Rather than taking punitive action, the new legislation would authorize state and local governments and private fund-managers to divest assets for companies that invest over $20 million in Iran"s energy sector, which the U.S. government would publish in a list every six months.

The Iran Sanctions Enabling Act of 2007 was introduced in the Senate by Illinois Democrat Barack Obama (news, bio, voting record) and in the House of Representatives by Democratic Reps. Barney Frank (news, bio, voting record) and Tom Lantos (news, bio, voting record), who chair the Financial Services and Foreign Affairs committees, respectively.

Iran is embroiled in a diplomatic stand-off with the West over its nuclear program, which it claims is for civilian electricity but the United States and other nations worry could be meant for atomic bomb-making.

Fund managers that choose to divest could do so "without breaching their fiduciary responsibilities to their investors," and thus dodge class-action lawsuits from disapproving investors, Frank said.

"Federal law should not stand in the way of investors or state and local governments who want to act on their own conviction about morality and American interests," Frank said.

The Iran-Libya Sanctions Act requires the government to consider sanctions on foreign companies that invest more than $20 million a year in Iran"s energy sector.

However, no companies have actually been sanctioned by the law, which took effect in 1995, according to U.S. congressional researchers.

The legislation, which could be debated by the House this summer, could have major implications for pension funds like the California Public Employees" Retirement System or Calpers, which manages the world"s biggest pension fund with $225 billion.

Several years ago New York City"s public pension systems began nudging U.S. firms with foreign subsidiaries, like Halliburton to exit Iran. Since then, at least eight states -- including Florida with its $40 billion pension fund - have introduced divestment legislation.

A report by the Library of Congress" Congressional Research Service found more than $100 billion in energy investments in Iran since 1999 by such foreign firms as France"s Total, Royal Dutch Shell, Italy"s ENI and Inpex of Japan.

PIN/REUTERS