B-Ds fret over proposed placement agent rules

A bill introduced last week in the California Legislature would require money manager placement agents to register as lobbyists and regulate their compensation.

Placement agents help investment managers gain business from pension plans, but some unethical practices have raised questions about “pay to play.”

The proposed legislation is in response to revelations last year that a firm headed by a former California Public Employees’ Retirement System board member had received more than $50 million in fees from investment managers doing business with the state.

Last week, New York state announced a settlement last week with two placement agents, Markstone Capital Group LLC and Wetherly Capital Group LLC, in a pay-to-play investigation.

The two firms agreed to pay back money to the New York State Common Retirement Fund.

The California bill could “dramatically impact many small broker-dealers who act as placement agents,” said Lisa Roth, chief executive of Keystone Capital Corp. and former chairwoman of the National Association of Independent Broker/Dealers Inc.

The bill would ban contingency fees based on Calpers’ placing money with a manager.

“Contingency fees are how placement agents get paid, so that’s the prickly part of the legislation, Ms. Roth said. She estimated that more than 400 brokerage firms offer placement agent or third-party marketing services.

The “actions of several bad actors … has triggered a wave of new proposed rulemaking and legislation,” Ms. Roth added. That includes a Securities and Exchange Commission proposal first circulated last fall that would prohibit a financial adviser from paying third parties for solicitation of advisory business from any government entity, she said. That proposal was met with substantial industry opposition.

Andrew “Buddy” Donohue, director of the SEC’s Division of Investment Management, said in December that he was formulating a final rule that might include an exception for regulated broker-dealers that are prohibited from engaging in pay-to-play practices.

Ms. Roth said she expects the SEC to “re-release” the proposal soon.

“Many placement agents are not properly registered as broker-dealers,” she said.

The California bill is backed by Calpers, state Controller John Chiang and state Treasurer Bill Lockyer.

E-mail Dan Jamieson at [email protected].