SEC’s proposed placement agent ban draws ire

The consensus among PE professionals in regards to the Securities and Exchange Commission’s proposal for heightened regulation of placement agents to prevent future pay-to-play scandals is that increased disclosure and restrictions on political contributions make perfect sense. However, an outright ban is going too far.

“The broad-based ban on placement agents [as proposed in file No. S7-18-09] is unjustified,” said David Love, managing director with placement agent C.P. Eaton Partners, in a letter posted on the SEC website. “Because it does not differentiate between [the] legitimate firms in the business and the illegitimate pay-to-play entities, if enacted it would seriously damage a valuable segment of the investment industry. In turn, it would harm the ultimate investors that the SEC is charged with protecting.”

The 60-day comment period on the SEC proposal ends on Oct. 6.

Thomas Scotto, an independent marketing consultant and retired New York City police detective, provided a succinct distillation of his feelings on the proposed ban, questioning its fundamental logic.

“In law enforcement we always, by evidence, prosecute the guilty,” he said in his letter. “We do not lock everyone up and then let the innocents prove themselves.”

The SEC’s proposal follows the eruption of a pay-to-play scandal involving the New York State Common Retirement Fund in March. Since then, a number of private equity firms, individuals associated with the pension fund, and others have been implicated in the scheme. In addition, the legitimacy of the role that placement agents played in the fund-raising process has been questioned.

In late April, New York State Attorney General Andrew Cuomo unveiled plans for a code of conduct for public pension funds that calls for the elimination of the use of placement agents and other finders. The SEC first disclosed its intention to propose measures to curtail pay-to-play practices in late July. It unveiled the details of the proposal on Aug. 7.

The majority of those moved to make their feelings known on the SEC website are, unsurprisingly, the placement agents whose livelihoods would be threatened by the SEC’s proposed ban.

But buyout professionals also chimed in with most pointing out the importance of placement agents in their own fund-raising processes. They emphasized the role the industry plays for smaller firms, especially when they are just starting out.

Stephen Presser, managing director at Monomoy Capital Partners, a New York-based lower mid-market turnaround firm, went into detail about the role the firm’s placement agent MVision Private Equity Advisors played in raising its first fund. It closed in January 2006 with $280 million in commitments, ahead of its $200 million target.

“We were, in essence, three private equity professionals and an idea,” Presser said in the comments. He also called attention to the screening and pre-qualification function that he feels legitimate placement agents provide. “Our placement agent chose Monomoy much more than Monomoy hired a placement agent,” he wrote.

Similarly, a limited partner also weighed in against the ban. Real Desrochers, the former director of alternative investments at the California State Teachers’ Retirement System, and who retired in February, said he believes placement agents play a “valuable role” for investors in alternative assets by streamlining what they bring to an LP’s attention, thereby improving the efficiency of the LP’s internal investment process.

“Although the placement agent is paid by the manager, the best agents spend considerable time with the GP on the alignment of interest concerns of investors,” Desrochers said, adding later in the comments that he’s a “big believer in transparency and disclosure” for the general partner and the placement agents.