WASHINGTON -- The Municipal Securities Rulemaking Board cautioned bond underwriters this week that making political contributions to issuers can create the appearance of bribery and erode investor confidence.

But the board, in a brief statement Monday, stopped short of taking the more ambitious step it contemplated last winter. That step would have entailed publishing voluntary procedures that firms should follow to disclose political contributions made to municipal officials -- possibly as an attachment to the official statement for a deal.

"In the municipal securities market, the payment of political contributions by an underwriter -- or any other party connected with the underwriting process -- to officials involved in the choice of the underwriting team may create at least the appearance that the contribution has influenced the selection of that team," says the board's notice, which was approved at the MSRB's quarterly meeting late last week in Jackson Hole, Wyo.

It warned that underwriters and other participants in bond deals should be particularly vigilant, given the hard times for state and local governments.

"Many municipal securities issuers are facing tremendous economic challenges. It is critical that the municipal market engender the highest degree of public confidence so that investors will provide much needed capital to these state and local governments," the statement says.

"In this regard, the board encourages underwriters and state and local governments to maintain the integrity of the process of selecting the parties involved in the underwriting of municipal securities," the MSRB said.

The board said its concerns about political contributions are not limited to underwriters, and apply to any party providing services to issuers.

It acknowledged most state and local governments already require disclosure of political contributions and that they are publicly available. Nevertheless, it said it still has concerns about the issue.

Under federal law, candidates for federal office must report the contributions they receive from political action committees and individual firms to the Federal Election Commission in Washington. The information can then be reviewed in a public reference room.

But at the state and local level, reporting laws vary greatly. There is also no central location where a person can find out who contributed what to whom.

The MSRB's notice was met with disappointment from some regional firms who bitterly complain that the use of political contributions to influence deals is a way of life in the market.

"I think the MSRB should have taken a stronger stand," said James Frein, president of Hutchinson, Shockey, Erley & Co. in Chicago. "Until our side of the industry is forced to do something, $(the problem$) is just going to continue."

"I'm tired of it," said a regional dealer, who asked not to be identified. "It gets down to who you know and what do you want to give. You bet I'm disappointed. In reality, everybody would like to see [disclosure of contributions] happen," he said, "but no one wants to step forward and be the first ones to put their neck on the line."

An official with another firm, who also asked not to be identified, said "a firm like ours would be much better off if it weren't even possiblke to play this game. If you just had to get business on the basis of who gives the best service and contributions didn't come into play, a firm of our size and nature" would fare much better, he said.

The issue was the subject of a Chicago Sun-Times editorial Friday, which criticizes Cook County Board President Richard Phelan in connection with a $272.5 million bond issue. The editorial says he "zoomed" the issue through a board vote without debate by the panel's finance panel or public hearings.

"Thanks to the rush-rush job, the fact didn't emerge until after the vote that 14 financial institutions in line for nearly $700,000 in fees to prepare the bond deal contributed up to $10,000 to Phelan during the past year," the Sun-Times says. "Another financial institution is holding a $300,000 loan Mr. Phelan obtained for his election campaign," the editorial also says.

Pam Smith, a spokeswoman for Mr. Phelan, rejected the charges. "There are many participants in the county's bond issues that have not made political contributions. Certainly there are sometimes cases where we do a bond issue" with a firm that has made a contribution, she said. "But there is no prerequisite for getting bond work."

Many bond firms support written procedures recommending disclosure of contributions.

Others, however, say such procedures would be nightmarish to try to implement. They also maintain the procedures are unnecessary or would saddle underwriters with a burden that should be shared by all industry participants. They warn that reporting contributions in conjunction with the official statement, which the MSRB had been eyeing, could create misperceptions. That would be particularly the case if a variety of firms made contributions to a key official's campaign but only the few that are competing for a deal are mentioned in bond documents.

MSRB Chairman David Hartley, managing partner of Stone & Youngberg in San Francisco, said the board simply was not in a position to do much in the area short of preempting federal or state laws. "We floated every issue possible and this is our consensus," he said. "We are not about the business of trying to undertake any additional jurisdiction over this matter. What you see is the result of our considered best judgment."

Mr. Hartley first mentioned the board's interest in the volatile issue Dec. 2, 1990, during a speech before the Municipal Analysts Group of New York. He said at the time, "We're concerned about political contributions as it relates to this business. It's done. It's out there. And everybody knows it. We think that perhaps we should at least, in the spirit of integrity, provide some procedures on disclosure."

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