Additional Pay-to-Play Disclosure Required of Municipal Securities Dealers

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Brokers, dealers, and municipal securities dealers are now required to disclose additional information about their bond ballot contributions under amendments to the Municipal Securities Rulemaking Board’s (MSRB) “pay-to-play” rule, G-37. The Rule G-37 amendments, which took effect yesterday, only expand public disclosure requirements for all dealers and do not trigger the two-year ban on municipal securities business for other political contributions under the rule.

The amendments cover bond ballot contributions made by a dealer, its municipal finance professionals (MFPs), its non-MFP executive officers, and political action committees controlled by such parties.

The amendments expanded the definition of “contribution” to include “any gift, subscription, loan, advance, or deposit of money or anything of value” provided to a bond ballot campaign to influence voter approval of a municipal securities offering or to pay the costs or incurred debt associated with a bond ballot initiative. The amendments also added a definition of “reportable date of selection.” This definition refers to the earliest of the date of the issuer engagement letter, the date of the bond purchase agreement, or the date on which the issuer notifies the dealer (orally or in writing) that it has been selected for municipal securities business.

Regarding bond ballot campaign contributions, dealers must now disclose the full issuer name and issue description of any primary offering of municipal securities authorized by voter approval of measures on such a bond ballot under Rule G-37. The amendments include a two-year “lookback provision” for contributions made by MFPs and non-MFP executive officers of the dealer before they took on such roles.

Rule G-37 limits financial as well as in-kind political contributions. In its first action against a dealer on the basis of in-kind political contributions last year, the Securities and Exchange Commission cited activities such as fundraising, drafting speeches, approving campaign expenditures, and arranging advertisements, among other activities, as prohibited contributions under the rule. For in-kind bond ballot contributions, a dealer must include in its disclosure the value and nature of the goods or services under the amendments.

As of February 2013, disclosures made by dealers under Rule G-37 are publicly posted on the MSRB’s Electronic Municipal Market website.