WASHINGTON - The Municipal Securities Rulemaking Board said yesterday it will propose an "aggressive" two-pronged rule designed to control political contributions made by dealers to issuers.

Under one part of the rule, dealers would be prohibited from making contributions that are designed to capture or keep an issuer's bond business.

Under the other, dealers would be required to disclose over a four-year period all political gifts made to issuers with whom they have done business.

The board also announced that it would propose a second rule requiring dealers to alert investors in writing at the time of a bond sale whether an issuer intends to provide secondary market disclosure affecting their investments. In addition, dealers would be required to alert investors that lack of secondary market disclosure could affect the price and liquidity of their investments.

The MSRB unveiled the proposed rules at a press briefing four days after the 15-member board approved the measures at a meeting held in Colorado Springs.

The proposals come in the wake of influence-peddling scandals in Louisiana and New Jersey, and as Congress and the Securities and Exchange Commission put increasing pressure on the MSRB to deal with the controversial issue of political gifts and secondary market disclosure.

Board officials said in a written statement yesterday that their political contributions rules would cover dealers and "associated persons," which the board defines as securities professionals. They said it would be up to dealers to decide whether a particular contribution was aimed at securing business from a politician, and thereby in violation of the guidelines.

"It would apply to all situations in which an official of an issuer has discretion to select a dealer," the board said. "These situations include dealers acting as negotiated underwriters, financial advisers, placement agents, and negotiated remarketing agents."

Dealers would be required to disclose the information over the board's electronic Municipal Securities Information Library.

The board said it plans to issue its proposed political contributions rule for comment by the end of August. It will review comments at its November meeting and hopes to file a rule with the SEC for review soon after.

Concerning secondary market disclosure, MSRB executive director Christopher Taylor said the board will begin to develop rules this fall that would require dealers to provide customers with written disclosure about the availability and impact of continuing disclosure on their securities.

Rules would "require a dealer to provide a written notification to the customer about what the issuer has agreed or not agreed to do, at the time of sale," Taylor said.

"If the issuer hasn't got [a pledge someplace, such as in the indenture], then every trade thereafter is going to have [to have] written notification to the customer," he said.

Taylor said the board has not determined where the dealer's notice to the investor about the availability of secondary market disclosure should appear.

Where Will Notice Be?

"It will have to be in writing, but we have not determined where. The confirmation is an obvious place, but the confirmation is likely to go the way of the Dodo bird," Taylor said, referring to a push by regulators to accelerate settlement of securities market trades, a move likely to make confirmations extinct.

"This is a significant notification and the confirmation may not be the appropriate place," F.2 said. "It may be necessary for it to be in a separate writing. [But] we have not determined that yet."

MSRB chairman Charles Fish said, "With the growing complexity of the market, the board is concerned that investors are not aware that liquidity and pricing of municipal securities are adversely affected without continuing disclosure information.

"The board believes that this proposal will address these concerns but stands ready to recommend federal legislation to mandate disclosure if adequate continuing disclosure information from issuers is not made available."

Securities and Exchange Commission member Richard Roberts called the board's announcements an "appropriate regulatory response" to allegations that have "cast a shadow on the integrity" of municipal securities, and to the lack of continuing disclosure in the market.

But Roberets said he would prefer that regulators issue a rule that includes municipal issuers, and said he is growing increasingly convinced that legislation to "enlarge" regulators' authority "may now be necessary.

SEC officials have been studying whether the agency has authority to promulgate a rule requiring issuers to make secondary market disclosure. Roberts signaled yesterday that no decision has been made by top agency staff members. It is still a subject of "ongoing debate," he said.

The House Energy and Commerce Committee is expected to conduct hearings in September on whether new rules are needed to protect municipal investors, and whether the 1975 Tower Amendment, which restricts regulators' ability to impose standards on municipal issuers, should be fully or partially repealed.

The SEC is scheduled to report to Congress on the issues late this month or in early September.

Rep. Edward Markey, D-Mass., chairman of the Energy and Commerce panel's subcommittee on telecommunications and finance, said he is "pleased" to hear that the MSRB is taking action, but that he needs more details about the proposed rules to know whether they are adequate.

"By September, the MSRB, the National Association of Securities Dealers, and the SEC will all be submitting responses to the request that Chairman Dingell and I made in May. I intend to schedule hearings in the subcommittee after we've received these reports so we can examine their findings and recommendations in some depth."

Rep. Henry Gonzalez, D-Tex., chairman of the House Banking Committee, said, "The municipal securities business has long been a cesspool of political corruption. Certainly the tentative action of the MSRB is a step in the right direction, but it is far from comprehensive.

"It still leaves room for bond counsels and many others to grease the skids for bond houses by making political' contributions, and to do so in the dark in many cases. It doesn't set a high enough standard."

Support From GFOA

Gonzalez and Rep. Jim Leach, R-Iowa, introduced legislation on June 18 that would repeal the Tower Amendment, and require underwriters, bond counsels, and dealers to disclose all political contribution.

Jeffrey Esser, executive director of the Government Finance Officers Association, said the group is "very supportive" of the board's actions, particularly in secondary market disclosure.

"We think their statement is very supportive of some of the voluntary efforts that we are working closely with the MSRB on, [including a] pilot project to have annual financial reports electronically transmitted to the board's Continuing Disclosure Information system.

"And we think their policy recommendation is very consistent with voluntary efforts that GFOA has engaged in with the National Federation of Municipal Analysts and other groups to bring about improved secondary market disclosure."

Esser last week called "outrageous" a recent call by the Public Securities Association for the SEC to issue a rule mandating secondary market disclosure by issuers.

Micah Green, executive vice president at the PSA, said the association would have no comment on the board's proposals until it has seen more details.

Newly confirmed SEC chairman Arthur Levitt said yesterday, "I welcome and commend the MSRB efforts to address these concerns. It is of the utmost importance that investors have confidence in the integrity of the municipal market and that the market operate in a fair manner."

"In particular, the commission has long supported efforts to improve secondary market disclosure, and I am pleased that the MSRB is directly addressing this issue," he said.

Board officials yesterday did not say whether the political contributions proposal will dry up contributions by municipal bond firm employees. But MSRB chairman Fish noted, "If that's the result, so be it."

Officials said it will be the dealer's job under the proposal to decide whether it is making contributions to get business. If the underwriter has any doubt, it should not make the contribution, they said.

Mark Schwartz, formerly an investment banker and attorney with Prudential Securities Inc., who has charged he was fired by the firm for complaining about being pressured to make contributions, said. "While disclosure is an important step, it's only one step.

"Fundamental questions have to be asked about why municipal bonds have a preferred regulatory position from other securities, particularly in light of the revelations that continue to come out. I trust that the SEC and the congressional committee will deal comprehensively with this issue and perhaps the days of self-regulation will soon be over."

Proposed Rules on Political Contributions and Continuing Disclosure

"At its meeting week, the board voted to:

* Propose for comment a rule prohibiting municipal securities dealers from making political contributions to issuers for the purpose of obtaining or retaining municipal securities business and requiring dealers to disclose for a four-year period all political contributions to issuers with whom they have done business.

* Promulgate rules to require written disclosure by dealers to investors alerting them to the importance and availability of continuing disclosure information affecting their investments.

Under the two-part proposal on political contributions, the board first would prohibit dealers and their associated persons from making contributions to municipal securities issuers for the purpose of obtaining or retaining municipal securities business. The term "associated persons" means, in general, securities professionals. It would apply to all situations in which an official of an issuer has discretion to select a dealer. These situations include dealers acting as negotiated underwriters, financial advisers, placement agents, and negotiated remarketing agents.

The second part of the proposal would require dealers and associated persons to disclose contributions made to issuers in situations in which the issuer has discretion to select the dealer and does so. Dealers would disclose all contributions two years before and two years after the awarding of such business. Such information would be sent to the board for inclusion in the Municipal Securities Information Library (MSIL) system, an electronic library through which such information will be made readily available to the public.

With regard to continuing disclosure information - information about the issuer's finances or activities that would affect the value of its outstanding securities - the board will begin this fall to develop rules that would require dealers to provide customers with written disclosure about the availability and impact of continuing disclosure on their securities. Currently, there is no national requirement for disclosures by issuers to investors or to the market. In addition, whatever information is provided is not readily accessible in a central location. The lack of continuing disclosure information affects the ability of investors in the secondary market to accurately value their holdings and to find a ready market for such securities."

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