Municipal-Bond Firms Face Tighter Rules on Political Gifts After Deal Ban
The municipal bond market regulator may force underwriters to disclose more information about their political donations, a move that would show whether banks are evading a ban on using giving to secure deals.
The Municipal Securities Rulemaking Board said today it may require underwriters to disclose the names of political-action committees to which they have ties. The board also advised firms to give greater scrutiny to whether donations by PACs run by their parent companies could violate Rule G-37, which bars them from giving money to politicians who award them bond deals.
“The MSRB remains concerned that individuals and firms subject to Rule G-37 may seek ways around the rule through payments to and contributions by affiliated PACs that benefit issuer officials,” the rulemaking board said today in a notice posted on its website.
Securities firms are banned from underwriting bonds within two years of giving a political donation to officials with the power to steer the work their way, a regulation intended to crack down on the influence peddling that was once common in the $2.8 trillion municipal bond market.
The proposal today that underwriters disclose the names of PACs is less comprehensive than one considered last year. In September 2009, the MSRB requested comment on whether underwriters should be required to disclose the actual contributions made by the bank PACs to local officials.
Industry Consolidation
The municipal regulator said it is looking at the rules on so-called pay-to-play because consolidation in the finance industry has put bond dealers under the control of banks and other companies that have PACs. Goldman Sachs Group Inc., JPMorgan Chase & Co. and Bank of America Corp. are among banks that have overseen such funds and also underwrite municipal bonds, according to Federal Election Commission records.
The Securities and Exchange Commission, which enforces the board’s rules, has also examined the issue. In March, it warned banks that the ban applies to executives at holding companies that oversee the securities dealers.
That followed an investigation of donations by JPMorgan and four of its executives in 2002 to then-California Treasurer Phil Angelides. Within two years, JPMorgan made $37 million in fees from more than 50 California bond deals. The SEC didn’t charge anyone with wrongdoing, though it released the details to pressure banks to better monitor their political giving.
The ban on donations by municipal bond underwriters has been in place since 1994. In 2005, a separate regulation barred banks from hiring politically connected consultants, whose donations were not constrained, to win bond business.
Guidance on PACs
The Municipal Securities Rulemaking Board today also advised banks on when donations by PACs with ties to the securities underwriter or its employees violate the rules.
Political donations by a PAC might be covered by the ban if a municipal finance banker is among those who control it, the board said. Underwriters might also run afoul of the law, the board said, if a banker refers to PAC contributions when seeking to drum up business with municipal officials.
To contact the reporters on this story: William Selway in Washington at wselway@bloomberg.net