The National Association of Securities Dealers has found three potential violations of the municipal market's political contributions rule, following a three-month special investigation into Wall Street's compliance with the regulation.
During the inquiry, which began in August and ended in early October, the association conducted 20 "spot checks," in which regulators demanded information from municipal market firms about contribution activities.
The inquiry is separate from the group's routine enforcement of securities regulations. NASD officials say they routinely conduct special investigations or examinations following the passage of new securities guidelines.
"Two firms told us about the [political contributions] situation," said Walter J. Robertson, the association's director of enforcement. "One, we picked up on our own."
Robertson said that only one of the three firms has formally asked for "relief" from the penalties by providing the association with documents concerning the infractions.
In all three cases, the municipal employees may have broken the contributions rule by making political contributions in jurisdictions where they are not registered to vote. In one case, the NASD found three employees who contributed outside of their voting districts.
The NASD has not taken enforcement action against any of the firms identified as potential violators. Robertson said, however, that the association is prepared to announce the outcome of the investigation in the coming weeks.
Robertson would not name the firms involved, or the areas of the country where the possible violations took place. But an official from a leading public policy group said he found the number of violations troubling, given the degree of press attention the contributions rule has attracted.
"Three out of 20? I think that's a lot," said Andrew Greenblatt, an executive director at New York State Common Cause. "That's 15% of the group. Can you imagine 15% of any industry violating an important regulation?"
Heather Ruth, president of the Public Securities Association, a trade group representing the municipal market, would not comment on the matter.
The NASD, a self-regulatory agency that monitors the securities industry, provides frontline enforcement of the contributions rule, which was passed in April by the Municipal Securities Rulemaking Board.
The rule, G-37, does not prohibit municipal market executives from contributing to political campaigns. Instead, the rule is designed to restrict so called pay-to-play practices, in which municipal bond executives make contributions in order to win negotiated bond business from state and local officials.
Under the MSRB rule, a municipal firm executive can make contributions of up to $250, but only to state and local officials in the district where the executive is registered to vote.
Municipal executives are also barred from soliciting contributions on behalf of state and local officials. Breaking the rule could lead to a firm's being barred from doing business with an issuer that received the contribution.
The Bond Buyer has reported that executives at several firms have either made questionable contributions or appeared to have solicited contributions on behalf of local politicians.
In September, Robertson confirmed that the NASD had begun examining two cases in Florida, one involving a Kidder, Peabody & Co. municipal executive, and another involving a municipal executive at Smith Barney Inc. Robertson yesterday would not comment on these inquiries.
