China: The Effect Of New Placement Agent Policies On Asia

Executive Summary

The placement agent industry has been under increasing scrutiny in the U.S. following scandals involving U.S. state governmental retirement plans and private equity firms or those raising money for such firms. State governmental retirement plans have proposed new policies requiring disclosure of placement agents used in funds in which they invest and in certain instances have banned the use of placement agents altogether in respect of their own investments. The U.S. Securities and Exchange Commission has proposed a rule curtailing, among other activities, the use of placement agents who have made campaign contributions to persons such placement agents would subsequently solicit for investments on behalf of plan sponsors. The overall effect of these policies and proposed rules remain to be seen, both domestically in the U.S. and in Asia, however, careful monitoring of this developing issue from the legal and regulatory side may prove to be critical for Asian fund sponsors.

The Melee

The placement agent industry has been under increasing scrutiny in the U.S. following several significant scandals involving interactions between U.S. state governmental retirement plans and private equity firms or those raising money for them (i.e., the fund's placement agent). This scrutiny has focused on allegations of wrongdoing tied to "pay-to-play" contributions. The most common variant of these scandals involves the hiring of a politically‑connected placement agent by a fund sponsor to ensure that a public retirement plan will invest in the sponsor's fund. Fees paid to this placement agent subsequently flow back to the public official in charge of managing fund investments. In a different scenario, fund managers and placement agents make campaign contributions to public officials to get access to government retirement plans and secure an affirmative investment decision by the public official in charge of the government's investments. These activities were allegedly engaged in by prominent alternative investment asset class investors, including the New York State Common Retirement Fund (the second largest governmental retirement plan in the U.S.), the Illinois State Retirement Systems/Boards, and the state of New Mexico's retirement plan. Unfolding simultaneously was the Bernard Madoff "feeder fund" ponzi scheme.

The results of these closely-timed, highly-publicized scandals led U.S. federal and state governments to review current policies and regulations with respect to campaign contributions to public officials by placement agents or members of the fund sponsors represented by such placement agents. This review has led to reforms and proposed reforms both at the state level, mostly regulating the conduct of the state pension plans, and the federal level, through the U.S. Securities and Exchange Commission (the "SEC"), regulating the activities of placement agents and the managers that use them.

New Policies by U.S. State Governmental Retirement Plan Investors

The changes in policy and state laws have focused on regulating and controlling the actions of governmental retirement plans in connection with their interaction with placement agents and fund sponsors. The New York City Employees Retirement System, New York State Common Retirement Fund, the State of Connecticut Retirement and Trust Funds, and State Teachers' Retirement System of Ohio are now prohibited from investing in any fund that uses a placement agent with respect to their investment, or which has used a placement agent to market and promote the fund to them. Others, including the California Public Employees' Retirement System, New Jersey's Division of Investment, Teachers' Retirement System of Texas, New Mexico Educational Retirement Board and State Investment Council, and Los Angeles City Employees Retirement Systems, Fire and Police Pension System, and Water and Power Employees' Retirement Fund, require substantive disclosure by the fund's manager with respect to any placement agent used, any fees paid, and any political contribution made by a fund sponsor to a candidate for office in such state. These two groups of pension systems represent an aggregate of roughly US$760 billion of investment assets as of August 1, 2008. Another dozen or so governmental retirement plan investors have taken a "wait and see" attitude.

These policies may have a significant effect on investments as many governmental retirement plan investors rely on placement agents to do their diligence. Trusted placement agents are used by investors to support their often small, overworked internal investment staffs. When working with effective placement agents, governmental retirement plan investors often see more and better deals that have been "pre-screened" for them by the placement agents. Governmental plan staff forbidden from investing through a placement agent may find themselves completely overwhelmed by the volume of offering documents and inquiries they receive. Smaller, emerging managers may bear the brunt of this, as they may have the most difficult time getting the attention of governmental retirement plan investors whose programs are often legislatively mandated to support them.

Proposed SEC Rule

Responding to these "pay-to-play" schemes, the SEC has focused on fund managers and proposed a new rule to address concerns that fund managers and placement agents selected by public pension plans are based more on political connections than credentials. The rule would apply to both registered and unregistered advisers exempt from registration under the U.S. Investment Advisers Act of 1940. If enacted as proposed, the rule would prohibit for two years the engagement of a fund sponsor by a governmental retirement plan if the adviser had contributed to the campaign of a person associated with the governmental retirement plan making the investment. Another aspect of the proposal prohibits third‑party solicitations of governmental retirement plans, including engagements of firms that have coordinated, arranged or solicited contributions to an elected official or candidate with respect to the proposed investment. Finally, the rule would require additional recordkeeping and disclosure to the SEC of campaign contributions by the placement agent and its employees to elected officials, candidates, and political action committees. While this proposed rule is directed at fund sponsors and third-party placement agents, a number of legal practitioners have voiced concerns over whether the rule will apply to in-house placement agents as well.

Legal practitioners have expressed concern that if a fund sponsor violates either the proposed rule upon being promulgated (or the policies of the governmental retirement plans prohibiting the use of placement agents in funds in which they invest), such violation may also violate the private placement exception under U.S. securities laws. U.S. securities laws provide that a private placement of securities must not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. To the extent that information about a fund sponsor's or its placement agent's political contributions is not properly disclosed, a governmental retirement plan investor may have the right to rescind its commitment to the fund.


The overall effect of these policies and proposed rules remain to be seen, both domestically and in Asia. In an era of tougher regulation and oversight, the SEC will be looking to support the interests of investors, and governmental retirement plans in particular. On the other hand, some voices of reason will articulate the value that placement agents bring to both fund sponsors and investors alike, and perhaps persuasively make the case that prohibiting them outright or even overburdening them with regulation is only liable to increase the cost of capital raised rather than its safety. In particular, the effects of these policies on smaller fund sponsors, and many governmental investing agencies that are otherwise short-staffed and furloughed, may prove harmful to those most in need of the expertise of placement agents.

Asian fund sponsors will want to work with a legal fund counsel with expertise in this developing body of U.S. securities laws and regulations to tackle the complications associated with the proposed rules and new policies. Additionally, fund sponsors should consider working with fund counsel to perform substantive "due diligence" on their placement agent, seriously scrutinizing the placement agent agreement and obtaining proper indemnification in the event that the placement agent's acts violate U.S. securities laws. However, these precautions should not prevent fund sponsors from being prepped by their placement agents or obtaining their investor contacts, or ultimately from successfully raising funds with U.S. governmental retirement plan investors.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions