Political Contribution Rules (Rule G-37)

6.5.3 Political Contribution Rules (Rule G-37)

Introduction to Rule G-37

The Municipal Securities Rulemaking Board (MSRB) established Rule G-37 to address concerns about “pay-to-play” practices in the municipal securities industry. These practices involve municipal securities dealers and their associated persons making political contributions to officials of municipal issuers in order to influence the awarding of municipal securities business. Rule G-37 aims to prevent such unethical practices by imposing strict limitations and requirements on political contributions made by municipal finance professionals (MFPs).

Understanding “Pay-to-Play”

Pay-to-Play refers to the unethical practice where businesses make political contributions to government officials in hopes of influencing the awarding of contracts. In the context of municipal securities, this could mean that a municipal securities dealer or its representatives make contributions to elected officials who have influence over the awarding of municipal securities business, such as underwriting or advisory contracts.

Key Provisions of Rule G-37

Rule G-37 is comprehensive and includes several key provisions designed to curb pay-to-play activities:

1. Prohibition on Business: If a municipal securities dealer or its MFPs make a political contribution to an official of a municipal issuer, the dealer is prohibited from engaging in municipal securities business with that issuer for two years.

2. De Minimis Exception: MFPs are allowed to make contributions of up to $250 per election to candidates for whom they are eligible to vote without triggering the ban on business.

3. Recordkeeping and Reporting Requirements: Dealers must maintain records of all political contributions made by the firm and its MFPs. Additionally, they must report these contributions to the MSRB on a quarterly basis.

4. Look-Back Provision: The rule includes a look-back provision that considers contributions made by individuals who become MFPs within two years prior to their employment.

5. Ban on Soliciting Contributions: MFPs and dealers are prohibited from soliciting or coordinating contributions to officials of municipal issuers with whom they are seeking business.

6. Ban on Indirect Contributions: Contributions made indirectly through third parties, such as family members or political action committees, are also subject to Rule G-37.

Compliance with Rule G-37: Practical Scenarios

To better understand Rule G-37, let’s explore some scenarios that illustrate compliance and potential violations:

Scenario 1: Direct Contribution

Situation: John, an MFP at XYZ Securities, contributes $500 to the mayoral campaign of a candidate in a city where XYZ Securities is seeking to underwrite a municipal bond.

Analysis: This contribution exceeds the $250 de minimis threshold and would trigger a two-year ban on XYZ Securities from engaging in municipal securities business with that city.

Scenario 2: De Minimis Contribution

Situation: Sarah, an MFP eligible to vote in her district, contributes $200 to a city council candidate’s campaign.

Analysis: Since Sarah’s contribution is within the $250 de minimis limit, it does not trigger the ban, and her firm can continue to engage in municipal securities business with the city.

Scenario 3: Indirect Contribution

Situation: Tom, an MFP, asks his spouse to contribute $300 to a local official’s campaign on his behalf.

Analysis: This indirect contribution is considered a violation of Rule G-37, as it circumvents the contribution limits and could result in a two-year business ban.

Scenario 4: Look-Back Provision

Situation: Emily joins ABC Securities as an MFP and had contributed $400 to a state treasurer’s campaign six months prior to her employment.

Analysis: The look-back provision applies, and ABC Securities would be subject to a two-year ban from engaging in municipal securities business with the state.

Regulatory Framework and Enforcement

The MSRB, in conjunction with the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC), oversees the enforcement of Rule G-37. These organizations ensure compliance through regular audits and investigations. Violations of Rule G-37 can result in significant penalties, including fines, suspension, or revocation of licenses.

Best Practices for Compliance

To ensure compliance with Rule G-37, municipal securities dealers and their MFPs should adopt the following best practices:

• Implement Robust Policies: Establish clear policies and procedures for political contributions and ensure all employees are aware of the limitations and reporting requirements.

• Conduct Regular Training: Provide ongoing training to MFPs and other relevant employees to reinforce the importance of compliance with Rule G-37.

• Maintain Accurate Records: Keep detailed records of all contributions and ensure timely reporting to the MSRB.

• Monitor Indirect Contributions: Educate employees about the risks of indirect contributions and establish mechanisms to detect and prevent such activities.

• Review Employment Practices: Consider the look-back provision when hiring new MFPs and assess any potential contribution-related risks.

Conclusion

Rule G-37 is a critical component of the regulatory framework governing municipal securities. By understanding and adhering to its provisions, municipal securities dealers and their professionals can maintain ethical standards and avoid the pitfalls of pay-to-play practices. Compliance not only protects the integrity of the municipal securities market but also enhances the reputation and trustworthiness of the firms involved.

Series 7 Exam Practice Questions: Political Contribution Rules (Rule G-37)