With its new proposed regulations, the SEC is once again following behind the trailblazing enforcement work of the New York attorney general's office, this time Andrew Cuomo's Pension Fund Code of Conduct ,which has been signed by several investment firms seeking to achieve settlements on placement agent investigations.
With billions of dollars to invest, public pension funds are attractive targets for investment managers. If they can find a way to win votes on the pension board by "influencing" a public official with campaign contributions (or even worse, outright bribes), the profits from managing multi-millions of dollars can easily cover the costs of a little baksheesh. So the SEC is dead right to put a stop to this practice.
Having worked in the investment industry for 20 years, I can report that the reputable players marketing to public funds welcome this rule. Pay to Play is a nuisance for honest professionals trying to market and sell investment services. Usually it's the individual salesperson that ends up footing the bill in order to win the deal and a commission. Then he or she tries to find a creative way to get reimbursement from the firm, whose internal compliance codes of ethics may or may not permit such practices. That's why third-party marketers became popular: the investment company could write them a check and let the dirty work get done behind the scenes. It's the public-finance version of "Don't Ask, Don't Tell." One thing's for sure: Sales commissions could be lower if they don't have to put up with campaign solicitations.
While they are at it, the SEC should also outlaw the nefarious practice of influence-peddling in the deferred compensation marketplace. As I've reported before, some of the big-name plan administrators have bought their way into the so-called 457 and 403b markets by paying endorsement fees and royalties to sponsoring nonprofit organizations and unions. These cozy arrangements have provided huge revenue streams to tax-exempt organizations whose mission should be public policy and professional development, not influence-peddling.
The SEC press release says: "The proposed rule also would prohibit an adviser from paying a third party, such as a solicitor or placement agent, to solicit a government client on behalf of the investment adviser." My view is that unions and non-profit associations that promote or endorse a "preferred provider" in the 457 and 403b markets should fall expressly under that prohibition. Then the only remaining question is whether some of the insurance companies making these payola contributions can evade the SEC because they are not technically investment advisors -- although they are licensed vendors of SEC-registered mutual funds.
Let's hope that the final SEC regulations put an end to all forms of Pay to Play abuses. At the very least, there should be rules and sanctions against campaign contributions by investment vendors, and outright criminal sanctions against bribery under the antifraud provisions of the securities laws. But there also must be a clear prohibition against paying endorsement and royalty fees to organizations associated with public employers and public officials, as well as employee unions. The costs of these marketing schemes should be refunded to the employees whose retirement savings are impaired by higher fees as a result of these deals. Let the marketplace determine who's best in the business, not some group of professional cronies or lobbyists.
Finally, I hope that the SEC can persuade its fellow regulators (such as the insurance regulators and banking regulators) to adopt identical provisions. Otherwise, the reputable registered investment advisors would face an uneven playing field when trying to compete with peddlers from other financial industries that the SEC does not regulate.
Industry lobbyists would like to water this all down with disclosure requirements instead of prohibitions. They know that employees don't read the fine print. I say they're full of baloney. Outlaw this nonsense and cut the pork out of these deals.
