Can you picture your father as a bagman for political contributions? Maybe not, but that's the sort of idea traveling through the bond market these days.

Just a month after the Municipal Securities Rulemaking Board's controversial ban on campaign contributions took effect, the market is abuzz with stories and conjecture about how the ban can be, and will be, circumvented.

"There is no question in my mind that people will get around" the rule, said the head of one municipal bond firm in the Midwest.

The maneuvering won't be legal, since Rule G-37 explicitly forbids the use of conduits -- "other persons or means" -- to get around it. But there's always the old-fashioned approach: Break the rule and then cover your tracks.

While many industry players and observers said they haven't heard of any attempts at circumvention, others reported first-hand experience in being asked to act as accomplices.

Most of the officials interviewed spoke only on the condition they would not be identified.

Rule G-37, which took effect April 25, bars municipal dealers from doing business with a state or local governments for two years after the dealer, its political action committee, or its bond professionals contribute to an officeholder in those governments who could influence the awarding of bond business.

The ban covers only securities firms, leaving law firms and independent financial advisory firms free to contribute to politicians. And that leaves open a possible, if illegal, avenue for "under-the-table" contributions by securities firms.

One Midwest investment banker said he heard of another banker using his politically connected father to make contributions.

A bond attorney in the Midwest said that after the rule took effect a securities firm asked him to bill the firm more and then use the excess money to make a contribution to a particular politician.

"I was kind of stunned," the bond attorney said, adding that he turned down the request immediately. The attorney declined to name the securities firm.

Landscaping Ploy

The conduit does not have to have anything to do with public finance. One public finance executive said a lobbyist used his son's landscaping business to funnel contributions on behalf of two investment banking firms.

"All [the rule] is going to do is drive everything further underground," the executive said.

Some politicians and their fund-raisers are even coaching firms on how to get around the MSRB rule.

"Public officials raise a lot of money from public finance officials. They are not going to walk away because of some goofy MSRB rule," said a bond lawyer.

A public finance executive in Chicago said he was told by "a couple" of public officials to get a neighbor or a friend to write the contribution check and to attach the executive's business card to the check so the officials would know who was really making the contribution.

Politicians may also coach firms to funnel contributions or gifts through nonprofit organizations that in turn fund events for politicians. One Midwest firm was solicited by a local government to donate money to an organization that was going to fund an overseas trip for the mayor.

"My understanding is that is illegal if a designation is made," said an executive at the firm. "Anything that is done to get around the rule is illegal."

A related ploy has cropped up in Florida, say municipal market participants working in the state.

In a number of instances, sources said, well-connected investment bankers or consultants have set up charitable events, installing an incumbent elected official as the chairperson or keynote speaker.

"This can help the public official in several ways," said a Tampa-area public finance executive. "It can result in a contribution from the organization, and contributions from people brought together for the event.

"But it is also great exposure, which is really the name of the game in politics," the executive said.

Several people working in the municipal bond industry said they think that firms will be as creative in getting around G-37 as they are put in putting together new kinds of deals.

One opening is that most political terms run for four years while the rule's ban lasts for only two years after a firm makes a contribution. A firm could help a candidate financially and then collect in bond business in the second half of the politician's term.

A public finance executive in Maryland cited "street talk" that has "firm A" and "firm B" agreeing to take turns. Firm A makes no contributions to a given candidate and gets bond business for two years; "firm B" makes contributions and waits. After the two years, the firms switch places. In the meantime, the politician gets a steady flow of money.

Another scenario is, as one public finance executive put it, "the federal official who can read minds." Federal officeholders are not covered by the MSRB ban, so their war chests could take in contributions and then sprinkle the money among local officials chosen by the donors.

Contributions may legally be made to state and local political parties, but public finance officials could circumvent G-37 by telling the party what candidate should get the money. One public finance executive in Chicago said he has asked one of the parties to seek clarification from the Securities and Exchange Commission to see if specific contributions could elicit a no-action letter from the agency, which would essentially permit those contributions.

With many state offices up for election this year, fund-raisers are still expected to draw attendees from the ranks of public finance, according to sources. Some public finance executives may buy their tickets without falling under the MSRB ban.

Under Rule G-37, public finance executives eligible to vote for a particular candidate may contribute up to $250 per election to the candidate without triggering the ban.

Other executives may accept tickets "donated" by entities not covered by the ban, such as law firms or other businesses. A public finance source suggested that the ticket price could be reimbursed by the securities firm official or traded for future "favors."

Gene Andrist, head of municipal finance at Hanifen, Imhoff Inc. in Denver, said he is incessantly solicited by politicians, but cites G-37 to the solicitors and refuses to contribute.

"So far, people have understood," Andrist said. When asked if that would hurt his firm, he replied: "I don't know if it will hurt us or not. It might. I don't know what will happen."

Andrist, like many other bankers interviewed, said he has not been approached and asked to use an indirect method to contribute money to campaigns.

Still, local and regional firms are suspicious that the big firms will find a way around the rule.

Alex Brown, manager of George K. Baum & Co.'s Colorado operation, said he's not sure yet if retail sales brokers are covered by the law and worries that larger firms will be able to use brokers to get around the law.

"Our concern with the MSRB ruling all along is if you were a certain type of firm outside of the state and made contributions through a series of holding companies," Brown said.

Three well-connected California-based investment bankers who work for major New York firms said they have not heard of any dealers trying to circumvent the new rule on political contributions.

When it comes to Rule G-37, he said, "I don't think anybody in the big firms is sad."

But the bankers said the link between personal connections and deal-making remains.

"Somebody on a government board who is making a decision about bonds probably will lean toward their friend who coaches the baseball team or who attends the same church," the banker said. "Because of that relationship, that [underwriter] still has a leg up on the competition."

Such relationship-based connections, despite Rule G-37, "will still be there," the banker said.

Buying Votes

An unscrupulous professional "could hand a guy a thousand-dollar bill to buy his vote, but that always has been the case," a banker said. "You can't legislate that."

As stories of possible ways to evade the MSRB rule circulate through the industry, regulators are not saying much about any potential problems.

David Clapp, a general partner at Goldman, Sachs & Co. and MSRB chairman, said he is not aware of instances where anyone has tried recently to get around the rule.

"I don't know of any," Clapp said. "I think it's fair to say that the board has not received anything that would indicate [people are trying to get around the rule]. The amount of giving virtually has stalled."

Julie Lutz, assistant director of enforcement at the SEC, said she could not comment on examples cited by industry participants or say whether she is aware of other attempts to circumvent the rule.

SEC commissioner Richard Roberts warned firms to steer clear of any attempts to indirectly bypass the MSRB rule.

"If I was a member of the securities industry, I would be very concerned to engage in these shenanigans," Roberts said. "If they are discovered, it appears to me a strong argument could be made that most if not all would violate the language of the MSRB rule."

"I've always assumed certain segments of the securities industry would attempt to devise methods to circumvent the rule," Roberts said. "My advice to those individuals would be to be very careful."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.