Bond market watchdog seeks SEC approval for more transparency on bond referendum campaigns

November 1, 2012

In just about every election, local governments put measures on their ballots asking voters to allow the sale of bonds so that municipalities can finance roads, schools or other projects. Interested parties often form campaigns to help pass or crush these initiatives.

And sometimes the investment banks that donate to those campaigns get hired to sell the bonds to investors after an initiative passes, raising the possibility that they got a leg up in the selection process because of their monetary support for the ballot bond measure — not because they offered taxpayers the best deal.

Now, the watchdog group that oversees the $3.7 trillion municipal bond market is asking the Securities and Exchange Commission to mandate more disclosure from the investment banks that donate to bond-referendum campaigns. But the group has resisted a push to ban these types of bank contributions, despite pressure from various groups to do so.

The hesitancy of the Municipal Securities Rulemaking Board, the industry’s self-regulating body, is rooted in concerns over lawsuits.

In the mid-1990s, the SEC approved an MSRB regulation that barred investment banks from contributing to the campaign coffers of local officials who are in a position to reward bond underwriting. The goal was to curtail real and perceived conflicts of interest. An investment banking firm sued. The government prevailed, but the threat of similar challenges lingers.

“We need to have a record and concrete details to show that there would be real harm if the restrictions weren’t in place,” said Ernesto Lanza, the MSRB’s deputy executive director. “We need to do more homework and connect the dots in case we face another challenge.”

Asking for disclosures does not elicit the kind of pushback generated by talk of an outright ban. In fact, since 2010, the MSRB has required firms or their municipal professionals to publicly report the contributions they’ve made to bond-ballot campaigns.

But the MSRB says it needs more information to determine whether there needs to be a ban on engaging in business resulting from such contributions. That’s why it will soon ask the SEC to approve a rule that requires more details from firms, such as the timing of the contributions, to determine whether they were made before or after a firm was hired to sell the bonds.

The MSRB, chartered by Congress, is not a government agency, so its rules do not become law unless the SEC approves them.

Already, the Center for Competitive Politics, which describes itself as an advocate of First Amendment political rights, is questioning whether a ban on contributions to ballot initiatives infringes on free speech. “Simply put, ballot measure committees receive stronger constitutional protection against government regulation than do candidates,” the group wrote in a letter to the MSRB in September.

Other institutions and groups say that a ban is necessary to preserve the integrity of the bond market and that the proposed disclosure requirements do not go far enough. The National Association of Independent Finance Advisors and the California Association of County Treasurers and Tax Collectors fall into that camp.

In a September letter to the MSRB, the California group cited a review by the Bond Buyer publication that found “a nearly perfect correlation between broker-dealer contributions to California school bond efforts in 2010 and their underwriting subsequent bond sales.”

Jay Goldstone, MSRB’s chairman, said he’s concerned about the pattern. “There seems to be a strong relationship between contributions and underwriting business,” Goldstone, who also is chief operating officer for the city of San Diego, said in a statement. “We are concerned that this connection may damage the integrity of the municipal market.” The board’s 21 members include people from industry and academia and city officials.

Even some major investment banks — including Morgan Stanley, Citi and JPMorgan Chase — have said they favor placing a ban on bank donations to bond-ballot campaigns.

Some of the larger banks see this issue as a black eye to the industry, said Bart Mosley, co-president of Trident Municipal Research. They’d rather have regulators put in place workable rules that will level the playing field, Mosley said.

But other investment bankers have argued that the campaigns play a critical role in invigorating taxpayers who otherwise may not be inclined to vote on a referendum that essentially raises their taxes. They also say that municipalities need the firms’ input on those issues.

In a letter to the MSRB in 2009, an investment banking firm called George K. Baum said municipalities typically hire the company before a ballot-campaign committee is formed and before a contribution of any kind is discussed because of the firm’s expertise in investment banking and public policy development.

“We do not believe that issuers retain us as their investment banker because of any specific monetary contribution that we provide, and we do not include such in our proposals,” wrote Robert K. Dalton, the firm’s vice chairman.

Dina ElBoghdady covers housing policy for The Washington Post.
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