1

 National Examination Risk Alert 

By the Office of Compliance Inspections and Examinations1

Volume II, Issue 4                                                 August 31, 2012   

“Pay‐to‐Play” Prohibitions for Brokers,

Dealers and Municipal Securities

Dealers under MSRB Rules

Introduction

This Risk Alert summarizes the observations of National 

Examination Program (“NEP”) examiners with respect to brokers, 

dealers or municipal securities dealers (collectively, “firms”) 

engaged in municipal securities business, and their practices related 

to contributions to political campaigns of public officials of issuers 

with whom they are doing or seek to do business (“Pay-to-Play”).2

 

Moreover, this Risk Alert identifies areas of concern stemming from 

some recent examinations and sets forth a number of practices that 

some firms have elected to use. 

By sharing this information, our intent is to alert senior 

management, risk managers, and legal and compliance personnel to 

                                                            

1

 The Securities and Exchange Commission (“SEC” or the “Commission”), as a matter of policy, disclaims 

responsibility for any publication or statement by any of its employees. The views expressed herein are 

those of the staff of the Office of Compliance Inspections and Examinations, in coordination with other 

SEC staff, including the Division of Trading and Markets, and do not necessarily reflect the views of the 

Commission or the other staff members of the SEC. This document was prepared by the SEC staff and is 

not legal advice. 

2

 This Risk Alert only reflects observations with respect to broker-dealer’s obligations under current MSRB 

rules. It does not address any obligations of municipal advisors or swap advisors, for example. In addition, 

this Risk Alert does not address any obligations of investment advisers pursuant to the Investment Advisers 

Act of 1940. 

In this Alert:		

Topic: Regulatory concerns related

to “Pay‐to‐Play” practices under

MSRB rules.

Objectives: Provide a summary of

the observations of SEC examiners

with respect to firms engaged in

municipal securities business, and

their “Pay‐to‐Play” practices.

Key Takeaways:		

Examinations have revealed a

number of potential weaknesses

regarding supervision of MSRB

“Pay‐to‐Play” prohibitions.

Factors that firms might consider

when evaluating their compliance

and supervision policies and

procedures in this area include

strategies for improving

surveillance and certification

procedures.			

In addition, firms are reminded of

their obligation to keep written

supervisory procedures current,

and to provide regular training to

Municipal Finance Professionals.
2

these issues, encourage them to review compliance in these areas at their respective firms, and 

encourage improvements in compliance if applicable. The practices and issues described below 

are for informational purposes only. Their presentation is not intended as an endorsement of any 

particular practice as the staff recognizes that each firm must design its compliance structure 

based on a risk analysis that takes into account many factors. The practices described do not 

represent legal opinions or advice and may not necessarily represent legal or regulatory 

requirements. Depending on the characteristics of an organization, the described practices may 

not be applicable to a particular firm given its business or operations. 

I. MSRB Rules Regarding Prohibitions on “Pay-to-Play” Practices3 

Municipal Securities Rulemaking Board (“MSRB”) Rule G-37 generally prohibits firms 4 from 

engaging in “municipal securities business” with an issuer for two years after any contributions 

have been made to an official of such issuer by the firm, a “municipal finance professional” 

(“MFP”) associated with the firm, or a political action committee controlled by the firm or MFP (a 

“controlled PAC”).5

 There is an exception from this prohibition for a contribution of $250 or less 

                                                            

3

 See note 2. 

4

 Some banks or separately identifiable departments or divisions of banks are required to register with the 

Commission as municipal securities dealers under Exchange Act Section 15(B)(a) and are subject to MSRB 

rules. 

5

 As defined in MSRB Rule G-37, the term "municipal securities business" means: 

 (A) the purchase of a primary offering (as defined in rule A-13(f)) of municipal securities from the issuer 

on other than a competitive bid basis (e.g., negotiated underwriting); or 

 (B) the offer or sale of a primary offering of municipal securities on behalf of any issuer (e.g., private 

placement); or 

 (C) the provision of financial advisory or consultant services to or on behalf of an issuer with respect to a 

primary offering of municipal securities in which the dealer was chosen to provide such services on other 

than a competitive bid basis; or 

 (D) the provision of remarketing agent services to or on behalf of an issuer with respect to a primary 

offering of municipal securities in which the dealer was chosen to provide such services on other than a 

competitive bid basis. 
3

per election made by an MFP to an official of an issuer for whom the MFP was entitled to vote 

(referred to herein as a “de minimis contribution”).6

An MFP is defined to include 

 any associated person of a firm that primarily engages in municipal securities 

representative activities;7

 any associated person who solicits municipal securities business;8 

 any associated person who is both a municipal securities principal or a municipal securities 

sales principal and a supervisor of any of the persons described in the two bullets above; 

 certain supervisors, up to and including the CEO or similarly situated official or the 

officer(s) of a bank designated by the board of directors of the bank as responsible for the 

day-to-day conduct of the bank’s municipal securities dealer activities; and 

 any associated person who is a member of the firm’s executive or management 

committee or similarly situated officials, if any. 

                                                            

6

 There are certain exemptions from the prohibitions under MSRB Rule G-37(i) and (j), available at

http://www.msrb.org/Rules-and-Interpretations/MSRB-Rules/General/Rule-G-37.aspx. 

7

 These activities include one or more of the following: 

 (1) underwriting, trading or sales of municipal securities (provided, however, that sales activities with 

natural persons will not be considered to be municipal securities representative activities for purposes of 

Rule G-37); 

 (2) financial advisory or consultant services for issuers in connection with the issuance of municipal 

securities; 

 (3) research or investment advice with respect to municipal securities; or 

 (4) any other activities which involve communication, directly or indirectly, with public investors in 

municipal securities; provided, however, that the activities enumerated in subparagraphs (3) and (4) above 

shall be limited to such activities as they relate to the activities enumerated in subparagraphs (1) and (2) 

above. 

8

 Evidence of solicitation activities include, among other things, signing cover letters submitting responses to 

requests for qualifications (“RFQ”) for underwriting business and/or having the person’s name appear in 

responses to RFQs as a member of the underwriting team. See, e.g., Southwest Securities, Inc., Exchange 

Act Rel. No. 61768 (Mar. 24, 2010). 
4

 Each person designated by the firm as an MFP retains this designation for one year after the last 

activity or position that gave rise to the designation. Non-MFPs can become MFPs once they 

solicit municipal securities business.9

 

Rule G-37 contains “look-forward” and “look-back” provisions.10 The basic look-back period is 

two years. This period starts to run from the making of a non-de minimis contribution to an 

official of the issuer by the firm, an MFP primarily engaged in municipal securities 

representative activities or solicitation activities associated with the firm, or a controlled PAC. 

During this two-year period there is a ban on engaging in municipal securities business with that 

issuer under MSRB Rule G-37(b)(i). The look-forward period is one year. During this period, 

which starts to run with the last activity or position that created MFP status for an individual, that 

person retains his or her status as an MFP. For persons who are MFPs solely by virtue of their 

supervisory or management-level activities, the look-back is shortened to six months under 

MSRB Rule G-37(b)(iii) and the look-forward is one year. For someone who is an MFP solely 

because of solicitation activities, MSRB Rule G-37(b)(ii) provides that the only contributions 

made by him or her to officials of an issuer during the two-year look-back period prior to 

becoming an MFP that would result in a ban on business would be those non-de minimis

contributions made to an official of an issuer from whom such person has solicited business.11 

                                                            

9

 Interpretive Notice on the Definition of Solicitation Under Rule G-37 and G-38, dated June 8, 2006, 

available at http://www.msrb.org/Rules-and-Interpretations/MSRB-Rules/General/Rule-G38.aspx?tab=2#_6E7D5C54-C56D-4DB5-BEC5-914028440CDC. This interpretation provides guidance 

as to what may or may not constitute a solicitation under Rules G-37 and G-38. It also states that the 

following would generally not be viewed as solicitations: communications with a conduit borrower, often a 

private entity; and payments made by a broker-dealer to third party consultants engaged to provide specific 

expert services incidental to completing the offering, for which the broker-dealer has already been retained 

by the issuer. 

10 The look-back provision arises by operation of MSRB Rule G-37(b)(i) and the look-forward provision 

arises from the definition of “municipal finance professional” under MSRB Rule G-37(g)(iv). See MSRB 

Interpretive Notice 2006-15(June 15, 2006), http://www.msrb.org/Rules-and-Interpretations/RegulatoryNotices/2006/2006-15.aspx. MSRB Interpretive Notice on the Definition of Solicitation Under Rule G-37 

and G-38, dated June 8, 2006, http://www.msrb.org/Rules-and-Interpretations/MSRB-Rules/General/RuleG-38.aspx?tab=2#_6E7D5C54-C56D-4DB5-BEC5-914028440CDC. This interpretation provides guidance 

as to what may or may not constitute a solicitation under Rules G-37 and G-38. It also states that the 

following would generally not be viewed as solicitations: communications with a conduit borrower, often a 

private entity; and payments made by a broker-dealer to third party consultants engaged to provide specific 

expert services incidental to completing the offering, for which the broker-dealer has already been retained 

by the issuer. Instructions for Forms G-37, G-37x and G-38t (February 1, 2010), available at

http://www.msrb.org. 

11   Since MSRB Rule G-37(b)(ii) and (iii), by their terms, apply to persons who are MFPs solely by virtue of 

their solicitation or supervisory/management activities, any such solicitor MFP or supervisory/management 
5

Contributions of MFPs to issuers that may cause a firm to be banned from municipal securities 

business with an issuer are not limited to those contributions made by the MFPs while they are 

associated with a firm.12 Specifically, the MSRB has provided that an individual that makes a 

non-de minimis contribution to an issuer official would cause any firm with which the individual 

becomes associated as an MFP during the two-year period following the contribution to be 

banned from the municipal securities business with the issuer.13 In addition, a non-de minimis 

contribution to an issuer official made by a person already associated with a firm but not then 

qualifying as an MFP would nonetheless cause the firm to be banned from municipal securities 

business with the issuer if that associated person becomes an MFP of the firm during the twoyear period following the contribution.14

The rule also generally requires firms to file a Form G-37 with the MSRB by the last day of the 

month following the end of each calendar quarter (i.e., January 31, April 30, July 31 and October 

31). Form G-37 requires a listing of the issuers with which the firm has engaged in municipal 

securities business during the calendar quarter.15 In addition, firms are required to disclose on 

Form G-37 all campaign contributions by the firm and certain campaign contributions by MFPs, 

non-MFP executive officers and controlled PACs to issuer officials, bond ballot campaigns and 

                                                                                                                                                                                               

MFP that engages in municipal securities representative activities for purposes of the rule would not qualify 

for the modified look-back periods described above.

12 MSRB Questions and Answers Concerning Political Contributions and Prohibitions on Municipal 

Securities Business: G-37, available at http://www.msrb.org/Rules-and-Interpretations/MSRBRules/General/Rule-G37-Frequently-Asked-Questions.aspx (“MSRB Q&A Guidance”), Q&A No. II.13 

(May 24, 1994, revised October 30, 2003) and Q&A No. II.14 (December 7, 1994, revised October 30, 

2003). 

13 Id. The applicability of the two-year period is subject to the modified look back provisions for certain 

categories of MFPs described above. 

14 MSRB Q&A Guidance, Q&A No. II.15 (May 24, 1994, revised October 30, 2003) and Q&A No. II.16 

(June 29, 1998, revised October 30, 2003). The applicability of the two-year period is subject to the 

modified look back provisions for certain categories of MFPs described above. 

15 This listing should be by state, along with the type of municipal securities business, e.g., whether serving as 

an underwriter (as part of a negotiated offering), as a dealer in an agency offering (such as a private 

placement or as a primary distributor for a 529 college savings plan), financial advisor and/or remarketing 

agent. Instructions for Forms G-37, G-37x and G-38t (February 1, 2010), available at

http://www.msrb.org). 
6

political parties of states or political subdivisions.16 Finally, Rule G-37 prohibits solicitation of 

any payments or coordination of any payments by firms and their MFPs in connection with 

contributions by others to an official of an issuer with which the firm is engaging or seeking to 

engage in municipal securities business, or to a political party of a state or locality where the firm 

is engaging or seeking to engage in municipal securities business. 

MSRB Rule G-38 prohibits any firm from making any payment, directly or indirectly, to any person 

who is not an affiliated person of the firm to solicit municipal securities business (as defined in 

Rule G-37) on behalf of such firm. 

The text of Rules G-37 and G-38, and the interpretive notices and letters relating to such rules, are 

available on the MSRB website at http://www.msrb.org/Rules-and-Interpretations/MSRBRules.aspx.

II. Issues Observed in NEP Examinations Regarding Firm Compliance with MSRB 

Prohibitions on “Pay-to-Play” Practices 

Based on recent NEP examinations of firms engaged in municipal securities business to assess 

their compliance with Rule G-37, the NEP has observed practices that raised the following 

concerns about firms’ compliance with their obligations under that rule and related rules 

applicable to such firms:17

 Doing Municipal Business within the Two-Year Ban: NEP staff have observed 

facts that suggest that some firms may have engaged in municipal securities 

business with issuers within two years of their MFPs making contributions other 

than de minimis contributions to officials of the issuers. 

                                                            

16 Contributions by MFPs (or non-MFP executive officer as defined in MSRB RuleG-37(g)(v)) of less than 

$250 per election or per ballot campaign need not be disclosed on Form G-37 if the MFP or non-MFP 

executive officer is entitled to vote for the issuer official or ballot initiative. In addition, Rule G-37 does 

not require disclosure on Form G-37 of payments made by an MFP or non-MFP executive officer of a 

political party of a state or a political subdivision in which such person is entitled to vote if all payments by 

such person to such political party, in total, do not exceed $250 per year. 

17 In addition to MSRB Rule G-37, these practices may also implicate supervisory obligations of brokers, 

dealers and municipal securities dealers under MSRB Rule G-27 over their municipal securities activities 

and those of their associated persons... 
7

 Recordkeeping: NEP staff observed facts that suggest that some firms examined 

may not have maintained accurate and complete lists of their MFPs and NonMFP executive officers as required by MSRB Rule G-8.18

 Failure to File Form G-37: NEP staff observed facts that suggest that firms may 

have failed to file accurate and complete Form G-37s, such as identification on 

that form of all municipal securities business in which a firm was engaged or all 

political contributions made to issuer officials by MFP and non-MFP executive 

officers.19

 Inadequate Supervision: NEP staff has observed facts that suggest that some 

firms examined may have failed to establish or implement adequate supervisory 

procedures to ensure compliance with MSRB Rules G-37 and G-38.20 Once a 

firm has designed procedures to ensure compliance with the rules, it must also 

implement those procedures.

III. Staff Observations of Compliance Programs Related to MSRB “Pay-to-Play” 

Prohibitions 

The staff has been informed by firms that they design compliance programs regarding pay-toplay practices in the light of a complex matrix of relevant legal obligations including, in addition 

to MSRB rules, other federal, state and local requirements related to bidding for government 

business, election law, employment law, privacy requirements, etc. The nature of these 

aggregated legal obligations varies depending on a firm’s size, the types of business that it 

conducts and the states or localities in which it conducts business. Consequently, the NEP staff 

has observed that firms follow a wide range of different approaches to compliance policies and 

procedures in this area that are described below. This description of observed practices is not 

                                                            

18 MSRB Rule G-8 requires firms to maintain accurate and complete lists of their MFPs and Non-MFP 

executive officers. See http://www.msrb.org/Rules-and-Interpretations/MSRB-Rules/General/Rule-G8.aspx. 

19 Some firms recently examined failed to identify all of the municipal securities business in which the firms 

engaged. Several failed to identify all political contributions made to issuer officials by MFP and non-MFP 

executive officers. 

20 The staff observed that some firms recently examined had procedures that appeared to be inadequate to 

comply with Rules G-37 and G-38. Other firms had procedures designed to ensure compliance with Rules 

G-37 and G-38, but failed to implement these procedures. 
8

exhaustive. Other practices besides those described below may be appropriate to consider, and 

some of the practices may not be applicable to a particular firm’s business. 

The staff has observed the following steps that certain firms have taken with respect to “Pay-toPlay” prohibitions under MSRB rules as well as other applicable legal requirements. 

 Training to MFPs: Many firms provide regular training for MFPs on the requirements 

of MSRB Rules G-37 and G-38, and document the training received by the MFPs.21 Such 

training serves as an important supplement to surveillance, particularly during years in 

which political contributions are likely to be higher, such as presidential election years.22

 Self- certification. Some firms also require MFPs, non-MFP executive officers and 

employees who could become MFPs to certify on an annual or other periodic basis that 

they understand and are abiding with all firm requirements regarding political 

contributions. 

 Surveillance: Some firms use various resources, such as the internet, to search for political 

contributions made by any of their MFPs, non-MFP executive officers and employees who 

could become MFPs (e.g., www.fec.gov and a number of non-governmental sites) to ensure 

that these employees are accurately reporting their political contributions to the firms and, as 

applicable, to determine whether such contributions were reported on the firm’s Form G-37 

filings. Moreover, these firms may screen e-mails and other communications to ascertain 

whether MFPs or non-MFP executive officers have made any unreported contributions. 

 Two-Year Look-back. Some firms have adopted procedures to identify non-MFPs who 

may become MFPs in the future as a result of a promotion or change in responsibilities. 

NEP staff observed that these firms subject such employees to the firm’s political 

contribution requirements prior to becoming MFPs to mitigate the impact of any required 

look-back under Rule G-37. In addition, NEP staff observed that some firms survey 

potential employees about their political contributions to determine whether the applicant 

                                                            

21 Training programs are often set up by firms to comply with the continuing education requirements of 

MSRB Rule G-3(h) and as a supplement to, or as part of, a supervisory plan required by MSRB Rule G-27. 

22 Firms should make certain their written supervisory procedures comport with MSRB Rule G-27 and are up 

to date with MSRB guidance regarding supervision and “Pay-to-Play” practices. 
9

made any contributions that could impact the firm’s municipal securities business under 

Rules G-37 and G-38. 

 Pre-Clearance or Restrictions on Political Contributions. 23 NEP staff have observed

a range of steps taken by some firms, in light of the matrix of diverse federal, state and 

local requirements described on page 7 above, to pre-clearing or restricting political 

contributions, such as the following three approaches. 

o Preclearance of Political Contributions by MFPs. NEP staff have observed 

that many firms require pre-clearance of political contributions by MFPs. Some 

firms structure their internal approval program so that MFPs must seek approval 

from compliance or a similar group within the firm.24 

o Pre-Clearance of Political Contributions by non-MFPs: NEP staff have 

observed that some firms have determined to require some level of pre-clearance 

of political contributions beyond just MFPs. In some instances these firms have 

set different thresholds for employee pre-clearance based on factors such as the 

employee’s status and the particular functions or activities for which the 

employee is responsible. At higher risk levels these firms may require 

preclearance of all political contributions, including federal, since a federal 

official may be running for a state office, while at lower risk levels they may 

only require preclearance of contributions in connection with local political 

races. Some firms apply a similar risk analysis to determine whether to require 

preclearance of political contributions by immediate household members of 

certain employees. As with MFP preclearance, some firms structure their internal 

approval program so that covered employees must seek approval from 

compliance or a similar group within the firm. 

                                                            

23 MSRB rules do not require pre-clearance of employee political contributions, and NEP staff does not 

believe pre-clearance procedures are a necessary component of a firm’s supervisory procedures and 

compliance controls with respect to “Pay-to-Play” prohibitions under MSRB rules. 

24   As discussed below, in conversations with firms some have indicated a need to ensure a clear separation 

between the group providing approval and other management or human resources functions within the firm 

to avoid the appearance that decisions related to the terms or conditions of employment are influenced by 

political orientation. 
10

o Prohibition on political contributions. While not required by MSRB rules, 

some firms have chosen to prohibit any non-de minimis political contributions by 

MFPs or prospective MFPs as a condition of employment, to the extent permitted 

by state or local law. As part of this analysis, such firms have made a 

determination that the jurisdictions where they operate allow such prohibitions. 

 Separation of Functions. Some firms have told us that they provide separation between, 

on the one hand, functions such as preclearance, look-backs, or surveillance, and on the 

other hand, functions that could influence an employee’s terms of employment, such as 

management and human resources. This separation is intended to protect an employee 

against any possibility that an adverse action could be taken based on the employee’s 

political preferences. 

Conclusion 

This alert informs firms engaged in municipal securities business about areas of concern 

identified in NEP examinations of compliance with prohibitions on MSRB “Pay-to-Play” 

practices. It also describes observations by the Examination staff regarding supervisory practices 

and controls for compliance with MSRB rules that some firms have elected to adopt with respect 

to prohibitions on “Pay-to-Play” practices in the context of municipal securities activities. 

However, it does not purport to provide a list of steps to effectively discharge responsibilities and 

does not address the requirements for other types of registered entities or pay-to-play 

prohibitions under other regulatory regimes. 

The staff hopes that sharing observations from recent examinations is helpful to firms in 

strengthening their compliance and risk management programs related to municipal securities, 

and welcomes comments and suggestions about how the NEP can better fulfill its mission to 

promote compliance, prevent fraud, monitor risk, and inform SEC policy. If you suspect or 

observe activity that may violate the federal securities laws or otherwise operates to harm 

investors, please notify us at http://www.sec.gov/complaint/info_tipscomplaint.shtml.
11

This Risk Alert is intended to highlight for firms risks and issues that the staff has identified in the course of examinations regarding

compliance by firms with municipal securities pay‐to‐play prohibitions under MSRB rules.				In addition, this Risk Alert describes

factors that firms may consider to (i) assess their supervisory, compliance and/or other risk management systems related to these

risks and issues, and (ii) make any changes, as may be appropriate, to address or strengthen such systems.		These factors are not

exhaustive, and they constitute neither a safe harbor nor a “checklist.”			Other factors besides those described in this Risk Alert may

be appropriate alternatives or supplements to consider. The risks, issues and associated factors described are for informational

purposes only.		They do not necessarily represent legal or regulatory requirements.		They do not present any legal opinion or advice.		

Moreover, future changes in laws or regulations may supersede some or all of the discussion in this Alert.		Some of these risks, issues

and associated factors may not be applicable to a particular firm given the characteristics of its business or operations.		The

adequacy of supervisory, compliance and other risk management systems can be determined only with reference to the profile of

each specific firm and other facts and circumstances.