8.4.2.4. Political Contributions (Pay to Play Rule)
MSRB Rule G-37 seeks to prevent fraud and promote an open and transparent market for municipal securities that protects investors and the public. Often referred to as the “pay to play” rule, it has two main components. First, it prohibits broker-dealers from engaging in “municipal securities business” with government issuers if they have made certain political contributions to that issuer. Second, it requires municipal securities dealers to disclose specific information related to political contributions.
For the purposes of this rule, municipal securities business is defined as:
- • The purchase of securities in a primary offering from an issuer in a negotiated underwriting
- • The offer or sale of securities in a private placement
- • The provision of financial or consulting services for these types of primary offerings
- • The provision of services as a remarketing agent when secured by other than a competitive bid
In other words, municipal securities business is strictly limited to activities related to a primary offering that is not won by competitive bid.
The rule was created to prevent underwriting firms from winning business via campaign donations to elected officials. It prohibits dealers and their associated professionals from conducting any securities business with an issuer within two years of making a political contribution to elected officials of that issuer.
The elected official must be someone who has the authority to influence whether municipal securities business is directed toward the dealer. The rule applies whether the contribution was made by the broker-dealer, an associated person, or a Political Action Committee controlled by either the broker-dealer or a “municipal finance official” of the broker-dealer.
The rule applies