Another Vote To Ban Placement Agents

In the latest blow for the beleaguered fund placement business, the Securities and Exchange Commission has voted to propose its own ban on the use of third-party agents with regard to public pension funds.

There was word at press time that members of the fund placement industry are organizing a lobbying effort to fight back. The SEC’s move follows the pay-to-play scandal involving the New York State Common Retirement Fund, which broke in mid-March, and the introduction of a code of conduct for investing with public pension funds by New York State Attorney General Andrew Cuomo in May that also seeks to prevent investment firms from hiring placement agents to help in their efforts to secure pledges.

“In taking these steps today, I think we can help to level the playing field for all advisers, both large and small, so that they can compete for government contracts based on investment skill and quality of service, not based on political contributions and inappropriate under-the-table payments,” said Mary Schapiro, the chairman of the SEC, in a statement issued on July 22.

The SEC issued a press release detailing the nuts and bolts of its proposal although the actual wording of the measures has yet to be released. Once the rules are officially released there will be a 60-day period for open comments from the public.

Like Cuomo’s code of conduct, the SEC so far isn’t leaving much room for interpretation. There’s no mention of setting up a system to vet and register placement agents, who have long provided a valuable service for buyout firms, especially shops on the smaller end of spectrum who often lack internal resources to market their funds. Instead, the proposal eliminates the use of any and all third parties and outlines a number of restrictions for political contributions.

The proposal, if adopted in its current form, would at least philosophically support the Cuomo code of conduct, which to this point has only been adopted by private equity players under investigation in New York, and Cuomo himself was quick to applaud the SEC’s move.

“These rules will institutionalize on a national scale the principles we established in our Code of Conduct,” Cuomo said in a statement, adding later: “These reforms are essential to eliminating the corruption in the current system.”

Cuomo said in May he was working closely with state and federal officials to combat the use of unregistered middlemen in pension fund investments but the results of those efforts are pending.

Implementation of a specific registration system for placement agents has been suggested in some circles but there hasn’t been a groundswell of industry support for the idea. After all, legitimate agents most likely don’t see the necessity. They are likely to already be registered as broker-dealers with either the Financial Industry Regulatory Authority, or FINRA, or the Securities Investor Protection Corp., or SIPC, or both. Examples include Atlantic-Pacific Capital, which is registered with both FINRA and SIPC, and Probitas Partners, which is registered with FINRA.

There are also the in-house fund placement businesses of investment banks such as Credit Suisse and Lazard Ltd. to consider, as well as the activities of The Blackstone Group, which provides placement agent services through its Park Hill Group unit. It’s unclear how the bans being discussed would account for the operations of these businesses, which are obviously established names in the private equity industry.

The reaction from the limited partner side of the aisle, aside from pension funds with some direct link to pay-to-play allegations who have adopted their own bans, has been to move toward increased disclosure of fees paid to placement agents rather than an outright ban. That was route chosen by the California Public Employees’ Retirement System, or CalPERS, the nation’s largest pension fund, in mid-May.

While the outright ban is difficult to justify, given the many placement agents who have operated on the right side of the law for decades, the proposed rules on political contributions, as sketched out, have a firm basis in common sense. The proposal would prohibit investment advisers from making contributions to elected officials who can influence what firms get business from the pension fund. Any person found to have made such a contribution would be barred for two years from providing advisory services for compensation, either directly or through a fund.

According to peHUB.com, the sister Web site of Buyouts, a group of around two dozen placement agents are at work on plans to establish a lobbying group. The report says the group has retained MultiState Associates, an Alexandria, Va.-based provider of lobbyist, legislative and regulatory tracking and other consulting services, to help with the enterprise. C.P Eaton Partners and Atlantic-Pacific Capital are two of the independent agents driving the group’s formation. Charlie Eaton, the founder of C.P. Eaton Partners, told peHUB.com, the initial goal of the group would be to counter the SEC’s proposal.