NEW YORK -- In a presidential election year widely expected to generate unprecedented levels of campaign giving and spending, the Securities and Exchange Commission is pushing new rules that could keep the mutual fund industry out of the game.
The SEC wants to eliminate the use of campaign contributions by mutual fund companies as a tool to obtain lucrative contracts to manage public pension funds.
SEC officials hope to avoid another so-called ''pay-to-play'' scandal similar to the one that tarnished the municipal bond market in the mid-1990s, when bond underwriting firms were found to be making contributions to local politicians in return for contracts to underwrite municipal bond offerings.
New rules proposed last year by the SEC would exclude fund companies from obtaining government advisory contracts for two years iftop officials of the fund have contributed more than $250 to a politician in a position to award such contracts.
''Elected officials who allow political contributions to play a role in the management of these assets violate the public trust by rewarding those who make political contributions,'' SEC officials wrote in an introduction to the proposal.
Similarly, investment advisers seeking to influence the award of advisory contracts by making political contributions are compromising their fiduciary obligations, the SEC document states.
The rules have yet to be approved and an SEC spokesman declined to comment while the proposal is pending. But the topic will be on the agenda at the SEC's Roundtable on Investment Advisory Issues scheduled for May 23 at the agency's headquarters in Washington, D.C.
While fund companies have voiced support for the SEC's effort to curb pay-to-play practices, the industry has argued that the SEC's proposed measures are too broad.
Moreover, critics argue that the SEC's plan probably violates constitutional rights of freedom of speech protected under the First Amendment.
Typical of the responses received by the SEC in comment letters from various segments of the mutual fund industry is a letter from the Investment Counsel Association of America, a Washington, D.C., trade group.
''The ICAA strongly opposes any attempts by investment professionals to 'buy business' through campaign contributions,'' wrote ICAA executive director David Tittsworth.
However, the proposal as written essentially blocks anyone professionally connected to a mutual fund or investment advisery firm from making political contributions for any reason out of fear that the contribution could be misconstrued as a payoff, Tittsworth wrote.
The ICAA concluded that the SEC's broad brush infringes on every American's constitutional right to support candidates by making campaign contributions.
Other letters echoed those sentiments.
''The commission's proposed rule, while laudable in its goals, has certain features that would unduly limit political rights without advancing fair competition among investment advisers,'' wrote officials at Fidelity Investments.
The Franklin Templeton Group added: ''We believe that the commission's proposal places undue burdens on investment advisers and intrudes on the ability of an individual to participate in the political process simply because he or she is associated with an investment adviser.''
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