My years in government, both federal and state, have taught me that policymakers, despite best intentions, often craft the wrong answers to the right problems. One recent example of this phenomenon involves the proposed Securities and Exchange Commission rule regarding placement agents.
After well-publicized scandals at state pension plans in New York and New Mexico, the SEC is moving to ensure the integrity of those funds by banning political contributions in connection with pension plan allocations. They also propose an outright prohibition on the use of placement agents, a long-established component of a plan sponsor's exercise of its fiduciary obligation.
To be sure, the ban on political contributions makes a large amount of sense. Political considerations deserve no weight when making investment decisions on behalf of a state's teachers, nurses, firefighters and police officers.
But a ban on placement agents may actually be harmful to the interests of those state employees. As the executive director of the Massachusetts Pension Reserves Investment Management Board, a $40 billion pool funding the retirement of tens of thousands of state teachers and employees, let me explain why.
Placement agents are essentially investment bankers for small and midsize money managers that have not yet attained a scale to support internal marketing departments. Some placement agents are part of the major commercial and investment banks; others are smaller independent firms. Bona fide placement agents all have experienced financial professionals and already are regulated by the SEC and the Financial Industry Regulatory Authority.
We rely on them to do due diligence on the investment funds, pick out the best and the most innovative and bring us what they consider the optimal opportunities. With only 24 employees, there is no way that we could sort through the universe of investment funds without a preliminary screening by a skilled placement agent. The smaller, newer funds, some of which have provided us with some of our best returns, would have never found their way to us if they had not been represented by a skilled placement agent.
To equate the parade of various unsavory political fixers that have been implicated in the current pension fund scandals with legitimate placement agents is absurd. The SEC should do everything in its power to eliminate the corrupting influence of political fixers from the business of investing and ensure that only qualified professionals are in the business. In addition to the ban on political contributions, the SEC should look at, to list just a few suggestions, stringent licensing requirements, mandatory and comprehensive disclosure, enforcement of proper professional standards and registration.
But to ban an entire class of financial intermediaries from the marketplace will simply deprive state pension funds of investment opportunities from which they would otherwise benefit.
Michael Travaglini is executive director of the Massachusetts Pension Reserves Investment Management Board, Boston, which oversees the investment of state, county, local and other public employee retirement systems in Massachusetts.