Several top Wall Street executives are discussing an industrywide ban on at least some political contributions to public officials who select firms for municipal bond transactions, industry sources say.

The move, which could mark the first time the industry has taken matters in its own hands to limit or eliminate campaign contributions, is designed to bolster the municipal market's image following numerous reports that bond firms are expected, almost as a matter of course, to make large campaign contributions to politicians who select bond underwriting syndicates.

The possible self-imposed ban or limits would supplement recent efforts by the Municipal Securities Rulemaking Board, the municipal industry's self-regulatory agency, which is examining the issue. The board's executive director, Christopher Taylor, yesterday declined to comment.

A source close to the MSRB said its membership is "leaning toward a ban" on industry contributions to politicians who select firms for underwriting positions.

The source said the board has not decided if the ban would rule out all political contributions, or under what conditions industry executives would be prevented from making donations to their candidates of choice.

The 15-member board will meet the week of July 28 on the issue. A source close to the board said it has hired an outside counsel to examine if a ban would be legal.

Although it is not clear how the industry's effort would mesh with the board's expected response, one industry executive said the board would likely incorporate a new code of conduct into its own campaign restrictions. The industry code would also likely be relied upon until the MSRB's new rules are in place, industry sources speculated.

While the board is reacting largely to a federal investigation of the role political contributions play in the municipal bond business, the efforts of several Wall Street executives began almost a year ago.

That's when Frank G. Zarb, former chief executive officer at Smith Barney, Harris Upham & Co., met with high-level executives from Goldman Sachs & Co., Morgan Stanley & Co., and other firms to discuss a possible industry ban on political contributions, sources say.

Zarb, now vice chairman and chief executive of Primerica Corp., was not available for comment.

But sources say Zarb met with David C. Clapp, a Goldman general partner and head of the firm's municipal bond department, and possibly Robert E. Rubin, who at the time was a co-chairman of Goldman's management committee before taking a position as an economic adviser with President Clinton's administration.

Neither Clapp nor Rubin were available for comment.

More recently, sources say, Zarb met with Richard B. Fisher, chairman of Morgan Stanley & Co., on the same issue.

Sources say the meetings were an attempt to discuss solutions to the perception that a conflict of interest exists when Wall Street firms contribute to the political campaigns of politicians who also select bond underwriters. For many politicians, Wall Street represents the largest pool of cash to finance their campaigns.

Although the discussions began almost a year ago, sources say that in recent months some of the same executives met on the issue, spurred by the federal investigation into a New Jersey Turnpike Authority bond transaction and reports that underwriters are constantly under pressure to fund campaigns of politicians who select bond syndicates.

The discussions of the issue by major industry executives have also taken place during recent meetings of the Public Securities Association, PSA president Heather Ruth has confirmed.

Ruth said the PSA on its own cannot impose a ban on political contributions, but its membership can. "People are interested in limiting political contributions," she said, refusing to name the executives involved in the discussions.

"The PSA has no position on this issue," Ruth said, adding that the association cannot "legally enforce" a code of conduct on its members. "But our members can do what they want as individual firms."

Just how far any ban on political contributions will go, as well as its effectiveness, is uncertain, market executives and public watchdogs say.

Several market executives interviewed say constitutional issues would prevent regulators or industry self-policing to enact a complete ban of political contributions.

Many executives say, for example, that the First Amendment protects individuals who may want to support a political candidate, even if those individuals are investment bankers and even if the candidates make underwriter selections.

However, other industry executives say the constitutional issues can be easily resolved.

One executive who favors some kind of a ban on political contributions said a rule may be fashioned so that individual bankers can make political contributions, but not if they work for a bank that applies for municipal bond underwriting positions, the executive said.

In addition, sources say one proposal advocated by a leading industry executive would allow bankers to make contributions only as individuals, and not as members of their firms. The executive, who runs a major Wall Street firm, said in an interview with The Bond Buyer that "full disclosure" would provide the industry with the ability to police itself if certain firms began to bundle individual contributions to curry favor with politicians.

Still, several industry executives doubt these measures will have a real impact. A ban on political contributions, for example, does not prevent Wall Street firms from employing politically connected consultants, or doing pro bono work on behalf of politicians. Other executives doubt the enforceability of any self-imposed rules.

"These efforts are moving in the right direction, but they sound like there may be some loopholes." said Julian Palmer, executive director of New York State Common Cause. Palmer said these rules, for example, do not prevent politicians from asking Wall Street investment bankers for money. Further, many Wall Street firms could continue to benefit from individual donations, he said.

In addition, Wall Street bond firms are not alone in funding political campaigns in the hope of winning lucrative public financing business. Bond lawyers and money managers are also major contributors to political campaigns, although the current action would not effect these individuals.

In the past, attempts to ban or limit political contributions have been thwarted in large part by Wall Street's efforts to compete for lucrative bond underwriting positions. Many firms initially resisted Zarb's pleas for a reform of the system, as well as the calls for reform by other municipal market executives.

The earlier efforts by executives at Smith Barney and Goldman were viewed with skepticism and suspicion by many firms in the market, investment bankers say. Some industry executives, for example, viewed attempts by these firms to limit or ban campaign contributions as a way to freeze their current position in the municipal bond market. Smith Barney and Goldman are among the industry leaders in negotiated underwritings.

But the recent events in New Jersey, as well as other reports detailing the connection between political contributions and the municipal industry have given the effort for reform new life.

"I believe you will see some industry effort on this subject some time this year," said the head of one large investment bank, who spoke on the condition of anonymity.

The official said the industry will likely produce a "set of standards" that would be self enforced. "There would be a lot of pressure from the industry for firms not to violate" the rules, the official said.

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.