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SEC looked to muni rules in writing placement ban

The agency is seeking comments on rules that would prohibit placement agents from dealing with US public pensions. Among the revelations are that the private fund placement industry may be made to pay for the past sins of the US municipal bond market.

The US Securities and Exchange Commission Monday unveiled proposed rules that would, among other restrictions, ban private equity firms from hiring placement agents to raise money from public pensions.
 
The proposed rule, titled “Political Contributions by Certain Investment Advisers”, primarily sets forth rules against political contributions to officials with sway over public investing entities, such as the elected officials who oversee US public pension funds. 
 
However, one section of the proposed rules includes a prohibition on the use of third parties to solicit business from government entities. If enacted, this rule would prevent placement agents from raising money from public pensions on behalf of their general partner clients, a potentially severe blow to the private-funds placement industry.
 
Last month, the SEC announced that its so-called “pay to play” rules would include a ban on placement agents soliciting government business, but the details of the proposal were not released until Monday.
 
Members of the public have two months to provide comments to the SEC before a final rule is crafted. All comments submitted will be made public. 
 
According to text of the proposed rule, the SEC decided to include the ban on third-party marketers out of a belief that investment advisors would find it difficult to monitor and control the activities of external consultants: “We are concerned that our adoption of a rule addressing pay to play practices by advisers would lead to a similar use of consultants or solicitors by investment advisers to circumvent the rule.”
 
In particular, the SEC referenced a rule governing the US municipal securities market, called G-38, which similarly bans the use of third parties to solicit government clients.
 
The municipal securities rule originally allowed for the use of third-party consultants in working with government clients, but was later amended to ban the use of these consultants. The reason for this, according to the SEC, was that the Municipal Securities Rulemaking Board found the disclosure rules already in place governing the use of third-party solicitors were inadequate to prevent the circumvention of pay-to-play rules, and in many cases the required disclosures were not being made.
 
Nevertheless, in its proposed rule, the SEC directly asks for comments on whether a middle ground can be found whereby placement agents are not prohibited from soliciting government clients but are required to adopt the same pay-to-play rules. The text reads: “[S]hould we consider narrowing the prohibition to accommodate government solicitation activities by third parties if such third parties. . . commit not to contribute to (or solicit contributions for) officials of any government entity from which any adviser that hires them is seeking business?”
 
The SEC in 1999 proposed a ban on investment managers making political donations to clients, but the proposal was never made final after a California court declared a similar ban imposed by the California Teachers’ Retirement System to be unconstitutional.
 
The most recent pay to play curbs come amid a growing scandal that has already led to the arrest of several people with ties to the New York State Common Retirement Fund, most notably former political operative Henry Morris.
 
 Private equity firms including The Carlyle Group, Riverstone Holdings and advisory firm Pacific Corporate Group have agreed with New York Attorney General Andrew Cuomo to pay fines related to fees paid to third parties who solicited business with New York State Common.