SEC Proposed Pay to Play Rules Draw Many Comments

Earlier this year the SEC proposed so-called “pay to play” rules which would restrict SEC registered investment advisers from managing money from state and local governments under certain circumstances.  According to the SEC press release, “the measures are designed to prevent an adviser from making political contributions or hidden payments to influence their selection by government officials.” The rule would do four major things:

1. Restricting Political Contributions
2. Banning Solicitation of Contributions
3. Banning Third-Party Solicitors
4. Restricting Indirect Contributions and Solicitations

The comment period, which ran for 60 days, produced some very good points.  As a general matter most groups opposed the proposed rules for some reason or another.  Below I have gathered some of the more interesting or important points which were raised in the comments which are publicly available here.  All of the following quotes are directly from the comments of the submitters which are identified.

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Joan Hinchman – Executive Director, President and CEO, of NSCP (National Society of Compliance Professionals Inc.)

• The practical result of the ban will be that an adviser will be economically compelled to end its relationship with a governmental entity.
• The ban will deprive participants and beneficiaries of public funds of well qualified advisers and drive up the cost of investment advisory services due to higher compliance costs.
• The Rule will affect at a minimum all registered investment advisers that not only advise governmental public pension funds, but also may cover investment companies in which governmental pension funds choose to invest.
• Advisers lacking capital to hire employees to obtain government clients or the experience and sophistication to do so would be placed at a material competitive disadvantage.

These comments can be found here.

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Jeffrey M. Stern and Robert W. Schwabe – Managing Partners of Forum Capital Securities, LLC

Forum Capital Concurs wholeheartedly with those persons and entities that have commented on the Proposed Rule to date that banning investment advisers from compensating third-party placement agents for securing capital commitments from public pension fund investors would:

• Unfairly advantage private investment firms large enough to employ an internal marketing and investor relations staff over those firms that cannot afford to employ such a staff internally;
• Limit the universe of investment opportunities presented to public pension funds for their consideration;
• Deprive private investment firms of the services of legitimate placement agents that have contributed to the success of many investment advisers already existing and thriving prior to the promulgation of the Proposed Rule, thereby limiting the opportunities of new private investment firms to successfully raise funds, execute their investment strategies and grow into market leading investment firms;
• Reduce competition within the investment advisory business in general and the various alternative investment asset classes in particular; and
• Reduce the amount of capital available to companies that rely on private investment firms for their financial support.

These comments can be found here.

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Sue Toigo – Chairman of Fitzgibbon Toigo Associates in Los Angeles California

• Without placement agents, the ability of emerging asset management firms, the majority of which are minority- and women-owned firms, to gain the business of the large public pension funds becomes virtually impossible.
• Under the proposed regulation, small emerging companies will find it increasingly challenging to market their investment products to pension funds.

These comments can be found here.

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William J. Zwart – BerchWood Partners, LLC

• Emerging managers would not be able to effectively access or approach the public entity investment community without the support of the placement agent community.

These comments can be found here.

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R. Dean Kenderdine – Executive Director and Secretary to the Board of Trustees of State Retirement and Pension System of Maryland

• The strict outright prohibition of investment management firms’ use of placement agents to implement their marketing efforts to public pension funds would result in increased costs to the investment firms and a reduction in viable investment opportunities being presented to public pension funds.
• Public funds will not be presented with the broadest array of investment opportunities and hinder the competitiveness of the investment management marketplace.
• Placement agents being prohibited would have an adverse impact on our return potential and increase our cost of operations.

These comments can be found here.

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Fernando Ortiz Vaamonde – Managing Partner of ProA Capital de Inversiones

• An outright ban on placement firms would unfairly disadvantage small- and mid-size firms, many of which are unlikely to be able to recruit and retain significant in-house fund-raising capabilities.

These comments can be found here.

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Keith Breslauer – Managing Director of Patron Capital Limited

• With the new rule, Patron would not be able to without great difficulty, expand its investor base to include public pension plans.
• The effect of the new rule is to harm the fund raising abilities of funds like Patron and materially impact the investing opportunities of public pension plans.

These comments can be found here.

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Brian Fitzgibbon – CEO of Fitzgibbon Toigo & CO., LLC

• Without placement agent assistance, some of the best fund managers may never get to market.
• A ban on placement agents is unfair, irrational and harmful to Private Equity. There will always be some corrupt public officials and organizations that want to game the system.

These comments can be found here.

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B. Jack Miller – General Motors Asset Management

• Many partnerships are too small to have their own marketing staff and rely on third party PA’s to introduce them to investors.

These comments can be found here.

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Jake Elmhirst – Global Co-Head Private Funds Group of UBS Securities, LLC

USB strongly believes that:

• Registered placement agents play a beneficial role in the capital markets;
• The proposed ban would be detrimental to both private equity managers and their public pension plan investors;
• The proposed ban in lA-291O is unnecessary and overbroad, and the Commission can regulate registered broker-dealer placement agents through other means;
• The placement agent ban in IA-2910 purports to be modeled on MSRB Rule G-38 but is in fact inconsistent with that rule and the policies supporting it; and
• The Commission should consider alternatives to a ban on all intermediaries, including an exemption for registered broker-dealer placement agents, and increasing regulation of properly registered placement agents.

These comments can be found here.

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Thomas P. DiNapoli – State Comptroller

• Under the proposed SEC rule, it is not clear if the investment adviser would subsequently be prohibited from earning compensation for advisory services provided to the Fund.
• It is important that the final rule adopted by the SEC clearly articulate what behavior is prohibited in making contributions or soliciting or coordinating payments to state or local political parties.

These comments can be found here.

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Melinda Gagyor – Fulcrum Financial Inquiry, LLC

The proposed placement agent ban should be eliminated because:

• It will devastate the placement agent business and cause severe job losses in an already troubled economy;
• The vast majority of emerging, small and middle-market investn1ent managers will simply not survive or be forced to operate at a huge disadvantage;
• Pension funds will see a significant reduction in their access to potential investment opportunities; and
• Pension funds will no longer be able to use placement agents to help them pre-screen potential investment manager candidates

These comments can be found here.

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Ron S. Geffner – Partner of Sadis & Goldberg, LLP

While we strongly support the SEC’s efforts to eliminate corruption in connection with “pay to play” practices, the proposed ban on placement agents’ solicitation of government investors is overreaching and will:

• Deprive government investors of the benefits provided by placement agents, namely access to a broader range of potential investment opportunities and assistance with due diligence efforts, and
• Hinder smaller advisory firms in their efforts to attract government investors, as smaller firms generally have less in-house resources and rely more on the use of placement agents in soliciting government investors.

These comments can be found here.

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Fred Gortner – Managing Director of Paladin Realty Partners, LLC

• Without quality placement agents like Triton Pacific, emerging small and mid-cap investment management firms like ours would be forced to operate at a significant and inequitable disadvantage to larger investment managers that have the financial resources to employ large, experienced teams of investor relations and in-house placement professionals.

These comments can be found here.

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Drew Maxwell

• Your proposed ban on placement agents will unjustly penalize a huge percentage of emerging, small, minority-owned and middle-market investment managers, as these firms rely extensively on placement agents to help them.

These comments can be found here.

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Joseph M. Velli – Chairman and Chief Executive Office of BNY ConvergEx Group, LLC

• While we believe that the general ban on third-party solicitors is unnecessary, we are concerned in particular about the vagueness of the rule’s definition of “related person”.
• We believe it is critical for the SEC to clarify the test for control included in the definition of “related person”.

These comments can be found here.

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Frode Strand-Nielsen – Managing Partner of FSN Capital Partners A.S.

• It would be highly challenging for us to raise capital from international in institutions unless we had the assistance of a legitimate placement agent.
• If you take away the role of a placement agent, you will deprive firms like ours of the ability to raise capital in the United States, and you will also seriously impair the pension funds’ capacity to invest with the best private equity firms internationally.

These comments can be found here.

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Mark G. Heesen – President of National Venture Capital Association

• It is in the interest of the entire venture capital community if firms retain the option of using placement agents for marketing to all potential investors, including public pension funds.

These comments can be found here.

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Richard H. Hurd, Jr. – President of Strategic Capital Partners

• We know first hand the value that qualified placement agents can provide particularly to emerging, small and mid-cap investment management firms. Without such services, smaller firms have limited access to the institutional market. Likewise, pension fund will be prohibited from participating in the entrepreneurial strategies and success of companies like ours.

These comments can be found here.

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Other related hedge fund law articles:

• Hedge Funds and Insider Trading
• Hedge Fund Laws
• IA Registration Tips
• How to register as an Investment Advisor
• New Hedge Fund Regulation
• Investment Advisor Books and Records Requirement
• Net Capital Requirement for State Registered IA Firms
• Withdrawing from IA Registration

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs Hedge Fund Law Blog.  If you are a hedge fund manager who is looking to start a hedge fund or if you have questions about your investment advisor compliance program, please contact us or call Mr. Mallon directly at 415-868-5345.