In recent years, there has been a proliferation of pay-to-play rules at the federal, state, and local level.  Many of these rules target all who seek to do business with a particular government entity.  Some focus on a certain industry or profession, such as investment advisers.  All claim that the end goal is to prevent corruption or the appearance thereof.  This was on display once again when the Municipal Securities Rulemaking Board (MSRB) announced during its Quarterly Meeting it was developing a proposal for a pay-to-play rule for municipal advisors.  A close look at the MSRB’s discussion reveals the impact of the Supreme Court’s rationale in McCutcheon v. FEC on the further release of these rules. 

Influx of Pay-to-Play Rules

The first federal pay-to-play rule, MSRB Rule G-37, became law in 1994 and effectively restricted the campaign contributions of certain brokers, dealers, and municipal securities dealers.  Since then, on the federal level, the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) have released pay-to-play rules affecting investment advisers (SEC Rule 206(4)-5) and swap dealers (CFTC Rule 13.451).  Back in January of 2011, the MSRB proposed a pay-to-play regime for municipal advisors (MSRB proposed Rule G-42), only to withdraw the proposal to allow time for other rules (such as a rule providing the definition of, and requiring registration for, municipal advisors) to be proposed and implemented.  Earlier this year, when the MSRB re-proposed Rule G-42, the pay-to-play provisions were absent.  Based on the MSRB Quarterly Meeting, it appears that the MSRB plans to amend Rule G-37 to include municipal advisors. 

In short, MSRB Rule G-37 prohibits brokers, dealers, or municipal securities dealers from engaging in municipal securities business with an issuer within two years after a political contribution to a covered official.  Contributions of $250 or less are considered de minimis, and do not trigger the two-year ban.  Based on the comments from MSRB Board Chair Daniel Heimowitz during the quarterly board meeting, it appears that the board will extend the rule to incorporate municipal advisors and key employees – or “associated persons” – of the advisor, just as Rule G-37 currently covers dealers and municipal finance professionals.

As mentioned above, this approach is different than the one proposed in January 2011, when the MSRB released Proposed Rule G-42.  At the time, the proposed Rule G-42 closely followed Rule G-37.  By expanding Rule G-37, the MSRB will be further solidifying an important distinction between that Rule and the pay-to-play rule for investment advisers and swap dealers under SEC Rule 206(4)-5 and CFTC Rule 13.451, respectively: whereas covered associates under the SEC and CFTC rules may contribute up to $350 per election (if they are entitled to vote for the covered official) and up to $150 per election (if they are not entitled to vote for the covered official) without triggering the two-year-ban, Rule G-37, by contrast, makes no such distinction and imposes a $250 de minimis limit regardless of the individual’s eligibility to vote for the covered official.

Of course, a detailed analysis of the amendments to Rule G-37 will be necessary once the MSRB releases its proposal in order to determine the exact coverage of the new pay-to-play rule.

Regulation of Municipal Advisors

The pay-to-play rule would follow the municipal advisor registration rules that were released by the SEC in September 2013.  Originally, the compliance date was January 13, 2014,[1] yet due to “the need to provide market participants additional time to comply” the SEC effectively pushed this compliance date back to July 1, 2014.[2]  Many in the industry are analyzing the municipal advisor rules to determine whether or not they qualify and therefore would need to register.  If an entity has to comply with the various registration requirements, it will (barring specific exceptions) have to comply with the new pay-to-play regime. 

Between now and the effective compliance date, in-house counsel should conduct a rigorous analysis to determine whether their entity is required to register as a municipal advisor.  The SEC has provided for a variety of exceptions to and exclusions from the definition of a “municipal advisor.”  Depending on the type of entity or the type of work, the municipal advisor registration rule—and therefore the forthcoming municipal advisor pay-to-play rule—may not apply.  With that said, another federal pay-to-play rule may still apply (i.e. Rule 206(4)-5)), and in-house counsel should always be cognizant of the applicable state or local pay-to-play rules. 

McCutcheon and Pay-to-Play

At the Quarterly Meeting, MSRB Board Chair Daniel Heimowitz stated that “For two decades, MSRB Rule G-37 has played a central role in curbing the use of, and the appearance of the use of, political contributions to secure municipal securities business . . . Extending these provisions to municipal advisors will help prevent quid pro quo political corruption, or the appearance of such corruption, in public contracting for both dealers and municipal advisors.”[3]  The specific inclusion of the phrase “quid pro quo corruption” may have been in direct response the Supreme Court’s rationale in McCutcheon v. FEC.[4]   While the end result of McCutcheon was the eradication of the aggregate contribution limits placed on individuals, the means of getting there involved a detailed discussion of corruption and what specifically the government interest must be to pass constitutional muster.

In the plurality opinion, Chief Justice John Roberts stated, “Congress may target only a specific type of corruption—‘quid pro quo’ corruption” when regulating in the campaign finance arena.[5]  He further reasoned that “spending large sums of money in connection with elec­tions, but not in connection with an effort to control the exercise of an officeholder’s official duties, does not give rise to such quid pro quo corruption.”[6]  And with regards to regulating the appearance of corruption, he said that “because the Government’s interest in preventing the appearance of corruption is equally confined to the ap­pearance of quid pro quo corruption, the Government may not seek to limit the appearance of mere influence or access.”[7]

Confining regulation in the area of campaign contributions and expenditures to the prevention of actual or apparent quid pro quo corruption – the “direct exchange of an official act for money”[8] – ties the hands of lawmakers and regulators seeking to advance new rules in this area.  With that said, Rule G-37 has been challenged and upheld before, by the Court of Appeals for the D.C. Circuit, which acknowledged the possibility of quid pro quo in the bond market.[9]  Moving forward, however, lawmakers and regulators will have to be very clear that any restrictions on campaign contributions are narrowly tailored to prevent quid pro quo corruption, or the appearance thereof. 


While regulators will seek to adjust in a post-McCutcheon world, counsel for targeted entities – in this case those entities that may do business with or advise municipalities – must first determine whether they meet the definition of “municipal advisor” as set out by the SEC.  If such detailed analysis yields a conclusion that an entity will be considered a municipal advisor, that entity will then have to prepare for yet another pay-to-play rule.