By Cyril Tuohy
A proposal by municipal regulators to limit political contributions and other pay-to-play practices for municipal advisors has pitted groups arguing for First Amendment rights against a coalition of public interest lobbies, a government employees union and a socially conscious investment fund.
Under the proposal known as Rule G-37, the federal Municipal Securities Rulemaking Board (MSRB) — acting under the authority of the Dodd-Frank Wall Street Reform and Consumer Protection Act — would expand restrictions on political contributions made by municipal advisors. The rules already apply to municipal securities dealers.
MSRB executive director Lynnette Kelly said “addressing corruption, or the appearance of corruption,” among municipal advisors is a goal of expanding G-37.
“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,” she said.
Draft amendments to G-37 would bar municipal advisors from “engaging in municipal advisory business with municipal entities for two years, if certain political contributions have been made to officials of those entities who can influence the award of business,” the MSRB said.
Advisors would also have to disclose political contributions to officials and bond ballot campaigns, and the contributions would be posted on the MSRB’s Electronic Municipal Market Access website.
However, Allen Dickerson, legal director for the Center for Competitive Politics, said the rule and its proposed amendments are riddled with “vagueness and over-breadth,” and present “serious constitutional concerns.”
“The right to support candidates in this way, regardless of occupation, is a central liberty secured by the First Amendment,” Dickerson wrote in a comment letter to the MSRB.
Dickerson cited the landmark Supreme Court rulings in Buckley v. Valeo, Citizens United v. Federal Election Commission(FEC), and McCutcheon v. FEC that will “provide a strong signal that such restrictions will be carefully scrutinized” by the courts, he wrote.
In the McCutcheon v. FEC case, the Supreme Court backed the right to political contributions and invalidated the aggregate contribution limits included in amendments to the Federal Election Campaign Act of 1971.
On the other side of the G-37 argument, a coalition including the nonprofit group Public Citizen; the American Federation of State, County and Municipal Employees; the socially conscious Harrington Investments and other public interest groups and advocates of financial reform is backing the proposal as a way to control runaway political spending.
“The undersigned applaud the proposed improvement to the MSRB’s rule that expands the contribution restrictions to municipal advisors,” the coalition wrote.
“When contracts involving state and municipal finance can be influenced by campaign contributions instead of what’s best for taxpayers — or even raise the suspicion that the contracting process may have been tainted by campaign money — the result can be devastating,” the coalition wrote.
Coalition members also said the proposed changes to G-37 could be strengthened even further by treating securities broker/dealers and municipal advisors of a firm “as a single entity with a common interest” in the context of reining in pay-to-play practices.
Rule G-37, developed by former Securities and Exchange Commission Chairman Arthur Levitt, was approved in 1994. It prohibits municipal finance professionals and dealers from soliciting contributions to a government official with any role or influence in selecting municipal securities dealers.
The rule would extend to municipal advisors or consultants who advise state and local governments.
Under the Exchange Act, the term municipal advisor includes financial advisors, guaranteed investment contract brokers, third-party marketers, placement agents, solicitors, and finder and swap advisors that provide municipal advisory services.
Leslie M. Norwood, managing director and association general counsel for the Securities Industry and Financial Market Association, which represents broker/dealers, said the MSRB should further refine the draft rule to avoid possible court challenges.
“The definition of ‘municipal advisor representative’ should be revised to include only those associated persons primarily engaged in municipal advisory activities, in conformity with the definition of ‘municipal finance representative’ for dealers,” SIFMA wrote.
Exceptions made to small political contributions of $250 or less under G-37 should be consistent with the $350-and-under contribution exceptions under SEC rules governing investment advisors and other rules under the Commodity Future Trading Commission governing contributions made by swap-dealers, SIFMA said.
Expanding the reach of G-37 to advisors is the latest proposal by regulators to clamp down on the $3.7 trillion municipal securities market. Efforts to regulate municipal advisors only came into force in 2010 with the passage of the Dodd-Frank Act.
Earlier this year, a new registration regime enforced by the Securities and Exchange Commission took effect.
Unlike U.S. government securities that are traded every day and tracked by hundreds of buyers and sellers, the municipal market has remained more opaque — to the benefit of dealers, brokers, advisors, lawyers and consultants.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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