WASHINGTON - A proposal curbing political donations by money managers to officials overseeing public pension funds is in the deep freeze.
Sources say the proposed SEC "pay to play" rule is dead. But Securities and Exchange Commission officials contend the rule, like many others, is on hold until a new chairman has been appointed. (Commissioner Laura Unger, a Republican, is acting chairman until President Bush nominates a new head.)
The proposal had been challenged not only by trade groups representing money managers and elected officials, but also by public pension funds, including the $165 billion California Public Employees' Retirement System, the nation's largest.
A CalPERS spokesman said officials declined to comment.
"There is a possibility that this will disappear," said Michael Udoff, vice president and associate general counsel at the Securities Industry Association, one of the many trade groups that had opposed the SEC proposal.
Richard Y. Roberts, a former SEC commissioner, agrees. "I don't think the new chairman would be interested in pursuing it," said Mr. Roberts, now counsel to the law firm of Thelen Reid & Priest LLP, Washington.
Mr. Roberts, who reluctantly cast a vote in 1994 for a similar SEC proposal regulating political contributions in the municipal bond market, sees no need to extend the rule to money managers.
And David G. Tittsworth, executive director of the Investment Counsel Association of America, a Washington trade association representing the money management industry, also expressed satisfaction that the SEC proposal has been shelved.
"The proposal was too heavy-handed, and it did not fit how the investment adviser business is conducted, or the level of abuse that was uncovered," he said. For one thing, unlike municipal dealers, investment advisers have an ongoing fiduciary relationship with public pension funds. Then too, unlike the municipal bond business where one official, usually the treasurer, generally determines the awarding of a contract to an underwriter, most public pension funds have a board of trustees.
Outgoing SEC Chairman Arthur Levitt Jr. had hoped the agency's four commissioners would approve the rule in private before he left office last month, but two of them reportedly had expressed concerns about the proposal.
The proposal apparently had been sent to the commissioners to vote on, but never was acted upon. An SEC spokesman declined to confirm that it had been sent to the commissioners for a vote.
Ms. Unger declined to comment on her views about the proposal.
`A bad idea'
The SEC's "pay-to-play" rule, proposed in August 1999, also raised the ire of Sen. Phil Gramm, R-Texas, chairman of the Senate Banking Committee, whose committee must clear any nominee for the SEC chairman before the full Senate casts its vote. A spokeswoman for Mr. Gramm confirmed he still believes the proposal is "a bad idea," but said she did not know if Mr. Gramm would bring up the proposal in confirmation hearings.
The proposal would have banned money managers from doing business with public pension funds for two years after the "adviser, or any of its partners, executive officers or solicitors" made political contributions to public officials who also have a say in hiring and firing investment advisers to public pension funds. The proposal also would have required money managers with more than $25 million in assets and subject to federal regulation to maintain detailed records of political contributions made by their executives.
In a letter a year ago to Mr. Levitt, Mr. Gramm expressed concerns about the scope of the rule, noting it failed to recognize the distinction between influence peddling and contributions made "because of an existing personal, family, or professional relationship with the candidate."
Les Braun, chairman and chief executive officer of Hamilton Lane Advisors, Philadelphia, believes that is an important distinction.
Mr. Braun, who made a contribution to the 1994 campaign of H. Carl McCall, New York state comptroller and sole trustee of the $120 billion New York State Common Retirement Fund, Albany, believes he was unfairly skewered in the press, even though his contribution had no connection to any business dealings between his firm and the state pension fund.
"One of the difficulties with regulating on pay-to-play is: Where do you draw the line between someone's right to support political candidates of their choice that are somehow involved with them or their organizations in other business dealings," he observed.
Moreover, political contributions are hard to regulate because a loophole in campaign finance law lets individuals channel unlimited amounts of money to the political candidate of their choice by contributing to the candidate's political party, he noted.
Mr. McCall's office did not return calls seeking comment.
State treasurers pleased
State treasurers also are pleased the SEC has shelved the pay-to-play proposal. "The feeling of most treasurers is that those who happen to be holding a position should not be singled out, and if Congress wants to adopt comprehensive campaign finance reform, that's fine," said James H. Douglas, treasurer for the state of Vermont and the current chairman of the National Association of State Treasurers. Moreover, Mr. Douglas said states are free to regulate business dealings by contributors to public officials.
Mr. Douglas is a trustee of the Vermont State Employees' Retirement System, the Vermont Teachers' Retirement System and the Vermont Municipal Employees Retirement System, which have a total of nearly $2.4 billion in assets. He noted that both Vermont and Connecticut, for example, prohibit business dealings with the state treasurer's office for two years by individuals who have made any political contributions to those officials.
In a meeting with SEC commissioners last June, three treasurers - Jim Hill of Oregon, then president of the National Association of State Treasurers, Dan Ebersole of Georgia and Georgie Thomas of New Hampshire - expressed concern about the proposed regulation. In a November 1999 letter commenting on the proposal, Mr. Hill, representing the treasurers' association, urged the SEC to withdraw the proposed regulation, noting state treasurers already are subject to state laws governing political contributions and disclosures.
Representatives of many groups contend the proposal was overkill. The National Association of State Retirement Administrators and the Investment Counsel Association of America, for example, both have ethics guidelines they expect their members to follow.
The NASRA ethics code calls on fiduciaries of public pension plans to carefully review the trust and conflict-of-interests laws applicable to them, "to ensure that the fiduciary's relationships with other parties are not incompatible with the duties of the system."
The Investment Counsel Association of America has a similar code of ethics, which recommends that investment advisers adopt policies and procedures designed to prevent abuses in political contributions that are best suited for their own firm's structure and business relationships.