The Regulation of “Pay-to-Play” and the Infuence of Political Contributions in the Municipal Securities Industry

Friday, January 1st, 1999 at 12:00 am by Jon B. Jordan
Jon B. Jordan, The Regulation of “Pay-to-Play” and the Infuence of Political Contributions in the Municipal Securities Industry, 1999 Colum. Bus. L. Rev. 489

In the municipal securities industry, dealers and underwriters have traditionally been allowed to make political contributions to elected officials responsible for selecting firms for government municipal bond business. It has been contended that the purpose of some of these contributions has been to influence officials into selecting those dealers and underwriters for municipal bond business. This system-known as “pay-to-play” because dealers had to pay, in the form of campaign contributions, in order to play or be considered for municipal underwriting business-has been around as long as the municipal securities industry itself. The system was not openly spoken of on Wall Street, as it seemed shady at best. However, municipal securities firms had to be a part of this system in order to survive. In the early nineties, some of the largest municipal securities firms decided to form a unified voluntary ban against pay-to-play. This voluntary ban awakened regulators, who took heed of the new movement and backed it up with regulation, which led to the adoption of Rule G-37, the first rule aimed at ending pay-to-play. This movement toward change, however, was not well-received by all in the industry. Initial resistance to the movement soon developed and eventually the rule was constitutionally challenged. Rule G-37 survived the onslaught, but time exposed its flaws. Loopholes were exploited, and many complained that the rule was inherently unfair. Regulators did their best to address these concerns, while enforcement measures and costly barriers to business added weight to the rule’s goal of eliminating pay-to-play. Eventually the system, as it existed prior to the rule, was virtually abolished. The use of political contributions as a means for obtaining municipal bond business is now viewed as a negative and costly endeavor that no firm would want to undertake. With municipal securities firms free from the taint of pay-to-play, regulators have focused their attention on the legal profession’s role in the municipal securities industry and the pay-to-play system. In this regard, regulators have sought an end to attorney pay-to-play, where attorneys make political contributions for the purpose of obtaining municipal legal business. This recent objective by regulators has met considerable resistance. However, some legal organizations, such as the American Bar Association (“ABA”), have taken effective strides to end attorney involvement in the system. This article will trace the story of pay-to-play from its traditional beginnings to its ultimate demise. The problem of pay-to-play and how it can be costly to taxpayers and investors will then be explained. The movement toward ending the system by both the private and regulatory sectors will also be explored. The adoption of Rule G-37 as a means to end the system, as well as the resistance and challenges to the rule, will then be discussed. Problematic loopholes and fairness complaints that have arisen will be laid out. Enforcement actions and costly barriers to business, which gave force to the rule, will also be discussed. The ongoing debate governing attorney pay-to-play will then be explained. Finally, the author will address what he believes to be the future of pay-to-play as it involves securities firms and the legal profession.

Author Information

Mr. Jordan is an attorney with the Washington, D.C. office of Baker & Botts, LLP.