Lazard Freres & Co. yesterday said it will subject its employees to a wide-ranging set of procedures that bans all business-related political contributions and provides a "litmus test" for the hiring of political consultants.

Senior executives with Lazard Freres said the procedures are an effort to establish a new ethical standard at the firm, which has been jarred in recent months by federal and state investigations into its municipal finance activities in New Jersey, Massachusetts, and Louisiana.

On Monday, Lazard Freres was one of 17 of the municipal market's largest underwriters in calling for a ban on political contributions aimed at winning municipal bond business.

The ban, spearheaded by Frank G. Zarb, vice chairman and group chief executive of Primerica Corp., was endorsed Monday by Arthur Levitt Jr., chairman of the Securities and Exchange Commission.

But Lazard Freres' private effort is designed to put in writing a code-of-conduct that employees and senior managers at the firm must follow regarding political contributions and the use of political consultants, two of the most controversial issues facing both market regulators and executives with municipal bond firms.

The procedures, described in a Oct. 18 document obtained by The Bond Buyer, also covers the firm's policy on "gifts or gratuities" to municipal issuers and the disclosure of side agreements it may have with other firms in the municipal bond market.

"The essence of this document is to put together policies and procedures that address the problems in the muni area being focused upon by the media and regulators," said a company spokesman. The policy was developed by Lazard Freres' municipal department along with the firm's internal and outside counsel.

The spokesman said Lazard will make the document available to government investigators and regulators. He said the firm has had requests from competing underwriters, who may also develop similar policy statements as the industry attempts to rebuilt its image following disclosure of federal and state investigations into municipal bond deals across the country.

Although it is too early to determine the industry-wide impact of the document, Lazard's efforts received some initial approval from SEC chairman Levitt. In an interview yesterday with the editorial board of The Bond Buyer, Levitt said he has read Lazard's new compliance standards and it "is pretty terrific."

According to the document, titled "Compliance Policies and Procedures Relating to the Municipal Bond and Municipal Finance Departments," the firm prohibits contributions from municipal finance employees made to influence the awarding to municipal securities, and has established a set of compliance procedures that the firm's employees must follow.

The document says Lazard Freres will now consider its municipal finance professionals, their supervisors, and senior management "restricted professionals, who will be prohibited from making political contributions."

Other executives will have to prove that their contributions are "motivated by personal political beliefs."

The firm's general counsel will review contributions from these individuals and "consider, among other things, whether there is any connection between the intended recipient" and a list of municipalities where Lazard Freres is seeking business.

Under the new policy, the firm will not hire political consultants if "the publication of the terms of the consulting agreement [including the identity of the consultant] in the national media would subject the firm to embarrassment."

The document said consultants cannot share fees with third parties or make political contributions in an attempt to receive business. Lazard Freres will also enter into formal agreements with its consultant, who must comply with the firm's new policies.

Lazard Freres will disclose who it has hired as a consultant to a municipality. The disclosure will be made in the form of a letter "to the governing body of the municipal client, or perspective client."

Also under the new policy, the firm will require written disclosure of all side agreements and arrangements with other firms, either in its role as a financial adviser or an underwriter.

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