The Financial Regulatory Authority (FINRA) has fined some of the nations largest banks over municipal bond lobbying costs. The fines are applied to Citigroup (NYSE: C), Goldman Sachs (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM), and others connected to state and local bonds and lobbying connected to them. In total, the five firms fined will pay $4.48 million to settle regulatory claims they used funds from municipal and state bond deals to pay lobbyists.

In a statement from FINRA, they note that local authorities were unfairly asked to reimburse payments that the firms made over five years to the California Public Securities Association, a lobbying group, to help influence the state. The firms inadequately described the fees, wrapping them into bond- underwriting expenses, Finra said.

The lobbying and essential fraud that FINRA discovered taking place can hurt investors and add borrowing costs. If a municipality hires an underwriter based on whether it supports a campaign rather than its ability to market bonds can lead to mispricing and overall market inefficiency. Underwriters that fund bond-authorization campaigns and then collect fees from approved debt sales are among unresolved pay-to-play issues in the $3.7 trillion municipal market.

This discovery wreaks of a class pay-to-play issue prevalent in financial markets around the world. Marilyn Cohen, founder of Envision Capital Management based in Los Angeles, commented . “I’m not surprised — my surprise is they found it. That’s just the cost of doing business. It’s all pay-to-play.” Her firm oversees about $210 million of munis.

Citigroup and 16 other underwriters also reimbursed California $2.3 million last year after a regulatory probe found they used taxpayer funds to pay fees to their lobbyists. In February of 2011, California Treasurer Bill Lockyer noted that the practice was “improper, it will stop now, it will not happen again, and we will get our money back.” Bill Ainsworth, a spokeman for Lockyer commented on the FINRA statement by saying “We are pleased by this action. “It sends a message that it is wrong for underwriters to charge taxpayers for lobbying and political activities. We are glad other California issuers are getting compensated.”

States have been plagued by high borrowing costs as their risks of default have risen and investors have soured on the issues. On top of that, the pay to play activity surely added some degree of cost, and FINRA’s action comes at a critical time for government bonds.  Removing this activity from the market should lower borrowing costs, albeit slightly, but add more transparency to an otherwise opaque market.