Curbing Pension 'Pay to Play'
Under new SEC rules, placement agents won't be outlawed, but they will be regulated.
The Securities Exchange Commission (SEC) issued proposed regulations last week that ban investment advisors from serving public pension funds if they make campaign contributions to elected officials. The new rules will curtail some of the shady practices that have transpired in the public pension world in the past, especially the practice of buying votes on pension boards through campaign contributions and gifts to fiduciaries.
• Investment advisors cannot work for hire for a public plan if they or their top guns have made campaign contributions in excess of a de minimus level.
• Advisors are prohibited from "bundling" other contributions to help candidates whose roles are related to pension funds
• Placement agents must be registered as broker-dealers or investment advisers themselves in order to receive compensation, and thereby become subject to these same rules.
I applaud the SEC for these new rules. They didn't go quite as far as I suggested in my column on this topic last August, but they cover almost all of my key principles and written suggestions including the restrictions on "placement agents."
Those firms — the ones that collect finders' fees for lining up votes on pension boards for their investment advisory clients — must now become broker-dealers or registered investment advisors and thereby play by the SEC's rules. I suspect that in some cases, their actual functions as broker-dealers and advisors will be a "shell" for continuing their primary business of influence-peddling, but it will be fun to watch how far some of these agents will go to continue that line of business. We will probably see some of the placement agents merge their companies or simply hire on with a registered firm in order to avoid setting up a regulated operation of their own.
We'll have to see whether the SEC rules also apply to governmental 457 deferred compensation and 401 defined contribution plans. Their press release references "other similar governmental investment accounts." I still need to dig a little deeper to see how inclusive that definition might be. Hopefully, it is sufficiently broad so that the governmental defined-contribution industry is similarly regulated. I'd also like to see the pay-to-play prohibition extended to endorsement groups in that industry, including the public employee unions and governmental trade associations who receive backsheesh for their imprimatur.
It's also not immediately clear whether the campaign-finance rules apply to pension board members who run for election, and not just the ex officio types like state treasurers. For example, several board members of the nation's largest public pension fund, CalPERS, are elected by plan members and conduct campaigns for their position as fiduciaries — and one or two have reportedly received campaign contributions from nefarious sources in the past. Let's hope that the regulations cast a broad enough net that those vote-buying efforts are snuffed out as well.
Some of the rules don't take effect for a year, so plan trustees and administrators would be wise to demand immediate compliance when they put business out to bid in the coming twelve months.
Nobody wants to see excessive federal regulation of the public pension community. But in this case, I think that most public plan trustees and observers will sigh with relief if the SEC's rules are broadly written and enforced to tighten up the private-sector marketeering practices and campaign contribution abuses we have seen in the past. The SEC has done for the state and local government pension sector what it has failed to do on its own. Score one for the good guys.