Municipal bond dealers across the nation are largely falling in line with a recommendation from the industry's leading trade association calling for a moratorium on political contributions to state and local officials.
The moratorium, announced Tuesday by the Public Securities Association, came in response to a proposal by an industry regulator that would ban business-related political contributions from municipal executives.
Ban fever appears to be catching. California Treasurer Kathleen Brown, in testimony yesterday before the House Energy and Commerce Committee's subcommittee on telecommunications and finance, said she is not accepting campaign contributions from all "individuals who participate in municipal finance transactions, including attorneys, financial advisers, consultants, and accountants." The total ban supplements an earlier, partial moratorium on contributions from securities firms and bond lawyers.
When the PSA first came out with the proposed moratorium, only a handful of firms said they would follow the association's lead.
Yesterday, The Bond Buyer reported that Merrill Lynch & Co. and Goldman, Sachs & Co. said they had already imposed a ban on future contributions to public officials. Executives at Merrill said they are reviewing the need to make good on prior commitments.
But yesterday, the tide apparently turned. All but one firm among the industry's top underwriters - Bear, Stearns & Co. - announced that they have implemented the moratorium. A spokeswoman at Bear Stearns said the firm had no comment.
Among regional firms contacted, an executive at the Cleveland-based McDonald & Company Securities Inc. said the firm will allow employees to make political contributions on the local level.
Robert Clutterbuck, a senior managing director at McDonald said the firm "strongly endorses" the position that dealers should not make contributions outside the geographic area where they do business. "Why should an Ohio firm be giving to New York politicians?" he asked.
On the local front, however, Clutterbuck said that McDonald employees have been given a mandate by the firm to become involved in their communities on a political or charitable basis by donating money and time.
"We strongly endorse that firms should be able to contribute where they have employees," Clutterbuck said. He said while McDonald has been in contact with the PSA recently over its latest position, the firm plans to bring that position up for discussion next week at the PSA's Regional Roundtable Program in Chicago.
Officials at all the industry's leaders in municipal bond offerings this year said they have imposed the ban recommended by the PSA.
In addition to Merrill Lynch and Goldman Sachs, the firms are CS First Boston, Smith Barney Shearson Inc., Morgan Stanley & Co., Paine-Webber Inc., J.P. Morgan Securities, Prudential Securities, and Lazard Freres & Co.
An executive at Lehman Brothers said a formal policy will be in place in a couple of days. James Cain, an assistant vice president in corporate communications at Lehman Brother, said the firm "intends to adopt a moratorium on [political action committee] contributions as advanced by the PSA." A Lehman official said the ban also applies to individual contributions.
Carl M. Eifler, a managing director and head of public finance at CS First Boston, said the firm was one of the few that stopped giving political contributions following announcement of the Municipal Securities Rulemaking Board's proposed ban on contributions in August. "Our situation here is very simple," Eifier said. "We declared a moratorium internally on August 30 when the MSRB-proposed rule was in place."
A spokesman for Lazard Freres, a firm that was the target of a federal investigation into New Jersey bonding practices, said, "For some weeks we have had in place a moratorium on political giving in the municipal area."
The industry's support for the PSA recommendation is not surprising, market executives say, given the current regulatory climate.
MSRB Gives Warning
When the MSRB, the industry's self-regulatory agency, announced proposed restrictions on political contributions in August, it warned industry executives that its plan could be enforced by the Securities and Exchange Commission and the National Association of Securities Dealers under existing regulations.
The proposed restrictions came in response to both federal and local investigations of municipal market firms and the role political contributions play in a firm's ability to win lucrative bond underwriting business.
But the MSRB's plan caused widespread confusion among market executives, who in recent weeks have said that numerous public officials, including those who select bond underwriters for municipal bond deals, continued to lobby municipal industry for contributions.
At the same time, many firms have chosen to interpret the proposal liberally, and have continued to give political contributions.
In addition to the PSA's efforts, Frank G. Zarb, vice chairman and group chief executive of Primerica Corp., which owns Smith Barney Shearson, is planning an Oct. 18 meeting with the chief executives from all the major Wall Street firms and SEC Chairman Arthur Levitt to discuss a "voluntary mechanism" to ban political contributions.
"The central tenet ... is that no contribution may be given if it even gives the appearance of attempting to influence the selection of an underwriter," Zarb said in a letter announcing the meeting.
However, industry executives said the proposal advocated by Zarb left room for improvement and forced the PSA to recommend its moratorium.
While most firms are agreeing to ban contributions, reaction from some officials and municipal professionals across the nation was mixed.
Catherine L. Spain, director of the Government Finance Officers Association's federal liaison center, said the PSA's call for a "de minimis" standard under which employees could make contributions up to a set minimum is along the lines of what the finance officers group has proposed.
"Beyond that, I really don't want to say anything," Spain said, denying specific comment on the PSA's call for a contribution moratorium.
Maine Treasurer Sam Shapiro said issuers and treasurers may be getting unfairly maligned in the congressional hearings. "I really wonder if we deserve the amount of slop that's being spilled on our shoetops," Shapiro said. "There have been some questionable dealings, but no indictments yet."
Shapiro, in an interview in The Bond Buyer earlier this year, said that banning campaign contributions may be the only way to remove the specter of corruption over the municipal industry.
One municipal dealer said, "About 60 days ago, we felt the MSRB was going to come out with an interim rule banning contributions." Therefore, he said, "Other than people we've made commitments to, we're not making any contributions."
"This is the equivalent of a cease fire," the dealer said. He noted that the ban will be effective as long as issuers do not seek contributions and underwriters do not make them.
Mid-Atlantic Cheers
Underwriters in the mid-Atlantic region cheered the PSA recommendation.
"Are we going to abide by it? Absolutely. When we read about it, we were relieved," said one underwriter who requested anonymity. The president of a regional firm, who likewise requested anonymity, said many underwriters feel that because about 80% of bonds are sold through negotiation rather than through competitive bid, there is a perception that firms hoping to get business must make political contributions.
"I don't know if that's justified or not," he said. "But the perception is that if you want a level playing field for bond business, the way to create a level field is to support candidates who want to get into office. It's a real pain."
In the Midwest, Duke Steenson, managing director of the fixed income department at Piper Jaffray Inc., said the firm is encouraging employees to comply with the PSA's request, even though he does not believe his firm has been involved in any questionable practices.
"We don't go overboard on anything. We are basically a conservative firm," Steenson said.
In a conference call to all of Kemper Securities Inc.'s public finance offices Monday, Tom Reedy, executive vice president in charge of public and corporate finance, said that all campaign contributions will be halted "until the situation has been clarified," a spokeswoman for the firm said.
The spokeswoman for the Chicago-based firm said the announcement also prohibited public finance officials from soliciting contributions for candidates from Kemper employees.
Bud Johnson, a senior vice president at Raffensperger, Hughes & Co. in Indianapolis, said the firm would cease making political contributions "for the time being" until the final rules come out of the MSRB.
Participants in the California public finance community expressed misgivings over the PSA's call for a moratorium on political contributions by member firms and their employees.
"I want to be able to support political candidates and ballot initiatives that I feel are in the interests of good government," said Malcolm L. Jones, a vice president in the Los Angeles office of Kidder, Peabody & Co.
The suggested moratorium means that "by virtue of your profession, you're in a position of not being able to express your personal support financially" for candidates or state and local officials, said Scott Sollers, a partner and manager of public finance for San Francisco-based Stone & Youngberg.
Nonetheless, Stone & Youngberg's municipal finance professionals no longer make such contributions, Sollers said. "We have eliminated all personal contributions. I support that philosophically, if, as an industry, it creates a level playing field."
On a related matter, Sollers said his firm never has had a corporate account or a political action committee account to divvy funds to candidates. "We have never supported individuals through PACs or bundling" of contributions, he said.
However, Stone & Youngberg contributes money to general obligation bond measures and state ballot propositions "that we feel have benefit to municipalities," Sollers said.
Noting that some competitors do have corporate accounts earmarked for political donations, Sollers said his firm's policy of not maintaining such accounts "has cost us business on occasion."
Douglas L. Charchenko, 1993 chairman of CalPSA and a senior vice president with Kidder Peabody in San Francisco, said CalPSA's board has not met to discuss PSA's call for a moratorium on contributions. The board is scheduled to meet Oct. 28 to discuss the matter.
"We will probably follow suit with the national PSA, because we are a subsidiary," Charchenko said. "But if some members of the board feel strongly enough, we might have a dissenting opinion."
Charchenko said the call for employees to hold off on political campaigns for the time being is bound to be controversial among investment bankers.
"It is a draconian measure when you restrict the freedom of individuals to support candidates whose positions they endorse," Charchenko said. "I have a bit of a problem with that personally. But the reason it has come to this is because significant abuses have occurred. So maybe overreaction is what we need."
