Financial groups call on regulators to narrow new policy against kickbacks

A wide range of financial interests is pressing federal regulators to limit a proposed curb on “pay to play” practices in state and local investments.

The Securities and Exchange Commission (SEC) proposed the new policy following allegations that political operatives and elected officials received kickbacks for help in winning business from New York’s pension fund.

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The policy is designed to restrict investment advisers from making political contributions to influence government officials over how business is awarded. State and local governments often hire private advisers to help manage large pensions and other funds.

The SEC’s proposal would bar investment advisers for two years from providing paid services to state and local authorities if they contribute $250 or more to an elected official overseeing the business. The proposal would also ban advisers from asking a third party, such as a placement agent or finder, to help win business from the government.

The new rule has drawn more than 200 comments from state and local authorities, Washington-based trade associations and prominent investors. New York City Mayor Michael Bloomberg and other state officials voiced strong support for the policy.

But financial interests are urging the SEC to tread carefully.

The Investment Company Institute (ICI) said the policy “significantly overreaches” and should be more narrowly tailored. The Managed Funds Association (MFA), which represents hedge funds, argued that the $250 level for political contributions is too low and should be raised to $1,000.

ICI, MFA and many of the financial interests raised concerns specifically about the proposed ban on placement agents. The hedge fund group said that the ban would harm alternative and offshore investors.

“Because public pension plans are more likely to be familiar with larger, well-known managers, small and offshore managers attempt to level the playing field by engaging third party placement agents to market their services,” MFA wrote.

Stephen Schwarzman, the billionaire co-founder of the Blackstone Group, wrote to the SEC that the proposal’s ban on placement agents is a “bad idea."

“Eliminating placement agents as a group because there were a few bad actors who have tarnished the industry is analogous to eliminating Major League Baseball because several of its players behaved illegally,” Schwarzman wrote.

He argued that Blackstone’s rise is in part due to agents helping secure capital in the 1980s and 1990s.

Schwarzman said that a placement agent helped secure capital from CalPERS, the giant California pension fund.

“We were one of the first major investments by CalPERS in the private equity area. This was a direct result of our using a placement agent firm with very significant experience in the private equity investing field, and who had enormous credibility with virtually all of the major investors among state pension funds in this asset class,” Schwarzman wrote.