Tag: Placement agents

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.

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Schwarzman Stands up for Placement Agents

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“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

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Placement Agents Fight Bans

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Placement agent bans were put in place at the New York State Common Retirement Fund and the New Mexico State Investment Council because of the pay-to-play scandals at those pension funds. Now the SEC has proposed a ban on using placement agents when seeking capital investments from public pension funds.

A coalition of placement agents is urging the SEC to pull the plug on its proposed rule, convinced it could put some of them out of business. Placement agents are accusing the Securities and Exchange Commission of regulatory overkill, saying the proposal would indiscriminately hammer both good and bad firms.

The coalition is offering an alternative proposal:

Placement agents would be barred from making political contributions to anyone in the decision-making chain of command for public pension fund investments. The placement agent would disclose its fee arrangement with the fund’s general partner to any potential limited investment partners. Placement agents must be registered with the SEC or the Financial Industry Regulatory Authority.

There are also a few comments already submitted on the SEC’s Proposed Rule for Political Contributions by Certain Investment Advisers.  Ted Carroll’s comment is short and straight to the point:

“Please stop all this nonsense. Placement agents provide a valuable service to small and midsized investment firms and 99.99% are honest diligent people. Its offensive to see the many large political donors involved in the recent pay to play schemes get to pay fines and adopt hollow policies to avoid real prosecution. Catch and punish the guilty, leave the innocent alone.”

The comment from Claude R. Parenteau points out that the actions that precipitated the SEC proposal were already illegal activities under current regulations.

The comments also point out that the restriction could disadvantage smaller investment advisers who use placement agents to outsource marketing and sales because they can’t afford the overhead of having their own full-time marketing and sales staff.

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    SEC Proposes Measures to Curtail “Pay to Play” Practices

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    At yesterday’s Open Meeting, the SEC voted unanimously to propose measures intended to curtail “pay to play” practices by investment advisers that seek to manage money for state and local governments. In 1999, the SEC considered a proposal to curb adviser pay to play practices modeled on MSRB Rule G37 that applies to underwriters of municipal bonds. This new proposed rule is both broader in its coverage and narrower in its applicability that the 1999 proposed rule.

    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.

    Comments and Publication

    The full text of the proposed rule is not yet available. There will be a 60 day comment period.

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    New York Public Pension Fund Reform Code of Conduct

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    In a widely publicized story, The Carlyle Group has agreed to adopt New York Attorney General Andrew Cuomo’s Public Pension Fund Reform Code of Conduct. It is the first money manager to adopt Cuomo’s new “code of reform” for the municipal-pension market. (Carlyle executives will not be subject to any criminal liability under the settlement with the NYAG.)

    It is not clear how the ban on placement agents will interact with the SEC limitations on general solicitation under Rule 502. Many private investment funds use a broker/dealer as an intermediary with potential investors (including public pension funds) to comply with the SEC rule. It seems like the ban on placement agents could hurt the ability of smaller funds and newer funds to obtain investments from public pension funds. If a private investment fund seeking investors has no existing relationship with the public pension fund, then contacting the public pension fund directly could be considered part of a general solicitation in violation of SEC rules. The placement agent, if a licensed broker/dealer, can help establish the relationship to avoid a general solicitation.

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    Image is from Wikimedia commons under Creative Commons License: NYStateMap2.PNG.

    N.Y. Comptroller Bans Placement Agents for State Pension Fund

    State Comptroller Thomas P. DiNapoli today announced he has banned the involvement of placement agents, paid intermediaries and registered lobbyists in investments with the New York State Common Retirement Fund (CRF). The ban includes entities “compensated on a flat fee, a contingent fee or any other basis.”

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