August 8, 2009
Supplemental comments by Girard Miller
My earlier comments and my August 6 column in Governing.com (http://www.governing.com/column/will-sec-ban-pension-pay-play) have spurred feedback from pension officials and financial industry professionals who are concerned about the potential anti-competitive consequences of prohibiting third-party marketers.
In the spirit of fairness, I would like to suggest an appropriate middle way for the SEC to ban the use of third-party marketers except where they are tightly regulated and observe a strict code of conduct.
For small and emerging investment advisory firms, a third-party marketing organization may be their only affordable way to raise their visibility with institutional clients. An outright prohibition would therefore be anti-competitive and would favor large institutions that can hire highly compensated institutional salespersons.
As I stated in my original comments dated August 5, the investment advisory industrys use of third-party marketers has always had a seedy side to it. I continue to oppose outright the too-common abusive and corrupt sales practices that have arisen in this sector, but would prefer regulation over prohibition at an industry-wide level.
I also remain steadfastly opposed to use of endorsement and royalty arrangements in the 457/403b deferred compensation retirement industry whereby investment firms pay outlandish fees to nonprofit organizations and unions to buy influence, ultimately at the expense of public employees in their investment returns.
If the Commission decides to craft a public-sector provision that allows third-party marketing organizations while at the same time banning various practices such as campaign contributions, gifts and other forms of influence-peddling, the following requirements would be appropriate:
1.The organization receiving payments for third-party marketing must be a registered investment advisor or broker-dealer with regulated investment businesses substantially broader than simply marketing to public officials, public pension trustees and governmental retirement plan officials, and must comply completely with FINRA regulations that limit entertainment and gifts. (E.g., $100 per person for entertainment.) Smaller retirement plans ($50MM)should be included, not exempted, as FINRA presently allows.
2. The marketing organization or its representative cannot seek to contact or influence individual trustees or board members without explicit written approval of the entire board and a public disclosure of all such contact including written disclosure to the full board and the public via the plans website or other public notice. Regulations should permit direct contact with the designated professional investment staff of the public-sector investment organization (CIO and retirement plan administrator), but third-parties playing politics with trustees and other influential public officials (either elected or appointed) should be regulated in that activity. If the SEC decides to level the playing field by imposing similar requirements on registered representatives employed directly by an investment advisor, I support that measure as well.
3.A uniform Code of Conduct (similar perhaps to the NY Attorney Generals document) should be established to govern all marketing actions of persons and organizations seeking to influence the investment process of public-sector retirement plans.