WASHINGTON -- The Government Finance Officers Association gave qualified support yesterday to a proposed rule that would crack down on political contributions by municipal dealers, but the National League of Cities blasted the plan as a "quick fix" that will not work.
The groups made their remarks in written comments filed with the Municipal Securities Rulemaking Board on a two-part rule that the board proposed on Aug. 30. The proposal came in the wake of widening reports of influence peddling activities in New Jersey and other states this year.
Minneapolis Mayor Donald M. Fraser, president of the cities group, warned that the MSRB proposal is raising investors' doubts about the safety of negotiated deals and said that it sets up a double standard for treatment of gifts to state and local officials versus those given to federal officeholders. He added that the rule would duplicate existing state laws and that it needs extensive further study.
GFOA executive director Jeffrey L. Esser argued that contributions are best regulated at the state and local levels, but conceded that the current system is not perfect. He backed requiring bond dealers who have been awarded business to report all contributions to issuer officials for a specified period. But he said the board should provide some exemptions from its all-out ban, such as for contributions of $100 or less.
The board's rule would bar dealers from making direct or indirect contributions designed to capture business. It also would require dealers to disclose political gifts made to issuers with whom they do business over a four-year period: the two years before they are awarded a deal and the two years after.
Comments on the proposal, which has the backing of the staffs of the Securities and Exchange Commission and the National Association of Securities Dealers, were due yesterday. But the remarks of other key groups such as the Public Securities Association and National Association of Bond Lawyers are not expected until next week.
The MSRB is expected to finalize a rule at its next quarterly meeting in November and then submit it to the SEC, which will issue it for public review. The MSRB will not make comments available until after the November meeting.
Fraser, the head of the league of cities, urged the MSRB to withdraw the proposed rule until the board has completed a comprehensive cost-benefit and risk analysis of the plan.
"We believe the imposition of political campaign disclosure mandates is inappropriate, duplicative and harmful," Fraser said. Cities are concerned that the board's efforts are raising investors' doubts about the credibility of the municipal market, and in particular, the propriety of negotiated deals, Fraser said.
Further, campaign disclosure is an issue for taxpayers, not investors, Fraser said. "In our view, an investor is concerned about fiscal information relating to the safety and soundness of a municipal issue. It is the taxpayer and voter in the municipal jurisdiction who is concerned about who makes and who receives political contributions and why."
Disclosure laws already exist in ever state that are designed to protect taxpayers, he said.
Fraser also said that the rule would impose a double standard on state and local governments. It would effectively ban dealer contributions to state and local officials absent proof beyond a reasonable doubt that such contributions are unrelated to any municipal business, he said. "In contrast, federal campaign contributions, from the very same dealers, would be unquestioned absent a federal demonstration of fraud, bribery or other criminal violation."
But GFOA's Esser said he supports the board's proposal that dealers disclose those contributions they make to issuers with whom they are doing business because it is "measured" and "targeted to a specific problem."
"It applies only to negotiated transactions which is where conflicts are possible and it provides for the collection of information in a central, accessible location," he said. The rule also would make it possible to identify individual contributors who are employed by the same employer, he said.
But Esser said the board's proposal to ban those contributions designed to win bond business is so broad that it may effectively ban all gifts, whether legitimate or not.
"While we support banning those contributions that are solely for the purpose of retaining or obtaining business, the rule as proposed is more far reaching and may invite a legal challenge from market participants or others who have a legitimate interest in the political process, but who would be prohibited under the rule from exercising their constitutional right to participate in that process," Esser said.
He said that the answer is not to abandon that part of the rule, but to allow certain exceptions, such as for contributions up to $100 or some other "de minimis" amount.
"We believe that the MSRB should act and act decisively so that the Congress does not step in and overreact," Esser said. "At the same time, MSRB action should be measured ... so that candidates' ability to finance their campaigns is not jeopardized."
Esser said that the rule also should deal with the hiring of consultants or "finders" by underwriters to solicit business. "If politics is to be taken out of the underwriter selection process, this practice must be reviewed."
The rulemaking board said in the introduction to its proposed rule that it plans to phase in the standard so that only those gifts made on or after the standard takes effect, which will be no earlier than Jan. 1, would have to be reported.
But MSRB executive director Christopher Taylor warned dealers Aug. 31 not to try to circumvent the intent of the rule by making contributions before the effective date because enforcement officials can use the board's existing "fair practices" rule to go after violators.
Nevertheless, improper gift giving continues unabated, one dealer warned yesterday, asking not to be identified.
"Underwriters are lining up and writing checks like they did before," the dealer. "It's unbelievable. Political campaign contribution giving is continuing unabated. They're going to fund-raisers in New York and writing checks. They have to, because their competitors are doing it. It's laughable."
The comment is consistent with a warning delivered by Public Securities Association president Heather Ruth on Sept. 22 that the rule will not work. She said there is not a "high level of confidence" that the "behavior changes" that the MSRB is betting on in the market will happen. "Certainly, there is no evidence of [any moderation] in the current environment, and a great deal of evidence to the contrary."
One Washington regulator, who asked not to be identified, said recently that monitoring dealers' activities before the board's proposed Rule G-37 takes effect would be difficult because dealers are not currently required to keep records of gift giving.
