November 1, 1999


Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Stop 6-9
Washington, D.C. 20549

Re: Release IA-1812 (the "Release"), File No. S7-19-99,

Political Contributions by Certain Investment Advisers

Dear Mr. Katz:

This letter is submitted on behalf of the thirteen subsidiaries of Legg Mason, Inc., each of which is registered with the Commission.1 Legg Mason appreciates the opportunity to comment on proposed new Rule 206(4)-5 and amended Rule 204-2 under the Investment Advisers Act of 1940 regarding political contributions by certain investment advisers.

Legg Mason supports the concept of a new rule that would prohibit advisers from making or soliciting political contributions for the purpose of influencing the award of advisory contracts by public entities. Legg Mason does not, however, support the rule that is proposed. If adopted, the proposed rule will not merely discourage advisers and certain of their employees and agents from participating in "pay-to-play" schemes. It will have a more far-reaching effect. The scope of the proposed rule is so broad and its sanctions are so severe that it will, in practice, operate to prevent almost all advisers, all of their employees, and all who aspire to work in the investment management industry from contributing to, or participating in, state and local political elections for fear of losing, or being precluded from competing for, existing, potential, or merely hoped-for business.

In this letter, Legg Mason (a) outlines the compliance policies it will most likely enact if the proposed rule is adopted; (b) comments specifically on some of the elements of the proposed rule; and (c) proposes an alternate structure for a new rule.

I. Legg Mason Will Most Likely Enact Strict Policies if the Proposed Rule is Adopted.

If the proposed rule is adopted, Legg Mason will most likely prohibit every employee who works in the investment management business from (a) making political contributions to anyone in any amount and (b) engaging in volunteer political activity of any kind. Because of the proposed prohibition against indirect contributions2, a compliance policy that applies only to Legg Mason's subsidiaries that presently do business with a "government entity" (of which there are eight) would be insufficient. 3 Legg Mason's policy would have to cover all thirteen of its subsidiaries in light of the possibility that any one of them or their employees could be alleged to have made an illegal indirect contribution on behalf of an affiliate. Legg Mason anticipates that any other organization controlling or under common control with multiple entities will enact a policy of similar scope.

An effective policy would also have to cover more than just current "executive officers" and "solicitors" because of the two year look back provision.4 It would have to cover anyone who, within the next twenty-four months, could conceivably assume a role as an "executive officer" or "solicitor," or refer a client to Legg Mason. Legg Mason estimates this number to be at least 1500 employees, including all of the broker-dealer representatives employed by Legg Mason Wood Walker, Incorporated (its principal broker-dealer subsidiary), who periodically refer advisory business to Legg Mason.5

An efficient policy would also ban all political contributions, not just those prohibited under the proposed rule. First, any policy that permits some but not all political contributions will require some form of preclearance. It will be prohibitively expensive and time consuming to process preclearance requests for 1500 employees. Second, Legg Mason's covered employees live in approximately 25 states. It is difficult for a conscientious citizen to identify the state and local candidates for whom he or she may be eligible to vote; it may be impossible to determine the candidates for whom more than a thousand employees living in 25 states and innumerable localities are eligible to vote. Third, even a well-intentioned contribution that is permitted under the rule could give rise to an allegation that an impermissible "indirect" contribution was made on behalf of an affiliate.

For example, assume that two of Legg Mason's subsidiaries are ABC, based in New York, and XYZ, based in California. ABC services high net worth individuals and does not do business with any "government entity." XYZ services institutional clients and government entities across the nation. John Doe lives and works in New York for ABC. Mr. Doe makes a $250 contribution to Jim Smith, an incumbent "official," who is able to influence the selection of an adviser for the New York State Pension Fund and for whom Mr. Doe is eligible to vote. If Mr. Doe made his contribution while XYZ was one of three finalists to manage a portion of the New York State Pension Fund, is it possible that Mr. Doe could be alleged to have made an indirect contribution on behalf of his affiliated adviser, XYZ? If the portion of the New York State Pension Fund out for bid was $300 million, would anyone want to jeopardize the ability to win that business for a $250 contribution to a state official? Of course, the answer to the former question is "yes," and the answer to the latter question is "no." For these and other reasons, the compliance policy that would most likely be adopted by Legg Mason and many other advisers is to prohibit all political contributions by all employees.

Legg Mason would also have to give serious consideration to banning political volunteer work for all of the employees covered by the rule. For example, can an employee covered by the rule volunteer to assist with the campaign of an "official" if the employee stuffs envelopes that contain materials requesting contributions? Such activity would be prohibited under the proposed rule.6 It would be prohibitively expensive to attempt (a) to educate employees about the volunteer political activities in which they could lawfully engage and (b) to implement compliance policies and procedures designed to monitor such activity.

Legg Mason therefore opposes the proposed rule. It is far too broad and restrictive. The infringement of a citizen's right to participate in the political process that will result from its adoption (and/or the costs that will be incurred by covered advisers)7 is too high a price to pay based on Legg Mason's experience and the thin record of abuse alleged in the proposing release. The rights of an estimated 300,000 people will be affected by the proposed rule.8 Yet, the Commission relies primarily on (a) two court cases; (b) an anonymous letter received from a solicitor; and (c) some allegations in fifteen magazine and newspaper articles (which the SEC did not independently investigate or otherwise confirm to be valid), all spanning a nine year period, to justify the compelling need required to support the restrictions proposed. One suspects that if rampant abuse were present in a multi-trillion dollar segment of the asset management business, a more comprehensive record of abuse over the last decade could be compiled. The proposed rule should apply more narrowly and have less severe sanctions.

II. Legg Mason's Comments to Specific Elements of the Proposed Rule.

Legg Mason agrees with the following suggestions made by the Securities Industry Association and/or the Investment Counselors Association of America in their comment letters:

III. Legg Mason's Proposed Alternate Structure for a New Rule.

Legg Mason believes that if a rule is adopted, it should prohibit only the conduct to be discouraged: making or soliciting political contributions with an intent to influence the award of an advisory contract. It is unfair and unconstitutional to discourage or prevent a citizen from making or soliciting political contributions for any other reason. Any rule that is adopted should also provide advisers maximum flexibility to design effective and efficient internal controls. This could be better accomplished by proposing a new rule or rule amendments that:

Legg Mason believes that the foregoing requirements would better balance the Commission's interest in discouraging pay-to-play schemes, Legg Mason's employees' rights to participate in state and local politics, and Legg Mason's ability to design internal policies and procedures that address these competing interests.

Legg Mason appreciates the Commission's consideration of these comments. Please contact me if there are any questions or if additional information is required.

Very truly yours,

Andrew J. Bowden
Deputy General Counsel and
Vice President


1 They are: Batterymarch Financial Management, Inc., Bartlett & Co., Berkshire Asset Management, Inc., Bingham Legg Advisers LLC, Brandywine Asset Management, Inc., Legg Mason Capital Management, Inc., LM Financial Partners, Inc., Legg Mason Fund Adviser, Inc., Legg Mason Institutional Advisors, Inc., Legg Mason Real Estate Services, Inc., Legg Mason Wood Walker, Incorporated, Western Asset Management Company, and Western Asset Global Management Ltd. The foregoing are hereafter collectively referred to as "Legg Mason."

2 See section (a)(2)(ii) of the proposed rule.

3 Words appearing in quotation marks in this letter are defined terms in the proposed rule.

4 Presently, there are no "partners" employed by Legg Mason.

5 This is a major difference between the effect of the proposed rule and Municipal Securities Rulemaking Board Rule G-37. There are approximately 151 employees and control persons employed by Legg Mason who are subject to Rule G-37. One of the reasons so many fewer people are covered by Rule G-37 is that it is relatively uncommon for a broker-dealer representative to refer municipal underwriting business to Legg Mason. Advisory business is referred with far greater regularity.

6 See section (a)(2)(i) of the proposed rule.

7 The relationship between these interests is inverse. A policy that bans all contributions and volunteer work will result in the greatest restrictions for employees but the lowest cost compliance program for an adviser. A policy that requires the firm to parse covered and non-covered employees, and permitted and impermissible contributions and activities, will leave employees with some (but still limited) freedom to participate in the political process but will be unreasonably expensive for an adviser to implement and maintain.

8 See Comment Letter submitted by the Securities Industry Association.

9 This assumes that only an individual who directly participates in the selection of advisers for a government entity will be defined as an "official."