CORONADO, Calif. - A federal official, in response to numerous questions from municipal bond dealers, stressed last week that dealers should err on the side of caution in complying with a proposed political contributions rule.

Christopher [Kit] Taylor, executive director of the Municipal Securities Rulemaking Board, repeatedly cautioned dealers that they risk inviting the ire of federal regulators if they try to interpret the rule liberally once it goes into effect.

"Use your common sense," Taylor said. "I cannot urge you enough, don't sit Were and [say], ~Oh, how am I going to lot ground the edges of this rule.' Don't do that."

Dealers had plenty of questions about the proposed rule during a panel discussion here Thursday at the fall conference of the National Association of Securities Dealers.

They wondered, for example, if politically-active spouses might be affected by the rule; whether limited partners who arc not active in day-to-day operations will need to curtail contributions; and exactly how many people will be covered in situations where the dealer is a subsidiary of a bank.

The MSRB on Nov. 11 approved a modified political contributions guideline - Rule G-37 - that strengthens some parts of an original proposal and toned down others.

"The basic provision of the proposed rule bans a firm from doing municipal securities business with an issuer to whom a political contribution has been given by a municipal securities professional, the firm, or a dealer-controlled PAC within the last two years," Taylor said Thursday.

"There is an exception to this ban - a municipal securities professional may give a contribution of no more than $250 to a candidate in a jurisdiction where he is entitled to vote," he said.

In response to numerous questions seeking more specific guidance, Taylor continually noted dealers will have to exercise prudent judgment.

"I can't control all aspects of a bank; I can't control all affiliates, but let me tell you this is an area where the bright lights are shining and you want to make sure you're on the side of the angels," Taylor said.

He was especially adamant about stressing a provision of the rule "prohibiting you from doing indirectly what you are prohibited from doing directly."

This means that others in a company cannot give the contribution, nor can consultants or lobbyists be used to funnel money to politicians.

As a hypothetical example, Taylor cited the temptation to have mortgage bankers help circumvent the rule.

"You're going to have to make sure other people in your firm aren't winking and nodding and saying to their buddy on the underwriting desk, ~Who are you underwriting this week? Can I give a contribution?' You want to have very explicit procedures in place" to prevent this sort of activity, Taylor said.

Also on the panel with Taylor were Richard Roberts, member of the Securities and Exchange Commission, and Heather L. Ruth, president of the Public Securities Association.

All three officials also appeared last Wednesday in Chicago at a PSA-sponsored closed meeting of senior managers al regional firms. The PSA is expected to name a task force shortly to draft model policies and procedures that regional firms can use to implement the MSRB's proposed political contributions rule.

The PSA held the Chicago meeting after SEC Chairman Arthur Levitt Jr. asked the trade group and 10 other interest groups in a letter to "provide a process" to help their members establish voluntary internal bans on political contributions to issuer clients.

"The reaction thus far, I suppose it's safe to say, has been mixed," Roberts said at the NASD conference. "It is my impression that a number of firms are seriously considering implementing an initiative."

Levitt's letter went to groups representing dealers, bond lawyers, financial advisers, and issuers following an announcement by 17 Wall Street firms that they were adopting individual bans on contributions.

"It is certainly not the commission's intention for this initiative to be limited to an exclusive Wall Street club," Roberts said at the NASD panel.

Many of the questions about the contributions rule that arose at the NASD panel were similar to ones raised at the PSA meeting, Taylor said.

One item that received attention - and perhaps surprised federal officials - was the extent of concern over the fact that the contributions rule does not apply when giving to those running for national office.

During a question-and-answer session at Wednesday's PSA meeting, "boy, I was disabused real quickly" about whether this is an issue, Taylor told the NASD group. "There was a chorus of people in the audience saying they felt that congressmen had played an active role in the awarding of bond deals and that contributions were made to those congressmen for that purpose."

Ruth of the PSA said: "It was genuine concern [first] that it happens now, and [second] that it would be the ultimate loophole. That is, where hypothetically your mayor comes to you and says ~I know you can't give a contribution to me any longer, but give it to congressman X and he'll take care of me.'"

The matter has generated concern and "is a tricky issue," Ruth said.

Dealers at the NASD meeting also wondered about other sticky issues, such as whether a politically-active spouse would have to curtail activities.

There "has been a lot of discussion at the [MSRB] table about this - spouses are not included in this rule now," Taylor said.

But he said the instance could raise the kind of indirect influence, perceived or real, that the MSRB wants to curtail.

"If your spouse is very active in the community and you underwrite the bonds, you are going to have to answer to that," Taylor said. "And the public perception right now, quite candidly, is that there's an all too close correlation between the amount of money or other things of value going to the people that are making the decisions."

Taylor said signing onto the principles espoused by the so-called group of 17 Wall Street firms is "a good thing" because he cannot write a rule to cover every circumstance.

If people would rather not exercise prudent judgment, "I can sit here and if you want me to I'll write the most detailed, excruciating, difficult rules, and it'll close every loophole, and you won't be buying and selling and trading and making a living, you'll be filling out forms so [the NASD] can read them," Taylor said.

"But I don't think writing rules is a good solution to the problems," he continued. "I would much prefer to see people out there taking the high road on their own, and that's what the principles are designed to do."

Ruth acknowledged that "this is a real change in behavior and it has some civic cost to it. Everyone's a little uncomfortable about that."

But Ruth said that concern has to be balanced against a perception that "things have really gotten out of hand, and we've simply got to do something drastic in order to change the nature of the business."

Ryan Ushijima, chief financial officer of Hawaiian Capital Securities, asked the panel whether a limited partner in his firm - who put up capital but does not work in the day-to-day operations - would have to curtail his contributions if the company wants to keep working with certain issuers.

"That guy probably is covered because he is ... an owner of the firm and it is impossible to divorce his ownership of that firm or his participation in that firm from your activities in the firm," Taylor re

Taylor said he appreciates the dilemma this might pose, but "this is the problem with rule writing. You throw babies out with the bathwater."

But in the example of the limited partner, "to me it is a clear conflict of interest and in violation of the spirit, if not the letter, of the rule," Taylor said.

In an interview afterward, Ushijima said he appreciated hearing directly from the panel, especially since it helped him understand the intended comprehensiveness of the rule. "We want to comply with both the letter and the spirit" of the rule, he said.

Ushijima predicted that some firms may need to examine restructuring their ownership to avoid running into possible conflict-of-interest problems.

Taylor, who received questions on various ownership issues, said, "You better have very good supervisory procedures in place" to make sure that banks and their affiliates, or other companies with underwriting subsidiaries, abide by the rule.

Such firms "would be very wise to have very explicit procedures in place to show why they're giving contributions [to] where they're giving to insure and insulate the muni people from the appearance of a conflict of interest," Taylor said.

He also stressed that firms better be preparing compliance procedures, given that the effective date for the rule is January 1, 1994.

"I do not want to hear any sob stories from anyone in this industry that they were unaware of the cutoff date," Taylor said.

The political contributions discussion so dominated Thursday's panel that little time was spent on the topic of standards for secondary market disclosure.

Roberts called the topic as big an issue as political contributions, and panel participants agreed it will involve extensive work in the weeks ahead.

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