The SEC is considering changes in a proposal - strongly opposed by some fund companies - designed to stop firms from contributing to government officials in an effort to win business managing government employee pension plans.

The SEC may modify its so-called pay-to-play proposal, according to Paul Roye, director of the SEC's division of investment management. That proposal would effectively bar money management firms from doing government business for two years if key company executives contribute more than $250 to elected officials or candidates who could influence the selection of who manages government employee pension money.

The pay-to-play proposal, which the SEC issued Aug. 4, is modeled on a 1994 rule adopted by the Municipal Securities Rulemaking Board, a self-regulatory body for the municipal bond industry, based in Washington, D.C. The rule was aimed at halting the practice of government officials receiving contributions from municipal bond dealers and brokers trying to obtain underwriting business.

The SEC recognizes that the investment advisory industry differs from the municipal finance industry, Roye said. In light of those differences, the agency is considering making changes to its original proposal, he said.

Nevertheless, the SEC remains committed to adopting a rule that would keep advisers from making political contributions in an effort to win government money management business, Roye said.

"The SEC must, and will, act by specific regulation to prevent the practice of buying government business with campaign contributions," Roye said. "It is the right thing to do."

Roye made his comments May 9 in Washington, D.C. to an association of employee benefits professionals. The SEC provided a copy of Roye's speech to Mutual Fund Market News. Roye did not describe how the SEC might modify the original pay-to-play proposal and he was not immediately available to elaborate on his remarks.

Several large fund companies have praised the SEC for attempting to limit pay-to-play in the investment advisory business. But, some companies have said that the scope of the agency's initial proposal is too broad. The proposed rule "while laudable in its goals, has certain features that would unduly limit political rights without advancing fair competition among investment advisers," Fidelity Investments of Boston wrote in a Nov. 1 letter to the SEC.

Rules on investment advisers' political contributions should prohibit contributions designed to win business, said David Tittsworth, executive director of the Investment Counsel Association of America of Washington, D.C. The proposed rule, however, is too broad, he said.

The association, which represents SEC-registered investment advisers, expects this week to issue recommended best practices for investment advisers with respect to contributions to elected officials and candidates.

Meyer Eisenberg, deputy general counsel of the SEC, said the agency was considering alternatives to the original pay-to-play proposal as a result of the comments the commission received.

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