letter - 3PM - Third Party Marketers Association

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The Third Party Marketers Association3PM agrees that the pay‐to‐play issue will not be completely solved by disclosure. However, we dobelieve that the adverse effect of pay‐to‐play can only be minimized if the investment process becomesmore transparent. We do not believe that a singular ban on all Third Party Marketers will in any wayadvance this objective.In order to curtail the abusive practices that have occurred, the Commission should implement a seriesof rules, regulations and guidelines that will increase transparency in the investment process andeliminate potential conflicts of interest by mandating full disclosure of any direct or indirectcompensation that could affect or compromise the investment process. These rules should be appliedevenhandedly across all groups of investment advisers and should cover all sales professionals whetherthey operate independently or are direct employees of an investment manager. Furthermore, theCommission should consider extending the scope of rules that already exist to include thoseconstituencies not currently covered by them. As an example, Rule 206 (4)‐3 is aimed at providingdisclosure to an area where a perceived conflict of interest exists. The rule could be extended to allinvestment managers that provide the same or virtually the same services. Additionally, this rule couldbe extended to include other forms of compensation cited by the Commission including politicalcontributions and other forms of non‐monetary compensation that could impact investment decisions.3PM does not suggest that these contributions were inappropriate. We do suggest that a formulaicapproach would not resolve these allegations, and that these issues are best addressed through a policyapproach that encourages disclosure and transparency applicable to all investment advisers and theirrepresentatives, whether or not they are registered under the Investment Advisers Act.It is also our belief that for this process to be effective, disclosure must be provided by any party, whichwould include investment advisers, Third Party Marketers, public officials or other trustees, who areinvolved in the investment decision making process and may by the nature of their position have theability to exert undue influence on the process. While we understand that the SEC is limited in theconstituencies for which it can propose legislation, it is in the best interest of everyone for theCommission to work with the pension community, FINRA and the State regulators to developmeaningful policies that address these issues and monitor the conduct all parties involved in theinvestment process.Section II A 3 –Pay‐to‐play Restrictions(a) Two Year “Time Out” for ContributorsWe request comment on whether two years is an appropriate length of time.3PM does not believe a two year cessation of compensation would be a sufficient deterrent tocurtail pay‐to‐play practices. We believe that this proposal should be amended to include the rightof an investor to rescind an investment decision should pay‐to‐play activities be uncovered. In thePage 8
The Third Party Marketers Associationcase of an illiquid investment, this might extend to no management or incentive fees being earnedwhile investment is held by the manager.Contributions ‐ We request comment on our proposed definition of “contribution.”While 3PM agrees that a rule prohibiting pay‐to‐play is appropriate, we submit that limiting the ruleto “political contributions” is too narrow. The definition should be amended to broaden its scopeand should include any form of compensation that would compromise or influence of any decision,especially as it relates to the investment decision making process.Covered Associates – We request comment on the scope of the proposed rule and, in particular,those persons associated with the advisers whose political contributions would trigger theapplication of the two‐year “time out” and would be prohibited from soliciting politicalcontributions from others.Rather than a straight prohibition on the use of Third Party Marketers, we believe that Third PartyMarketers should be viewed in the same light as “covered associates”. It is 3PM’s belief thatinvestment advisers should be held accountable for actions of the Third Party Marketers that theyengage. In general, an investment adviser’s responsibility extends to violations of generaladvertising and solicitation, and to the penalties associated with omission or misrepresentation ofmaterials facts. Using the same logic, we see no reason why the same extension would not apply topay‐to‐play activities.Consequently, the Commission should consider adding such a provision which would levy similarpenalties on investment advisers that are found to have failed to provide adequate supervision overthe activities of a Third Party Marketer who is found to have engaged in pay‐to‐play practices, asthose applied to other rule violations such as general advertising and solicitation, or to materialmisleading representations. Essentially, this approach would allow investors to rescind theirinvestment decision and would allow them to seek a remedy that would be most appropriate underthe given circumstance. It would also expose the violating party to damages that could besubstantially higher than the two year moratorium might provide.De Minimis Contributions ‐ Comment is requested on the scope of the exceptionThe Commission’s proposed exception of $250 is acceptable and we agree with the assessment thatgenerally contributions of this amount are typically not made with the intent to influence decisions.(b) Ban on using Third Parties To Solicit Government Business3PM strongly objects to the blanket prohibition on the use of Third Party Marketers to marketinvestment advisery services to government entities. The proposed prohibition represents aPage 9
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letter - 3PM - Third Party Marketers Association

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