WASHINGTON -- A federal appeals court refused Friday to temporarily suspend the centerpiece provision of the Municipal Securities Rulemaking Board's "pay to play" political contributions rule.

The U.S. Court of Appeals for the District of Columbia rejected a motion by Alabama bond dealer William B. Blount for an "emergency stay" of the provision in Rule G-37 that bars municipal dealers from doing business with state and local governments for two years if the dealer, its political action committee, or its bond professionals contribute to an officeholder who can influence the awarding of bond business.

But the three-judge panel granted Blount a partial victory by suspending a provision in the rule that bars dealers from soliciting contributions on behalf of a state or local government official. The court, however, only suspended the provision for Blount. Other dealers who object to the provision must file their own requests for stays, the court said.

Lawyers for Blount said the ruling means their client can continue to conduct many of the fund-raising activities for now that he assumed as chairman of the Alabama Democratic Party.

The stay will remain in effect until the appeals panel rules on the constitutionality of Rule G-37. No date has been set for the three-judge panel to hear arguments in the case.

Securities and Exchange Commission Chairman Arthur Levitt Jr. said in a statement Friday: "I am extremely pleased that the D.C. Court of Appeals considered our arguments and denied the majority of the stay on G-37 requested by William Blount. I am further gratified that the limited extent to which they did grant a stay applies only to Mr. Blount -- and that one of the judges would have denied the request entirely.

"The SEC remains committed to the principals of G-37. Complemented by the principals of disclosure which we have introduced, we believe wholeheartedly that it will go a long way toward ending the pay-to-play merry-go-round throughout the industry," Levitt said.

A spokesman for the SEC said that one of the three judges on the appeals panel, Judge Abner Mikva, said in the Court's two-page order that he favored completely denying Blount's request for a stay.

Blount, who is chairman of the Alabama Democratic Party, filed an emergency request April 29 that asked the appeals panel to suspend three provisions of the MSRB rule until the panel has had time to rule on the constitutionality of Rule G-37, which took effect April 25.

The appeals panel also set a briefing schedule for lawyers in the case. Blount lawyers Williams & Connolly are to file their client's brief by June 1. The SEC must file by July 1, and the MSRB by July 18. Blount must reply by Aug. 1. Oral arguments will be heard at the "earliest possible date following completion of briefing," the panel said.

"We're thrilled," said Christopher Taylor, executive director of the MSRB. "It is a wonderful victory for the industry. This will go a long way toward removing uncertainty about the rule."

The appeals panel's ruling followed a luncheon speech by Levitt in which the SEC chairman urged bond lawyers to push for reform of political contributions in the municipal bond market regardless of how the MSRB's new standard eventually fares in federal appeals court.

"I believe that we are dealing with a force as inexorable as wind and tide. Whether the Municipal Securities Rulemaking Board's Rule G-37 stands or falls, the winds have changed, and we need to set our sails accordingly or risk foundering," Levitt said in a luncheon address at the National Association of Bond Lawyers 1994 Washington Seminar.

Levitt told bond lawyers that their actions to date in the political contributions area have been "constructive."

"We recognize the problems you face -- yet we need you not only to sign on to the changes we're instituting, but to help make them a reality," he said.

Levitt has been pushing bond lawyers and other market participants to follow the lead of 17 Wall Street firms that signed a landmark accord last fall that bars municipal dealers from giving political contributions to issuer clients.

The bond lawyers' association issued a "statement of professional principals" on political contributions in March that does not go as far as the so-called Group of 17's agreement.

The statement says lawyers should not make contributions for the purpose of retaining or obtaining bond business. They also should not give contributions to clients indirectly through spouses or others.

But the statement falls short of banning contributions. It says that if local campaign finance or disclosure laws are inadequate, then firms should prepare annual reports disclosing political contributions and file them in a state or federal repository or keep the records on the firm's premises.

Levitt said he "appreciated the first step" lawyers took in March and urged them to address other problems that "put a dent in consumer confidence."

"We should all be concerned about the bond counsel to the city who is also the Mayor's chief fund-raiser or campaign treasurer. [Also a concern] is the proliferation of functions on offering statements -- where three law firms, or two accounting firms, now do the job that one firm used to do," Levitt said.

In other comments, Levitt asked lawyers to help the SEC implement recent proposals aimed at improving municipal market disclosure.

"The market is already starting to focus on the next set of issues, such as the nature of the proposed repository for issuer information. The commission deliberately chose not yet to propose a centralized system, because of the interest of certain states in serving as repositories for their own municipalities," Levitt said.

"But at the risk of being branded a ~federalist,' let me say that a system with many repositories is something like a creature with many heads -- frightening to confront and difficult to subdue. Disclosure without access is not disclosure; and system inefficiencies will breed market inefficiencies. We've got to give this serious thought," Levitt said.

He said he also welcomed bond lawyers' input on how the SEC should handle conduit bonds. "The commission has recommended legislation to remove the exemption from federal securities laws for such nominally municipal issues, where the obligation is really a corporate obligation," Levitt said.

"Pending passage of the legislation, the commission and its staff are carefully considering the treatment of conduit issues under our proposed disclosure rules," he said. "Should they be able to use the exemptions we've proposed for small municipal issuers in secondary markets?"

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