Commenters to SEC: We Don’t Like Your Stinkin’ Rules

We’re just three days into the 60-day comment period on the SEC’s proposed rules for placement agents, and market pros have already begun voicing their disapproval.

The SEC website shows five comments submitted on Monday and Tuesday, with four of them objecting to the proposal’s ban on investment advisors (PE funds, VC funds, hedge funds, etc.) using placement agents when trying to solicit fund capital from public pension systems. The fifth letter is an objection to the proposed ban on political contributions from investment advisors to pension-connected officials, which the writer claims is a violation of free speech rights (this argument won’t fly — nor should it — since SEC already regulates political contributions in other areas).

Here’s a sampling of what’s been submitted. First up is Wes Ogburn, a hedge fund and fixed income portfolio manager for the Stanford Management Co. (i.e. Stanford University endowment):

“The third-party placement agents are broker-dealers themselves and are therefore subject to a stricter degree of regulatory oversight/enforcement vs. the municipal “consultants” that banks used to solicit underwriting business from municipalities who were not subject to similar oversight and registration with FINRA… Increased transparency and a ban of political contributions by third-party placement agents should be effective in curbing the “pay to play” practices of recent years.”

Ted Caroll, a partner with small-cap buyout shop Noson Lawen Partners:

“Please stop all this nonsense. Placement agents provide a valuable service to small and midsized investment firms and 99.99% are honest diligent people. It’s offensive to see the many large political donors involved in the recent pay to play schemes get to pay fines and adopt hollow policies to avoid real prosecution. Catch and punish the guilty, leave the innocent alone.”

Brady Pyeatt:

“I work for a placement agent and this new provision will negatively impact our business. We help private equity funds find institutional investors and public pension funds are part of the mix. We are not advisors, we are advocates for our client and all parties are aware of that. It is the quality of the funds that we represent and the due diligence process that they are subjected to that determines whether or not an investment is made. Some of these new funds will never make it into the market if we and others like us are unable to introduce them. Innovation will be lost and talent will be squandered. The people who were involved in pay to play schemes knew they were breaking the rules and they did it anyway. Don’t punish the rest of us for the transgressions of a few. It is unwise and unfair and those who are inclined to cheat will just find another way to do it.”

David Pohndorf, managing director of Source Capital Group:

“With at least 40 state funds active in private equity, as well as a dozen municipal funds, it is very difficult for new funds, or small funds, to communicate with the appropriate investment personnel at these funds, in addition to communicating with endowment, foundation, insurance company and corporate pension fund investor prospects, without the assistance of experienced private placement agents who specialize in private equity fund placement, and who have carefully built productive relationships with the public funds over many years.

In summary, the SEC proposal punishes those placement agents who provide a meaningful service to the private equity fund community while doing nothing to preclude wrongdoing by state and municipal pension fund personnel who continue to work with questionable registered and non-registered persons attempting to win investment commitments on behalf of private equity fund clients.”