WASHINGTON - The Municipal Securities Rulemaking Board's forthcoming political contributions rule would not only ban direct gifts by bond firms that are aimed at snaring an issuer's underwriting business, but it would ban indirect payments as well, the MSRB's executive director said yesterday.
Political contributions that are merely designed to put a bond firm in the running for an issuer's business - not just those made to capture or keep the business - would be "absolutely forbidden" under the panel's proposed contributions rule, said Christopher A. Taylor, the MSRB's executive director.
Taylor also said payments channeled to candidates by firms through third parties such as bond counsel and consultants would be banned.
His comments came after executives of some brokerage firms said Wednesday that they do not make contributions to win deals. Instead, they said, their contributions are designed simply to get them in the running.
The so-called practice of "pay-to-play is out. It's done. It's over," Taylor said in a telephone interview the day after the board announced its plans to propose a two-pronged rule to clamp down on political contributions made by dealers to issuers.
The rule would bar dealers from making contributions designed to capture or keep an issuer's bond business. The rule also would require dealers to report to the MSRB all political gifts made two years before and two years after the award of a bond issue.
Taylor explained that pay-to-play takes place when a dealer makes a contribution not for the purpose of being selected as an underwriter for an upcoming deal, but simply for the right to be recognized as a contender for an underwriting slot.
One public financial official in a New York firm told The Bond Buyer Wednesday, "We don't do any of these [contributions] to directly gain business. You do what is necessary to be in the game, to be considered, to present your credentials."
Another report in The Wall Street Journal quoted the vice chairman of a West Coast underwriting firm as saying that minority firms have traditionally given a greater percentage of their revenue in campaign contributions than the major firms, even though to his knowledge the contributions have never influenced anyone. "They only qualified you to be considered for the [underwriting] team," the vice chairman said.
But Taylor said yesterday, "There has been some suggestion that pay-to-play is permitted. It is expressly not. Payment of political contributions for the purpose of pay-to-play are definitely covered by this [upcoming] rule and are absolutely forbidden."
Also barred, he said, would be any move by underwriters to funnel contributions to issuers through those bond professionals assisting in deals, such as bond lawyers and consultants.
Taylor was responding to a warning Wednesday by Rep. Henry Gonzalez, D-Tex., chairman of the House Banking Committee, who said that the board's upcoming rule may be a step in the right direction, but does not go far enough.
"It still leaves room for bond counsels and many others to grease the skids for bond houses by making ~political' contributions, and to do so in the dark in many cases. It doesn't set a high enough standard," said Gonzalez.
Along with Rep. Jim Leach, R-Iowa, Gonzalez introduced legislation on June 18 that would require underwriters, bonds counsels, and dealers to disclose all political contributions.
Taylor disagreed with Gonzalez's assessment of the board's upcoming rule. "Our rule will say that you may not make a political contribution directly or indirectly. I underline ~indirectly' in flashing neon. Indirectly is out," he said.
"Moreover, for those members of the [municipal bond] community who are not familiar with the federal securities laws, they make it very clear that it is a violation to do indirectly what you are forbidden to do directly. I am surprised that members of the municipal bond community are not aware of that," Taylor said, referring to the press reports.
Underwriters differed in their reactions to the board's announcement.
Michael E. Dougherty, chairman of Dougherty, Dawkins, Strand & Bigelow Inc. in Minneapolis, said that the MSRB rule has "created more questions than answers."
"I felt that the [MSRB] position is incomplete," Dougherty said.
Dougherty, who was chairman ol the Public Securities Association in 1992, said that the MSRB should take the PSA's position on political contributions "foursquarely and deal with the real issues."
"I think that the issue was stated by the PSA in their statement that the entire Tower amendment should be looked at. That's what the MSRB should do," Dougherty said.
Robert T. Clutterbuck, senior managing director at McDonald & Company Securities Inc. in Cleveland, said that "firms that have been doing a solid job on financings have absolutely nothing to worry about" under the rule.
The rule will "greatly reduce some of the free riding that clearly has been going on on a nationwide basis," Clutterbuck said.
The board said Wednesday that it will issue a proposed rule on political contributions for comment by the end of August.
It also said it will propose a second rule later this year requiring dealers to alert investors in writing at the time of a bond sale whether an issuer intends to provide secondary market disclosure affecting their investments.
The board will hold a special meeting in late September to begin developing "the specifics" of its proposal governing ongoing disclosure. "The board intends to move as quickly as possible to propose effective requirements in this area," the board said.