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.