Shifting Regulatory Landscape in the US and Abroad
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My Presentation on the SEC's proposed Pay to Play rule and the Say on Pay bill as part of the discussion of regulatory changes affecting private equity real estate companies.
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Shifting Regulatory Landscape in the US and Abroad
- 1. Shifting Regulatory Landscape in the US and Abroad Pay to PlaySay on Pay Doug Cornelius Chief Compliance Officer Beacon Capital Partners, LLC
- 2. Pay to Play
- 3. Pay to Play New York State Common Retirement Fund Fraud
- 10. Covered Politicians Incumbent or candidate for elective office who: (i) Is directly or indirectly responsible for, or can influence the outcome of, the hiring; or (ii) Has authority to appoint any person who is directly or indirectly responsible for, or can influence the outcome of, the hiring, of an investment adviser for government funds
- 14. Placement Agents “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.” - Steven Schwarzman The Blackstone Group
- 15. Penalty: Two Year Prohibition on Compensation
- 16. Say on Pay
- 18. Say on Pay Corporate and Financial Institution Compensation Fairness Act of 2009 (H. R. 3269)
- 19. Say on Pay Requires that any proxy for an annual shareholders meeting provide for a separate shareholder vote to approve executive compensation
- 20. Say on Pay - Section 4 New federal regulations requiring each covered financial institution to disclose incentive-based compensation arrangements to determine whether the compensation: is aligned with sound risk management; is structured to account for the time horizon of risks; and meets other criteria appropriate to reduce unreasonable incentives offered by such institutions for employees to take undue risks.
- 21. Say on Pay - Section 4 covered financial institution means: an investment advisor, as such term is defined in section 202(a)(11) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)(11)) With assets of more than $1 billion
- 22. Say on Pay - Disclosure Disclose incentive-based compensation to determine whether the compensation: is aligned with sound risk management; is structured to account for the time horizon of risks; and meets other criteria appropriate to reduce unreasonable incentives offered by such institutions for employees to take undue risks.
- 23. Say on Pay - Prohibitions Prohibition on incentive-based compensation that-- could threaten the safety and soundness of covered financial institutions; or could have serious adverse effects on economic conditions or financial stability.
Hinweis der Redaktion
- Needless to say that was illegal, which is why they were handcuffs.The New York Attorney General got involved and came up with a code of conduct intended to eliminate pay to play practices with the New York State pension plans.Some of the investment groups that had been involved “voluntarily” adopted this code of conduct.
- The Securities and Exchange Commission did not want to be outdone by the states. I don’t want to single out New York. New Mexico had a very similar, though less-publicized, scheme.The municipal securities industry had several similar schemes. Some of that industry’s rules are the basis for these new investment adviser pay to play rules.
- In early August, the Securities and Exchange Commission issued a proposed rule to prohibit Pay to Play activities for investment advisers.
- Their proposed rule is very similar to the New York code of conduct in what they prohibit. They severely limit the ability for investment advisers to directly or indirectly make campaign contributions or solicit others to make campaign contributions.
- Who is covered? The general partner of an investment fund is generally considered to be an investment adviser under the Investment Advisers Act.The “203(b)(3) exemption” cited in the rule is the exemption for having fewer than 15 clients. The rule that most of us in the room who are not registered rely on for exemption from registration.So that means all of the real estate private equity funds in this room are covered, regardless of whether you are registered with the SEC.
- The proposed regulation has this very broad definition covering which politicians are affected by the ban on political contributions or solicitations.Its all keyed to whether the official or candidate for the office can directly or indirectly influence the hiring of the investment adviser (which in our case is the selection of an investment fund)My big problem is how do you figure this out? I would like some burden on the government to create a list of political offices that are affected.
- There is a de minimis exemption or safe harbor from the ban on political contributions if the contribution is less than $250 and is for a official that you can actually vote for. I could give $250 for someone running for the Massachusetts Treasurer. I could not give $100 to someone running for the New York Comptroller (since I vote in Massachusetts).
- Investment advisers would be required to maintain a record of the names, addresses and titles of all covered personnel, all government entities to which the investment adviser is providing or is seeking to provide, or has provided in the last five years, investment advisory services and, in chronological order, the amount of all direct or indirect political contributions, who they were made to and the date that they were made. These records would cover all political contributions, even those below the $250 de minimis threshold.
- The SEC has taken that position that all placement agents are bad.Regardless of whether they are registered broker/dealer, regardless of whether they abide by the political contribution limits
- The rule is just a flat ban on using placement agents when dealing with government investors[poll audience on use of placement agents]This rule will obviously have a big impact on the placement agency industry. The rule may be good for incumbents, it could be harder for smaller and newer funds to attract the attention of government plans for investments.For those us that use placement agents, we would have to hire more internal people to deal with this pool of potential investors. But the compensation model would have to be different.
- Over 100 comments. The one from Steven Schwarzmann seemed to catch the most attention.He also pointed out how placement agents help smaller and newer funds get investments.He also told his story and how placement agents helped him get started. Without them, his first fund would have failed.
- What’s the penalty for violating the rule?A two year ban on providing investment advisory services for compensation.The commentary makes it clear that it is not a prohibition on providing services. You do not have to sever the relationship. You just can’t receive compensation during the time-out. You would have to give the government investor the right to withdraw without penalty.What does that mean in the context of a private fund with a promote and a management fee?I would feel confident saying that you would not be able to charge the management fee during the two years. As for the promote? I’m not sure.
- The pitchforks came out over executive pay at financial institutions. This summer, the house passed the Say on Pay bill, authored by Congressman Frank.There has been lots of grumbling over the years about executive pay at public companies. Now this combined with the executive pay at banks rescued by federal government and with our tax dollars.
- The formal title of the bill is the Corporate and Financial Institution Compensation Fairness Act of 2009.
- Personally, I largely ignored the bill because I thought it was solely about proxy votes for executive pay at public companies. Not my area. I have enough to worry about.
- Then someone mentioned that there was something else in there.So take a look at Section 4.It starts implicating covered financial institutions.
- What is a covered financial institution?It includes investment advisers with assts of more than $1 billionFor purposes of Section 202(a)(11) the general partner of a pooled investment fund is generally considered to be an investment advisor.That means this law would govern most of the people in this room.
- If passed, what does this mean for the industryWe already mentioned the disclosure obligation.I am not sure what they mean by “sound risk management” or “accounting for time horizons of risk” or “unreasonable incentives for undue risks”The law leaves it up to the various regulators to determine the meaning of these terms, determine the scope of disclosure and what needs to be disclosed. If the executive compensation rules for public companies are an example, the disclosure obligations are likely to be very ugly.
- The other is the ability of the regulators to ban some forms of incentive-based compensation. As with the disclosure, there is no definition of what is meant by these terms and they leave it up to the various regulators to define the terms and determine the scope of the prohibitions.