendations, fair pricing, disclosure of material facts, uniform practice, official statement submission and dissemination requirements, trade reporting, MSRB underwriting and transaction assessments, and the professional qualifications of registered representatives and principals. 

MSRB Rule G-37, adopted in 1994, is a seminal regulation that local, state and federal agencies and other entities have used as a model for addressing the potential influence of political contributions on the awarding of securities business and other government contracts.  Most recently, the press has reported on efforts by New York Attorney General Andrew Cuomo to establish prohibitions modeled on MSRB Rule G-37 in connection with suspected pay-to-play activities involving public pension funds in the State of New York, as well as the Securities and Exchange Commission's plans to propose new rules for investment advisors based on MSRB Rule G-37.

The MSRB protects investors, state and local governments and other municipal entities, and the public interest by promoting a fair and efficient municipal securities market. The MSRB fulfills this mission by regulating the municipal securities firms, banks and municipal advisors that engage in municipal securities and advisory activities. To further protect market participants, the MSRB provides market transparency through its Electronic Municipal Market Access (EMMA®) website, the official repository for information on all municipal bonds. The MSRB also serves as an objective resource on the municipal market, conducts extensive education and outreach to market stakeholders, and provides market leadership on key issues. The MSRB is a self-regulatory organization governed by a 21-member board of directors that has a majority of public members, in addition to representatives of regulated entities. The MSRB is overseen by the Securities and Exchange Commission and Congress.