SEC Warns Firms on Muni Pay-to-Play Rules

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.


Read more about corporate compliance and ethics issues at Compliance Building.