The US Securities and Exchange Commission is reportedly considering exempting registered broker-dealers from a proposed ban on placement agents soliciting public pensions for commitments on behalf of private investment firms.
The SEC outlined its thoughts on the exemption in a recent letter to the Financial Industry Regulatory Authority (FINRA). FINRA has confirmed reception of a letter from the SEC, but neither FINRA nor the SEC would confirm the contents of the letter.
A report from Global Pensions said the letter contained a suggestion from Andrew Donohue, director of the SEC’s investment division, that “an exception to the ban for registered broker-dealers acting as legitimate placement agents might be feasible if FINRA were to implement rules that would prohibit pay-to-play activities”.
He added: “I am very interested to learn whether FINRA would consider crafting and adopting such rules for its members.”
In July, the SEC unveiled a sweeping plan that would prevent private equity firms from hiring placement agents to solicit public pensions for commitments. The SEC’s proposal would not prohibit a state or local government from hiring a third-party firm to help select an investment advisor, the SEC said in a statement.
The proposals also would bar private investment firms and their executives who have contributed to elected officials in a position to influence pension investment decisions from working with or soliciting money from the pensions.
On Tuesday, Christopher Dodd, chairman of the Senate Banking Committee, sent a letter to the SEC warning about the effect that the proposed placement agent ban could have especially on smaller investment funds, which lack the resources to support an in-house marketing team. “In some cases the use of third-party agents may be the only cost-effective way for smaller funds to get the attention of public fund managers and thereby raise needed capital,” he wrote.
He added that such a ban could also reduce the amount of information available to public funds about the full range of investment opportunities, and recommended strong regulation – including SEC registration for all municipal advisors – rather than outright prohibition.
The SEC has drawn more than 170 comments from industry members on the proposal, the vast majority of which were supportive of the main thrust of the proposal, which would ban placement agents from making political contributions to publicly elected officials who are involved with the investment approval process. But the commenters were heavily opposed to banning placement agents from contacting public pension plans. Many of the comments called for better regulation of placement agents rather than an outright ban. It seems that the SEC has taken these suggestions to heart.
Competition would be reduced as this could increase the relative advantage of larger, consolidated investment firms.
Wesley Ogburn, portfolio manager at Stanford Management Company, said that the ban would put smaller firms at a disadvantage, as they cannot afford to hire and retain full-time marketing and sales staff or could be forced to pass these added costs on to their fund investors.
“Competition would be reduced as this could increase the relative advantage of larger, consolidated investment firms,” he wrote in a comment on the SEC’s website. “The ban could reduce breadth and quality of investment options for many government pension plans as they would have reduced access to smaller investment firms that are often oversubscribed and/or have limited resources to market to a broad swathe of institutional investors.”
The SEC, along with New York Attorney General Andrew Cuomo, have engaged in a multi-year investigation of pay-to-play practices at the $109 billion New York State Common Retirement Fund in which political operatives allegedly strong-armed investment firms into paying sham finder’s fees in exchange for commitments from the pension.
Cuomo has indicted six people, including alleged ringleader Henry Morris, a former political operative of former New York Comptroller Alan Hevesi; David Loglisci, the former New York Common chief investment officer; and Barrett Wissman, the former head of a Texas-based hedge fund.