WASHINGTON -- The Municipal Securities Rulemaking Board yesterday released the details of its tough new rule that would prevent dealers from making political contributions designed to capture an issuer's business or put a firm in the running for deals.

Under proposed Rule G-37. which is spelled out in the board's August issue of MSRB Reports, firms and individual dealers would have to stand ready to prove to regulators that any contributions made to issuers were done without the intention of getting, keeping. or "otherwise influencing" the award of bond underwriting business.

Firms would be required to establish internal procedures ensuring the contributions they or their employees make to issuer clients are not barred under the rule, according to the five-page proposal on which comments are due by Sept. 30.

The rule is modeled after the Foreign Corrupt Practices Act, a tough federal standard that prohibits issuers of corporate stocks and bonds from paying off foreign governments in order to get overseas business, according to a footnote in the MSRB proposal.

The standard requires U.S. corporations to follow airtight internal procedures before they give a gift to a foreign government, Washington observers say.

"One of the most significant things in the MSRB's rule is the fact that the dealer must establish that he [gave a contribution) without the intent of" winning business, said MSRB executive director Christopher Taylor. "It's the dealer's responsibility to show that he didn't do it for that purpose."

Asked how dealers are to judge whether a contribution is acceptable under the rule, Taylor said, "That's their problem. That's what makes this rule tough. You have to have procedures in place [that allow you to say] we're not giving contributions to obtain business and here's how we know."

Yesterday's proposal follows the board's announcement on Aug. 4 that it would propose a detailed two-pronged rule designed to control political contributions made by dealers to issuers.

Under one part of the rule released yesterday, dealers would be prohibited from making direct or indirect contributions designed to capture or keep an issuer's bond business. Under the other, dealers would have to disclose all political gifts made to issuers with whom they do business for a four-year period: the two years before they are awarded a deal and the two years after.

The rule applies to dealers acting as negotiated underwriters, including managers and syndicate members. I also applies to dealers acting as financial advisers and consultants, placement agents, and negotiated remarketing agents.

The proposal would do more than just ban gifts that are made for the purpose of keeping current business or getting future deals, according to the board's release. It also would ban so-called pay-to-play contributions designed to put firms in the running for an issuer's business.

The rule also would bar bribery, or what the board calls a "quid pro quo financial arrangement to secure current or future business." And it would bar contributions designed to put a dealer in the running for current or future business, even if the deal does not pan out for the underwriter, the board said.

The board said yesterday that the term political contributions includes any "gift, subscription, loan, advance or deposit of money or anything of value" designed to influence the outcome of any "candidacy, nomination, election, or appointment of any person for state or local office."

Dealers would be barred from trying to circumvent the rule by using people as "conduits," the MSRB said. For instance, dealers could not ask clerical personnel, family members, attorneys, or others in their stead to make a contribution that is barred under the rule, the board said.

Dealers also would violate the rule by giving a contribution to one employee of an issuer who passes it on to officials in a position to influence the award of a deal, the MSRB said.

The board's rule would require a dealer that has been awarded business to keep a record of any contributions by the firm, by nonclerical employees and officials of the dealer, and by the dealer's political action committees. The record would cover the two years before and the two years after the deal is awarded, and the firm would have to keep the record on file for six years.

Records would be sent to the MSRB's Municipal Securities Information Library, where they would be made "readily available" to the public, the board said.

The idea of a central repository for political contributions information to state and local issuers has been hailed by election reform groups as an unprecedented step forward.

The MSRB said the record keeping is designed to "assist enforcement agencies" in inspecting dealers for compliance with the rule. Dealers would have to report the total dollar amount of contributions and the total number of contributors when the issuer awards the dealer the business.

Dealers would file separate initial reports for each type and each instance of municipal securities business awarded, according to the proposal. Then dealers would submit an update report for two more years semiannually that discloses any additional contributions made. The board would specify due dates for update reports.

The proposed rule comes in the wake of recent influence-peddling scandals in New Jersey, Louisiana, and Massachusetts. At the same time, Congress and the Securities and Exchange Commission have been putting increasing pressure on the MSRB to deal with the controversial issue of political gifts.

Rep. John Dingell, D-Mich., chairman of the House Energy and Commerce Committee, and Rep. Edward Markey, D-Mass., chairman of the panel's subcommittee on telecommunications and finance, sent letters to the SEC, MSRB, and National Association of Securities Dealers on May 27 asking then to "take a comprehensive look at the present scheme of regulation in light of the current scandals involving alleged illegal payoffs, influence peddling, conflicts of interest, and questionable sales practices."

They also asked the regulators to make recommendations on how to beef up sluggish secondary market disclosure.

The SEC, MSRB, and NASD plan to send their reports to Dingell and Markey this Friday. Markey's finance panel tentatively plans to hold its first oversight hearing on the municipal securities market on Sept. 9.

"We believe that the MSRB's efforts are an important step forward to deal with the political contributions [issue]," said Micah Green, executive vice president of the Public Securities Association.

Nevertheless, the PSA is concerned that because the MSRB's jurisdiction is limited only to dealers, dealers will be the only participants in the municipal market that are being regulated, Green said.

Why should the rules not apply to all participants, including independent financial advisers, attorneys, and engineers, he said. "Imagine a huge firm with thousands of employees. I'm sure there is some giving that has no relation to employment. That's why we believe the recipient already has the information and they are the right one to ask for it."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.