Friday, September 07, 2012

SEC Staff Issues Risk Alert on Municipal Securities Pay-to-Play Practice

The SEC’s Office of Compliance Inspections and Examinations has issued a national examination risk alert on political contributions made by firms engaged in the municipal securities business. The alert identifies areas of concern that have arisen in recent examinations, including weaknesses in the supervision of the Municipal Securities Rulemaking Board’s pay-to-play prohibitions.

MSRB Rule G-37 prohibits firms from engaging in municipal securities business with an issuer for two years after any contributions to an official of the issuer by the firm, a municipal finance professional (“MFP”) or a political action committee controlled by the firm or the MFP. The rule provides an exception for contributions of $250 or less to an official in an election in which the MFP is entitled to vote.
The rule contains both look-forward and look-back provisions. The look-back provision is two years, starting from the date on which a contribution is made. During the two-year look-back, there is a ban on engaging in municipal securities business with that issuer
The look-forward period is one year which starts to run with the last activity or position that created the MFP status for an individual. If a person is an MFP solely by virtue of his or her supervisory or management level activities, the look-back is six months and the look-forward is one year.
Firms are required to file Form G-37 with the MSRB by the last day of the month following each calendar quarter to list the issuers in which the firm has engaged in municipal securities business. Firms also must disclose all campaign contributions to issuer officials, bond ballot campaigns and political parties of states or political subdivisions.

The alert advises that the SEC’s national examination program has found practices which raised concerns about firms’ compliance with their obligations under the pay-to-play rule. Some firms have engaged in municipal securities business with issuers within two years of their MFPs having made contributions other than the $250 that is allowed to officials of issuers.

The staff has found instances where firms have not maintained accurate and complete lists of their MFPs and non-MFP executive officers as required. Some firms have failed to file accurate and complete Forms G-37 and others have failed to establish or to implement adequate supervisory procedures to ensure compliance with the rules

The staff said it hopes that its alert will assist firms in strengthening their compliance and risk management programs related to municipal securities.