Civic Organizations Applaud Proposal to Strengthen Anti-Corruption Rules in Municipal Securities

Oct. 1, 2014

Civic Organizations Applaud Proposal to Strengthen Anti-Corruption Rules in Municipal Securities

WASHINGTON, D.C. – A diverse coalition including consumer advocates, labor unions, investment organizations, and financial reform and campaign finance groups today endorsed an effort by Washington regulators to strengthen the rules to prevent Wall Street from corrupting the municipal securities sector. Municipal securities are the bonds issued by school districts, cities and states that are paid off with tax dollars and used to fund public projects.

The Municipal Securities Rulemaking Board (MSRB) requested public comment on new restrictions on political contributions from municipal advisors. This would expand the restrictions already in place on municipal securities dealers. These restrictions are part of what is known as Rule G-37.

According to the comment submitted by the groups:

“Generally, Rule G-37 is intended to combat pay-to-play practices. Pay-to-play describes practices where a person makes cash or in-kind political contributions to help finance the election campaigns of state or local officials for the purpose of unduly influencing the award of government contracts.

“The potential for corruption in the interplay between campaign contributions and government contracts flows in both directions: businesses sometimes seek government favor through campaign contributions, and elected officials sometimes extract campaign contributions from businesses with the lure of government favors. Without reasonable restrictions curtailing such behavior, pay-to-play can easily serve to undermine the integrity of the contracting process.”

The organizations joining in the letter to the MSRB are: Public Citizen, Harrington Investments, U.S. PIRG, AFSCME, Free Speech for People, the New Progressive Alliance, ReFund America Project of the Roosevelt Institute, Consumer Federation of America and Americans for Financial Reform.

The groups also suggest three ways to further strengthen the rule. First, the artificial distinction between dealers and advisors at the same firm should be ended. Large firms tend to provide both dealer and advisor services, yet dealers within one firm would still be allowed to make contributions to government officials who select advisors, and advisors could make contributions to officials who select dealers. Dealer/advisor firms should be treated as a single entity.

Second, political action committees (PAC) of large banks and large firms can evade the restriction because of the loose definition of who “controls” the PAC. The groups propose the MSRB prohibit contributions from PACs “associated” with the firm.

Third, it is recommended that there be more comprehensive disclosure of all individual, firm and PAC contributions so that the public may monitor whether evasion is indeed occurring for later rulemaking.

According to the letter:

The proposed rule permits contributions from securities dealers to public officials that only have influence over the selection of securities advisory services at the same firm. It also permits contributions from securities advisors to officials that only have influence over the selection of securities dealers at the firm. (Only where the official has influence over both services is a dealer-advisory firm barred from making contributions and securing business.) This simply invites firms to create legal fictions for contributions between its dealer and advisory services, which would be nearly impossible to monitor. It would be extremely difficult to ensure that the contributions of one division at a firm were not known to the marketing agents at another division of the firm. Likewise, it defies reason to believe a public official might not solicit contributions from one division of a firm even though decisions by the official could only benefit another division of the same firm.

View the letter (PDF).

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