WASHINGTON -- Regulators signaled yesterday that they may move to require municipal securities underwriters to disclose political contributions made to state and local officials and to partially repeal the law that protects issuers from being told what to disclose in official statements.
The Municipal Securities Rule-making Board announced in a press release that it is considering "requiring dealers and associated persons to make additional disclosures regarding their political contributions prior to any underwriting activity."
Such a disclosure rule is one of several "options" being eyed by the board in light of press reports that have "heightened public awareness and concern over the role of political contributions in the underwriting process," the board said. The board was referring to widening investigations by federal and local officials into possible political influence peddling involving bond deals in New Jersey and New York.
Also yesterday, Richard Roberts, a member of the Securities and Exchange Commission, told the House securities subcommittee that if secondary market disclosure does not continue to improve in the municipal market, he "would be interested in pursuing with the subcommittee some limited repeal of the Tower Amendment."
Roberts was referring to the 1975 Tower law, which limits the SEC's authority to impose registration and other disclosure requirements on tax-exempt issues before they are offered for sale to the public.
The MSRB said it debated the volatile issue of political contributions at a board meeting here last Thursday and decided as a first step to ask issuers for help.
"The board determined to meet with issuer groups to discuss whether measures could be adopted by issuers or state legislatures to help ensure that political contributions do not influence the underwriter selection process. In addition, the board is considering its own options for action in this area," the board said in a reference to a possible rule that would require disclosure of contributions.
"During the next few months, the board will review issues regarding its authority in this area, as well as the burdens and benefits of any such action."
Meanwhile, Rep. Edward Markey, D-Mass., chairman of the House Energy and Commerce Committee's subcommittee on telecommunications and finance, raised questions about the municipal market when he pointed during yesterday's hearing to recent press reports that the SEC, the National Association of Securities Dealers, and the U.S. Attorney's office have launched an investigation into alleged illegal payments by Merrill Lynch & Co, in connected with the sale of $2.9 billion of New Jersey Turnpike Authority bonds.
Markey also pointed to a recent press report contending that the municipal bond market has a history of bid rigging, bribery, insider trading, and other illegal activities, and that it lacks the federal oversight found in many other securities markets. The article also says that heavy political contributions by Wall Street firms are legal in most states and are and ordinary cost of doing business.
"What's the state of affairs," asked Markey during a hearing held on the SEC's budget requests for fiscal years 1994 and 1995.
Roberts responded. "Certainly the SEC and MSRB have the authority to require disclosures [by broker-dealers of political contributions] in this area in some form or fashion," and it is an issue "we need to take a look at."
"I don't think anyone is interested in either the SEC or MSRB becoming a mini-Federal Election Commission," Roberts said, but it is an "issue we should be concerned with. It's certainly given a marketplace that is known for its integrity a black eye."
"Political contributions have always been present in the municipal securities marketplace," he said. "They have always to some extent posed a problem in terms of at least the appearance of impropriety. That problem seems to go up and down. It certainly has gone up in terms of the attention scale recently."
He noted that the MSRB issued a two-paragraph policy statement two years ago alerting broker-dealers to be careful of how they handle political contributions.
"Certainly there are disclosure obligations scattered state by state, but none required at the federal level unless it's" a material fact, he said.
Public Securities Association president Heather Ruth said later she "welcomed" the MSRB's statement on political contributions.
"State and local officials should not be influenced by political contributions in their award of any business, including selection of bond underwriters or other professionals engaged in the municipal finance business," Ruth said.
"It is in the interest of both issuers and all members of the municipal finance community to preserve public confindence in the municipal market," Ruth said. "The actions announced today by the MSRB constitute a good beginning of a process which can ensure the credibility of all the financing mechanisms available to state and local governments."
Responding to the board's announcement late yesterday, Roberts said, "The MSRB appears to be in the process of stepping up to the plate. I'm encouraged by their announcement and look forward to their developments in this area.
"There's been an inability to get a consensus on the board. But the combination of chairman Charles Fish's strong leadership and the unflattering attention that the issue has recently received have driven the board to a consensus," he said.
During yesterday's hearing, Markey also asked, "What impact does the current lack of adequate secondary market disclosure" have on liquidity in the market?
"It makes the secondary trading marketplace much less efficient that it should be," Roberts said. "Certainly there have been some strides secondary market disclosure -- some progress has been made on a voluntary basis. I encourage that progress to continue."
"At some point and time, if that progress does not continue and there are not additional achievements made in that regard, I would be interested in pursuing with the [panel] some limited repeal of the Tower Amendment" to enable the commission to require added disclosure, he said.
Roberts has said in the past that he may favor additional disclosure requirements for conduit and other bonds with high default rates.
Markey noted that the regulation of the municipal bond market is one of five issues that his panel has on its "forward-looking agenda." Other issues are the health of the mutual fund industry, the regulation of the derivative instruments, corporate accountability to shareholders, and the future of the stock market.