SEC Warns Firms on Muni Pay-to-Play Rules
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As we previously reported, the Securities and Exchange Commission (SEC) has given notice that it intends to take a very active role with respect to pay-to-play issues in the securities markets. On March 18, 2010, the SEC issued a report warning firms that municipal securities rules prohibiting pay-to-play apply to affiliated financial professionals, not just a firm’s employees. In the report the Commission made it clear that an executive who supervises the activities of a broker, dealer or municipal securities dealer is not exempt from the MSRB’s pay-to-play rule just because he or she may be outside the firm’s corporate governance structure.
The pay-to-play rule at issue is MSRB Rule G-37, which generally prohibits firms from underwriting municipal bonds for an issuer for two years after a municipal finance professional (MFP) involved with that firm makes a campaign contribution to an elected official of that municipality. The Commission clarified that an executive may be deemed an MFP if he or she is not part of a broker-dealer, but oversees the broker-dealer from the vantage of a holding company.
The SEC report was issued in connection with an Enforcement Division inquiry into whether JP Morgan Securities Inc. (JPMSI) violated MSRB Rule G-37. JPMSI underwrote municipal bonds issued by the state of California within two years after the Vice Chairman of JPMSI’s parent bank holding company, JP Morgan Chase & Co., Inc. (JP Morgan Chase), who also led JP Morgan Chase’s investment banking business, gave a $1,000 contribution to the Treasurer of the State of California. As quoted from the report: “On September 10, 2002, the Vice Chairman forwarded an invitation for the California Treasurer’s New York fundraising event to JP Morgan Chase’s executive committee and to its Vice President for Government Relations with a handwritten note stating that the California Treasurer is an important client and soliciting their help in raising $10,000 for the event.” Although the Vice Chairman of JP Morgan Chase was not a director, officer or employee of JPMSI, the Commission found he nevertheless was an MFP associated with JPMSI because he functionally supervised JPMSI and served on the executive committee that oversaw JPMSI.
One commentator observed of the JPMSI investigation: “That is exactly the sort of behavior that the SEC wants to prohibit with MSRB Rule G-37 and its proposed pay to play rule.” The SEC merely said its report should serve as a “warning” about mixing political donations and state banking business.
The SEC report serves to remind the financial community that placing an executive who supervises the activities of a broker, dealer or municipal securities dealer outside of the corporate governance structure of such broker, dealer or municipal securities dealer does not prevent the application of MSRB Rule G-37 to that individual’s conduct. “Firms cannot rely solely upon…organizational charts in determining whether a person is subject to those rules,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. The SEC will look to the activities, not merely the title, of an associated person in determining whether the person is subject to the pay-to-play restrictions. A key takeaway from this report is that pay-to-play remains a key focus of the SEC and the SEC is continuing to increase its involvement with respect to pay-to-play issues.
