SIFMA Suggests Revisions to SEC Proposed Placement Agent Rule

The Securities Industry and Financial Markets Association (SIFMA) today submitted a comment letter in response to the Securities and Exchange Commission’s (SEC) recent Proposed Rule to ban the use of third-party placement agents, and institute a new pay-to-play regulation regime for investment advisers.
 
“SIFMA strongly supports the Proposed Rule’s stated goal of eliminating pay-to-play practices from the selection of investment advisers to public retirement funds, and applauds the SEC’s efforts to address this complicated issue,” wrote Ira Hammerman, general counsel and managing director at SIFMA. “We are concerned, however, that the Proposed Rule is not reasonably calculated to achieve these important regulatory objectives.”
 
Third-party placement agents are individuals or firms, or affiliates of firms, which primarily assist funds in placing their interests with investors, which include government investors.
 
SIFMA provided comments and suggested revisions to four areas with respect to the Proposed Rule. Those areas are as follows:
 
Placement Agent Ban
 
In lieu of a ban on the use of third-party intermediaries to place fund interests, the SEC should clearly reiterate the Exchange Act’s general prohibition on the use of unregistered finders. SIFMA said that broker-dealer regulation provides a better avenue for regulating pay-to-play activity—rather than under the Adviser’s Act—and consistent with the SEC’s objectives, reduces the potential for confusion and results in a more manageable compliance burden. This approach would have the added protection of enabling the SEC and FINRA to examine these placement agents’ activities.
 
Several public pension funds—including those from Massachusetts, Missouri, South Dakota, Connecticut, and Maryland—have previously commented on the rule to the SEC, indicating that a ban of the use of placement agents would be very detrimental to their ability to identify and employ the most effective investment managers.
 
Two-Year Ban on Compensation for Services If Inappropriate Contribution Made
 
In the Proposed Rule, the SEC seeks to ban advisers from receiving compensation for two years after it is determined that the adviser, or any of the adviser’s covered employees, made a political contribution to a public official who has some influence over the investment decisions of the funds. SIFMA suggested that the SEC replace the proposed prohibition based-regime with a disclosure based regime.
 
SIFMA suggested that such a regime should include periodic disclosure of:
◦ Political contributions by covered associates; and
◦ Investment advisory business undertaken with government entities whose covered officials received political contribution from an adviser’s covered associates.
 
Disclosure of this activity, SIFMA said, would provide the SEC and government entities with sufficient information to determine whether advisers were attempting to distort the decision to select investment advisers.
 
SIFMA also noted that the Proposed Rule be narrowed to better address the SEC’s objectives in tackling pay-to-play in the investment advisory market. Specifically, SIFMA proposed that the terms “investment advisory services” and “executive officers” be defined to cover only individuals with respect to investment advisory services they provide to government entities. SIFMA also suggested that the type of contributions that trigger the two-year ban should be narrowed to only cover activity that may actually impact government entities’ decision-making. Should the SEC decide to adopt the two-year ban, SIFMA requested, among other things, that the SEC revise the look-back period along the lines of what is currently applicable to municipal financial professionals under Municipal Securities Rulemaking Board Rule G-37.
 
Third-Party Solicitor Ban
 
With respect to unaffiliated third parties who solicit advisory services from government entities, SIFMA suggested that the SEC should expand its regulation of payments to those parties to require that investment advisers make payment to third-party solicitors contingent on their disclosure of political contributions to covered officials. SIFMA said the SEC’s Cash Solicitation Rule currently regulates the circumstances of payments to third-party solicitors, and a reasonably simple amendment to that rule would provide the best means to address this issue.
 
Covered Investment Pools
 
Lastly, SIFMA recommended revising the scope of the restrictions on covered investment pools as written in the Proposed Rule, to exclude investment advisers to investment companies and private funds in which the private fund is not a "alter ego" of the individual investment adviser. The Proposed Rule would extend to advisers to investment companies and funds simply because they have government entity investors, regardless of whether those advisers had any interactions with government officials.
 
SIFMA also requested that the SEC establish a longer period for implementing the any requirements in the Proposed Rule to ensure maximum compliance.