Citigroup Inc. and Bank of America Corp.’s Merrill Lynch are among five firms that will pay $4.48 million to settle regulatory claims they used funds from municipal and state bond deals to pay lobbyists.
Local authorities were unfairly asked to reimburse payments that the firms made over five years to the California Public Securities Association, a lobbying group, to help influence the state, the Financial Industry Regulatory Authority, which oversees securities firms, said today in a statement. The firms inadequately described the fees, wrapping them into bond-underwriting expenses, Finra said.
Underwriters that fund bond-authorization campaigns and then collect fees from approved debt sales are among unresolved pay-to-play issues in the $3.7 trillion municipal market. Hiring an underwriter based on whether it supports a campaign rather than its ability to market bonds can lead to mispricing, which can hurt investors, as well as higher fees and borrowing costs.
“The script remains the same,” said Marilyn Cohen, founder of Envision Capital Management Inc. in Los Angeles, which oversees about $210 million of munis. “I’m not surprised -- my surprise is they found it. That’s just the cost of doing business. It’s all pay-to-play.”
The banks, also including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley, agreed to pay $3.35 million in fines and reimburse certain California bond issuers $1.13 million, according to the statement. Citigroup’s $1.28 million in sanctions were the largest, followed by Merrill’s $1.07 million.
Citigroup and 16 other underwriters also reimbursed California $2.3 million last year after a regulatory probe found they used taxpayer funds to pay fees to their lobbyists. The practice was “improper, it will stop now, it will not happen again, and we will get our money back,” California Treasurer Bill Lockyer said in February, 2011.
“We are pleased by this action,” Bill Ainsworth, a spokesman for Lockyer, said of today’s Finra statement.
“It sends a message that it is wrong for underwriters to charge taxpayers for lobbying and political activities,” Ainsworth said in an e-mail. “We are glad other California issuers are getting compensated.”
The five banks violated the Municipal Securities Rulemaking Board’s fair-dealing and supervisory rules, according to the statement. The Alexandria, Virginia-based MSRB, a self-regulatory body that sets guidelines for the muni market, has banned would-be underwriters from giving to most campaigns for elected officials who could influence the award of bond sales.
Making such contributions is more widespread among smaller underwriters, according to disclosure filings with the rulemaking board.
Banks have been divided over whether they should be allowed to support drives in favor of referendums authorizing debt issues that they later underwrite. Some say it creates the appearance of undue influence, while others say it merely helps issuers win the votes and finance needed projects.
The lobbying payments that resulted in today’s sanctions spanned 2006 through 2010, according to Finra. The companies didn’t admit or deny wrongdoing.
Goldman Sachs “discontinued the longstanding industrywide practice of seeking reimbursement for such fees” in California last year, the bank said in a statement. It also refunded the lobby-group fees that had been charged on state-level issuances in which the firm was lead underwriter.
Morgan Stanley is “pleased to have resolved this issue in a satisfactory manner,” Mark Lake, a spokesman for the New York-based company, said in an e-mailed statement. Spokesmen for New York-based Citigroup and Charlotte, North Carolina-based Bank of America also said the firms were pleased to resolve the issue. A spokesman for New York-based JPMorgan didn’t immediately respond to messages seeking comment.
“Issuers are entitled to know what they are paying for and why,” Brad Bennett, Finra’s chief of enforcement, said in the statement. “It was unfair for these underwriters to pass along the costs of their Cal PSA membership to the municipal and state bond taxpayers, neglecting to disclose that these costs were unrelated to the bond deals.”