WASHINGTON -- The Securities and Exchange Commission is conducting a "broad, comprehensive, and thorough" investigation of Orange County, Calif.'s financially troubled investment pool, SEC commissioner Richard Roberts said yesterday.

The investigation will include an examination of the relationships between county officials and the broker-dealers involved in the county's derivatives and leveraged investments, Roberts said in a television interview with CNBC and a follow-up telephone interview.

The National Association of Securities Dealers is also investigating the broker-dealers involved in the pool, an official with that organization confirmed yesterday.

Questions have been raised about whether Merrill Lynch & Co. violated a rule aimed at halting pay-to-play practices in the municipal market by underwriting several bond issues for the county after three Merrill employees each contributed $1,000 to the reelection campaign of Robert Citron, the county's former treasurer.

The SEC is also said to be looking at whether Orange County officials may have violated securities fraud laws by failing to fully disclose the investment pool's financial troubles sooner. The county filed for bankruptcy last week.

In a related issue, Roberts said he expects Congress "will take a long hard look" at the Federal National Mortgage Association and other government-sponsored agencies "to see if any changes are needed in the way those agencies do business."

Roberts' remarks come as Orange County and several other localities have suffered widely publicized losses and liquidity problems in connection with structured notes issued by these agencies. In several of these cases, local officials said they invested in the notes because they thought they were safe and fully backed by the U.S. Government.

The questions about political contributions made by Merrill employees to Orange County's Citron revolve around a Municipal Securities Rulemaking Board rule that took effect last April after being approved by the SEC.

Under the rule, a broker-dealer is prohibited from doing any municipal bond business with an issuer client for two years if any of its "municipal finance professionals" contributed to that client. The rule covers any broker-dealer employees who solicit municipal bond business, even if that is a very small portion of their work.

Orange County records of campaign contributions show that Citron, who was county treasurer until he was forced to resign last week over the investment pool's losses, received $1,000 contributions on June 13 from Merrill's Michael Stamenson, Debra Harris, and Duane Canaga. Stamenson reportedly handled Merrill's Orange County account.

Merrill issued a statement last week saying that none of the three employees is covered by the rule.

The question as to whether county officials made proper disclosures about their financial troubles revolves around the securities law's antifraud provisions.

The antifraud provisions do not require state and local issuers to disclose information about their financial condition. But the provisions specify that when issuers make statements that can reasonably be expected to reach the market, those statements must be complete and accurate and must not omit material facts, SEC and bond lawyers said.

SEC chariman Arthur Levitt indicated at a conference in New York City last week that he thought Orange County officials could have disclosed information about their financial troubles sooner than they did.

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