Tag: MSRB Rule G-37

SEC Brings a Pay-to-Play Action

The Securities and Exchange Commission filed a “pay-to-play” case against Goldman Sachs and one of its former investment bankers, Neil M.M. Morrison. The SEC alleges that Goldman and Morrison made undisclosed campaign contributions to then-Massachusetts state treasurer Timothy P. Cahill while he was a candidate for governor.

The case was brought under the Municipal Securities Rule on pay-to-play: MSRB Rule G-37. The SEC’s investment adviser/private fund rule on pay to play, Rule 206(4)-5, is based closely on that MSRB rule.

The SEC’s order found that Goldman Sachs did not disclose any of the contributions on MSRB forms and did not  keep records of the contributions in violation of MSRB rules.

Goldman Sachs agreed to settle the charges by paying $7,558,942 in disgorgement, $670,033 in prejudgment interest, and a $3.75 million penalty. This is the largest fine ever imposed by the SEC for Municipal Securities Rulemaking Board pay-to-play violations. The SEC’s case against Morrison continues.

According to the SEC’s order against Goldman Sachs, Morrison worked in the firm’s Boston office and solicited underwriting business from the Massachusetts treasurer’s office beginning in July 2008. Morrison was substantially engaged in working on Cahill’s political campaigns. Before joining Goldman Sachs, between January 2003 and June 2007, Morrison was employed by the Massachusetts Treasurer’s Office, which included positions as the first deputy treasurer, chief of staff and assistant treasurer, reporting directly to Cahill.

Morrison participated extensively in Cahill’s gubernatorial campaign, often during working hours from his Goldman Sachs office, and used Goldman Sachs resources (such as phones, e-mail and office space). The SEC claims that Morrison’s use of Goldman Sachs work time and resources for campaign activities constituted valuable in-kind campaign contributions to Cahill that were attributable to Goldman Sachs and disqualified the firm from engaging in municipal underwriting business with certain Massachusetts municipal issuers for two years after the contributions.

While Morrison was an employee and working on the Cahill campaign, Goldman Sachs participated in 30 prohibited underwritings with Massachusetts issuers and earned more than $7.5 million in underwriting fees.

According to the complaint, this seems like an egregious violation of the pay-to-play rules. It does highlight that items beyond cash contributions could be considered a “contribution” under the pay-to-play rule.

We would not consider a donation of time by an individual to be a contribution, provided the adviser has not solicited the individual’s efforts and the adviser’s resources, such as office space and telephones, are not used….

A covered associate’s donation of his or her time generally would not be viewed as a contribution if such volunteering were to occur during non-work hours, if the covered associate were using vacation time, or if the adviser is not otherwise paying the employee’s salary

Sec Release IA-3403 page 46 and footnote 157 (.pdf)

From a compliance perspective, the question is how to value the use of time in the office, email, and phone usage. I suppose you can add up long distance charges. For employees you can use their hourly rate to determine time spent.  For Morrison, it appears that even using a very conservative measurement  of his time and the Goldman resources, the value would be many times in excess of the $250 limit under the MSRB rule. (The SEC limit is $350 if you can vote for the person.)

Sources:

Placement Agents and the MSRB

In addition to laying out the changes to Form ADV, in Release No. IA-3110 the SEC also took a slightly different course on regulating placement agents. Rule 206(4)-5, released in July 2010, required placement agents to either be registered with the SEC as an investment adviser and subject to the limitation on campaign contributions, or register with FINRA. The FINRA registration was subject to enactment of a similar pay-to-play rule by FINRA.

The SEC has abandoned FINRA for the MSRB when it comes to regulating placement agents that interact with government sponsored plans.

Section 975 of Dodd-Frank Wall Street Reform and Consumer Protection Act created a new category of regulated persons called a “municipal adviser.” This new category will regulated by the Municipal Securities Rulemaking Board.

The MSRB is undertaking a rule-making to subject municipal advisers to the pay-to-play rules in place for municipal securities dealers under MSRB Rule G-37.

“Municipal advisors” include businesses and individuals that advise municipal entities concerning municipal financial products and municipal securities, as well as businesses and individuals who solicit certain types of business from municipal entities on behalf of unrelated broker-dealers, municipal advisors, or investment advisers.

In comparing the de minimis amounts under Rule 206(4)-5 and MSRB Rule G-37, the MSRB only allows for contributions up to $250 for candidates the person can actually vote for. The SEC rule is $350 for a candidate you can vote for and $150 for a candidate you can’t vote for. Both have a two-year ban for violation of the rules.

Sources:

SEC Warns Firms on Muni Pay-to-Play Rules

While sources are wallowing in the exposure of a political figure in a “pay to play” scandal, I thought there might be some lessons for other investment managers as states and perhaps the SEC roll out limitations on political contributions.

The original story seemed mildly interesting.  The SEC warned firms that municipal securities rules prohibiting pay-to-play apply to affiliated financial professionals, not just a firm’s employees. The story caught my eye because MSRB Rule G-37 was identified as a model for the SEC’s proposal on pay to play.

The SEC wanted to make it clear that an “executive who supervises the activities of a broker, dealer, or municipal securities dealer is not exempt from the MSRB’s pay-to-play rule just because he or she may be outside the firm’s corporate governance structure.”

The SEC report identified JP Morgan and the Treasurer of the State of California, but did not name names. It did not take much research to find out that Phil Angelides was treasurer at the time of the incident. The Wall Street Journal identified the JP Morgan executive as David Coulter who was the vice chairman who oversaw the bank’s investment-banking business.

“On September 10, 2002, the Vice Chairman forwarded an invitation for the California Treasurer’s New York fundraising event to JP Morgan Chase’s executive committee and to its Vice President for Government Relations with a handwritten note stating that the California Treasurer is an important client and soliciting their help in raising $10,000 for the event.”

That is exactly the sort of behavior that the SEC wants to prohibit with MSRB Rule G-37 and its proposed pay to play rule.

A key takeaway from the report is that the SEC will look “to the activities, not merely the title, of an associated person in determining whether the person is” subject to the pay to play restrictions.

The story gets juicy because Mr. Angelides is currently the Chairman of the Financial Crisis Inquiry Commission. The Financial Crisis Inquiry Commission was established under the Fraud Enforcement and Recovery Act of 2009 to “examine the causes, domestic and global, of the current financial and economic crisis in the United States.” Perhaps his own situation will be an example in the FCIC’s report due on December 15.

Sources: