Alert September 04, 2012

SEC Staff Risk Alert on Pay-to-Play Prohibitions under MSRB Rules Includes Observations on Overall Pay-to-Play Compliance Measures

The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) issued a National Examination Risk Alert summarizing the findings of OCIE’s National Examination Program with respect to compliance by broker-dealers and municipal securities dealers with MSRB rules governing contributions to the political campaigns of public officials of municipal securities issuers with whom the firms are doing or seek to do business.  The Risk Alert describes (a) the requirements of MSRB Rules G-37 and G-38 (on which the SEC modeled Rule 206(4)-5, the pay-to-play rule under the Investment Advisers Act of 1940),  (b) specific issues under Rule G-37 and G-38 noted by the National Examination Program and (c) the OCIE staff’s observations regarding the steps taken by firms to ensure that their compliance programs adequately address not only pay-to-play obligations under MSRB rules but also under other federal, state and local requirements related to bidding for government business, election law, employment law and privacy requirements.

Look-Back/Look-Forward Requirements. An important factor noted by OCIE is the application of the look-back and look-forward periods for political contributions by municipal finance professionals (“MFPs”).  For most MFPs the look-back period is two years, although for persons who are MFPs solely because of supervisory or management-level activities, the period is shortened to six months.  The look-forward provision in the definition of MFP requires firms to count, for purposes of Rule G-37, contributions made by an individual for one year after he or she ceases to engage in the activities or hold the position that created the individual’s MFP status. Firms need to have procedures in place to make sure they do not do business with municipal entities within the relevant look-back period in the event that political contributions were made by an individual prior to employment by the firm or prior to becoming engaged in activities that caused the individual to be designated an MFP, and must continue to track contributions by MFPs not otherwise engaged in municipal business during the one year look-forward period until their MFP status is terminated.