US SEC mulls exemptions for pay-to-play proposal

* Considers exemption for registered broker-dealers

* Proposal generated outcry from investment industry

By Dan Margolies

WASHINGTON, Feb 16 (Reuters) - U.S. securities regulators
could water down their own proposal to restrict money managers
from helping investment funds win lucrative business with
government pension funds, in a bid to ruffle fewer feathers in
the broker-dealer community.

The Securities and Exchange Commission has proposed
clamping down on "pay to play" -- or the practice of making
political contributions to pension fund officials in order to
win lucrative investment contracts.

The SEC proposed banning advisers from paying placement
agents, or pension-fund middlemen, from soliciting government
pension funds last year. The proposal was unveiled after an
investigation of New York's $110 billion pension fund revealed
millions of dollars in fees that investment firms had paid to
placement agents.

The proposal met with stiff resistance from the investment
and pension industries, which have urged tighter rules as
opposed to an outright ban.

Now the SEC is contemplating a tightly controlled exemption
for registered broker-dealers. The agency appears to be willing
to allow broker-dealers to act as legitimate placement agents
if the Financial Industry Regulatory Authority, the
broker-dealer watchdog, implements strict pay-to-play rules.

"It occurs to us that an exception to the ban for
registered broker-dealers acting as legitimate placement agents
might be feasible if Finra were to implement rulers that would
prohibit pay-to-play activities by those persons," an SEC
official said in a December letter to Finra.

Finra, which supervises nearly 5,000 brokerage firms, is
funded by the industry and overseen by the SEC.

The SEC proposal needs to be put to a final commission vote
before the proposal becomes a rule. John Nester, an SEC
spokesman, said that the agency's staff is still evaluating
public comments and has not yet made a final recommendation to
the commission.

In the SEC's December letter, the agency's director of
investment management, Andrew Donohue, said he was "very
interested to learn whether Finra would consider crafting and
adopting such rules for its members."

Herb Perone, a spokesman for Finra, acknowledged that Finra
had received the letters and that the proposal was under
discussion. He declined further comment.

The pay-to-play probe by New York Attorney General Andrew
Cuomo uncovered a web of connections between politically
connected placement agents, investment firms and public
retirement systems, notably ones in New Mexico and California.
Five people have pleaded guilty in Cuomo's probe.

The nation's biggest pension fund, Calpers, said last month
that investment firms paid placement agents more than $125
million in fees to win business at Calpers, including nearly
$59 million to a firm led by a former board member of the
pension fund.

Calpers said the data made the case for greater regulation
of placement agents.
(Reporting by Dan Margolies; editing by Carol Bishopric and
Matthew Lewis)