WASHINGTON - The Public Securities Association asked member firms yesterday not to make any more political contributions to state and local officials with whom they do business until regulators adopt a final rule that provides clear guidance on such gifts.

"The PSA today recommends that each of its members institute a moratorium on all political contributions by municipal finance professionals and their supervisors to state and local officials or candidates for such office in jurisdictions where they do, or expect to do, municipal finance business," the association said in a four-page press release yesterday afternoon.

The announcement marks the strongest formal action the group has taken on this issue.

The association also said firms should not try to get around the moratorium by letting other employees serve as conduits for those working with a given issuer.

The PSA said it called for the moratorium because of an earlier warning to underwriters from the Municipal Securities Rulemaking Board, which is preparing the final rule governing political contributions. When the MSRB issued its proposed rule in late August, it warned underwriters not to try rushing contributions to officials before the final version came out.

The MSRB said at the time that it interprets its current Rule G-17 governing fair dealing as prohibiting improper contributions and warned that the National Association of Securities Dealers, bank regulators and the SEC could enforce the prohibition now.

"As the only municipal market participants regulated at the federal level, municipal securities dealers should not be expected to risk their very ability to do business during a period of uncertainty about what is expected of them by the relevant authorities," the PSA said.

The trade group also announced yesterday that it will send a comment letter to the MSRB today recommending significant revisions to the board's proposed political contributions Rule G-37 "to provide clear limitations on contributions."

Underwriters have complained that the proposed MSRB rule is too vague and may expose firms and their employees to overzealous federal enforcement officials.

The PSA also has argued that restrictions should apply equally to other private-sector participants, including attorneys, independent financial advisers, consultants, and accountants. It has called on the Securities and Exchange Commission to use its existing authority, and to seek legislation if necessary, to require issuers to disclose contributions.

The two-pronged rule that was proposed by the MSRB on Aug. 30 would bar contributions by underwriters that are aimed at obtaining or retaining an issuer's business. It also would require dealers to report to the MSRB all political contributions over a four-year period to issuers with whom they do business.

Gerald McBride, chairman of the PSA's municipal securities division, is scheduled to testify on the political contributions issue tomorrow at the second oversight hearing on municipals by the House Energy and Commerce Committee's subcommittee on telecommunications and finance.

PSA president Heather Ruth said in a recent speech to the Municipal Forum of New York that dealers lack confidence that the MSRB's proposed rule will bring about "behavior changes" in the market.

The moratorium was proposed as major firms are set to attend a private meeting with SEC Chairman Arthur Levitt in mid-October to discuss their efforts to ban most, if not all, business-connected political contributions made by employees.

The PSA's said the comment letter to be filed today would propose five sets of changes to the rule, including establishment by the board of a "safe harbor" that would permit employees to continue to give contributions to issuers as long as the amounts fall under a set minimum. "Many PSA members have suggested that the appropriate range would be in the range of $100 to $250 per official, per year," PSA said.

To ensure that employees do not try to circumvent the rule, "bundling" of contributions should be barred, the PSA said. The rule also should set a maximum total contribution from a firm, its covered employees and partners, and its employee political action committee. All contributions should be reported, including those falling below the threshold, the PSA said.

Second, the MSRB should explicitly bar certain practices, such as retaining consultants who also serve as public officials in the same state as issuers that the firm hopes to influence, the PSA said.

Third, "the MSRB should require dealers to report all contributions and all municipal business continuously, rather than forcing dealers to guess about the influence a public official might have or have exercised regarding any particular piece of business," the PSA said. A comprehensive reporting requirement on the public officials who receive contributions would provide regulators with better data for monitoring compliance across entire firms, the PSA said.

Fourth, the MSRB should be realistic in the way it defines the municipal finance professionals and "associated persons" to be covered by its upcoming rule, the PSA said. "PSA believes that limitations should apply only to municipal bond professionals engaged in the solicitation and conduct of municipal securities business and their direct supervisors, up to and including the CEO of the firm. But reporting requirements should apply to all associated persons."

PSA vice president George Brakat-selos said in a telephone interview yesterday, "Now it's everybody in the firm with the exception of clerical and administrative personnel [that are covered by the rule]. To implement anything under G-37, firms need to have a more clear definition of an associated person."

Finally, the PSA said "unless the MSRB or SEC believes that it can ban all political contributions by dealers to state and local officials absolutely, then a revised rule should speak to clear and identifiable limitations and restrictions consistent with the state intent of the proposed Rule B-37 to prohibit political contributions for the purpose of securing business."

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