SEC softens stance on placement agent crackdown

The Securities and Exchange Commission had last year proposed to ban such middlemen after the discovery that third-party marketers had bribed government officials with influence over contract awards at the New York State Common Retirement Fund (CRF).

The proposed rule included a provision that would prohibit investment advisers from using third parties to exert influence designed to secure business on their behalf. (Global Pensions; August 27, 2009)

But in a letter to the Financial Industry Regulatory Authority (FINRA), the SEC said it may consider better regulation of pay-to-play activities rather than an outright ban.

The U-turn comes after a consultation process in which the SEC received a lot of feedback in support of third-party agents.

In the letter, Andrew Donohue, director of the SEC's investment division, suggests that "an exception to the ban for registered broker-dealers acting as legitimate placement agents might be feasible if FINRA were to implement rules that would prohibit pay-to-play activities".

He added: "I am very interested to learn whether FINRA would consider crafting and adopting such rules for its members."

Donald Steinbrugge, founding partner of placement agent Agecroft Partners, has welcomed the change in tone by the SEC, describing initial plans for a ban a "draconian, knee-jerk reaction", which would not necessarily reduce the risk of fraud.

"Third-party marketers play a number of critical roles, acting as fundraisers for smaller investment managers, while screening the manager universe for pension funds," he said.

"What is needed is not a ban, but a level playing field, where all investment sales activity to public pension funds is regulated, along with the introduction of disclosure requirements relating to any compensation received. In addition, there should be a prohibition on campaign contributions and limitations on travel and entertainment expenses to reduce any political influence in the selection process," he added.