GFOA of the US & Canada

Issue Brief: Municipal Market Regulations

Updated May 2003

As a result of this concern, the Municipal Securities Rulemaking Board (MSRB) issued a draft of MSRB Rule G-37 in August 1993. The SEC gave final approval to the rule in 1994. Rule G-37 prohibits any municipal securities dealer from engaging in municipal securities business with a state or local government issuer within two years after any contribution to an official of such issuer made by (1) the dealer, (2) any municipal finance professional associated with such dealer, or (3) any political action committee controlled by the dealer or any municipal finance professional. The rule applies to contributions made to any federal, state, or local office campaign. It also applies in those cases where the dealer directs some other person not otherwise covered by the rule to make a contribution in order to circumvent the rule. The only exception to Rule G-37's absolute prohibition on business is for contributions by those professionals entitled to vote for such an elected official that do not exceed $250 per election.

This prohibition is not a ban on political contributions – it is a ban on engaging in municipal securities business with an issuer after certain contributions are made to officials of such issuer. Rule G-37 also prohibits any dealer from soliciting any person or political action committee to make a contribution to an official of an issuer with which the dealer is engaging or seeking to engage in municipal securities business.

Recent Developments

MSRB Rule G-37
The MSRB launched a review of Rule G-37 in early 2000 to determine if certain provisions should be modified or eased to eliminate confusion make compliance easier and prevent unintended consequences. The MSRB initiated the review and simultaneously announced that it “does not believe any major overhaul is needed,” but indicated that questions had been “raised in a number of areas, including the scope of coverage of the term ‘municipal finance professional’ and the effectiveness of the waiver provision.”

The MSRB filed proposed amendments to Rule G-37 on political contributions with the Securities and Exchange Commission, which approved the revisions on May 8, 2003. The changes will ease, but not eliminate, the so-called look-back and look-forward provisions for supervisory and management-level municipal finance professionals who are not primarily engaged in municipal securities representative activities.

The final revisions comes a year after the MSRB first proposed several changes in Rule G-37. The amendments, which also revise a few subsequent changes filed in September 2002, is primarily designed to alleviate problems for supervisory and management-level employees who are transferred or promoted to positions related to, but not directly involved in, municipal securities departments. The board had proposed in September that such supervisory or management-level municipal finance professionals (MFPs), who are not in a dealer's municipal securities department be exempted from the current two-year look-back and look-forward requirements.

But under the reworked amendment, supervisory and management level MFPs would be subject to a six-month look-back provision and a one-year look-forward provision. Under the look-back provision, when a dealer hires an MFP, it must check to see whether that person made any contributions to issuer officials during the previous two years. Any such contributions could trigger Rule G-37's two-year ban on the dealer doing business with that issuer. Under the look-forward provision, once an individual becomes an MFP, that person retains this designation for two years after leaving his or her position.

The MSRB also proposed one technical amendment to its earlier proposal that would remove retail sales representatives from the rule's coverage as long as they do not solicit municipal business. That technical change clarifies the fact that the exemption applies to sales activities with individual, but not institutional, investors.

Pay-to-Play and Investment Advisers
In 1998, the SEC began a broad-based inquiry into state and local government fund management. In 1999, the SEC issued a proposed rule under the Investment Advisers Act of 1940 that would have prohibited an investment adviser from providing advisory services for compensation to a government for two years after the adviser or any of its partners, executive officers or solicitors made a contribution to certain elected officials or candidates. Such elected officials or candidates include state treasurers, comptrollers, or others who can influence the selection of advisers. There was a de minimis exception for contributions of no greater than $250 to candidates for whom the contributor can vote. On January 26, 2001 the SEC reported that the Commission decided “in general” not to act on rulemaking until a new chairman takes the helm of the agency. The decision responded to a directive from President George W. Bush requesting that independent agencies not promulgate new regulations on a voluntary basis. As a result, the final rule was not promulgated. Since the January decision by the SEC, the agency has given no indications that it intends to pursue formal promulgation of the rule.

Related GFOA Public Policy Statements

• Selection of Municipal Finance Professionals

Additional Resources

• Municipal Securities Rulemaking Board (www.msrb.org)
• Securities and Exchange Commission (www.sec.gov)
• Securities Industry and Financial Markets Association

GFOA • Federal Liaison Center • (202) 393-8020 • (202) 393-0780 FAX • Email