MSRB Seeks Public Comment on Additional Bond Ballot Disclosure Requirements

August 30, 2012

The MSRB issued Notice 2012-43 (“Notice”) on August 15, 2012, seeking public comment on whether to require additional disclosures by municipal securities dealers about contributions to bond ballot campaigns. The proposal would add to existing disclosure obligations regarding bond ballot campaign contributions. MSRB Rule G-37 currently requires brokers, dealers, and municipal securities dealers (together, “dealers”) to disclose quarterly the name of bond ballot campaigns which received contributions from either the dealer, its municipal finance professionals (“MFPs”), its political action committees (“PACs”), or its non-MFP executive officers. Dealers are also currently required to disclose the contribution amount, the category of contributor, and the municipal jurisdiction (city, county, state, or political subdivision) seeking to issue the bond.

The MSRB’s proposed amendment of Rule G-37 would require the following additional disclosures concerning bond ballot campaign contributions:

  • The date of the contribution
  • The complete name of the entity that would issue the bond
  • The name of the primary offering, including the full issuer name and full issue description, which results from the bond ballot campaign and for which the dealer engages in municipal securities business. Dealers also would be required to disclose the date on which the dealer was selected to engage in such municipal securities business
  • The receipt of any payments or reimbursements (including fees or expenses charged) related to a bond issuance resulting from the bond ballot campaign

The amendments would also revise the definition of “contribution” to specify cash or in-kind contributions. With respect to in-kind contributions, dealers would be required to disclose the value and nature of services provided, including election services or other “collateral work” provided to the issuer or bond ballot campaign. The Notice also seeks comment on related amendments to Rule G-8, on dealers’ books and records requirements. 

Bond ballot campaign contributions have attracted MSRB scrutiny in its effort to address conflicts of interest created by so-called “pay-to-play” practices. Bond ballot campaigns take place when state or local law requires voter approval of new bond issuances. State law typically bars municipal issuers from using public funds in support of bond elections, and issuers must rely on private third parties for financial contributions or in-kind services. Conflict of interest concerns arise when dealers directly or indirectly contribute to ballot campaigns. Although the U.S. Supreme Court has held that contributions in support of ballot initiatives do not present the same risks of corruption as contributions in support of individual candidates,1 it has upheld contribution disclosure regulations on the ground that they further citizens’ right to know who is seeking to influence election campaigns.

MSRB Rule G-37 requires disclosure of non-de minimis political contributions to an elected official of an issuer or state and local political parties. The rule prohibits dealers from engaging in municipal securities business with an issuer for two years following non-de minimis political contributions to an issuer official. In January 2010, the SEC approved amendments to Rule G-37 to require disclosure of bond ballot campaign contributions. While the existing disclosure obligations for bond ballot contributions mirror those for elected official contributions, Rule G-37 does not ban dealers from municipal securities business because of bond ballot campaign contributions. Nor would the amendments to Rule G-37 for which the MSRB is now seeking comment impose such a ban. The MSRB’s Notice does state, however, that MSRB “continues to assess whether further action regarding dealer and dealer personnel contributions to bond ballot campaigns, up to and including a corresponding ban on business as a result of certain contributions, would be warranted in the future.” 

In considering the proposed amendments, the MSRB points to a continuing concern that bond ballot campaign contributions may negatively affect the integrity of the municipal securities market. The MSRB says that it “has been informed of certain practices involving possible informal understandings among election advisors, underwriters, municipal advisors, and/or issuers in which financial support of bond ballot campaigns may be linked to the retention of such parties by the issuer if the associated bond ballot measure is approved.” The MSRB cites allegations that some underwriters and municipal advisors make contributions with the expectation that they will be reimbursed in the form of increased compensation for work on a resulting transaction. The MSRB has also been informed of underwriters and municipal advisors making cash or in-kind expenditures for bond ballot campaign costs and seeking reimbursement by being selected to work on the resulting transaction. Payment of such expenditures with the expectation of reimbursement “may occur under circumstances where the issuer or its personnel may be prohibited by state or local laws or regulations from directly making such expenditures.” As a result, those contributions “may assist an issuer in avoiding state law restrictions.” The MSRB goes on to warn that contributions with the expectation of an award of business or later monetary reimbursement could violate Rule G-17, requiring fair dealing and prohibiting deceptive, dishonest, or unfair practices — even if not precluded by Rule G-37.

The MSRB Notice states that it seeks comment on all aspects of the draft amendments, including whether the proposals would protect the integrity of the municipal securities market. The MSRB also seeks comment on whether the amendments could negatively affect issuers, investors, or the public, whether they would be burdensome for dealers, whether alternative measures could provide the same protections, and whether the amendments should apply in any future pay-to-play rules governing municipal advisors.

Comments on the proposed amendments are due by September 17, 2012. Dealers should carefully review the Notice and consider commenting. Dealers should consider the issues raised in the Notice when contributing to bond ballot campaigns this election season, and should keep in mind the MSRB’s warning regarding potential Rule G-17 violations in bond ballot campaigns. Lastly, dealers should watch closely for any further MSRB proposal to impose a ban on municipal securities business following a bond ballot campaign contribution.   


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1 See First Nat’l Bank of Boston v. Bellotti, 435 U.S. 765 (1978).

This article was originally published by Bingham McCutchen LLP.