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MSRB Looks to Extend Pay-to-Play Regulation to Municipal Advisors

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This week, the Municipal Securities Rulemaking Board (MSRB) requested public comment on draft amendments it is proposing to its rules regulating pay-to-play practices. Here, the MSRB is proposing a revision to Rule G-37 so as to extend its reach to municipal advisors. The regulated community knew this revision was coming last May but now we get a chance to examine the actual proposal, contemplate its policy implications, and place our bets on the outcome of inevitable judicial review.

As anticipated, the proposed changes would extend Rule G-37’s regulation of  contribution activity by municipal securities dealers (the folks who initiate the principal sales of bonds) to municipal advisors (the folks who help local governments decide how and when to issue bonds and then how to invest the proceeds). I say “as anticipated” because the Dodd Frank Wall Street Reform and Consumer Protection Act extended MSRB’s jurisdiction to permit the regulation of municipal advisors way back in 2010. Power may abhor a vacuum, but that is nothing compared to the contempt a regulating agency has for new authority unaccompanied by a Notice of Proposed Rulemaking.

Snark aside, MSRB’s proposed revisions are not, on their face, earth shattering. If Rule G-37 prevents broker-dealers from engaging in municipal business within two years of making campaign contributions to issuers, it stands to reason that municipal advisors should share their fate. That is especially true when one considers that some municipal advisors are also registered broker-dealers (and thus already subject to Rule G-37) while others are not.  What is not obvious to all is whether the United States Supreme Court will agree that anyone can be forced to abide by such restrictions consistent with the First Amendment.  That is less apparent.

Back in May, MSRB Board Chair Daniel Heimowitz was quoted as saying that these revisions are necessary to prevent the “appearance of corruption” manifest in municipal advisor contribution activity. In what is surely not a coincidence, that language is echoed by MSRB Executive Director Lynnette Kelly in the MSRB’s official press rollout of the proposed changes this week:

“Addressing corruption, or the appearance of corruption, in the awarding of municipal advisory business is a fundamental goal of the MSRB’s comprehensive regulatory framework for municipal advisors,” said MSRB Executive Director Lynnette Kelly. “Applying our well-established dealer pay-to-play rule to municipal advisors will help ensure that all regulated municipal market entities and professionals are held to the same high standards of integrity.”

Time will tell, but it is not at all clear that the MSRB’s articulated “appearance of corruption” justification will impress our current Supreme Court which expressly announced in McCutcheon v. FEC that the “appearance of corruption” rationale behind limitations on political speech is precisely the kind of thing that won’t withstand First Amendment scrutiny. It is clear that MSRB is aware of McCutcheon and has undertaken steps to conform with the holding.  MSRB’s proposed amendments require an actual link between a ban on municipal securities business “and a contribution made to an official with the ability to influence the awarding of that type of business.” The proposed new rules similarly require a link between a ban on municipal advisory business and a contribution made to an official with the ability to influence the awarding of that type of business. For reasons we discussed in connection with the TL Ventures case, these are significant concessions.

Let’s leave it here with the MSRB proposed regulations for now:  Logical? Clearly. Sound and acceptable public policy? Probably. Constitutional in the eyes of Chief Justice Roberts and Justices Thomas, Alito, Scalia, and Kennedy?  I gotta say, the early line is 3:2 against.

Your comments to the MSRB proposal are due October 1, 2014.

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