WASHINGTON -- There is no limit on the fine the National Association of Securities Dealers could levy against an underwriter who violates the Municipal Securities Rulemaking Board's political contributions rule once it goes into effect, NASD President Joseph R. Hardiman said yesterday.
"We have guidelines for fines. But there is no limit on the amount of fines we could levy," Hardiman told reporters at a breakfast at NASD headquarters.
"We just levied a $5 million fine against Prudential Securities" in connection with brokers' sales of limited partnerships in the 1980s, he said.
But Hardiman said he is not sure where violations of the MSRB's rule would fall under the association's guidelines for dollar amounts of fines.
Hardiman's comments are significant because the NASD is responsible for enforcing the MSRB's rules, including taking any enforcement action such as imposing fines.
His comments came five days after the MSRB approved a tougher than expected proposal that would bar municipal bond dealers who make political contributions from doing business for two years with the cities and states that the politicians serve.
The MSRB is expected to send its proposed rule to the Securities and Exchange Commission next month, and the SEC is expected to approve it as early as January.
Hardiman's comments also came one day after the National Association of Independent Public Finance Advisors voted not to follow the lead of 17 Wall Street firms and adopt individual bans on political contributions. The group voted to "discourage" firms and their employees from making such contributions.
"We feel the ~discourage' statement was a very strong one," said Freda S. Johnson, president of Government Finance Associates Inc. of New York City and a member of the board of the advisers' group. "We also feel that there have been no accusations of abuse in the use of political contributions associated with independent financial advisers."
Certainly, Johnson noted, firms can enact their own bans on an individual basis if they wish.
Hardiman was asked whether the NASD currently examines political action committee and other contribution records at municipal firms. "Examiners haven't in the past," he answered. "That's because it has not been a subject that was clearly and specifically a violation of our rules. Examiners certainly' are beginning to now, in light of all the initiatives underway."
NASD'S chief said the most severe NASD penalty is to bar someone from the securities business. "We can fine and bar and suspend them. After that, if there is any further action that has to be taken because of a violation of civil or criminal actions in a particular state, that's up to the state" or other enforcement officials, Hardiman said.
"Unfortunately, [political contributions] became a way of life for the leading underwriters. It became a competitive issue. Once, one, two, or three firms started doing it, then everybody else had to engage in the practice. I don't think anybody liked it. I think there is a heavy sigh of relief in the industry that we are taking steps to put significant limitations on political contributions for securing business," Hardiman said.
"I think the fact that 17 leading underwriting firms came forward on their own to restrict practices is a good sign that the industry is willing to [change]. The 17 firms' voluntary action and the MSRB action is a very positive step," he said.
Hardiman said that an even more important issue in terms of market efficiency is regulators' efforts to improve secondary market disclosure.
But he said he does not support banning dealers from selling bonds for which the issuer has not pledged to provide ongoing disclosure, which is a step the SEC has been eyeing.
"But I think that dealers should be required to make investors aware of the fact that there may not be any ongoing information about the issuer, and that should be a factor in the decision" to buy a bond, he said.
"At the time of sale, there should be notice to investors that there is not ongoing information that's made available by this issuer, so it's financial health and well-being cannot be measured," Hardiman said.
MSRB executive director Christopher Taylor warned firms this fall that even before the new rule takes effect, dealers who give inappropriate contributions could face charges that they violated existing Rule G-17, which requires fair dealing with customers.
"I think he was just firing a warning shot across the bow to firms," Hardiman said when asked to comment on Taylor's statement. "Yes," the NASD could bring action under G-17, Hardiman said, noting that it was an NASD inspector who first detected irregularities in the business relationship between Merrill Lynch & Co. and Armacon Securities, a small New Jersey-based securities firm.
"They would have to be fairly egregious [violations] to the point that they might rise almost to the level of fraud. That's a high standard against which to develop a case," he, said.
The MSRB rule "lays it out specifically," Hardiman said. "This is what you can and cannot do. I think that what the MSRB has done is make the standards much clearer. I think that's helpful for industry."