Dec. 4 (Bloomberg) -- Legislators from four different states have written the governors of the 50 U.S. states and 277 leaders of all the state legislatures suggesting divestment from companies doing business in Syria, Iran, North Korea and Sudan.

The legislators urge their colleagues across the nation to ``join our states, Delaware, Maryland, Massachusetts and New York in adopting'' a broad ``terror-free'' investing legislative model for state pension funds. State and local pension funds hold $3.1 trillion in assets, according to a Federal Reserve report.

By pushing for a uniform anti-terror investment strategy, the legislators, whose states haven't yet adopted the divestment plan, are aiming to magnify their influence on companies that do business in these nations and to spur a market for investment products to meet those requirements.

``Our constituents do not want their pension funds to support the economies of nations that sponsor terrorism,'' said Massachusetts state Representative Kevin Murphy, a Democrat. ``We have set forth a market-driven approach that applies real political and financial pressure on foreign companies to freeze operations within these countries or to withdraw, while at the same time ensuring high-yield returns.''

Murphy, along with Representative Don Blakey, a Delaware Republican, Democratic Senator Jeffrey Klein of New York and Republican Delegate Ron George of Maryland, pointed to the establishment of a series of terror-free indexes by the index firm FTSE Group that will be released next year.

Database of Companies

FTSE, based in London, is working with the Washington research and consulting firm Conflict Securities Advisory Group, which maintains a database of companies that it says do business in countries designated as sponsors of terrorism. The four states control about $455 billion in investments through their state and local pension systems, according to U.S. Census data for fiscal 2005-2006.

Jerry Moskowitz, president of FTSE Americas, said the market for terror-free investment products is growing, and his company will introduce three indexes next year. FTSE is sending letters to about 250 companies that will be excluded from the new index because of their business ties and giving them a chance to dispute the information or change their business practices.

FTSE is also negotiating with a major financial services firm to create an exchange-traded fund based on the new indexes, Moskowitz said. He declined to name the firm. He said preliminary studies that show investment returns didn't suffer when those companies were eliminated from a portfolio.

Uniform Approach

``FTSE is trying to respond to the market here,'' Moskowitz said. ``A number of states are going to begin guiding their pension plans to implement a terror-free strategy.'' He said it's crucial that states aim for a uniform approach so they can define their investment strategy clearly.

Murphy's initiative differs from laws in California, Florida, and several other states that target specific industries or aim to divest from only one nation. California, for example, passed a law in September that requires its public pension system to divest from businesses that invest more than $20 million in Iran's energy sector.

That law will require the California Public Employee Retirement System to divest from fewer than 50 companies, according to Murphy spokesman John Sheehan. Murphy's plan, which was introduced in June and has 66 co-sponsors, would probably require Massachusetts, and any other state that uses the same language, to sell investments in more than 350 companies.

The New Jersey legislature's Budget and Appropriations Committee yesterday approved a bill to divest its $84 billion in pension funds from Iran, which would require the sale of an estimate $1 billion in securities, according to Thomas Vincz, a spokesman for that state's Treasury. New Jersey already approved a bill to divest from Sudan.

Powerful Opponents

Divestment initiatives have powerful opponents, including the Bush administration, officials from the state investment boards of Wisconsin, Virginia and Colorado as well as the association of state pension funds.

``The administration opposes proposals to authorize divestment by state and local governments, which impair the ability of the president to act on behalf of the nation as a whole and risk creating a multiplicity of foreign policies,'' said Adam Szubin, director of Treasury's Office of Foreign Asset Control, in testimony in October.

``This is a simplistic solution to a complex problem that might make some people feel better but does nothing to affect the targeted companies or countries.'' said Keith Brainard research director at the National Association of State Retirement Administrators.

`More Obstacles'

Divestment campaigns ``affect the Sudanese people, not the officials directly,'' said Gamal Ahmed, 35, the embassy spokesman. ``Most of these companies work in the field of social development and infrastructure.'' Divestment would create ``more obstacles for the government of Sudan to buy locomotives and airplane parts, and this will expose the lives of the people to death,'' he said.

Ahmed Salkini, press secretary of the Embassy of Syria in Washington, said Murphy's effort ``would be an unfortunate step in the wrong direction.'' Engagement is a better strategy to ``achieve any positive result.'' Officials from North Korea and Iran didn't return calls.

Murphy and his colleagues aren't the first state officials to try to drum up support for terror-free investing. Missouri State Treasurer Sarah Steelman last year adopted a policy to require two state funds to divest from companies that do business with Iran, Sudan, North Korea and Syria.

In January, Steelman wrote every state treasurer urging them to consider similar policies. ``This investment strategy provides an opportunity for many of us far from the front lines of the war on terrorism to do our part,'' she wrote.

To contact the reporter on this story: Alison Fitzgerald in Washington at afitzgerald2@bloomberg.netTimothy J. Burger in Washington at Tburger2@bloomberg.net

Last Updated: December 4, 2007 08:03 EST