United States: Amended MSRB Rules G-37 And G-8 Require Enhanced Disclosure

On April 1, 2013, the Securities and Exchange Commission (SEC) approved amendments to MSRB Rules G-37 and G-8 that require enhanced disclosure and recordkeeping with regard to contributions made by brokers, dealers, and municipal securities dealers to bond ballot measure campaigns.

The amendments aim to shed additional light on the bond ballot measure activity of dealers and municipal finance professionals to address concerns that dealers are awarded lucrative municipal securities business in return for actively supporting a bond campaign. Importantly, the amendments do not broaden the scope of the contributions that trigger Rule G-37's two-year ban on municipal securities business to include contributions to bond ballot measure campaigns. The amendments only affect Rule G-37 and G-8's disclosure and recordkeeping requirements. The requirements take effect on July 1, 2013, and apply to municipal securities offerings with a sale or issuance date on or after July 1, 2013.

More extensive disclosure of bond ballot contributions required, including two-year look-back

Under newly-amended Rule G-37, brokers, dealers, and municipal securities dealers will now be required to disclose the following additional information with regard to contributions to bond ballot campaigns made by the broker, dealer, or municipal securities dealer, municipal finance professionals (MFPs), non-MFP executive officers, and any political action committee controlled by the municipal securities dealer or one of its MFPs:

  • Information regarding in-kind contributions to a bond ballot campaign, including the value and nature of the goods or services, including ancillary services, provided to, on behalf of, or "in furtherance of" the bond ballot measure campaign;
  • The specific date on which a contribution (direct or in-kind) was made;
  • Any payments or reimbursements received by a dealer or its MFPs from a third party that are "related to" any bond ballot contribution;
  • The full issuer name and the full description of any primary offering resulting from voter approval of a bond ballot measure to which a reportable contribution has been made; and
  • The date on which the broker, dealer, or municipal securities dealer was selected to engage in municipal securities business, reported in the quarter in which the closing date authorized by the bond ballot campaign occurred.

The amendments also impose a two-year look-back, requiring the disclosure of any contributions by an MFP or non-MFP executive officer of a dealer that were made during the two years prior to that individual becoming an MFP or non-MFP executive officer. These contributions must be disclosed in the same manner as if the person had been an MFP or non-MFP executive officer at the time of making the contribution.

Close monitoring of contributions, including in-kind contributions, and campaign finance law compliance required

Detecting and disclosing in-kind contributions may pose significant challenges for municipal securities dealers, particularly because the SEC has recently taken an expansive view of the activity that constitutes an in-kind contribution. As we noted in a previous alert, the SEC recently imposed a multi-million dollar sanction on Goldman Sachs & Co. for, among other things, failing to review, detect, and disclose in-kind contributions made by a company vice-president to the gubernatorial campaign of then-Massachusetts Treasurer Timothy Cahill, as required by Rule G-37. The in-kind contributions at issue included campaign activity conducted during work hours and the use of company resources, including phones, computers, e-mail, and office space, to assist Cahill's campaign.

When viewed in light of the SEC's recent enforcement activity, the amendments to Rules G-37 and G-8 will require municipal securities dealers to adopt and rigorously enforce procedures designed to ensure the detection and disclosure of contributions, including in-kind contributions, to bond ballot measure campaigns. Such procedures should include closely monitoring the activities of politically-active MFPs and executive officers, as simply requiring MFPs and executive officers to report their contributions to bond ballot campaigns is insufficient.

Additionally, because the amendments will require the public disclosure of any payments or reimbursements received from a third party that are related to a bond ballot contribution, municipal securities dealers that receive such payments or reimbursements "such as in the form of raising funds to be passed on to or spent in support of a bond campaign "should be especially aware that doing so may result in the dealer being required to register as a ballot measure committee and/or file disclosure reports with the local election oversight body and ensure compliance with any such requirements. In some jurisdictions, acting as an intermediary for contributions may even be prohibited outright.

This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.

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