Securities and Exchange Commission chairman Arthur Levitt wants to play an active role in a voluntary effort by municipal bond executives to reduce or eliminate political contributions, an official at the commission confirmed.
Levitt, who was sworn in as SEC chairman on July 27, has called for a private meeting in mid-October with a group of top executives from the Wall Street investment community who have initiated an effort to ban most if not all business-connected political contributions made by employees of their firms, sources with knowledge of the meeting said.
The meeting, tentatively scheduled for Oct. 18, is also an attempt to help close loopholes in rules proposed recently issued by the Municipal Securities Rulemaking Board, which has sought to limit political contributions from Wall Street firms, the sources said.
In July, The Bond Buyer reported that several top Wall Street executives were discussing a possible industry-wide ban on contributions to those politicians who select firms for municipal bond transactions.
But recently, Levitt decided to play a role in the industry's self-regulatory efforts. Sources at the SEC said Levitt wants to act as mediator by bringing all the major players together. The October meeting is designed to develop a consensus on the issue, sources said.
Levitt has so far discussed the meeting, which would be held in Washington D.C., with Frank G. Zarb, vice chairman and chief executive of Primerica Corp., which owns the brokerage firm of Smith Barney Shearson Inc., and David C. Clapp, a general partner at Goldman Sachs & Co., and chairman-elect of the MSRB, industry sources said.
"There's no agenda yet for the meeting," said one regulatory official with knowledge of the event. "There's no working document, and it's difficult to say what will be accomplished. The idea was to seize the initiative."
The official said the proposed meeting will likely produce "a set of principles," based on a policy statement submitted by a representative of each firm. "The MSRB rules say you can't give political contributions for the purpose of gaining or maintaining business," the official said. "This I think will say, ~We're not going to judge whether contributions are good or bad. We are not going to give them.'"
Sources said executives from Morgan Stanley Inc., PaineWebber Inc., Lehman Brothers, Merrill Lynch & Co., Goldman Sachs, Smith Barney Shearson, and possibly other firms will be asked to attend, including at least two regional firms.
Clapp will represent the MSRB at the meeting. Stephen Friedman, the chief executive officer of Goldman Sachs, will represent Goldman at the meeting, knowledgeable sources said.
The official at the commission, meanwhile, said that Levitt will probably mail an letter to likely participants in the next week, inviting them to the event.
Jennifer Kimball, a spokeswoman for the SEC, would neither confirm nor deny the meeting. "Obviously, [Levitt] has said publicly that he wants to encourage the private sector to work voluntarily," Kimball said. "I can't say what might or might not happen."
Neither Clapp nor Zarb returned numerous telephone calls. Robert Connor, a spokesman for Smith Barney Shearson, would not comment on the matter.
The meeting comes amid a number of investigations into the municipal market, including the role of political contributions in the underwriter selection process.
Recent events have prompted the MSRB to propose its own rules to help eliminate contributions. But industry executives, such as Zarb, Clapp, and Richard B. Fisher, chairman of Morgan Stanley, have for the past year wanted to take matters into their own hands by creating an industry-wide ban on many forms of political contributions.
On Aug. 20, the MSRB proposed a rule that would bar dealers from making contributions designed to capture or keep an issuer's bond business.
The proposed rule, known as G-37, also would require dealers to disclose over a four-year period all political gifts made to issuers with whom they have done business -- two years before and two years after a deal. The board would release the information through the Municipal Securities Information Library. Comments on the proposal are due Thursday.
MSRB executive director Christopher Taylor said recently that the rule would not only ban direct gifts by bond firms that aim to snare an issuer's underwriting business, but it would ban indirect payments as well. These so-called "pay to play" contributions, designed merely to put a bond firm in the running for an issuer's business, would be "absolutely forbidden," Taylor said.
Also barred would be any move by underwriters to funnel contributions to issuers through bond professionals assisting in deals, such as bond lawyers and consultants, Taylor said.
The MSRB's rule is modeled after the Foreign Corrupt Practices Act, a tough federal standard that prohibits issuers of corporate stocks and bonds from paying off foreign governments in order to get overseas business, the MSRB said. The standard requires U.S. corporations to follow airtight internal procedures before they give a gift to a foreign government.
But Heather Ruth, president of the Public Securities Association, said on Sept. 23 that the initial signals she is getting from the industry do not bode well for the rule's effectiveness. "There is not a high level of confidence that the behavior changes will happen," she said.
Industry sources with knowledge of the upcoming meeting said it is structured in large part to close loopholes in the MSRB rules that they fear will allow many firms to continue to obtain bond business by giving campaign contributions.
MSRB officials did not propose an all-out ban on political contributions because they feared a legal challenge to its constitutionality, sources said.
The October meeting is also an attempt by the industry to counteract the onslaught of requests by politicians seeking campaign contributions from Wall Street despite the recent increased scrutiny market sources said.
During the meeting, executives will decide how many variations of political contributions they will voluntarily ban. Other areas of the municipal business not covered by the MSRB proposed standards include the use of political consultants and the derivative markets.
But sources with knowledge of the meeting said all of these issues will be up for discussion. "The intent of the meeting would be to strengthen what the MSRB's rule does," said a top executive at one Wall Street firm. "It would plug the holes the MSRB could not fill because of the statute."
