BOSTON -- The board of directors of the Massachusetts Water Resources Authority, the subject of a state conflict-of-interest investigation, yesterday voted to terminate contracts with its bond underwriting team and its financial adviser.

The expected changing of the guard at the authority came after a previously undisclosed contract between Mark S. Ferber, who works for a firm that is the MWRA's financial adviser, and Merrill Lynch & Co., one of the authority's bond underwriters.

The contract triggered questions about the adviser's ability to provide independent advice to authority finance executives on bond sales. The state's inspector general has launched a probe into the matter

The board yesterday also, approved a new ethics and financial reporting package that would increase the amount of disclosure required from participants in MWRA financings.

The board, which met at authority headquarters in the Charlestown Navy Yard, voted to begin immediately the long process of reselecting, a new syndicate and financial adviser.

Authority officials said they will begin soliciting proposals from qualified underwriters and make a recommendation to the full board at its Sept. 22 meeting.

The MWRA's finance; official said they would like to have the new syndicate in place to be able to issue $200 million of revenue bonds in November or December.

If the new syndicate is not in place, though, MWRA chief financial officer Philip N. Shapiro said the bonds may be sold through competitive sale. That would mark the authority's first competitive issuance of debt.

The decision to change the MWRA's underwriters was first debated yesterday morning when the authority's executive committee for finance and administration voted 4 to 1 to recommend the measure to the full board.

At the preliminary meeting, Shapiro said approval of the new disclosure requirements will be the most strict in the country.

"This marks the first time that an issuer of municipal debt has done anything like this," he said. "We want there to be no question about ethics or financial disclosure.

Authority executive director Douglas B. MacDonald said he expects the MWRA disclosure package to be held up as an example to other issuers in the country that also want to improve their disclosure practices.

The only dissenting vote on the finance committee came from board member Norman Jacques, who said the measure did not go far enough.

Jacques said that bond counsel should be subject to the same disclosure restrictions as underwriters and the financial adviser. There was no motion to dismiss the authority's bond counsel, Mintz, Levin, Cohn, Ferris, Glovsky, and Popeo, P.C.

MacDonald said the position of bond counsel, was excluded from the board's action because of strict federal regulations already in place governing the activities of attorneys.

At the full board meeting. Jacques changed his vote after Shapiro said that language would be incorporated into the guidelines dealing with bond counsel if the board wished.

Shapiro said the size and makeup of the selection committee for the new syndicate and adviser would be announced at the board's Aug. 11 meeting. The decision to replace the syndicate comes after several weeks of controversy surrounding Ferber's other relationships.

The final vote of the board of directors was 9 to 0, with Samuel G. Mygatt abstaining; Robert J. Ciolek was absent. While Mygatt did not say why he abstained, a source close to the situation said his wife, Susan, is a partner with Goodwin, Proctor & Hoar, the law firm that is representing Ferber and First Albany.

Ferber, currently vice chairman at First Albany Corp., had been the MWRA's financial adviser for more than 10 years. In that time, he has worked at Kidder, Peabody Corp., First Boston Corp. Lazard Freres & Co.. and First Albany.

While employed at Lazard Freres, Ferber entered into an agreement with Merrill Lynch, that paid Ferber and his staff an, $800,000, retainer each year for promoting complicated swap transactions that could be executed by Merrill Lynch.

As part of the same agreement, Ferber and his staff entered into a fee-splitting relationship with Merrill on the swap transactions they worked on together. The contract between the firms was in place from late 1989 through the end of 1992.

The firms split more than $6 million in fees for issuers including the city of Boston, the state of Massachusetts, and the New England Medical Center.

At the beginning of this year, Ferber and his staff left Lazard and joined First Albany. Shortly after that, the MWRA named First Albany its financial adviser.

In an interview this week, Shapiro said if full disclosure had been made to the authority regarding the contract between Ferber and Merrill Lynch, the MWRA would not have approved the transfer of its financial adviser contract to First Albany this year.

It was also recently revealed that Ferber and his staff, while employed at Lazard, we're paid 10,000 a month by First Albany to assess the performance of the firm's cash management, compensation, and financial reporting.

"There has got to be a time when an issuer needs to believe that full disclosure does not mean full disclosure minus a few hidden agreements," MacDonald said in an interview yesterday. "People should wrestle with their conscience a little."

The contract with First Albany spanned a 17-month period during which the firm was a member of the authority's underwriting syndicate.

In a confidential portion of a letter to state inspector general Robert A. Cerasoli -- obtained this week by the The Bond Buyer -- MacDonald said disclosure about Ferber's outside activities were not known until late June.

Both MacDonald and Shapiro said the rewriting of the authority's disclosure policy began before the revelations about their financial adviser.

But in the text of the report, these recent questions are mentioned as part of the reason for the committee's expedience.

"In recent months, questions have been raised that make it prudent to examine whether the adoption of additional safeguards might enhance the actual and perceived integrity of the [MWRA] financing program," the report says.

"Press accounts of these matters, and of more questionable public finance relationships in New Jersey and elsewhere, pose a risk of diminished public confidence in the integrity of the municipal marketplace, a developmental to the authority," according to the report.

MacDonald said in the preliminary meeting that he "would not be surprised" if these new MWRA guidelines were superseded in the future by changes in the federal laws by either the Municipal Securities Rulemaking Board or the Securities and Exchange Commission.

Under the authority's new slate of guidelines, the new financial adviser will play no role in the selection of underwriters, Shapiro said.

Previously, Ferber was present at the selection process for underwriters to ask certain technical questions. However, he never had a vote on the selection of what firms the MWRA used.

Since 1991, the authority has used three senior managers: Merrill Lynch; Bear, Stearns & Co.; and Goldman, Sachs & Co.

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