MSRB seen likely to amend ban while adhering to rule's spirit.

WASHINGTON -- The Municipal Securities Rulemaking Board is expected at its meeting here this week to make several changes in its proposed political contributions rule but to retain the basic concept of its original plan, sources said yesterday.

The 15-member board, for instance, will probably narrow the scope of the rule so that it more closely targets employees and their supervisors who are directly involved in a firm's municipal business, the sources said.

The board, which meets today through Friday at board headquarters. is also expected to grant employees of municipal firms a "safe harbor" from enforcement action if they make contributions to state and local officials that are less than a set amount, such as $100. Such so-called de minimis contributions might nevertheless have to be reported under the final rule.

But the board is likely to retain the overall structure of the two-part rule, sources said.

As proposed on Aug. 30, the rule would bar contributions by underwriters that are aimed at obtaining or retaining an issuer's business. It would also require dealers to report to the MSRB all political contributions to an issuer two years before and two years after they do business with the issuer.

The Securities Industry Association urged the board in a letter Oct. 7 to drop the first part of the rule that would ban contributions designed to obtain or retain an issuer's bond business. It warned that a ban would have a chilling effect on employees' participation in the political process, noting that criminal and civil penalties already exist for improper payments.

But sources said yesterday that the board is unlikely to eliminate the provision. "I think the basic structure of the rule still holds," said one source who asked not to be identified.

"The proposal in August had some loose ends," the source said. "It created a lot of response in the industry and on the Street."

By not trying to tie up those loose ends in August when it first proposed its political contributions rule, the board is now faced with having to make some revisions, he said.

"Obviously, the rule has a little wider scope than what seems acceptable," the source said. "It would be very hard for a firm to monitor contributions the way the board left it. The board can [amend the rule in a way that will] tie that up a little tighter."

The board also may strengthen language aimed at restricting firms from "bundling" contributions from individual employees together and funneling them to any one candidate.

"Who is worried about the guy who wants to give $50 to the local mayor? That's not the problem," the source said. "The problem is when it is bundled and it becomes $50,000 to the state Democratic Party. When you put [contributions] all together in a package, you can tie up a state. You can own that state. That's what [the board wants] to stop.

"Rule G-37 has to cover things like indirect contributions" better, the source said. "There may be cash contributions to third parties on behalf [of a candidate]. There is a loophole there. I've seen a request for a contribution by a political candidate to a charity. I don't think that flies. I don't know how you plug that one."

But the board will not be able to eliminate every loophole, sources said yesterday. That is why industry efforts are an important piece of the equation, such as the recent moratorium on political contributions agreed to by 17 major Wall Street firms, they said.

"The best cop in the world is going to be the Street, not the [Securities and Exchange Commission] and the MSRB," one source said. "You will be judged by your peers in the industry. Wall Street has a lot of bright minds. If they've agreed to the spirit of the moratorium, any firm that violates that could have bigger problems, morally speaking, in the industry.

"I think [the MSRB rule] is going to have a reporting requirement," the source said. "Everyone is going to have access to the same information. You can't do anything on the Street without anyone knowing about it. Those who try to circumvent the rule are going to be found out and it's going to be public knowledge."

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