ATLANTA -- In its broadest response to Gov. Lawton Chiles's push for bond reform, Florida's cabinet has approved a draft of rules that limit the political activity of any municipal market participants hired to handle state debt issues.

The proposed rules, expected to be given final approval this fall after a public hearing process, direct the state's bond oversight agency to prohibit campaign contributions and fundraising activities from all underwriters and bond lawyers involved in state-level borrowings. The cabinet also asked that agency, the Division of Bond Finance, to bar municipal market participants from holding informal discussions with agency officials about whether they would be hired for state bond business.

In taking its action last Tuesday, the cabinet paralleled steps taken by the Florida Housing Finance Agency in April, when it drafted rules curbing political activity and business solicitation by bond underwriters and lawyers. The seven-member cabinet consists of the governor and the state's top administrative and elective officials.

But the scope of the cabinet's guidelines for the Division of Bond Finance go well beyond those drafted by the housing agency. In particular, the rules proposed for the division set explicit guidelines on whether a sale should be negotiated and how fees should be determined on such issues.

"These rules tell the bond industry, first of all, that decisions on who gets hired are not going to be made on the basis of campaign contributions," Treasurer Thomas Gallagher, a cabinet member, said yesterday. "But it also sends out the message that we will insist on adequate disclosure of fees and the reasoning behind selling bonds on a negotiated rather than competitive basis," he continued. "The bottom line is that we want them to make sure the state gets its money's worth."

The cabinet's action comes more than three months after Gov. Chiles began his bond-reform crusade when he directed the state's housing agency to server the link between politics and the awarding of bond contracts in Florida. About a month later, Gov. Chiles directed William Sweeney, who oversees the Division of Bond Finance, to propose similar guidelines for all state bond issuance.

Mr. Gallagher said he expects the cabinet to approve the rules by the end of October after a review process that would include the opportunity for a public hearing.

"We have to let the public have its say now," the treasurer said. "But frankly, I would be surprised if there are a lot of changes."

According to Mr. Gallagher, the cabinet directed Mr. Sweeney to look into the possibility of preparing legislation to apply the cabinet's directives for state bond issues to local issuers in Florida. He said the suggestion came from Secretary of State Jim Smith. Mr. Smith could not be reached for comment.

"We willbe available to provide technical help to those interested in such legislation," said Mr. Sweeney, who added that the division would prepare a report on the subject before Florida's next regular legislative session, scheduled for early 1992.

Mr. Sweeney said he did not anticipate that the division would handle any negotiated bond sales before final approval of the rules. "but I would assume that the governor and cabinet would want us to abide by their proposed rules if we did have such a sale," he said.

The state official said that he does not expect the application of the new rules to require the hiring of additional staff by the division. "The burden of these rules really falls on the service providers and the cabinet," he said.

In proscribing political activity by market participants, the proposed rules require that, to be considered for state bond work, market participants "must certify that they have not and will not make contributions or participate in the management of fund raising for or on behalf of any candidate for Governor or for a Cabinet position in Florida."

However, the guidelines do provide for some flexibility in application of this rule, allowing the "service provider ... [to] explain in writing the reasons which make certification of compliance impossible and any reasons that would justify its continuing qualification..." If there is a violation, according to the proposal, "the Governing Board [the cabinet] shall consider the magnitude of the violation and whether there has been a pattern of violations...."

In presenting guidelines for determining whether the division should authorize a negotiated sale, the proposed rules expand on administrative procedures adopted late last year by the division and spell out the conditions under which such sales are appropriate.

Those conditions include unstable market conditions, concerns about credit quality, an unusually large sale, an unusual structure, or changes in laws or regulations governing bond sales.

In addition, the proposed rules also require that before pricing a negotiated sale, the division must hire a financial adviser, "who shall, at a minimum, review and advise the division as to the reasonableness of the timing of the sale, the gross underwriting spread, and the price of the bonds."

The rules also stipulate that the the cabinet, which serves as the governing board of the division of bond finance, determine the distribution of the management fee among underwriters before giving final approval for the sale.

In addition, the rules specify that the senior bookrunner provide a disclosure statement at least five days prior to the award of the sale. Previously the disclosure statement was only required to be given at some point before the award.

The proposed rules also tighten previous guidelines by requiring the expense component of the gross underwriters spread be reported. Under the new rules, agreement on these expenses must be reached with the division at least three days before pricing, and unless the cabinet votes otherwise, compensation for underwriter's cousel cannot exceed that paid to bond counsel.

Finally, the director of the division would be required to submit to the cabinet a report of th negotiated sale's results. That report must include the price of the bonds, the allocation of the bonds, the gross underwriting spread, and the actual or estimated amount of all fees paid by the division.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.