Many Wall Street firms are criticizing a proposal by the Municipal Securities Rulemaking Board to restrict political contributions, saying the plan is weak and could create a competitive disadvantage for some market players, according to sources close to the board.

The sentiment could convince the board to alter its proposal, which in its current version would bar industry executives from making contributions for the purpose of obtaining or keeping municipal underwriting business. Any refined proposal should make the restriction more explicit and more difficult to circumvent, sources say.

So far at least two sources with knowledge of the board's activities say a further modification of the proposed rule is likely, and will be made public after the group's November meeting. But other sources said any expansion of the proposed ban would be difficult, given constitutional free-speech provisions.

"The MSRB misjudged the fear that is almost primordial by many on Wall Street that their competition won't do the right thing, and will read the draft rule as liberally as they can" said one source close to the board.

The source said there will probably be a more specific rule, given the industry's angst over the original proposal.

Christopher Taylor, executive director of the MSRB, said, "It would be very, very premature to suggest we're going to" change the rule. Taylor said the board will examine all the responses, and then make a decision on the issue. "Whatever you're hearing is unfounded, because we haven't sent the stuff to the board and the board hasn't had a chance to consider it."

For months, many Wall Street firms have expressed their concern over the effectiveness of the rule in private comments made to the board. sources say. These views were made in letters following the board's announcement of the proposal in August. The comment period ended last night.

Many Wall Street firms, for example, have complained that the rule would be impossible to enforce. As a result, the proposal, if enacted, could give a competitive advantage to firms that chose a liberal interpretation of the ban, over those that chose a more restrictive interpretation.

"It is difficult to understand how a rule that distinguishes between permissible and prohibited contributions on the basis of a contributors' intent would be effective in avoiding an appearance of impropriety," J.P. Morgan said in its comments to the board, which were obtained by The Bond Buyer.

"Regulators would find it difficult, if not impossible, to show that a contribution was made for the purpose of obtaining or retaining business particularly if the contributor expresses other reasons for the contribution," the letter said.

Sources close to the board say the group is walking a fine line between preserving constitutional rights of individuals at Wall Street firms, and attempting to rid the municipal bond business of conflicts of interest.

The source said the board will probably draw definitions as to who is covered by a proposed ban and who isn't, while enacting a strict ban on political contributions for everyone else, including family members of municipal executives.

Recently, officials at a handful of firms have also said that they will no longer make contributions. For example, a spokesman for Merrill Lynch & Co. said yesterday that the firm decided last week to no longer make any new contributions to state and local officials, at least until the MSRB rule is adopted.

Any earlier pledges to make contributions will be reviewed, the firm said.

The U.S. attorney's office in New York is investigating Merrill for its relationship with a politically connected securities firm in New Jersey.

Goldman Sachs & Co., has also voluntarily banned political contributions, sources there say. MSRB chairman David Clapp is a general partner in the firm's municipal division. Clapp was not available for comment.

On Tuesday, the Public Securities Association, the bond industry's lobbying group, asked member firms not to make any more business-related contributions to state and local officials until regulators can adopt a final rule that provides clear guidance on the issue.

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

Recently, the National Association of State Treasurers association said it is working on a code of conduct for public officials who play a role in the issuance of public debt. The Treasurer's Association also said it is in favor of financial disclosure as the basis for monitoring and regulating the relationship between elected public officials and the municipal securities industry.

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