Placement agents band together to oppose ban

A coalition of placement agents is urging the SEC to pull the plug on a proposed rule on so-called pay-to-play arrangements, 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.

“We're all being banned because of the actions of a few criminals,” said Charlie Eaton, chief executive and founder of C.P. Eaton Partners LLC, a placement agency in Rowayton, Conn.

“I don't think banning placement agents is the answer,” added Kelly DePonte, a partner with Probitas Partners, a placement agent based in San Francisco.

The SEC's proposed rule would bar money managers from using placement agents, pension consultants and other third parties to solicit investments from public funds, including retirement plans and college savings plans. Also, key money manager executives and employees who made a contribution in excess of $250 to a political official in the position to influence selection of the firm would be barred from providing services for a period of two years. Comments on the proposed rule are due by Oct. 6.

Allegations that money managers were funneling payments through intermediaries to politicians who could influence the hiring of managers at public funds have been raised in recent pay-to-play scandals, including one alleging that private equity firms paid fees to get hired by the $116.5 billion New York State Common Retirement Fund, Albany, (Pensions & Investments, May 14).

“The selection of investment advisers to manage public plans should be based on merit and the best interests of the plans and their beneficiaries, not the payment of kickbacks or political favors,” SEC Chairman Mary Schapiro said during a July 22 meeting, when the agency proposed its crackdown.

As part of the industry's response, Mr. Eaton said 25 firms have agreed to fund an educational lobbying campaign urging the SEC to replace its proposed ban with regulation aimed at weeding out the bad actors that trade on their political connections.

“We don't deal with politicians,” Mr. Eaton said in an interview. “We deal with the professional investment staffs at the funds. We add value and the criminals and the people who work off their political connections do not add value. I guess you could say they're the leeches on the system.”

Under the proposed standards that Mr. Eaton and other coalition members support, 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 also would disclose its fee arrangement with the fund's general partner to any potential limited investment partners and be registered with the SEC or the Financial Industry Regulatory Authority.

The coalition hired a lobbying firm, MultiState Associates Inc., Alexandria, Va., said Mr. Eaton. MultiState will introduce coalition members to SEC officials and key state politicians in New York, Illinois and New Mexico, where Mr. Eaton said bans on use of placement agents have already been imposed.

Probitas' Mr. DePonte — who is not a member of Mr. Eaton's coalition — said the SEC's proposed crackdown would be particularly hard on smaller or first-time general partnerships, such as private equity, real estate and hedge funds, that don't have their own marketing staff. The SEC's proposed rule “makes it harder for people who are newer or smaller to get started in this business,” he said.

Mr. Eaton said some of these new managers are owned by minorities. He declined to identify firms contributing to the lobbying effort, but said placement firms are important to all sorts of general partnerships.

Even some of the larger alternative investment general partners, Mr. Eaton said, are finding they need to broaden their search for institutional limited partners following an economic downturn that has depleted the pool of assets available for investment.

“It's particularly important in the environment of last year that you have to look a lot further to find institutional investors to make commitments,” Mr. Eaton said.

He said estimates suggest about 40% of general partners are currently raising capital through the more than 200 placement agents in business worldwide.

“We're a big industry,” Mr. Eaton said. “It (the proposed ban) would have a big impact on the whole industry — money managers too — because many would not get into the business without the help of placement agents.”