Ban on Bond Dealer Consultants Proposed
Dealers of municipal bonds would be barred from hiring former politicians and lobbyists as consultants to help win underwriting business from state and local governments under a rule proposed by the $2-trillion market’s regulator.
The rule seeks to prevent investment banks from using consultants to circumvent rules that restrict contributions the firms can make to politicians who award bond business. UBS, the top underwriter of municipal bonds last year, and Citigroup Inc. are among banks that have hired consultants with ties to elected officials.
“This is a market in which we want people to have confidence that things are being done in an honest, straightforward way,” said Christopher “Kit” Taylor, executive director of the Municipal Securities Rulemaking Board, in a teleconference Tuesday.
The MSRB began looking at whether to ban consultants in early 2004 after finding practices “that could present challenges to maintain the integrity of the municipal securities market,” the Arlington, Va.-based self-regulatory organization said. The board cited concern over the increasing use and pay of consultants and said more political contributions were being made by consultants.
Last year, the 10 largest underwriters paid $11.2 million to consultants, almost twice as much as in 1998, when the banks paid $6.2 million to consultants, according to data from MSRB filings.
In its proposed rule, the MSRB said the increased levels of compensation paid to consultants might be motivating them to “use more aggressive or questionable tactics in their contacts with the issuers.” The tactics could “undermine public confidence in the municipal securities market,” the regulator wrote.
Jon Teall, a spokesman for the New York-based Bond Market Assn., which represents firms that underwrite, trade and sell debt securities, declined to comment. He said staff planned to talk with members and might have a statement in coming days.
The association opposed two previous MSRB proposals that sought to heighten the regulation of consultants, saying in comment letters that consultants help banks reach more issuers and create more competition. The association in a Dec. 15 letter also said the MSRB had not provided any indication that consultants were “engaging in abusive practices.”
Banks pay consultants to help win bond business because they have relationships with municipal issuers or are familiar with the financial needs of the issuer. The consultants develop marketing strategies, talk with public officials and advise banks on ways to win underwriting assignments. More than 80% of municipal bonds nationwide are privately arranged without competitive bidding.
The new rule would prohibit securities dealers from paying anyone who is not an employee, partner or officer of a company to solicit municipal bond business.
Martha Haines, the Securities and Exchange Commission’s top municipal securities regulator, said she was gratified that the MSRB had examined consultant conduct.
“We’ve been encouraging them over the last year or so to look into the issues presented by the use of consultants,” she said. “The issue seemed to be coming up with increasing frequency.”
