Big Muni Bond Firms Agree to Curb Political Contributions : Ethics: Industry critics had charged that the donations were made in an effort to gain a share of the lucrative municipal financing business.
The leading municipal bond firms Monday pledged to voluntarily curb what industry critics have dubbed “pay for play” political contributions made in connection with seeking a share of the lucrative municipal financing business.
Eighteen bond houses and one Wall Street law firm endorsed an initiative barring brokerage firms, employee political action committees, bond industry consultants, municipal finance professionals, their supervisors and senior management from making or soliciting political contributions at either the state or local level. Lesser employees could give money as individuals, however.
The initiative, announced by Arthur Levitt, chairman of the Securities and Exchange Commission, covers firms that conduct about three-quarters of the nation’s municipal bond business. Its adoption comes just a few weeks after the Public Securities Assn., the bond industry’s lobbying group, asked member firms not to make any more political contributions to state and local officials until regulators could adopt a rule that provides clear guidance on the issue.
Meanwhile, an industry regulatory group, the Municipal Securities Rulemaking Board, is expected to meet next month to finalize a mandatory rule that would require detailed disclosure of campaign donations and would prohibit dealers from making political contributions for the purpose of getting or keeping municipal bond business.
Wall Street executives have decried the practice. However, industry officials say that if they wanted to compete they had to make political donations, because they feared that competitors who continued giving would have an inside track on the municipal bond business. It is legal for bond firms to make political campaign donations, and supporters of campaign giving say restrictions on political donations could violate the First Amendment rights of dealers.
But Levitt said Monday that “perceptions of inappropriate political contributions can seriously threaten the integrity of the municipal securities market” and “erode public confidence in a market that depends heavily on public trust.”
Municipal bonds, issued by state and local governments, special authorities and other public agencies, are used to pay for new roads, schools and other such projects. The interest on municipal bonds is generally exempt from federal income taxes.
Efforts to curtail political donations by bond dealers mushroomed earlier this year when federal investigators began looking into whether kickbacks were involved in the underwriting of New Jersey Turnpike bonds. Allegedly inappropriate campaign donations also surfaced in Boston and Kentucky this year.
The movement to curb campaign contributions by bond firms could significantly affect future election fund raising across the nation because the Wall Street investment community has become a big source of political money.
Currently, municipalities select firms to underwrite bond issues either through competitive bidding or direct negotiation. Competitive bidding is preferred because governments want to pay the lowest possible interest rate and save taxpayers money. But municipalities sometimes negotiate directly with a single bond firm for small bond issues or offerings that for some other reason might be difficult to place.
Several industry leaders praised the quick voluntary action, saying it will improve a recent climate of public mistrust of bond dealers.
“This goes beyond all of the regulatory steps taken thus far,” said Frank G. Zarb, vice chairman of Primerica Corp. “This was needed to curb public concern. This is the right time to take this step (because) minority and small firms were at a disadvantage with bigger firms” making significant campaign contributions.
“This is a good move,” said David C. Clapp, chairman of the Municipal Securities Rulemaking Board and a partner at Goldman, Sachs & Co. “I think most firms will be relieved.”
