WASHINGTON - A group of Wall Street executives representing 17 firms agreed yesterday to voluntarily bar their municipal bond departments from making contribution to state and local officials who are responsible for awarding lucrative negotiated bond underwriting deals.
The voluntary ban was announced at the headquarters of the Securities and Exchanged Commission by chairman Arthur Levitt after he met informally with executions from the Wall Street firms that underwrite the lion's share of the nation's municipal bond offerings.
Under the voluntary ban, "each firm, employee, political action committees, and each firm's municipal finance professionals, their supervisor, and senior management will be prohibited from making political contributions at state and local levels."
The accord would also prevent municipal executives from soliciting contributions from outside parties, such as their spouses, consultants, and financial advisers.
The agreement also addresses the following:
* Executives working outside the municipal divisions will be barred from making contributions only if the donations are made "for the purpose of inducing or influencing the obtaining or retaining of municipal finance business." The executives must also disclose their contributions.
* Companies affiliated with the 17 firms can also make contributions, but like individuals outside the municipal division, these companies cannot make contributions to obtain business.
* The firms have agreed to continue to work with market regulators on the matter, and have called on other market participants, such as law firms, financial advisers, and accounting firms "to join in this voluntary initiative."
The accord, however, did not address the thorny issue of the use of political consultants to obtain bond business. Executives said it is unclear if a similar effort will address the firm's use of consultants, with connections to state and local officials, to win lucrative bond underwriting slots The SEC chairman said that while the SEC has no "illusions" that the statement alone will solve all problems, he said it is a good "line of first defense."
The firms that joined the accord are: Smith Barney Shearson; Merrill Lynch & Co.; Donaldson, Lufkin & Jenrette Securities; Salomon Brothers; Morgan Stanley Group Inc.; Paine Webber Group Inc.; Prudential Securities Inc.: Lazard Freres & Co.; Kidder, Peabody & Co.; Lehman Brothers; CS First Boston; Goldman, Sachs & Co.; J.P. Morgan Securities Inc,; A.G. Edwards & Son; Dillon, Read & Co.; Oppenheimer & Co.; and Bear, Stearns & Co.
The announcement came as the market's chief self-regulatory group, the Municipal Securities Rulemaking Board, is putting the final touches on an Aug. 30 proposal to limit the growth of business-related contributions by Wall Street firms.
In recent weeks, the municipal industry's top lobbying group, the Public Securities Association, has recommended that firms not make political contributions until the MSRB's rule is finalized. Most of the major municipal underwriters have agreed to abide by the PSA's recommendation.
Spearheading today's effort was Frank G. Zarb, vice president and chief executive officer at Primerica Corp., the holding company for Smith Barney Shearson.
For the past year, Zarb has been informally trying to bring Wall Street executives together to limit business-related contributions.
In recent months, as the markets became the focus of unprecedented scrutiny following the disclosure of scandals involving bond transactions in New Jersey and New York City, Zarb made more progress in developing a consensus on the issue culminating in today's announcement.
Earlier this month, Zarb had circulated a draft proposal among Wall Street executives. The proposal called for the elimination of all contributions by the firm, organized groups of employees, and individuals in the market that "give the appearance of attempting to influence the selection of underwriters."
But the original proposal, according to some Wall Street executives, did not go far enough, and could be circumvented. Wall Street sources say yesterday's blanket ban on political contributions by executives related on a firm's municipal finance business reflects some disapproval with the earlier proposal.
Levitt said the SEC will watch closely the industry's progress under the ban as well as under the rule expected to be enacted by the MSRB this year aimed at curbing political contributions.
The rule proposed by the MSRB Aug. 30 would bar contributions by underwriters that are aimed at obtaining or retaining an issuer's business. The rule also would require dealers to report to the MSRB all contributions to issuers with whom they do business two years before and two years after each deal they do.
The MSRB is expected to vote an whether to clear the rule at its next quarterly meeting in November.
Levitt told firms he hopes they will have policies in place in the next 60 days. He also said he hopes that firms signing on to the agreement will urge all other participants in the municipal bon market to adhere to the initiative.
"My hope and expectation is that the group that met with me today will take into consideration advisers, attorneys, accountants, anyone else that serves as an indirect way of filtering money to municipal officials," Levitt said.
He said the SEC has to "emphasize that we will address the indirect approaches to this as vigorously as the direct approaches. It is my intention to bring the principles of this agreement to all participants in the municipal bond market."
Levitt signaled that the ban's impact could be broad, considering that the 17 participating firms account for roughly 75% of municipal underwriting volume. "These firms will have hard work ahead of them in the coming months, and the SEC will closely watch their progress," he said.
Levitt noted that at a congressional hearing on the municipal market Oct. 7 he asked Rep. Edward Markey, D-Mass., to give regulators several months to win industry reforms through voluntary efforts and MSRB rules. "My response to Markey was that were hopeful that the industry would come up with a plan that would obviate" the need for legislation," Levitt said yesterday. "I'm more hopeful today that I was when I made that statement" that this can be accomplished, he said.
Levitt described the scope of improper political giving as very extensive." He said, "I am concerned that those kinds of practices have become part of the fabric of the municipal securities business, to the extent that young people coming into the business learn practices which result in the subversion of a freely competitive business, and contempt for the political process."
Asked whether the SEC will push for a ban on all entertainment by firms, Levitt said "absolutely not. It's foolish to even a consider drawing the lines in that fashion.
