MSRB Scrutinizes PACs and the Potential for Circumvention of Rule G-37
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Since 1994, the Municipal Securities Rulemaking Board (“MSRB”) has sought to eliminate pay-to-play practices in the trillion dollar municipal securities market. As a result, the muni market has adopted and refined some of the toughest rules on political contributions. The rules promulgated by the MSRB have become a model for regulation of pay-to-play, as was shown with the SEC’s reliance on the MSRB rules in connection withits pay to play rule.
The MSRB continues to strengthen its influence over the activities of municipal bond brokers and dealers. Yesterday, the MSRB filed a proposed rule change with the SEC consisting of interpretive guidance in connection with Rule G-37 and the use of political action committees (“PACs”). The MSRB said it is reviewing the pay-to-play rules because recent consolidation in the financial industry has placed bond dealers under the control of banks, bank holding companies and other companies that have PACs.
The Proposed Interpretation provides guidance on factors that may result in a PAC being treated as a dealer-controlled PAC for purposes of Rule G-37. Rule G-37 provides that certain contributions to elected officials of municipal securities issuers made by dealers, MFPs associated with dealers, and PACs controlled by dealers and their MFPs (“dealer-controlled PACs”) may result in prohibitions on the dealers from engaging in municipal securities business with such issuers for a period of two years from the date of any triggering contributions. A dealer or MFP involved in the creation of a PAC would be viewed as controlling it. The dealer must also consider whether payments made by it or its MFPs to a PAC could be viewed as an indirect contribution.
The MSRB seeks industry comment through October 29 on whether to require dealers to disclose the names of affiliated PACs to the MSRB for public scrutiny. Such information would be posted on the MSRB web site.
