Last week the US Securities and Exchange Commission stopped collecting comments about a proposed ban on campaign contributions to public officials from investment managers who might do business with these officials.
During the “comment period” some 170 people sent in their views, but almost no one wanted to talk about campaign contributions. Most of the comments were instead focused on a small section of the proposal that would ban contact between public officials, like public pension officers, and placement agents hired by investment managers. And nearly every single comment on this topic was staunchly, emphatically opposed to this ban.
The SEC must now review the comments and then issue a final rule. They may ask for more comments. You might think that the avalanche of comments opposed to the ban would be a good sign. But in fact the SEC will ultimately not be swayed by arguments delivered by anyone other than the pension officials themselves.
According to a person who was briefed on the meetings, at least two groups of placement agents have visited with SEC officials recently in an attempt to learn in person the thinking behind the proposed ban, and to argue in person that it is entirely possible to battle pay-to-play without punishing an industry of mostly straight shooters.
These were “very tough meetings”, according to the source, leading both groups of visiting agents to conclude that the SEC is determined to proceed with the rule as proposed. Unless the pensions “rise en masse to your defense” the proposal is not going to be changed, was the message from the SEC officials, according to the source.
A few notable senior US public pension officials have in fact submitted comments opposed to the ban, but not anywhere near a enough to constitute a mass uprising.
There are many, many reasons why the ability to interact with third-party intermediaries is a benefit to institutions with an allocation to private equity, and yet there are also many reasons why individual public pension officials will, alas, not be voicing these publicly.
Chief among these is the political firestorm surrounding the pay-to-play scandal, in which employees of public institutions who stand up to explain why it makes sense for certain agents to be paid for reeling in public money risk getting their heads bitten off.
This firestorm grew immeasurably this week with a front-page revelation about CalPERS having only just discovered that one of its former board members, Al Villalobos, has received some $50 million over five years in exchange for helping managers raise capital from CalPERS. One manager, Apollo Global Managers, has paid Arvco Financial – Villalobos’ firm – more than $40 million. The former CEO of CalPERS recently went to work for Arvco. An investigation is under way, although neither Arvco nor Apollo have been accused of wrongdoing.
All of this drama steals attention from the compelling argument that rules governing GP donations can also be applied to their third-party fundraisers.
It’s a simple analysis that has already been delivered to the SEC en masse by the placement agents themselves. But it won’t get properly considered unless a large number of pension LPs start saying the same thing.