Many placement agents will find relief in the SEC's decision Wednesday to ban unregistered placement agents from soliciting commitments from public institutions on behalf of private investment firms.
The final ruling was significantly scaled back from its initial form, in which firms would have been barred from hiring any placement agents to interact with public pensions. The SEC's original proposal triggered hundreds of letters to the SEC from the industry defending the role of “legitimate” placement agents, as opposed to those who simply “grease palms”.
Instead, the SEC unanimously approved banning unregistered placement agents, according to a spokesperson.
The temptation to engage in pay to play activity is all too clear.
The SEC began considering the ban on placement activities with public pensions in the wake of a massive pay-to-play scandal involving the New York State Common Retirement Fund.
In New York, a state political operative, Henry Morris, working with the system’s chief investment officer David Loglisci, would allegedly forced private investment firms to pay sham finder’s fees in exchange for commitments to the pension. Loglisci pleaded guilty to charges related to the case, while Morris is fighting the indictment.
“Pay to play activity – where intermediaries direct contributions in order to obtain advisory pension plan business – undercuts the basic trust by harming investors and damaging the reputations of regulated institutions and the securities industry as a whole,” SEC commissioner Luis Aguilar said at the commission’s meeting Wednesday.
“The temptation to engage in pay to play activity is all too clear. Public pension plans control trillions of [dollars worth of] assets and represent one-third of all US pension assets,” Aguilar said. “The advisory business generated from these plans is tantalising in terms of both the fees and the reputational benefit.”
Longtime placement agents in the private equity market lobbied hard for the SEC to change its original proposal, arguing that while they were totally in favour of restricting political giving, a total ban on pension-agent interaction was a draconian method of stopping pay-to-play. The SEC originally reasoned that fund managers would be unable to fully police the actions of their fundraising agents.
Placement agents who are registered broker-dealers with the SEC still must contend with a number of policies at individual public pensions prohibiting the use of third-party solicitors. In addition, the state of California continues to evaluate legislation that would require placement agents to register as lobbyists, which would prohibit success fees.