Are the rules strictly forbidding political contributions by municipal bond professionals really too strict, or is the Municipal Securities Rulemaking Board (MSRB) just a bit too powerful for the NASD's liking?
That's a question numerous bond market participants were asking after NASD Chairman Frank Zarb recently told a Boca Raton gathering of the Bond Market Association (BMA) that Rule G-37, the so-called "pay-to-play" rule, might be in need of a little fine-tuning--and the NASD would like to be a big part of that process. The rule limits campaign contributions by municipal finance professionals to state and local political candidates or office holders who could award muni financing business. Dealers can be barred from muni business for two years in jurisdictions where they violate the rule.
"You have to wonder why the NASD is taking the lead on any revisions since it has always been the MSRB's territory," says one attendee contacted after the conference.
Zarb, who claims to be one of the driving forces behind the pay-to-play reform back when he ran Smith Barney, told the BMA crowd that although he remains a solid backer of the rule, aspects of it are so rigid that enforcement has become unwieldy and impracticable.
"The rule is so rigid that the enforcement has caused some unfairness," he told the group. He then went on to cite examples of small contributions made without the knowledge that the firm was seeking a piece of a locality's business--violations that brought down the full weight of the law.
"What we need to do is to add some common sense to the law," he said.
Although the news that the NASD will attempt to review some provisions of G-37 garnered some favorable comments from market participants, many also wondered why Zarb, who championed the mandatory, no-exceptions aspect of the rule is now doing an about face.
"I can't say for sure," says an official in the municipal department of a New York City-based brokerage. "But it seems that what is really to be gained is an increase in power for the NASD and maybe a gift of a little leeway for member firms."
Another conference attendee, from a Midwest regional, who has sat on numerous NASD committees says he believes the idea, like many NASD proposals, probably originated with NASD staff and committee members and was simply trotted out by Zarb.
"Why else would someone who saw an issue one way suddenly have a different opinion?" the regional executive says. "It's because the NASD has always been in an unusual position regarding this rule, including being a little subservient to the MSRB, and they see an opportunity to change it."
The "unusual position" is that the NASD has responsibility to enforce G-37 even though it is not an NASD rule. The MSRB sets and interprets muni rules; the NASD has enforcement responsibility. Although the NASD can grant some exceptions, it remains bound by MSRB rule interpretations. The MSRB has made it clear that exemptions should be rare.
At the BMA convention in 1997, Mary Schapiro, head of the NASDR, summed up the prevailing situation with regard to exemptions by saying, "Our door is open to such requests, but the opening is not wide."
In its 1996 settlement with the NASD, the SEC found widespread failure to enforce G-37, which was instituted in 1994 and was always unpopular with NASD members.
A spokesperson for the BMA said the group had no comment on Zarb's remarks.
Frank Zarb's office did not return calls. Christopher Taylor, MSRB chairman, was not available for comment by press time.