Tag: pay-to-play

FINRA and Placement Agents

Will FINRA step in to prevent a ban on placement agents working with government investors?

You may remember that last August, the SEC published a proposed rule that would create a prohibition on paying a third party, such as a placement agent, to solicit a government client on behalf of the investment adviser: IA-2910. The rule has generated lots of comments. The intent of the proposed rule is to prevent “pay-to-play” scandals. A noble and worthy goal.

The SEC seems to be softening its position on the placement agent ban. In a December 18 letter, the SEC asked FINRA if they would interested in crafting some rules for registered broker-dealers in dealing with government investors. Legitimate placement agents (such as FINRA-registered broker-dealers) “could be subject to separate regulations that might restrict their ability to engage in pay to play activities on behalf of their investment adviser clients.”

It took three months, but FINRA responded to the SEC with a “yes“.

“I am delighted to state that we are in a position to promulgate such a rule. We believe that the FINRA proposal should impose regulatory requirements on member broker-dealer placement agents as rigorous and as expansive as would be imposed by the SEC on investment advisers. We believe that a regulatory scheme targeting improper pay to play practices by broker-dealers acting on behalf of investment advisers is both a viable solution to a ban on certain private placement agents serving a legitimate function.”

It sounds like SEC is getting closer on making a decision about its pay to play rule. Perhaps the FINRA rule will make it easier to deal with.

In the interest of disclosure, my company uses placement agents in its dealings with investors, including government investors.

Sources:

SEC Warns Firms on Muni Pay-to-Play Rules

While sources are wallowing in the exposure of a political figure in a “pay to play” scandal, I thought there might be some lessons for other investment managers as states and perhaps the SEC roll out limitations on political contributions.

The original story seemed mildly interesting.  The SEC warned firms that municipal securities rules prohibiting pay-to-play apply to affiliated financial professionals, not just a firm’s employees. The story caught my eye because MSRB Rule G-37 was identified as a model for the SEC’s proposal on pay to play.

The SEC wanted to make it clear that an “executive who supervises the activities of a broker, dealer, or municipal securities dealer is not exempt from the MSRB’s pay-to-play rule just because he or she may be outside the firm’s corporate governance structure.”

The SEC report identified JP Morgan and the Treasurer of the State of California, but did not name names. It did not take much research to find out that Phil Angelides was treasurer at the time of the incident. The Wall Street Journal identified the JP Morgan executive as David Coulter who was the vice chairman who oversaw the bank’s investment-banking business.

“On September 10, 2002, the Vice Chairman forwarded an invitation for the California Treasurer’s New York fundraising event to JP Morgan Chase’s executive committee and to its Vice President for Government Relations with a handwritten note stating that the California Treasurer is an important client and soliciting their help in raising $10,000 for the event.”

That is exactly the sort of behavior that the SEC wants to prohibit with MSRB Rule G-37 and its proposed pay to play rule.

A key takeaway from the report is that the SEC will look “to the activities, not merely the title, of an associated person in determining whether the person is” subject to the pay to play restrictions.

The story gets juicy because Mr. Angelides is currently the Chairman of the Financial Crisis Inquiry Commission. The Financial Crisis Inquiry Commission was established under the Fraud Enforcement and Recovery Act of 2009 to “examine the causes, domestic and global, of the current financial and economic crisis in the United States.” Perhaps his own situation will be an example in the FCIC’s report due on December 15.

Sources:

California Regulates Use of Placement Agents

California

California has followed the lead of New York and started regulating the use of placement agents. California’s law requires placement agents to disclose contributions and gifts made to state and local pension and retirement board members, as well as information about the placement agent’s compensation, the services provided, and any lobbying or regulatory registrations.

The California law is based on disclosure. It does not ban the use of placement agents like New York and as proposed by the SEC

The new California law (Assembly Bill No. 1584) went  into effect on October 11, 2009 when Schwarzenegger signed the bill into law. The law establishes a disclosure-based regime that requires:

  • Potential placement agents, prior to acting to solicit a potential state or local public pension or retirement system investment, must disclose campaign contributions and gifts to public pension board members during the prior 24 months.
  • Placement agents must disclose any subsequent gifts and campaign contributions to pension or retirement board members for as long as they are being paid to solicit investments.
  • Each state and local public pension system must develop and implement policies requiring disclosure of payments to placement agents by external asset managers by June 30, 2010. The new disclosures must include, at a minimum, the following information:
    • the existence of the relationship;
    • a résumé for each officer, partner or principal of the placement agent;
    • a description of compensation paid to the placement agent;
    • a description of services to be performed by the placement agent;
    • a statement of whether the placement agent, or its affiliates, is registered with the SEC, the Financial Industry Regulatory Authority  or other regulatory body; and
    • a statement of whether the placement agent, or its affiliates, is registered as a lobbyist with any state or the federal government.
  • A state or local public pension or retirement system may not enter into an agreement with any asset manager that does not agree in writing to comply with any such policy.
  • Any placement agent or external manager that violates any such policy is barred from soliciting new investments from that state or local retirement system for five years from the time of the violation.

References:

Shifting Regulatory Landscape in the US and Abroad

PERE Real Estate CFOs Forum

This afternoon, I am speaking at the PERE Real Estate CFOs Forum in New York on the Shifting Regulatory Landscape in the US and Abroad.

Moderator: Gilbert D. Porter, Partner, Haynes & Boone LLP
Panel Members:
Andrea Carpenter, Director, INREV (European Association for Investors in Non-listed Real Estate Vehicles)
Doug Cornelius, Chief Compliance Officer, Beacon Capital Partners
R. Eric Emrich, Chief Financial Officer, Lubert Adler Partners, L.P

We are starting the discussion with the EU AIFM Directive and its potential implication on fundraising and operations in the European Union.  Then we move onto the four bills aimed at regulating private funds: the Hedge Fund Adviser Registration Act of 2009, the Hedge Fund Transparency Act of 2009 and the Private Fund Transparency Act of 2009 and the . Then we end with the SEC’s proposed Pay to Play rule and the Say on Pay bill.

I am leading the Pay to Play and Say on Pay discussions. Here is the slide deck that I am using:

Shifting Regulatory Landscape in the US and Abroad

Schwarzman Stands up for Placement Agents

blackstone

“Eliminating placement agents as a group because there were a few bad actors who have tarnished the industry is analogous to eliminating Major League Baseball because several of its players behaved illegally.”

Steven Schwarzman, The Blackstone Group’s chairman and chief executive, has submitted a comment letter on the SEC’s proposed ban on placement agents interacting with public pensions.  He comes squarely down on the side of placement agents. In fact, he credits placement agents with being essential to his fund-raising success.

The proposed SEC rule is fallout from investigations by the SEC and the New York District Attorney into a pay-to-play scandal involving “fixers” and prior scandal in New Mexico

References:

Reasons Why the SEC Wants to Regulate Political Contributions

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The SEC has proposed a New Rule on Political Contributions by Certain Investment Advisers to prevent advisers from participating in pay to play practices affecting the management of public pension plans. They had proposed a similar rule in 1999. Many of the comments to that rule said that pay to play was not a problem in the management of public funds.

Now, the SEC thinks that pay to play is a significant problem in the management of public funds by investment advisers. In recent years, the SEC and criminal authorities have brought a number of actions charging investment advisers with participating in pay to play schemes. Here are some of the incidents they cite in the proposed pay to play rule. http://www.sec.gov/rules/proposed/2009/ia-2910.pdf

Alabama

  • The SEC brought a case against the mayor of Birmingham and other defendants, alleging that while the mayor served as president of the County Commission of Jefferson County, he accepted undisclosed cash and benefits through a lobbyist as a conduit from the chairman of a Montgomery, Alabama-based broker-dealer, in return for awarding municipal bond business and swap transactions to the broker-dealer. See SEC v. Larry P. Langford et al., Litigation Release No. 20545 (Apr. 30, 2008).

California

Connecticut

  • Paul J. Silvester, the former Treasurer of the State of Connecticut, agreed to invest $200 million of state pension funds in return for the investment adviser providing consulting contracts valued at approximately $1 million each to two of his friends.SEC v. Paul J. Silvester et al., Litigation Release No. 16759 (Oct. 10, 2000); Litigation Release No. 20027 (Mar. 2, 2007); Litigation Release No. 19583 (Mar. 1, 2006); Litigation Release No. 18461 (Nov. 17, 2003); Litigation Release No. 16834 (Dec. 19, 2000);
  • Sanctions against William A. DiBella, the former Majority Leader of the Connecticut State Senate, and his consulting firm, North Cove Ventures, L.L.C. for their roles in aiding and abetting then Treasurer of the State of Connecticut, Paul J. Silvester in a fraudulent investment scheme.SEC v. William A. DiBella et al., Litigation Release No. 20498 (Mar. 14, 2008). See also
  • A judgment against Ben F. Andrews, Jr. in connection with a fraudulent scheme involving the investment of Connecticut state pension fund money. U.S.. v. Ben F. Andrews, Litigation Release No. 19566 (Feb. 15, 2006);
  • In November 1998, the then-Connecticut Treasurer invested $75 million of the Connecticut state pension fund with Thayer IV. In connection with this investment, Thayer, through Malek, agreed to hire a consultant at the Treasurer’s request. This consultant, who was paid nearly $375,000 by TC Management IV, had no previous involvement with the proposed investment and ultimately performed no meaningful work on the deal. In the Matter of Thayer Capital Partners, TC Equity Partners IV, L.L.C., TC Management Partners IV, L.L.C., and Frederick V. Malek, Investment Advisers Act Release No. 2276 (Aug. 12, 2004);
  • The principal of an investment adviser provided $2 million in consulting contracts to associates of the Connecticut State Treasurer to secure the decision to invest $200 million in state pension funds in his funds. In the Matter of Frederick W. McCarthy, Investment Advisers Act Release No. 2218 (Mar. 5, 2004);
  • An aide to the Connecticut State Treasurer received a $1 million consulting contract from an investment adviser with whom the Treasurer had invested $200 million in Connecticut state pension funds. In the Matter of Lisa A. Thiesfield, Investment Advisers Act Release No. 2186 (Oct. 29, 2003).
  • The indictment of the former mayor of Bridgeport, Connecticut, in connection with his conviction for, among other things, requiring payment from an investment adviser in return for city business. U.S. v. Joseph P. Ganim, 2007 U.S. App. LEXIS 29367 (2d Cir. 2007)

Florida

  • A partner at Lazard Freres & Co. was found liable for conspiracy and wire fraud for fraudulently paying $40,000 through an intermediary to Fulton County’s independent financial adviser to secure an assurance that Lazard would be selected for the Fulton County underwriting contract. United States v. Poirier, 321 F.3d 1024 (11th Cir.), cert. denied sub nom., deVegter v. United States, 540 U.S. 874 (2003)

Georgia

  • A broker-dealer, two of its officers and a city official were involved in a scheme to defraud the City of Atlanta in connection with the purchase and sale of certain securities while providing substantial, undisclosed monetary benefits to the city’s investment officer who was authorized to select a broker-dealer for the transactions. See In the Matter of Pryor, McClendon, Counts & Co., Inc. et al., Securities Act Release No. 7673 (Apr. 29, 1999); Securities Act Release No. 8062 (Feb. 6, 2002); Exchange Act Release No. 48095 (June 26, 2003); Securities Act Release No. 8245 (June 26, 2003); Securities Act Release No. 8246 (June 26, 2003).

Illinois

New Mexico

  • An investment adviser was barred from association with any broker, dealer or investment adviser for paying kickbacks to the Treasurer of the State of New Mexico. In the Matter of Kent D. Nelson, Investment Advisers Act Release No. 2765 (Aug. 1, 2008);  I
  • Conviction of the former treasurer of New Mexico for requiring that a friend be hired by an investment manager in return for accepting a proposal from the manager for government business.
  • Conviction for attempted extortion of the former treasurer of New Mexico’s successor for requiring that a friend be hired by an investment manager at a high salary in return for the former treasurer’s willingness to accept a proposal from the manager for government businessU.S. v. Vigil, 523 F. 3d 1258 (10th Cir. 2008)

New York

  • The deputy comptroller and a “placement agent” engaged in corruption and securities fraud for selling access to management of public funds in return for kickbacks and other payments for personal and political gain. SEC v. Henry Morris, et al, Litigation Release No. 21036 (May 12, 2009).

North Carolina

  • Alleged pay to play activities involving North Carolina’s state treasurer. Moore Defends Pension System, by Rick Rothacker & David Ingram for the Charlotte Observer (Feb. 25, 2007) (discussing )

Ohio

  • Reginald Fields, Four More Convicted in Pension Case: Ex-Board Members Took Gifts from Firm, CLEVELAND PLAIN DEALER (Sept. 20, 2006) (addressing pay to play activities of members of the Ohio Teachers Retirement System).

Pennsylvania

That is a big list of bad behavior is short period of time.

Maybe the SEC has a point.

Although I am not sure if the proposed SEC rule will stop it.

New SEC Rule on Political Contributions by Certain Investment Advisers

sec-seal

The SEC has just published the text of the proposed rule on political contributions by investment advisers. SEC voted unanimously to propose this rule at its July 22nd Open Meeting.

http://www.sec.gov/rules/proposed/2009/ia-2910.pdf

The proposed rule is intended to curtail “pay to play” practices by investment advisers that seek to manage money for state and local governments.

The new proposed rule has four primary aspects:

1. Restricting Political Contributions

An investment adviser who makes a political contribution to an elected official in a position to influence the selection of the adviser would be barred for two years from providing advisory services for compensation, either directly or through a fund.

The contribution prohibition would also apply to certain executives and employees of the  investment adviser.

Additionally, the range of restricted officials would include political incumbents and candidates for a position that can influence the selection of an adviser.

There is a de minimis exception that permits contributions of up to $250 per election per candidate if the contributor is entitled to vote for the candidate.

2. Banning Solicitation of Contributions

The proposed rule also would prohibit an adviser from coordinating, or asking another person or political action committee to:

  1. Make a contribution to an elected official (or candidate) who can influence the selection of the adviser.
  2. Make a payment to a political party of the state or locality where the adviser is seeking to provide advisory services to the government.

3. Restricting Indirect Contributions and Solicitations

There would be prohibition on engaging in pay to play conduct indirectly, if that conduct would violate the rule if the adviser did it directly. That would include directing or funding contributions through third parties such as spouses, lawyers or companies affiliated with the adviser.

4. Banning Third-Party Solicitors

There is prohibition on paying a third party, such as a placement agent, to solicit a government client on behalf of the investment adviser.

SEC to Consider Pay to Play Rule for Investment Advisers

sec-seal

At the SEC open meeting on Wednesday July 22, the Commission will consider whether to propose a rule to address “pay to play” practices by investment advisers. The proposal is designed, among other things, to prohibit advisers from seeking to influence the award of advisory contracts by public entities through political contributions to or for those officials who are in a position to influence the awards.

You can watch the meeting through the SEC Open Meetings Webcast, starting at 2:00 pm (EDT).

California’s Pay-to-Play Laws

California requires disclosure of gifts to officials at public agencies. The disclosure is made using Form 801 (.pdf).

This form is for use by all state and local government agencies to disclose payments made to the agency when the payments provide a personal benefit to an official of the agency. Examples may include travel, meals or other benefits. Under certain circumstances, these payments will not result in a gift to the official, but will be considered a gift to the agency. The payments must be used for official agency business and must meet other requirements that are set out in FPPC Regulation 18944.2 (.pdf), which is available on the FPPC website www.fppc.ca.gov. This form must be filed within 30 days of the use of the payment.

California treats the giving of tickets to officials at state and local agencies slightly differently. FPPC Regulation 18944.1 (.pdf) regulates this practice, with disclosure made on Form 802 (.pdf)

There is a whole series form for reporting lobbying activity:

  • Form 601 — Lobbying Firm Registration Statement
  • Form 602 — Lobbying Firm Activity Authorization
  • Form 603 — Lobbyist Employer/Lobbying Coalition Registration Statement
  • Form 604 — Lobbyist Certification Statement
  • Form 605 — Amendment to Registration
  • Form 606 — Notice of Termination
  • Form 607 — Notice of Withdrawal
  • Form 615 — Lobbyist Report
  • Form 625 — Report of Lobbying Firm
  • Form 630 — Payments Made to Lobbying Coalitions
  • Form 635 — Report of Lobbyist Employer/Lobbying Coalition
  • Form 635-C — Payments Received by Lobbying Coalitions
  • Form 640 — Governmental Agencies Reporting
  • Form 645 — Report of $5,000 Filer
  • Form 690 — Amendment to Lobbying Disclosure Report

Fortunately the FPPC put together a Lobbying Disclosure Information Manual (.pdf)

There is an extensive collection of campaign disclosure forms for California.

The key form may be Form 461 — Independent Expenditure Committee and Major Donor Committee Campaign Statement. There is an associated manual: Campaign Disclosure Manual 5 – Information for Major Donor Candidates (.pdf).  Chapter 4 of the Manual (.pdf) details the reporting requirements.

The FPPC Regulations are very long and detailed.

Colorado’s Pay-to-Play Law

The Colorado voters passed Amendment 54 in the November, 2008 elections, which amends the Colorado Consitution to limit campaign contributions: Text of the Proposed Initiative (.pdf) and Text of the Constitutional Amendment (.pdf).

The consitutional amendment carries a presumption of impropriety between contributions to political campaigns and the award of sole source government contracts.