WASHINGTON -- As expected, the MSRB asked the Securities and Exchange Commission yesterday to approve several amendments to its political contributions rule, including one that would protect firms that make good faith efforts to comply with the rule from being penalized for isolated violations by employees.
The Municipal Securities Rule-making Board also released a 13-page set of 40 questions and answers designed to help dealers better understand how to comply with Rule G-37. [A full text of the Questions and Answers will appear in tomorrow's issue of The Bond Buyer.]
Rule G-37, which took effect April 25, bars municipal dealers from doing business with state and local governments for two years after the dealer, its political action committee, or its bond professionals contribute to an officeholder who could influence the awarding of bond business. Employees can give up to $250 to candidates running for office in the jurisdiction where they live.
The Public Securities Association has expressed concern that even if dealers take all reasonable steps to monitor their employees' contributions, there could be unforeseen violations or mistakes that could put them out of the running for bond business.
"The Municipal Securities Rule-making Board recognizes that in certain circumstances the rule's prohibition on business may be too harsh a consequence for truly inadvertent contributions or the contributions of disgruntled employees," the board said in an introduction to its proposed rule change.
For instance, "a disgruntled municipal finance professional may make a contribution purposely to injure the dealer, its management, or employees," the board said.
"Also, a municipal finance professional eligible to vote for an issuer official may make a number of small contributions during an election cycle [e.g. over four years] which, when consolidated, amount to slightly over the $250 de minimis exemption [e.g. $255]," the board said.
For those reasons, the board said, it is proposing that dealers be allowed to apply to the National Association of Securities Dealers or to bank regulators for a "good faith exemption" from the rule. But the board said dealers will have to make a "substantial effort" to win an exemption.
The NASD or bank regulators would have to determine that the exemption is in the public interest. And dealers would have to meet a four-part test.
They would have to show that they instituted procedures "reasonably designed" to ensure compliance with the rule. They would have to show that they had no actual knowledge of the contribution before it was made, the board said. They would have to show that they have taken all available steps to get the contribution returned, and that they have taken other appropriate "remedial or preventive measures" under the circumstances.
"The proposed amendment appears to be responsive to the questions we raised about inadvertent [violations]," PSA President Heather Ruth said, stressing that she has not yet read the document.
Ruth said she is not worried that the amendment could provide a loophole for firms. "This is very limited and very narrow. It is available only for firms that have demonstrated that they have put in place appropriate supervisory procedures," she said.
Among the other changes proposed by the board, the panel would make clear that contributions to an incumbent or candidate for governor of a state are covered by the rule, assuming the governor has authority to appoint boards that determine bond issuance.
The amendments also make clear that the rule does not cover competitive deals or clerical staff and that it requires dealers to make quarterly reports of contributions by certified or registered mail.
