November 1, 1999

Mr. Jonathan G. Katz
Securities and Exchange Commission
Washington, D.C. 20549

Re: File No. S7-19-99; Political Contributions by Certain Investment Advisers

Dear Mr. Katz:

Fidelity Investments ("Fidelity") respectfully submits the following comments in response to the notice, dated August 4, 1999, published by the Securities and Exchange Commission (the "Commission") seeking comments regarding its proposed Rule 206(4)-5 (the "Rule") under the Investment Advisers Act of 1940 (the "Act"), which would restrict the making of political contributions by investment advisers and others to public officials who can influence the award of advisory contracts by public entities. We appreciate the opportunity to comment on the proposed Rule.

Fidelity has long supported the highest ethical standards with regard to the management of investment assets, including the assets of governmental clients. We believe that competition for investment management services should be based on performance and efficient delivery of services and commend any rulemaking initiative designed to foster such competition. While Fidelity supports the goals underlying the Commission's proposals, we are mindful that rulemaking in this area implicates other valued interests. These include the ability of individuals to participate in the political process and the right to political expression. For this reason, we believe that rulemaking in this area should be carefully drawn to reach abusive practices without unduly impinging upon the legitimate exercise of political rights and expression.

The Commission's proposed Rule, while laudable in its goals, has certain features that would unduly limit political rights without advancing fair competition among investment advisers. Fidelity urges the Commission, in light of public comments, to reassess some of the implications of its proposed Rule and to seek additional public comment on a revised proposal. Toward this end we offer the following comments.

I. The applicability of the proposed Rule should be clearly limited to Governmental Pension Plans.

The Commission's release accompanying the Rule refers to the conflicts of interest that emerge when political contributions are made by persons associated with investment advisers to officials that select the investment adviser for government pension plans. The Commission notes that plan beneficiaries may be harmed and it is clear that such beneficiaries are limited in their ability to withdraw their beneficial interest or otherwise exert discipline over the official or investment adviser. Fidelity suggests that the Rule by its terms be limited to the award of investment advisory contracts for pension and other employee benefit plans. State and local governments invest funds in other capacities, such as short-term cash management of tax and other revenues, but these arrangements do not appear to give rise to the types of abuses found in the public pension plan context.

II. The proposed Rule creates an unlevel playing field, disadvantaging investment advisers subject to the Act.

Because banks are excluded from the definition of "investment adviser" under the Act, the proposed Rule, predicated upon Section 206 of the Act, will not reach bank advisers. Yet banks are major competitors in the market for managing state and local governmental pension assets. Unless bank advisers are subject to restrictions on contributions to state and local officials comparable to those in the proposed Rule, non-bank investment advisers will be placed at an unfair competitive disadvantage. We therefore urge the Commission, before any rule is implemented, to seek to coordinate its rulemaking initiative with the banking regulators so that comparable limits are placed on bank and non-bank advisers alike.

The anticipated enactment of the Financial Services Act of 1999, currently before the Congress, further argues in favor of moving carefully in this area. Regulators and industry participants alike will need an opportunity to consider how this legislation, if enacted into law, will affect the structure of the advisory industry and the consequences of subjecting the industry to the Commission's Rule.

III. The sweep of the proposed Rule is unduly broad.

Fidelity urges the Commission to reconsider the reach of the proposed Rule and to limit its restrictions on political rights to those persons who, as a practical matter, have the ability and the incentive to exert undue influence over a governmental entity's selection of an investment adviser. In particular, we note the following:

A. The term "solicitor" should be defined to include only those who, within the scope of their employment, solicit state or local governmental pension plan advisory business. On its face, the current definition arguably reaches any individual who solicits any advisory business, whether from governmental or private clients. We assume that the Commission does not intend this result, as only those persons who solicit for government advisory services would have any incentive to use political contributions as a means to exert undue influence over government officials.

B. The definition of "executive officer" should be revised so as to include only those executive officers who oversee the performance or solicitation of government advisory services. The current definition is unnecessarily broad and would include a number of other executive officers, such as those who may oversee accounting operations or human resources, who have little incentive or opportunity to attempt to use political contributions in order to attract investment advisory business.

C. The Rule should narrow the two-year look back. Contributions made by individuals before becoming executive officers or solicitors do not implicate the concerns underlying the Rule and thus should not be covered by a look back provision. Also, the look back should not apply to contributions made by individuals while working for a different, unaffiliated employer. Absent a narrowing of the look back provision, the quality of investment advisory services provided to governmental clients is likely to be adversely affected, as advisers are compelled to screen job applicants for prior political contributions and are inhibited in making promotion and reassignment decisions based upon the talent and experience of their employees. Finally, the look back provision serves no purpose when applied to contributions to unsuccessful candidates and officials that have left office prior to the award of an investment advisory contract.

D. The Rule should include a de minimis contribution exception for advisers, PACs, executive officers and solicitors when such contributions advance political goals other than advisory services. The proposed Rule includes a $250 de minimis exception for candidates for whom an individual can vote. Institutions are also political citizens within states where they have operations and thus (where consistent with applicable state law) may legitimately support public officials and candidates for public office for reasons unrelated to the award of government advisory business. The Rule should include an exception for larger contributions (perhaps $1,000) for candidates in a jurisdiction in which the adviser is a substantial employer, property owner or taxpayer.

E. The Rule also should include a $250 de minimis exception for individuals, whether or not the contribution is made to a candidate for whom the donor can vote. Many people support the candidacy of friends, family members and candidates who support a favorite cause in elections outside their area.

F. The Rule should not impose recordkeeping requirements for individuals' contributions to PACs, other than PACs controlled by the adviser. The intention of the proposed Rule is to regulate contributions to candidates, not to PACs. Although all of the recordkeeping required by the proposed Rule will infringe on employees' privacy, requiring employees to inform the adviser of their contributions to PACs that are unrelated to the adviser is unduly broad and intrusive.

IV. The Rule should include other clarifying changes.

A. The Rule or adopting release should clarify that the $250 contribution exception is separately available for each person covered by the Rule, not aggregated for all persons associated with a particular adviser. The Commission also should clarify whether the de minimis exception applies separately to primary and general elections.

B. The Rule should apply only with respect to contributions to individuals who "have authority to hire the adviser," rather than to those who (as now proposed) may "influence the outcome" of the selection of an adviser. Without this clear language, advisers will be acting at their own peril in attempting to assess whether, in any given state or political subdivision, a public official or candidate is covered because, for example, he or she has the ability to remove officials for cause, to appoint officials in the case of vacancies, or to exercise other power or influence with respect to the hiring of an investment adviser.

C. The treatment of affiliates should be clarified. The release accompanying the proposed Rule states that affiliates are not intended to be covered by the Rule but it is unclear how section (a)(2)(ii) (the "indirect" prohibition) would be interpreted in this context. The Commission should make clear in the final Rule or adopting release that the "indirect" prohibition does not reach affiliates absent an express agreement or understanding between an adviser and its affiliate that the latter will engage in conduct with the specific intent of assisting the adviser in circumventing the prohibitions of the Rule.

V. The two-year ban on business is unnecessarily punitive.

Fidelity believes the two-year ban on business is a draconian remedy that in many instances is likely to be greatly disproportionate to the harm done or the public policy interests which the Rule seeks to vindicate. As demonstrated by the lack of exemptions made available so far under MSRB Rule G-37, the two-year ban may penalize an entire institution for the actions of a single individual, even when that individual has neither the ability nor the intent to impact the award of government advisory business. We believe that the ban is appropriate in two instances: (1) for firms that have clearly embarked upon a corporate course of conduct of using political contributions in an effort to obtain governmental investment advisory contracts and (2) firms that have established a pattern of failing to supervise employees in this area. In contrast to these two situations, the Rule ought not to impose firm-wide sanctions in instances of unintentional offenses or isolated offenses by individuals who act upon their own initiative.

Fidelity suggests the Commission adopt a series of graduated sanctions for pay-to-play violations (analogous to those provided in Section 22(d)(2) of the Securities Act). The Commission could impose fines or other penalties for more minor or unintentional violations of the Rule and reserve the two-year ban for those firms for whom such a penalty is appropriate. Such an approach, in our view, will serve the purposes of the Rule while avoiding undue impairment of competition among investment advisers.

VI. Under the Rule, an investment adviser should be able to cure inadvertent violations by obtaining a refund of the contribution and making appropriate disclosure to the Commission and the relevant state or local government.

It strikes Fidelity as particularly unfair and disproportionate for an investment adviser to be banned from performing advisory services for a governmental entity for two years because of an inadvertent contribution. The ban would also unnecessarily harm state and local governments in the case of existing clients because the Rule could force the termination of a mutually beneficial business relationship (although the adviser may be forced to perform services without compensation for some period). Unnecessarily forcing the termination of an advisory relationship imposes costs on government clients, associated with selecting a new adviser, and on employees and retirees, associated with portfolio commissions and other restructuring costs.

If an adviser has procedures in place that are reasonably designed to ensure compliance with the Rule, Fidelity suggests that the adviser should be able to cure an inadvertent contribution by obtaining a return of the contribution within some reasonable period. Notice to the Commission and the affected state or local government of the cure, and the resulting scrutiny, will prohibit advisers from abusing the exception.

Again, Fidelity commends the Commission for its efforts in this area and appreciates the opportunity to comment on the proposal. If you have any questions regarding any aspect of this letter, please call the undersigned at (617) 563-0910 or Eric D. Roiter at (617) 563-1742.

Respectfully submitted,

/s/ Larry G. Locke