WASHINGTON -- State and local groups are expected to tell regulators in a letter today that repealing the 1975 federal ban on regulating municipal bond issuers would be the wrong way to clamp down on abuses involving political contributions.
The letter from the Government Finance Officers Association, the National League of Cities, the U.S. Conference of Mayors, the National Association of Counties, and the American Public Power Association is expected to argue that repeal of the so-called Tower Amendment could lead to an array of costly new federal mandates on issuers.
The coalition's letter, which was sent today to the Securities and Exchange Commission, the Municipal Securities Rulemaking Board, and the National Association of Securities Dealers, comes one month after Rep. Jim Leach, R-Iowa, and Rep. Henry Gonzalez, D-Tex., introduced legislation to repeal the Tower amendment. Repeal would give regulators a green light to require issuers to disclose their contributions to underwriters in documents filed with the SEC and bank overseers.
The bill also would require underwriters, bond counsel, and brokers to disclose all political contributions they make directly or indirectly to issuers, anyone affillated with them, and their political parties.
The Tower Amendment to the Securities Act Amendments of 1975 bars the SEC and the Municipal Securities Rulemaking Board from requiring issuers to file any documents before the sale of their securities, and further prohibits the MSRB from mandating secondary market disclosure by issuers.
Meanwhile, the House Energy and Commerce Committee's securities panel is expected to schedule hearings this fall on whether new curbs are needed in the municipal securities arena, including repeal of the Tower Amendment.
More imminent, however, is the MSRB's quarterly meeting July 28-30 in Colorado Springs, where the board is expected to consider several options for regulating political contributions, including an all-out ban on underwriters making contributions to the issuers whose bonds they handle.
A knowledgeable source said that the MSRB has hired former SEC general counsel Harvey Pitt to analyze some of the legal problems it might run into if it attempts to ban or discourage underwriters from accepting political contributions from the issuers whose bonds they handle. Pitt, managing partner of Fried, Frank, Harris, Shriver & Jacobson in Washington, D.C., would not comment when contacted yesterday on whether he was assisting the board.
But industry observers said yesterday that Pitt may be wavering between recommending that board members propose a ban on some contributions or less extensive moves, including requiring underwriters and other municipal market professionals to disclose contributions in bond documents.
"It's unclear where the legal foundation" is for an all-out ban, one industry observer said. "There's the whole states' rights issue. If there's a movement toward banning contributions, board members are going to have to go into the board meeting next week with a strong legal underpinning. What if Harvey Pitt can't deliver up an ironclad legal opinion?"
The board has "the will" to propose a ban, he said, but that "the law seems to be not quite as far as the will."
Lucille Maurer, president of the National Association of State Treasurers, signaled in a telephone interview Monday that regulators may be violating the sovereignty of states if they ban political contributions by underwriters to state and local issuers.
"The question is one of balancing federal and state interests," said Matirer, treasurer of Maryland. "Can the federal government ban contributions to local and state elected officials? [So far], political contributions have been [something] that the states have to a large extent regulated. The federal government only goes to federal offices."
And even if federal regulators could ban contributions, the task would be extremely complex, another NAST official said.
"This involves a lot more than political contributions," said Milton Wells, director of NAST's office of federal relations in Washington. "It involves negotiated versus competitive deals. State treasurers aren't the only ones that get contributions. Mayors get them. There are a lot of actors ... Before people leap out to do anything, they need to think through these things a lot."
Issuer groups also are warning that repeal of Tower could lead to federal review and approval of bond issues, influence state and local government accounting standards and practices, preempt state oversight of the debt issuance process, and hold the potential for disruption of the otherwise efficient and well-functioning municipal bond market.
Besides a flat-out ban on political contributions, other possible actions being discussed include limiting negotiated underwritings; requiring disclosure of political contributions by underwriters in an official statement; and requiring underwriters, brokers, and dealers to report contributions to the MSRB.
In a related development, SEC enforcement chief William McLucas took issue recently with statements by some industry sources that the agency has given underwriters an additional four months to return questionnaires mailed earlier this year requesting information about their political contributions practices since January 1990.
"We have absolutely not agreed to any extension of time amounting to four months to answer the letter. We are dealing with firms on an individual basis regarding problems [they may have] in assembling and collecting the data," McLucas said.
Meanwhile, Arthur Levitt Jr., the Clinton administration's nominee to become the next SEC chairman, told Congress yesterday that he will not reach a conclusion about whether he feels the municipal bond market needs additional regulation, including regulation of underwriter political contributions, until the SEC completes its inquiry into the matter.
In written responses to questions posed by Sen. Donald Riegle Jr., chairman of the Senate Banking Committee, Levitt noted that the SEC's enforcement division has asked a number of municipal broker-dealers to voluntarily supply information on their political contributions.
"Until the ongoing inquiry establishes the nature and extent of these practices, I do not think I should draw any conclusions concerning whether municipal underwriters are engaged in practices that violate the securities laws, or whether there is a need to regulate further underwriter political contributions and other potential influence-seeking activities implicated by such activities," Levitt said.
He said the SEC "has long been concerned with improving disclosure in the municipal securities markets, and has periodically reviewed" the issue. Levitt said, however, that while he believes in the importance of disclosure in the municipal market, he also recognizes the "unique nature of this market and the critical role played by municipal issuers in financing much of the nation's infrastructure."