WASHINGTON -- Securities and Exchange Commission Chairman Arthur Levitt said Friday he sees two initial drawbacks to the political contributions rule approved late Thursday by the Municipal Securities Rulemaking Board.

Levitt said he hopes the MSRB will require securities executives who work outside of municipal departments and who give contributions to issuers to disclose those contributions. He noted that such a provision appears in the voluntary ban on political contributions adopted by 17 Wall Street firms Oct. 18, and said he would like it incorporated into the MSRB's rule.

He also said he hopes the rule will clearly warn dealers against trying to circumvent its impact by funneling contributions through advisers and consultants.

Levitt made the statements in a telephone interview one day after the MSRB voted to bar municipal bond dealers that make political contributions from doing business for two years with the cities and states that the politicians serve.

The board's latest rule also would allow individual employees to contribute as much as $250 to candidates where the employee is eligible to vote. In addition, the new provision would require firms to keep some records of employees' contributions, but drops a requirement in the boards original proposal that would have required all such contributions to be reported to the MSRB.

The chairman strews that he has not seen the final MSRB rule and that his views may charm once he has read it. "These are broad concerns about any proposal that regulators may come up with on these issues," Levitt said. "They are not meant" as criticism of the board's effort he stressed.

"The disclosure [of contributions] suggested by the group of 17 was a fundamental control that I think is terribly important," Levitt said. "I hope that the MSRB addresses this disclosure issue. To leave that out would be an omission I would be concerned about."

The ban adopted by the 17 firms says that "each firm, employee, political action committee and each firms municipal finance professionals, their supervisors and senior management will be prohibited from making political contributions at state and local levels." It then says that all other employees are not barred from making personal contributions as long as they are not made to influence municipal business.

But in a section of the accord that Levitt finds particularly important, it says that employees should disclose these contributions.

Turning to his concern that contributions may be funneled through other market participants, Levitt said, "The whole issue of advisers, lawyers, and consultants that are used to circumvent the intent of this proposal must be addressed. Some comment should be made by the MSRB. I would hope their statement includes mention of this -- if the firms choose to use advisers and consultants they may very well be undermining the impact of this proposal."

Levitt said the board's rule does not "diminish" the significance of the voluntary ban approved by the 17 firms. Even though he has not seen the board's rule, he said his initial view is that the rule and the firms' voluntary ban should "work hand and glove."

Reaction varied last Thursday to the MSRB's rule, which is expected to be sent to the SEC before Christmas. The commission will then release it for another round of comment and could take a vote on the plan as early as January, board officials said Thursday.

Timothy Masanz, director for economic development and technology at the National Governors Association, said he is "reserving judgment" on the rule. "It's not final yet," Masanz said, noting that the MSRB's rule will be open for another round of comment by the SEC. "We need to look at it."

"I'm pleased," said Ellen Miller, executive director for the Washington-based Center for Responsive Politics. "We think there ought to be a Berlin Wall between those doing business and those doing government. This is that kind of a restriction. I don't know of anything quite like this. It sets a positive trend. It is certainly a very strong restriction."

Micah Green, executive vice president of the Public Securities Association, said that "at first blush" the board's rule addresses several concerns dealers had with an earlier MSRB proposal dated Aug. 30.

That proposal would have barred contributions by underwriters that are designed to obtain or retain an issuer's business. It also would have required dealers to report to the MSRB all contributions to issuers with whom they do business both two years before and two years after each deal.

"Obviously, on its face the new rule is stricter, but it's easier for firms to comply with," Green said. The original version would have required a dealer to prove that he or she did not give a contribution to influence business. "But how are you going to prove or disprove" something like that?, he asked.

He also applauded the board's decision to exclude up to $250 in personal contributions by municipal finance professionals from the ban, although the new ban does not go as far as one proposed by the PSA. The MSRB's so-called de minimis provision only applies to contributions that municipal finance professionals make to officials in their voting-jurisdiction. The PSA had not recommended a geographic limit.

The board also did not adopt a PSA proposal that it set a ceiling on the total contributions that could be given by employees and political action committees, which the association hoped would help prevent "bundling" of contributions.

"How does the rule deal with bundling?" Green asked. "And how do you ensure that municipal employees don't use non-municipal employees as conduits? There weren't enough details in the MSRB's release" to explain that.

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