LITTLE ROCK — Investment bank Morgan Keegan Inc. gave $1,000 to a committee backing voter passage of a bond authorization for the city of Rogers in September, and the bank earned $502,000 selling the approved debt.
The city’s fee to raise $77 million exceeded the national average for similar debt sales by 14 percent, according to data compiled by Bloomberg. It went to the investment bank, a unit of St. Petersburg, Fla.-based Raymond James Financial Inc.
“If you contribute, you get selected,” said Christopher “Kit” Taylor, a former executive director of the Alexandria, Va.-based Municipal Securities Rulemaking Board, which sets guidelines for the municipal bond market. “For the bank, it is well worth the rate of return on the contribution.”
Underwriters that fund bond-authorization campaigns and then collect fees from approved debt sales are among the unresolved pay-to-play issues in the $3.7 trillion municipal market. The rulemaking board, after collecting data on dealer contributions to bond campaigns for two years, is starting to examine the need for restrictions based on such contributions, said Ernesto Lanza, deputy executive director and chief legal officer.
Greg Hines, mayor of Rogers, disputed implications that the city or Morgan Keegan acted improperly.
Contributions given by Morgan Keegan, as well as two other bond firms that bid on the project, were made two months after Morgan Keegan was selected as the lead underwriter, Hines told the Arkansas Democrat-Gazette.
“It’s a far stretch to suggest that there was any pay-for-play in this circumstance,” Hines said Thursday. “We were diligent about making sure we did everything right.”
Hines said Morgan Keegan has an office and employees in Northwest Arkansas so contributing to the Committee for the Future of Rogers campaign was logical. And Morgan Keegan has been involved in bond issues in the Rogers area since the 1980s, Hines said.
Morgan Keegan made the contribution, along with dozens of other businesses in Rogers, after being asked to by the Rogers Chamber of Commerce, said Jim Fowler, the managing director of the Little Rock office of Raymond James-Morgan Keegan. The request and contribution came after Morgan Keegan was selected as underwriter, Fowler said. The issue was primarily for roads and infrastructure improvements.
Hiring an underwriter based on whether it supports a campaign rather than its ability to market bonds can lead to problems ranging from mispricing, which can hurt investors, to higher fees and borrowing costs for taxpayers. The rulemaking board’s focus is on ensuring that investors are protected, Lanza said by telephone.
“When people aren’t hired on merit, the potential for a deal going bad increases,” Lanza said. “We’re trying to do the best we can to promote underwriters being hired on merit and not based on whether they contributed to a campaign.”
The rulemaking board has banned would-be underwriters from giving to most campaigns for elected officials who could influence the award of bond sales. Banks have been divided over whether they should be allowed to support drives in favor of referendums authorizing debt issues that they later underwrite. Some say it creates the appearance of undue influence, while others say it merely helps issuers win the votes and finance needed projects.
“There’s an explicit tit-fortat,” said Taylor. “Politicians say they can’t afford to support the bond election and it wouldn’t get done. This is a subtle form for taxpayer money supporting the election.”
Making such contributions is more widespread among smaller underwriters, such as RBC Capital, Piper Jaffray and Morgan Keegan, than larger dealers that include JPMorgan Chase & Co., Bank of America Merrill Lynch and Citigroup Inc., according to disclosure filings with the rulemaking board.
In some cases banks contribute cash to campaign committees. In others, they provide election services, such as preparing brochures explaining bond issues to voters. The practice, which occurs in many parts of the U.S., is more prevalent in Colorado, California and states in the Midwest and South.
Information for this article was contributed by Darrell Preston of Bloomberg News and David Smith of the Arkansas Democrat-Gazette.
Business, Pages 27 on 05/25/2012