WASHINGTON - Support is building on the Municipal Securities Rulemaking Board to amend the political contributions rule to protect firms from being punished because of isolated employee violations, board chairman David C. Clapp said Monday.

"The notion was met with a reasonable amount of acceptance" by board members last week, Clapp said in a telephone interview in which he discussed the panel's quarterly meeting that was held May 11-13 in Sea Island, Ga.

"We are taking a look at it, trying to figure out how we might best do it. We didn't get very far [last week]. Nothing was drafted," said Clapp, who is a partner at Goldman, Sachs & Co.

Rule G-37, which went into effect on April 25, bars municipal dealers from doing business with state and local governments for two years after the dealer, its political action committee, or its bond professionals contribute to an officeholder who could influence the awarding of bond business.

Dealers are worried that even if they take all reasonable steps to monitor employees' contributions, there could be unforeseen violations or mistakes.

"PSA members are very concerned about dealers' responsibility for inadvertent, ill-informed, or secret but intentional [possibly even vindictive] actions by individual employees acting outside the procedures established by the dealers," the Public Securities Association said in a three-page letter to the Securities and Exchange Commission in March.

The group said it assumes that a "rule of reason" will apply in these situations and that the opportunity to pursue business will not be "curtailed" because of "unintentional circumstances beyond the reasonable control of a dealer."

Clapp said: "There are some places where a real, inadvertent [action] could [result] in somebody giving money beyond what the rule allows in total innocence. [In such a case] the penalty does not fit the crime. We also would attempt to deal with the screwball" at a firm who knowingly makes an improper contribution, he said.

"But if the [violation occurred] simply because a firm doesn't have procedures in place, that's no excuse," Clapp said.

"We are also very aware that you don't want to write something that represents a loophole," Clapp said, noting for instance that the board does not want to add language that would allow consultants employed by firms to make improper contributions.

There is a certain amount of "queasiness" on the board about how to draft the rule, he said.

Rule G-37 requires firms to keep records for review by federal examiners of all of their negotiated deals and the contributions to issuer officials of those municipalities. Dealers also must disclose detailed quarterly information about political contributions made by the firms and their professionals, broken down by recipient.

The first reports are due by July 31, Christopher Taylor, MSRB executive director, told bond dealers meeting in Atlanta late last month. He said that the board will issue a set of procedures in early June for dealers to follow in filing reports. The procedures will appear in MSRB Reports, the board's quarterly notice to dealers.

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