Friday letter If you see something, say something

Just a couple of months ago, it appeared that the placement agent business had been given the death sentence for a crime it did not commit.

Thanks to the sleazy conduct of a few unregistered and politically connected middlemen, no less than the SEC, the attorney general of New York, the city comptroller of New York and several state pension authorities all established rules effectively banning the use of “placement agents”, broadly defined, to raise capital from US public pensions.

Making US public pensions off-limits would make the placement business vastly less profitable and likely kill off a number of franchises that are already struggling from a slower fundraising market. It would also make it more difficult for mid-sized and small GPs around the world to reach a critical group of investors, and vice versa.

But today there are signs that a flat-out ban on placement agents is being rethought. Last week we reported that the SEC has contacted the Financial Industry Regulatory Authority (FINRA), which regulates broker-dealers, about constructing rules governing placement agents. If enacted these rules would presumably negate the SEC’s original plan to ban placement-agent/pension interaction altogether.

This week a further gleam of light shone down on placement agents in the form of a new policy from the comptroller of New York City. John Liu announced that placement agents would not be banned from doing business with the city pensions he oversees, so long as these groups can prove that they are legit. Among these requirements would be registration with FINRA, a track record of having raised money outside of New York, and evidence that real services are being provided (as opposed to just an introduction).

Real placement agents will be relieved at all this news, which seems to indicate that the worst-case scenario of a nationwide public pension ban may not come to pass.

But before they break out the bubbly, all participants in the fundraising market should pause to reflect on where these regulatory afflictions came from. Yes, a handful of rogue actors committed crimes that ended up smearing the entire fundraising process. But none of the other industry participants, including the press, did enough to shine a light on the murky characters hanging around public pensions.

When the New York State Common pay-to-play scandal first broke, a placement agent remarked to PEI that politically connected “finders” were a real problem in the market. Clearly so, and it was too bad that the New York attorney general was the first to raise the alarm.

Whatever regulatory structure is ultimately put in place governing the private fundraising market, GPs, placement agents and every other legitimate actor should never hesitate to light up people seeking to circumvent and corrupt it. That way, any resulting regulatory response is more likely to only target the bad guys.