April 21 (Bloomberg) -- The U.S. Securities and Exchange Commission is considering rules to restrict money managers from paying to win state business as regulators ratchet up inquiries into kickbacks paid to a New York political adviser.

The agency is re-evaluating a 1999 proposal that would have barred investment advisers from managing state pension funds if they donated to elected officials involved in awarding adviser contracts, SEC Chairman Mary Schapiro said today in an interview. Schapiro said the SEC is “looking at everything related to municipal markets” as it considers new rules.

“One of the first things I asked the staff to do was dust off” the earlier proposal and “take a look at it,” said Schapiro, chairman since January. “Let’s see if it still makes sense or if there are things that we should do differently.”

The SEC and New York Attorney General Andrew Cuomo are investigating whether private-equity firms and hedge funds made illegal payments to so-called placement agents to do business with New York’s pension fund. Fallout from the New York probe spread to New Mexico as officials examine whether similar practices occurred with its $11.7 billion state trust.

The SEC and Cuomo last month accused New York Deputy Comptroller David Loglisci of arranging for the state’s pension fund to invest $5 billion with money managers that paid kickbacks to former Democratic adviser Hank Morris and others. Regulators are examining whether investment advisers, including Carlyle Group and Quadrangle Group LLC, knew the payments were improper.

Rattner, Quadrangle

Steven Rattner, who co-founded Quadrangle and now heads U.S. President Barack Obama’s auto task force, has the full confidence of the administration, a White House spokesman said. Robert Gibbs, Obama’s press secretary, said April 17 that Rattner isn’t likely to face “criminal or civil charges.”

Morris, who advised ex-New York Comptroller Alan Hevesi, received “sham” finder fees from private-equity firms and hedge funds, the SEC said in a March 19 lawsuit. Loglisci allegedly told money managers the payments were necessary to do business with the fund. Morris and Loglisci have said they will fight the state and federal claims.

New Mexico this week released a partial list of third-party brokers paid by money managers to win business from the state and also suspended an investment adviser. The list showed 42 brokers were paid as much as $35.9 million to get a piece of New Mexico’s State Investment Council’s trust.

Limitations Sought

“We should have limitations on the kind of people who can serve as intermediaries, but more importantly, the public should see who is getting paid and for what,” said former SEC Chairman Arthur Levitt, who is now a senior adviser to Carlyle and a board member of Bloomberg LP, the parent of Bloomberg News. “Who is it that gives out these billions of dollars of fees and commissions? It’s elected officials who solicit campaign contributions,” Levitt said in a Bloomberg Radio interview.

Schapiro, discussing new ideas to regulate municipal securities markets, said the SEC intends to “begin putting things out this summer.” The agency is “loosely targeting July,” she said.

Under the 1999 proposal, investment advisers would have been barred from managing pension money for two years after making a political contribution. The measure, which the SEC never adopted, also would have required money managers with government clients to keep records of their contributions.

Schapiro said the SEC is also reviewing the disclosure obligations of cities, states and underwriters that raise money by selling bonds. A 1975 law known as the Tower Amendment exempts municipal borrowers from filing documents with the SEC, as corporations that sell securities do.

Underwriters are required to make copies available of most municipal bond issues and disseminate information, such as payment delinquencies.

Levitt, who led the SEC from 1993 to 2001, said the agency is handicapped in fighting abuses such as investment advisers paying for government business because it lacks authority over municipal finance.

To contact the reporter on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net.

Last Updated: April 21, 2009 17:11 EDT