WASHINGTON -- The Securities and Exchange Commission is examining whether financial advisers and consultants are being used as "proxies" to make political contributions for municipal broker-dealers that have been banned from play-to-play practices, SEC chairman Arthur Levitt said yesterday.

"It's something that we're going to stay with and watch closely," Levitt said after speaking to the group, Women in Housing and Finance.

"I've talked to adviser groups, and it's my hope and expectation that advisers are not going to pick up and act as proxies for the firms," he said.

Levitt said that the Municipal Securities Rulemaking Board rule that effectively bans pay-to-play practices for broker-dealers is artfully worked so that it should cover such situations.

If broker-dealers are making political contributions through other market participants to get municipal bond business, "they are violating" that rule, he said.

The MSRB rule, which took effect last April after the SEC approved it, effectively bans pay-to-play practices by barring broker-dealers who contribute to issuer clients from doing business with those clients for two years afterward.

"I don't believe for a moment that this ban or anything else we do is going to eliminate greed and corruption, but I think it will make it a little less pervasive, a little more difficult," Levitt said.

Levitt also said that he thinks the SEC will prevail in a court challenge to the MSRB rule. Alabama bond dealer William Blount has asked the U.S. Court of Appeals for the District of Columbia to declare the rule unconstitutional. Oral arguments are to be heard in the case on Friday.

In his speech to the group, Levitt said he first became aware of pay-to-play practices when he was at Shearson Hayden Stone Inc., now Smith Barney Shearson.

"When I was at Shearson, I went to all too many meetings and fund-raisers to raise funds for candidates that I never heard of, never met before, who represented communities that I had never been to and never would go to. And we had to do this to stay in the business," he said.

Levitt said the SEC action to eliminate pay-to-play practices is just one of several reforms the SEC has pushed "to improve and update the municipal bond business."

The municipal business has changed little in recent years despite the fact that the percentage of individual investors who hold such bonds has jumped from about 45% to 70% over the last 10 years, he said.

"We're urging the municipal bond business to prepare itself for the 21st century," he said.

Another major SEC initiative has been "to enhance disclosure" in the municipal market so that issuers can keep investors informed about events that might effect their bonds "such as insolvency," he said.

Levitt ticked off other investor initiatives, disclosing that the SEC and National Association of Securities Dealers will soon begin a "sweep" of small broker-dealers to determine if they employ brokers who have engaged in unscrupulous activities that need to be investigated.

Levitt refused to comment on SEC investigations of Orange County, Calif.'s recent derivatives-related losses and Bankers Trust Co.'s derivatives dealings with its clients.

On securities litigation reform, Levitt said it is "extremely likely" that the Republican-led Congress will take up legislation soon after they go into session.

"I think we'll see a bill come up very quickly and move very fast," he said, adding that the SEC "will try to be constructive."

Levitt said he personally favors "improving the system" to ensure that investors who win securities suits, rather than their lawyers, benefit most when courts make monetary awards. He also said some securities lawsuits should never be filed in the courts.

At the same time, Levitt said, "We have to depend on the rights of individuals to bring their own actions" in court because the SEC does not have huge resources that can be used to protect investors.

Asked about the possible repeal of the Glass-Steagall Act of 1933, Levitt said he thinks members of Congress "will work toward a rational solution" so that "banks and brokers are able to formalize a working relationship which is in the interest of the investor public."

"I don't see this as a major battlefront," he said. "I'd like to see it as something we can arrive at in a rational and open way."

The SEC, he said, will want to comment on those areas of any bill "where investor protection is involved."

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