Placement agents confused over rule

Many third-party placement agents were caught by surprise by the Oct. 1 deadline to register with the Securities and Exchange Commission.

Some also were unclear whether they had to register, period.

“There's a lot of confusion,” said Edward Pittman, a securities attorney with the law firm of Dechert LLP, Washington. “I don't think the SEC was prepared for the impact that this would have, and there's no clear message that's been communicated to the industry.”

“All of the people who should be registered may not be registered by Oct. 1 because some of them are unaware of the requirement,” added Peg Henry, deputy general counsel of the Municipal Securities Rulemaking Board. The MSRB is an Alexandria, Va.-based self-regulatory organization that will be writing SEC-enforced rules for about 1,000 placement agents and other state and local government consultants that are estimated by the board and the SEC to have to register at the SEC under the new regulation.

Said Stacy Havener, president of the Third Party Marketers Association, Princeton Junction, N.J.: “We were a little bit caught by surprise. I don't think many of us realized that Congress was dealing with third-party marketers in this Dodd-Frank bill.”

Securities attorneys in the private sector said the SEC bypassed its usual public “notice and comment” procedures in order to meet the Oct. 1 deadline that was set by the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Barack Obama July 21.

In addition, the attorneys said it's not clear if unaffiliated placement agents who lobby local and state government pension funds on behalf of money manager clients are among the “municipal advisers” the law said had to register.

Under the new law, unregistered placement agents and others defined as “municipal advisers” will be required to fill out SEC registration forms that explain their lines of business. In addition, the disclosure forms, which will be publicly available through the agency's website, are supposed to detail a registrant's securities-related infractions and criminal histories.

“We didn't think the law's definition of municipal entity would include public pension plans,” Mr. Pittman said. “I've compared it to a computer virus that is hidden in an e-mail attachment. You just didn't know it was there.”

Mr. Pittman said yet another reason the requirement escaped notice is that the SEC in June had just adopted its own rules on money manager use of placement agents for public plans, appearing to have resolved the issue.

The SEC's pay-to-play rules will require money managers to use only agency-registered broker-dealers or investment advisers to solicit business from local and state pension plans after Sept. 13, 2011.

Adding to the confusion about who must file under the new requirement is the SEC's Sept. 1 “interim final temporary rule” providing for the registration itself. That temporary order exempted placement agents already registered at the SEC from the new registration obligation, as long as the investment advice they offer to local government entities is “investment advice for purposes of the Investment Advisers Act” of 1940.

“A registered investment adviser ... must register with the commission as a municipal adviser if the adviser ... provides any municipal advisory services other than investment advice within the meaning of the Investment Advisers Act,” the SEC order says.

“The question is whether investment advisers who are registered but are doing something beyond offering investment advice would be subject to registration under this provision,” said David Tittsworth, executive director of the Investment Adviser Association, Washington.

The SEC called its registration regulation an “interim final temporary rule” because it needed to use its emergency powers to bypass the usual “notice and comment process” to meet the statutorily mandated Oct. 1 filing deadline, Dechert's Mr. Pittman said. “They just didn't have time to put this together,” he added.

Under the SEC's Sept. 1 order, public comment on the “interim final temporary rule” is due Oct. 8, and the rule is slated to expire at 11:59 p.m. EST Dec. 31, 2011.

“The commission expects to consider a proposal for a final permanent registration program, including detailed requirements for the registration of municipal advisors, and to seek public comment on the proposal before its adoption,” the SEC said, in its Sept. 1 order.

SEC officials wouldn't comment, according to John Heine, an SEC spokesman.

In addition to shining fresh light on the intermediaries between public funds and money managers, the new registration regulation requires the placement agents — even those for money managers — to comply with rules set by the MSRB, which establishes regulations for the municipal securities market.

“In coming months, the board should be laying out rules on the fiduciary standards and rules on pay-to-play and other potential conflicts of interest that will apply to municipal advisers, including placement agents,” Ernesto Lanza, MSRB general counsel, said in an interview.

“The board will also be considering in the more distant future establishing licensing examinations for municipal advisers,” Mr. Lanza added.

“Congress is obviously trying to subject to regulation persons who offer services to state and local governments, including public pension plans,” said IAA's Mr. Tittsworth.

Dawn Rinaldi, chief operating officer of placement agency C.P. Eaton Partners LLC, Rowayton, Conn., said she didn't believe her firm had to register under the new requirement because it is already registered with the Financial Industry Regulatory Authority Inc., a Washington-based self-regulatory organization for brokers.

Executives at the TPMA are under the impression that only placement agents representing SEC-registered entities need to register under the new rule, said Ms. Havener, TPMA president and founder of third-party marketer Havener Capital Partners LLC, Boston.

However, “We're recommending that our members err on the side of caution and register,” she added.

The new registration requirement is getting positive reviews from executives at the $210.7 billion California Public Employees' Retirement System, Sacramento, Clark McKinley, spokesman, wrote in an e-mail response to questions.

“This SEC action will help shed more light on placement agents and activities that have raised questions about the integrity of the investment decision-making process,” Mr. McKinley wrote. “CalPERS strongly supports this action and other measures to ensure transparency and trust.”

In May last year, CalPERS adopted a policy requiring managers to disclose their use of placement agents and the fees involved. The policy also requires the placement agents to register as broker-dealers at the SEC or FINRA.

Legislation approved by the California Legislature, and currently awaiting action by the governor, would require placement agents to register as lobbyists with the state.

Also last year, New York City and New York state pension funds banned the use of placement agents.