ATLANTA -- When Gov. Lawton Chiles of Florida launched a no-holds-barred crusade to sever the link between the politics and the awarding of bond contracts, the municipal bond community was startled.

Gov. Chiles' proposals, made two months ago, were noteworthy because they marked the first time a government official had tried to place restrictions on campaign contributions from the public securities industry. They were shocking because of how directly the proposals confronted a widely acknowledged problem.

The new governor did not call for further disclosure of gifts from investment bankers or bond lawyers. Nor did he call for a reduction in the amounts given. Gov. Chiles -- addressing first the state's Housing Finance Agency and then its Division of Bond Finance -- urged no less than the total exclusion from state bond deals of any firm whose employees contribute or raise funds for to candidates for governor or the cabinet.

In addition, he asked that firms not be allowed to engage in informal communications with any state agency when they are being considered for employment.

One investment banker likened the proposals to a preemptive nuclear strike. Not surprisingly, they have evoked a welter of strong emotions.

Some market participants view Gov. Chiles' initiative with unqualified relief. To them, the governor's efforts come as a long-overdue response to a problem that has gotten out of hand. An extraordinary remedy, they say, is needed to clear away the specter of influence peddling that arises when investment bankers, financial advisers, and bond lawyers donate to the campaigns of the same officials with whom they do business.

Deep Ambivalence Typical

More typical, however, is deep ambivalence. Many of the public finance professionals that acknowledge the need for reform in Florida also say they find both the scope of the proposals and the maze of rules necessary to implement them deeply disquieting.

"It is clear some restrictions are necessary, but do we really want to impose the equivalent of the death penalty on a firm for the contributions of any member in any affiliate or subsidiary?" said Nelson Civello, executive vice president and director of the fixed-income group at Dain Bosworth Inc., a Minneapolis-based regional securities firm.

"Also, do we want to inhibit communication between investment bankers and public officials?" he added.

In particular, Mr. Civello said he is troubled by the apparent infringement on the right of citizens to freely participate in the political process. "I am a voter and may want to express an opinion about an issue that has nothing to do with my firm -- should my campaign contribution in support of that issue disqualify my company from working for a state?" he said. "And what about the firm, shouldn't it have a right to express itself as a corporate citizen?"

Mr. Civello said some distinction should be drawn between a firm that is located in the state where the campaign rules are imposed and firms that are based elsewhere.

"It's doesn't seem fair that the same rules should apply to members of a regional firm that has a direct day-to-day interest in the issues espoused by candidates and a Wall Street firm that may not even have an office in the state," he said.

Other bond professionals said they are unnerved by the apparent singling out of the municipal bond industry.

"We are supportive of the Gov. Chiles initiative in concept: Clearly, the selection of bond counsel or underwriters cannot be based on political contributions or political considerations," said Richard Chirls, president of the National Association of Bond Lawyers and a partner at Orrick, Herrington & Sutchiffe. "But at the same time, we do not think it is fair to put all the onus on the municipal bond industry -- what about contributors from other businesses."

Mr. Chirls said Florida ultimately may be hurt by the Chiles proposals if firms that underwrite bonds or provide legal opinions decide to forgo business with the state because of concern they could be in technical violation of the proposed rules.

"I think there could be many situations where even those professionals that agree with the spirit of the rules are going to decide that they do not want to do business with Florida," he said.

William R. Snodgrass, Tennessee's comptroller of the Treasury and secretary of the state funding board, agreed.

"I would hate to see a state losing access to a wide spectrum of the bond industry because of overly restrictive rules," he said. "I don't know what should be done, but it seems common sense would dictate a somewhat less sweeping solution to the problem of campaign financing."

Bond industry professionals and public officials also are troubled by the complicated mechanics that have been created to implement Gov. Chiles's ideas.

A draft of rules was approved in late May by the Florida Housing Finance Agency prohibits the "underwriter or any of its agents including underwriter's counsel, officers, principals, and professional employees," from "directly or indirectly making contributions" or engaging in "fund raising activities for or on behalf of candidates for governor or cabinet positions while the underwriter is on the agency's approved managing underwriter list, while the underwriter provides service to the agency, or for a period of five years thereafter."

Similar restrictions were imposed on bond counsel.

Complicated Mechanics

In addition, the board specified that to be considered for state bond work, underwriters must also have certified that they not made contributions or engaged in fund-raising duirng the "effective date of this rule or during the 24 months preceding the underwriter's application to the agency, whichever period is shorter."

The board-adopted rules also specifically define prohibited, or "ex-parte" communications as "a private written or verbal communication between a [board] member, or officer, or covered employee of the agency and an underwriter regarding the merits of the underwriter and whether the agency should retain the services of the underwriter."

Since that time, Gov. Chiles has asked the bond finance division to adopt similar rules, a request approved by the cabinet on May 13. Thomas Gallagher, the state treasurer, also added a request to the list that the division draft rules imposing limits on fees paid to underwriter's counsel; tightening of the criteria for negotiated sales; and developing mechanisms to increase competition among underwriters.

"This seems like a lot of gyrations to go through to end a problem," Mr. Snodgrass said.

Mr. Chirls said that, leaving aside the rules regarding campaign contributions and communications, he was concerned about the proposed restrictions added to the list.

"It's not clear where all this rulemaking will end, and I must say that I am worried about the limits placed on payment to underwriter's counsel -- this may well amount to the underwriters' denial of the right to counsel."

Faced with such objections, at least one of the people behind Gov. Chiles's proposals, William Sadowski, recently offered a detailed response.

Mr. Sadowski, secretary of the Florida department of community affairs, which oversees the housing finance agency, said the Gov. Chiles's solution to the problem of campaign contributions is not appropriate in every state--and that it may even be necessary to modify it once it is applied to Florida.

"We admit that this is an extreme way to deal with the problem, and are sensitive to the question of the constitutional rights of people who participate in elections," he said. "At some point in the future, we reserve the right to tone down the proposals to concentrate more on the public officials that receive contributions.

"But right now, the situation demands a tough response," Mr. Sadowski continued. "It is important to remember that we are not prohibiting anybody from contributing -- we are just saying if you want to do work for the state you have to forgo giving to a candidate for governor or cabinet position."

Mr. Sadowski also said that following a pair of recent workshops held by the Housing Finance Agency, its board has considering some changes to the draft rules adopted in late April.

For example, a securities firm would not necessarily be excluded if an employee of a corporate affiliate or the parent company made a campaign contribution.

"We realize that there is room for interpretation here, and we will try to avoid imposing rules that are not fair," he said. "The question will be, 'Is there a coordinated effort by the firm to influence a candidate?' That will be the key."

In addition, he said, the provision that underwriters and bond lawyers cannot be considered for state bond work if they have made contributions or engaged in fund-raising for two years before being considered for the pool and five years afterward, may be changed to whenever the next election falls.

Advisory Opinions Offered

In an effort to be fair, firms also will probably be allowed to get an advisory opinion beforehand on whether they would run afoul of any rules, Mr. Sadowski added.

"An effort will be made to help people avoid stepping into a hole," he said.

Officials like Mr. Sadowski working to flesh out Gov. Chiles's wishes can also point to a number of well-known industry participants who strongly back the governor's stiff medicine.

For example, Ralph Horn, the Public Securities Association's new chairman, said he feels such rules will ultimately benefit both the state and the securities industry, as more firms are encouraged to seek work in Florida who may have felt that could not compete because of the high cost of doing business.

"The best thing that can happen in Florida is for the issue of campaign contributions to just go away," said Mr. Horn, who is also executive vice president and manager of the municipal bond department at the First Tennessee Bank in Memphis. "If we are serious about creating a level playing field -- so the most qualified firm gets the job -- Gov. Chiles's proposals must be implemented."

Similarly, J. Chester Johnson, president of Government Finance Associates Inc., said the situation in Florida demands Gov. Chiles's remedy.

"I have to say that we have found that Florida does not have the kind of environment where we felt comfortable doing business," Mr. Johnson said. "I am very supportive of the governor's efforts to put greater limits on the financial community's involvement in political campaigns."

At Morgan Stanley & Co., Elaine LaRoche, a managing director and head of the public finance department, recently wrote Florida's Housing Finance Authority with a clear endorsement of the the draft of rules adopted by that agency.

"Morgan Stanley applauds the initiative taken by Gov. Chiles and the [housing] agency's board with respect to such rules, and we encourage their implementation and enforcement," Ms. LaRoche wrote. "We believe that this effort should and will be a model across the county, and is a critical first step to correct a problem that has been a vexing one for some time."

Harry M. Whittington, a member and past chairman of the Texas Public Finance Authority, went even further.

"I just find it so unsavory that year after year, bond underwriters make large campaign contributions to the the same public officials that control the borrowings of state and local governments," Mr. Whittington said.

"Then public officials compound the problem by limiting debate on the use of the taxpayers money by resorting to methods of borrowing that circumvent taxpayer approval," he added. "I think the question of ethics and accountability are inextricably linked and I would love to see the viscious cycle stopped by the adoption of Chiles's campaign proposals nationwide."

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