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Regulator probes funding of California muni bond lobbying group

January 24, 2011 |  6:37 pm

The brokerage industry’s self-regulatory agency is investigating the funding of the California Public Securities Assn., a group that lobbies on issues affecting the municipal bond industry in the state.

The Financial Industry Regulatory Authority sent a letter last week to firms that are members of CPSA, asking for details on payments they make to the 30-year-old group and how those payments are allocated toward political contributions that the group doles out.

The six-page letter, which asks for all data since Jan. 1, 2006, “was a surprise to us,” said James Cervantes, a managing director at bond underwriter Stone & Youngberg in San Francisco and CPSA’s current chairman. “Their requests are very broad.”

On its website, CPSA lists about three dozen members, including major brokerages such as Goldman Sachs & Co., regional bond underwriters such as De La Rosa & Co. and law firms including Orrick, Herrington & Sutcliffe.

Gina Petrocelli, the regulator who signed the letter, couldn’t be reached for comment. The letter said the request "should not be construed as an indication" that the agency has determined that any federal laws or agency rules have been broken.

There are long-standing industry “pay-to-play” rules restricting securities firms from doing business with municipalities, including handling bond offerings, once certain political contributions have been made to officials in those municipalities.

The Municipal Securities Rulemaking Board this month proposed a new rule that would impose similar restrictions on firms and individuals that advise municipal entities on financial issues

But CPSA says it isn’t an advisor. “We’ve taken great care to not play that role,” Cervantes said.

He said the group limits its lobbying and contributions to “big-picture issues” such as Proposition 22, a measure on last November’s ballot that sought to ban the state from raiding certain local-government funds. Voters approved it.

On its website, the group says it also organizes “educational conferences to help municipal officials make informed decisions regarding the use of various financial instruments to fund capital improvements or mitigate interest rate exposure.”

The letter from the Financial Industry Regulatory Authority asks the association's members to “describe with specificity [CPSA’s] purpose, activities and organizational structure.”

The regulator says all the information requested in the letter must be delivered by Feb. 1.

-- Tom Petruno