SEC: Supervisors of municipal finance professionals must also abide by pay-to-play rule

By Devika Patel

Knoxville, Tenn., March 18 - The Securities and Exchange Commission said it issued a report warning firms that municipal securities rules prohibiting pay-to-play apply to affiliated financial professionals, not just a firm's employees.

The pay-to-play rule, MSRB Rule G-37, prohibits firms from underwriting municipal bonds for an issuer for two years after a municipal finance professional involved with that firm makes a campaign contribution to an elected official of that municipality.

In the report, the commission clarifies that an executive who supervises the activities of a broker, dealer or municipal securities dealer is not exempt from the pay-to-play rule just because he or she may be outside the firm's corporate governance structure. As such, an executive may be deemed a municipal finance professional if he or she is not part of a broker-dealer but oversees the broker-dealer.

"Firms and their employees must adhere strictly to municipal securities pay-to-play rules," Robert Khuzami, the director of the SEC's enforcement division, said in a press release. "Global business heads cannot use titles and corporate organizational charts to avoid these responsibilities."

When the commission approved the rule in 1994, it indicated that banks and bank holding companies affiliated with brokers, dealers and municipal securities dealers were excluded from the rule.

Since then, the commission has not directly addressed whether directors, officers or employees of banks and bank holding companies are municipal finance professionals if they supervise the public finance activities of brokers, dealers and municipal securities dealers or serve on executive committees that supervise these activities.

The report stems from an enforcement division inquiry into whether J.P. Morgan Securities Inc. violated the pay-to-play rule. According to the report, J.P. Morgan Securities underwrote municipal bonds issued by the state of California within two years after a then-vice chairman of the firm's parent bank holding company, JPMorgan Chase, gave a $1,000 contribution to a California elected official.

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