Agents Try Heading Off US Marketing Rules

Shaken by an SEC proposal that could severely damage their business, third-party hedge fund marketers will revise their code of ethics at an upcoming annual meeting later this month in Chicago.

The move planned by the Third Party Marketers Association is part of an industry effort to head off federal regulation and legislation that would severely limit the portion of the institutional-investment community that placement agents can serve.

Some marketers have begun refusing to handle hedge funds that aren't registered with the SEC - a gesture that could soon become moot under pending U.S. legislation that would require most funds to register.

At the same time, promised regulatory reforms for the hedge fund industry are slowly advancing. Under an SEC proposal introduced in August, fund-marketing firms would be banned from receiving payment for serving as a matchmaker between investment advisors and government pension plans. The $2.2 trillion in state and municipal retirement systems represent about one-third of all U.S. pension-plan dollars.

The proposal was made in the wake of the New York Common Fund scandal, which implicated placement agents in alleged kickbacks to public officials who secured investments.

Placement agents have fought back hard against the SEC rules. Their association, known as 3PM for short, sent a 23-page letter to the SEC, joining about 100 others who submitted comments lambasting the commission's plan. To be sure, there are dissenting views - New York Mayor Mike Bloomberg wrote in support of the SEC proposal. Still, Private Equity Insider, a sister publication to Hedge Fund Alert, last week quoted industry members expressing confidence that they can convince the SEC to reverse itself.

But the actions anticipated in Chicago and voluntary changes regarding registration are evidence that many marketers aren't viewing a reprieve as a sure bet.

"We're going to revise [the code of ethics] and determine whether we need to expand it and take in some of the things regarding whatever the SEC decides, but Lord only knows what they're going to do," said one 3PM board member who spoke on the condition of anonymity.

Frank Minard, another board member who heads 3PM's strategy committee, confirmed the code of ethics would be on the agenda when the group holds its annual convention Oct. 28-29. The code is a relatively bare-bones affair that doesn't mention, for example, campaign contributions, another target of the SEC proposal.

"We're planning to get it updated and revisited," said Minard, who is with XT Capital of New York. "We haven't looked at it in a long time."

As for the ban, Minard said: "The refreshing thing is if you go to the SEC Web site and look at the comments, they're running 100 to 0 against this ban on placing hedge fund investments with public pension plans for a fee. The letter writers are appalled that just because there was some unethical behavior on the part of a couple funds you'd ban an entire industry that provides extraordinary value."

Last week, Rep. Paul E. Kanjorski, D-Pa., introduced legislation that would require all private equity and hedge funds to register. Meanwhile, the marketplace is already enforcing that requirement to some extent - institutional investors are increasingly unwilling to invest in hedge funds that haven't taken the step.

As a result, most major hedge funds are either already registered "or heading that way," said David Harmston of Albourne Partners, which advises corporate and public pension plans on about $200 billion of hedge fund investments. He believes registration is on a growing checklist of best practices, but that the smaller funds that are most likely to be unregistered are also the most likely to deal with placement agents. Larger funds usually employ in-house marketers.

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