MSRB NOTICE 2009-51 (SEPTEMBER 16, 2009)

REQUEST FOR COMMENT: RULE G-37 ON POLITICAL CONTRIBUTIONS AND PROHIBITIONS ON MUNICIPAL SECURITIES BUSINESS – BANK AND BANK HOLDING COMPANY POLITICAL ACTION COMMITTEE CONTRIBUTIONS

Rule G-37, on political contributions and prohibitions on municipal securities business, of the Municipal Securities Rulemaking Board (the “MSRB”) prohibits brokers, dealers and municipal securities dealers (“dealers”) from engaging in municipal securities business[1] with issuers if certain political contributions have been made. Rule G-37 was adopted to ensure that the high standards and integrity of the municipal securities industry are maintained by severing the connection between political contributions by dealers and municipal finance professionals (“MFPs”) and the awarding of municipal securities business. The MSRB believes the rule has assisted with severing the connection between contributions and the awarding of municipal securities business.

Under Rule G-37, the prohibition on municipal securities business is triggered by certain contributions to issuer officials made by dealers, dealer-controlled political action committees (“PACs”), MFPs and MFP-controlled PACs. In addition, some contributions to dealer-controlled and MFP-controlled PACs are required to be disclosed on Form G-37. During the recent financial market turmoil a number of traditional investment banks converted to banks or bank holding companies. Many banks and bank holding companies have PACs that make contributions to issuer officials. However, the prohibition and disclosure requirements of the rule do not currently extend to contributions that are made by dealer-affiliated bank and bank holding company PACs that are not controlled by a dealer or an MFP.[2]

The MSRB is concerned with the perception that certain bank and bank holding company PAC contributions to issuer officials may be a significant factor in the awarding of municipal securities business to bank-affiliated dealers.  As part of the MSRB’s periodic review of the continued effectiveness of Rule G-37 and due to recent market activity, the MSRB is considering amendments to the rule that would require the mandatory disclosure of dealer-affiliated bank and bank holding company PAC contributions to issuer officials, even if the PACs are not controlled by a dealer or MFP. At this time, the proposed amendments would not, however, provide for a ban on municipal securities business as a result of such contributions. To assist with its consideration, the MSRB is seeking comments from industry participants and other interested parties on such amendments to Rule G-37.

BACKGROUND

When Rule G-37 was enacted in 1994, the MSRB sought to prohibit dealers and MFPs from acting, indirectly, to accomplish something that, if done directly, would be a violation of the rule.[3] The MSRB has stated its concern with increasing signs that firms subject to the rule “may be seeking ways around Rule G-37 through payments to…non-dealer controlled PACs that find their way to issuer officials”[4] and through contributions to issuer officials by dealer-affiliated banks and bank holding companies.

In 2002, the MSRB sought comments on whether to include dealer-affiliated bank and bank holding company PAC contributions under the prohibition and disclosure requirements of Rule G-37.[5] In response, some commentators argued that there was no evidence that bank and bank holding company PAC contributions were being made to secure municipal securities business for an affiliated dealer. These commentators emphasized that banks and bank holding companies have legitimate concerns of banking institutions and their employees that are independent of municipal securities business. However, other commentators noted that exempting dealer-affiliated bank and bank holding company PAC contributions from the requirements of Rule G-37 provides a loophole that presents an opportunity to undermine the effectiveness of the rule and places traditional dealer firms at a disadvantage. Accordingly, these commentators argued that disclosure of such contributions is warranted. In addition, over the years, concerns have been expressed to the MSRB about the possibility of situations in which an affiliated dealer or MFP may obtain favor by merely noting that political contributions have been made by a bank or bank holding company PAC to the issuer official from whom the affiliated dealer or MFP seeks to receive municipal securities business.

REQUEST FOR COMMENT

The MSRB is requesting comment from the industry and other interested parties on whether dealer-affiliated bank and bank holding company PAC contributions should be subject to the mandatory disclosure requirements of Rule G-37. The MSRB is interested in receiving comments on the merits of requiring that dealers provide such information to the MSRB through Form G-37 for public disclosure. Such disclosure would increase the amount of information available to market participants and thereby increase market transparency. The draft amendments, which are included at the end of this notice, would not provide for a ban on municipal securities business as a result of dealer-affiliated bank and bank holding company PAC contributions to issuer officials.

Comments should be submitted no later than October 30, 2009 and may be directed to Leslie Carey, Associate General Counsel, or Ronald W. Smith, Senior Legal Associate. Written comments will be available for public inspection on the MSRB’s web site.[6]

September 16, 2009

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TEXT OF DRAFT AMENDMENT TO RULE G-37 [7]

Rule G-37.  Political Contributions and Prohibitions on Municipal Securities Business

(a) - (d)  No change.

(e) Required Disclosure to Board.

(i) Except as otherwise provided in paragraph (e)(ii), each broker, dealer or municipal securities dealer shall, by the last day of the month following the end of each calendar quarter (these dates correspond to January 31, April 30, July 31 and October 31) send to the Board Form G-37 setting forth, in the prescribed format, the following information:

(A) for contributions to officials of issuers (other than a contribution made by a municipal finance professional or a non-MFP executive officer to an official of an issuer for whom such person is entitled to vote if all contributions by such person to such official of an issuer, in total, do not exceed $250 per election) and payments to political parties of states and political subdivisions (other than a payment made by a municipal finance professional or a non-MFP executive officer to a political party of a state or a political subdivision in which such person is entitled to vote if all payments by such person to such political party, in total, do not exceed $250 per year) made by the persons and entities described in subclause (2) of this clause (A):

(1) the name and title (including any city/county/state or political subdivision) of each official of an issuer and political party receiving contributions or payments during such calendar quarter, listed by state;

(2) the contribution or payment amount made and the contributor category of each of the following persons and entities making such contributions or payments during such calendar quarter:

(a) the broker, dealer or municipal securities dealer;

(b) each municipal finance professional;

(c) each non-MFP executive officer; and

(d) each political action committee controlled by the broker, dealer or municipal securities dealer, [or] by any municipal finance professional or by a bank or bank holding company controlling, controlled by or under common control with the broker, dealer or municipal securities dealer;.

(B) – (E) No change.

The Board shall make public a copy of each Form G-37 received from any broker, dealer or municipal securities dealer.

(ii) – (iv) No change.  

(f) – (j) No change.


[1] Rule G-37 defines municipal securities business as: (i) the purchase of a primary offering of municipal securities from an issuer on other than a competitive bid basis; (ii) the offer or sale of a primary offering of municipal securities on behalf of an issuer; (iii) the provision of financial advisory or consultant services to or on behalf of an issuer with respect to a primary offering of municipal securities in which the dealer was chosen to provide such services on other than a competitive bid basis; or (iv) the provision of remarketing agent services to or on behalf of an issuer with respect to a primary offering of municipal securities in which the dealer was chosen to provide such services on other than a competitive bid basis.

[2] The MSRB has previously stated that the matter of control depends on whether or not the dealer or the MFP has the ability to direct or cause the direction of the management or policies of the PAC. (MSRB Q&A IV. 24 – Dealer Controlled PAC).

[3] Rule G-37(d) specifically prohibits dealers and MFPs from using conduits, including PACs, to contribute indirectly to an issuer official.

[5] See Notice Regarding Draft Amendments to Rule G-37 on Political Contributions (April 2, 2002) (the “2002 Notice”). In the 2002 Notice, the MSRB sought comments on draft amendments to the rule regarding these exemptions.

[6] All comments received will be made publicly available without change. Personal identifying information, such as names or e-mail addresses, will not be edited from submissions. Therefore, commentators should submit only information that they wish to make publicly available.

[7] Underlining indicates additions; brackets denote deletions.