The US Securities and Exchange Commission has provisionally approved a sweeping plan that would prevent private equity firms from hiring placement agents to solicit public pensions for commitments.
The SEC’s proposal would not prohibit a state or local government from hiring a third-party firm to help select an investment advisor, the SEC said in a statement.
The proposals also would have a significant impact on eliminating the political factor from the interaction between investment firms and public pensions. The proposals would bar private investment firms and their executives who have contributed to elected officials in a position to influence pension investment decisions from working with or soliciting money from the pensions.
Also, “the proposals would prohibit an advisor and certain of its executives and employees from doing indirectly acts that would violate the rules if done directly,” the SEC said. “This provision would prevent advisors from circumventing the rule by directing or funding contributions through third parties, such as attorneys, family members or companies affiliated with the advisor.”
“We are concerned there may be broader efforts and monetary payments being made to influence the selection of advisors to manage government plans,” according to a transcript of testimony by SEC chairwoman Mary Shapiro. “These payments have a distortive influence on the advisor selection process.”
Pay-to-play practices can “result in public plans and their beneficiaries receiving sub-par advisory services – at inflated prices,” Shapiro said.
The proposal will enter a 60-day public comment period and must receive a second vote from the commissioners before it is approved.
The SEC, along with New York Attorney General Andrew Cuomo, have engaged in a multi-year investigation of pay-to-play practices at the $109 billion New York State Common Retirement Fund in which political operatives allegedly strong-armed investment firms into paying sham finder’s fees in exchange for commitments from the pension.
Cuomo has indicted six people, including alleged ringleader Henry Morris, a former political operative of former New York Comptroller Alan Hevesi; David Loglisci, the former New York Common chief investment officer; and Barrett Wissman, the former head of a Texas-based hedge fund.
The Carlyle Group, Riverstone and Pacific Corporate Group have each reached settlements with Cuomo in the case, paying monetary fines and pledging to not use placement agents in future solicitations of pensions.
“These reforms are essential to eliminating the corruption in the current system,” Cuomo said in a statement Wednesday in response to the SEC’s actions.