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Financial reform bill calls for diversity

Each of the 30 federal financial agencies and departments are required to establish an office to boost hiring of and contracting opportunities for minorities and women. Critics say it will be burdensome and unnecessary.
By Julia Love and Jim Puzzanghera, Los Angeles Times
August 25, 2010
Reporting from Washington

The recently enacted financial reform legislation tries in numerous ways to change how Wall Street companies and their federal regulators act, but a little-noticed provision aims for something potentially more difficult and controversial — altering how they look.

To promote diversity in the largely a white male world, the new law requires each of the 30 federal financial agencies and departments, including the Securities and Exchange Commission and all 12 Federal Reserve banks, to establish an Office of Minority and Women Inclusion.

Those offices will have vaguely defined powers to boost diversity at their agencies and the companies they regulate and to increase federal contracting opportunities for minority- and women-owned businesses. Banks and other financial firms that fail to make "a good-faith effort to include minorities and women in their workforce" could lose their government contracts.

"This is a wake-up call for Wall Street: women, black Americans, Asian Americans, Latino Americans, they all pay for your bailouts," said Michael Yaki, a member of the U.S. Commission on Civil Rights. "Firms must take steps to be more reflective of America."

The provision, championed by Rep. Maxine Waters (D-Los Angeles), has been hailed as groundbreaking by minority and women's advocates. But it is raising concerns in the banking industry and among some Republicans of potentially burdensome regulations and costly new oversight that unnecessarily duplicates — and could go well beyond — other federal diversity initiatives.

"This will destroy the financial industry," warned Diana Furchtgott-Roth, a senior fellow at the Hudson Institute who was the Labor Department's chief economist under President George W. Bush.

"If the CEOs of American financial institutions have to be worried about the diversity regulations, whereas those in other countries are worrying about their profits, we are going to fall behind," she said.

Industry groups, regulatory agencies and analysts are just starting to grapple with the potential ramifications of the provision, which takes effect in January.

The effect is hard to gauge because the law gives the director of every new office the authority to develop each agency's own standards for equal employment, as well as at the companies they regulate and contract with for such services as asset management. If the legislation is interpreted broadly, the diversity requirements could reach down to subcontractors that provide food or janitorial services — something not required under current rules, said Jon Geier, an employment law expert at the Paul Hastings law firm.

"My clients are wondering what more will they have to do?" he said. "I can't tell them yet. It could be substantial. It could be a paper tiger."

The directors of the new offices have limited enforcement power. They can recommend to the agency's head that a contract be ended and refer a case to the Labor Department for sanctions, but can't force any action.

The diversity requirements in many ways duplicate those already mandated by other laws for the federal workforce and contractors.

Sen. Susan Collins (R-Maine) has criticized the provision for creating another bureaucratic hurdle for small companies hoping to get government business. She said each federal agency already has an Office of Small and Disadvantaged Business Utilization to help minority- and women-owned firms, not to mention the Equal Employment Opportunity Commission and the Labor Department's Office of Federal Contract Compliance Programs that cover the same territory.

But the requirements for banks and other financial firms under regulatory oversight are new. And they're vague: The provision says only that the new offices must assess the diversity policies and practices of regulated companies.

At the least, the provision adds to the great uncertainty in the industry caused by the sweeping financial reform bill as firms await detailed rules on hundreds of provisions to be drafted by individual agencies.

"This is one of the provisions that has a large question mark," said James Ballentine, senior vice president of government relations for the American Bankers Assn.

As the president and chief executive of Community West Bank in Goleta, Calif., Lynda Nahra is the type of person the provision aims to help. But she thinks it's unnecessary.

"Do we need an office in each federal regulatory agency?" she said. "I think that's overkill, and it's not the best use of money."

The House Financial Services Committee added the provision in 2009 at the urging of Waters and other members of the Congressional Black Caucus. Part of the motivation was the limited participation by firms owned by women or minorities in emergency programs undertaken by the Treasury Department and the Federal Reserve to address the financial crisis.

"The inclusion of minorities and women in our financial services programs is long overdue," Waters said, noting that only one of the 12 firms that the Treasury pre-qualified as fund managers for its Legacy Securities Public-Private Investment Program was minority-owned.

Waters also cited federal data showing women made up 44.2% of the federal workforce in 2006, and minorities 28.3%. Some financial regulatory positions had lower figures: Just 35% of financial institution examiners were women and 18.7% were minorities, according to the Office of Personnel Management.

In 2008, white men held 64% of senior positions in the financial services industry, according to a May report by the Government Accountability Office.

The new offices, according to the provision, must "to the extent consistent with applicable law" consider the diversity of companies seeking contract work and, in some cases, their subcontractors. The provision applies to "all contracts of an agency for services of any kind" but specifically cites financial services such as asset management and programs dealing with economic recovery.

Diverse firms can best serve minorities hit hard by the crash of the subprime mortgage market, said Janis Bowdler, deputy director of the wealth-building policy project at the National Council of La Raza.

"It's one thing to put bilingual tellers in your banks. It's another to make sure you have a diverse board," she said.

Todd Gaziano was one of four members of the U.S. Commission on Civil Rights who wrote to lawmakers objecting to the provision. He said that companies whose workforce did not reflect the overall population could find it difficult to convince agencies that they had done enough to hire minorities and women.

"It's pernicious, it's unconstitutional and it's counterproductive to ending discrimination because it requires discrimination," he said. "If you are hiring somebody because of his race, you are not hiring somebody else from a different race."

The provision was narrowed during final negotiations over the bill. A sentence was added clarifying that it did not apply to "the lending policies and practices" of any regulated firm.

Rep. Ed Royce (R-Fullerton) tried to narrow it further. One of his failed amendments called for just one diversity office for the entire Federal Reserve. A House Republican aide said one agency estimated that the office would cost it about $270,000 a year.

It could be years before the provisions kick in. Similar language was added to a 2008 bill mandating new diversity offices at federal housing agencies, including Fannie Mae, Freddie Mac and the Federal Home Loan Banks. Those agencies have not yet approved final rules.

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Copyright © 2010, Los Angeles Times

SEC Adopts New Measures to Curtail Pay to Play Practices by Investment Advisers
FOR IMMEDIATE RELEASE
2010-116

Washington, D.C., June 30, 2010 — The Securities and Exchange Commission today voted unanimously to approve new rules to significantly curtail the corrupting influence of "pay to play" practices by investment advisers.

Pay to play is the practice of making campaign contributions and related payments to elected officials in order to influence the awarding of lucrative contracts for the management of public pension plan assets and similar government investment accounts. The rule adopted by the SEC today includes prohibitions intended to capture not only direct political contributions by investment advisers, but also other ways that advisers may engage in pay to play arrangements.

"The selection of investment advisers to manage public plans should be based on the best interests of the plans and their beneficiaries, not kickbacks and favors," said SEC Chairman Mary L. Schapiro. "These new rules will help level the playing field, allowing advisers of all sizes to compete for government contracts based on investment skill and quality of service."

The new SEC rule has three key elements:

• It prohibits an investment adviser from providing advisory services for compensation — either directly or through a pooled investment vehicle — for two years, if the adviser or certain of its executives or employees make a political contribution to an elected official who is in a position to influence the selection of the adviser.

• It prohibits an advisory firm and certain executives and employees from soliciting or coordinating campaign contributions from others — a practice referred to as "bundling" — for an elected official who is in a position to influence the selection of the adviser. It also prohibits solicitation and coordination of payments to political parties in the state or locality where the adviser is seeking business.

• It prohibits an adviser from paying a third party, such as a solicitor or placement agent, to solicit a government client on behalf of the investment adviser, unless that third party is an SEC-registered investment adviser or broker-dealer subject to similar pay to play restrictions.

The new rule becomes effective 60 days after its publication in the Federal Register. Compliance with the rule's provisions generally will be required within six months of the effective date. Compliance with the third-party ban and those provisions applicable to advisers to registered investment companies subject to the rule will be required one year after the effective date.

FACT SHEET

Across the country, state and local governments manage money as part of many important public programs. Such programs include public pension plans that pay retirement benefits to government employees, retirement plans in which teachers and other government employees can invest money for their retirement, and plans that allow families to invest money for college (commonly known as "529 plans").

The assets overseen by these governments are substantial. Public pension plans alone hold more than $2.6 trillion of assets and represent one-third of all U.S. pension assets. 529 plans today hold approximately $100 billion in assets.

The Role of an Investment Adviser

To help manage this money, state and local governments often hire outside investment advisers. These investment advisers may directly manage the money in the pension funds or government programs for these state and local governments.

In some cases, these advisers may provide advice to the governments about which investments they should make, or which investment options they should make available as choices to workers investing for retirement or families investing for college. Additionally, the advisers may manage the mutual funds or other investments in which employees' or families' money is invested.

In return for their advice, the investment advisers typically charge the governments fees that come out of the assets of the pension funds for which the advice is provided. If the advisers manage mutual funds or other investments that are options in a plan, the advisers receive fees from the money in those investments.

Selecting an Investment Adviser

The investment advisers are often selected by one or more trustees who are either themselves elected officials, or are appointed by elected officials. While such a selection process is common, the fairness of the selection process can be undermined in two ways.

On the one hand, the process can be undermined when advisers seeking to do business with state and local governments make political contributions to elected officials or candidates, hoping to influence the selection process. On the other hand, elected officials or their associates may ask advisers for political contributions, or otherwise foster a perception that only advisers who make contributions will be considered for selection. Hence the term: "pay to play."

In recent years, the SEC has charged investment advisers with engaging in pay to play practices. Investment advisers who engage in such practices compromise their obligations to put their clients' interests first. Pay to play practices distort the process by which investment advisers are selected and can harm the pension, retirement or 529 plans, which may receive inferior advisory services and pay higher fees. Pay to play practices also create an uneven playing field among investment advisers, and may hurt smaller advisers who cannot afford the required contributions.
Prohibitions of the Pay to Play Rule

Advisers and government officials engaging in pay to play practices may try to hide the true purpose of contributions or payments. The SEC today adopted a rule that includes prohibitions intended to capture not only direct political contributions by advisers, but other ways advisers may engage in pay to play arrangements.
Restricting Political Contributions

Under the new rule, an investment adviser who makes a political contribution to an elected official in a position to influence the selection of the adviser would be barred for two years from providing advisory services for compensation, either directly or through a fund.

The rule applies to the investment adviser as well as certain executives and employees of the adviser. Additionally, the rule applies to political incumbents as well as to candidates for a position that can influence the selection of an adviser.

There is a de minimis provision that permits an executive or employee to make contributions of up to $350 per election per candidate if the contributor is entitled to vote for the candidate, and up to $150 per election per candidate if the contributor is not entitled to vote for the candidate.

Banning Solicitation of Contributions

The pay to play rule prohibits an adviser and certain of its executives and employees from asking another person or political action committee (PAC) to:

1. Make a contribution to an elected official (or candidate for the official's position) who can influence the selection of the adviser.

2. Make a payment to a political party of the state or locality where the adviser is seeking to provide advisory services to the government.
Banning Certain Third-Party Solicitors

The pay to play rule also prohibits an adviser and certain of its executives and employees from paying a third party, such as a solicitor or placement agent, to solicit a government client on behalf of the investment adviser, unless that third party is an SEC-registered investment adviser or broker-dealer subject to similar pay to play restrictions.

Restricting Indirect Contributions and Solicitations

Finally, the pay to play rule would prohibit an adviser and certain of its executives and employees from engaging in pay to play conduct indirectly, such as by directing or funding contributions through third parties such as spouses, lawyers or companies affiliated with the adviser, if that conduct would violate the rule if the adviser did it directly. This provision prevents advisers from circumventing the rule by directing or funding contributions through third parties.

Robert Whalen
(212) 681-4840
FOR RELEASE: Immediately June 30, 2010


CRF LAUNCHES EMERGING MANAGER PROGRAM FOR HEDGE FUNDS
State Pension Fund Allocates $200 Million to The Rock Creek Group

The $132.6 billion New York State Common Retirement Fund (Fund) has allocated $200 million to The Rock Creek Group to manage the first installment of the new emerging manager component of the Fund's industry leading hedge fund portfolio, State Comptroller Thomas P. DiNapoli announced today.

"We want to replicate the great success we've had with emerging managers in the Fund's public and private equities portfolios, and Rock Creek is the right firm to kick this off in the hedge fund space," DiNapoli said. "Our expanded use of emerging managers will help keep the Fund agile and well positioned to take advantage of promising opportunities, and achieve sustainable future growth."

DiNapoli said Rock Creek will play a key role in developing the emerging manager hedge fund portfolio, focusing on newer firms, firms with assets totaling less than $500 million, and women- and minority-owned fund management companies.

Led by former World Bank Treasurer and Chief Investment Officer, Afsaneh Beschloss, Rock Creek has extensive experience in trading, portfolio management, risk management and investment management operations.

"Rock Creek is eager to help New York's pension fund develop this important strategic initiative," Beschloss said. "Our efforts will reflect Comptroller DiNapoli's commitment to extending opportunities to the universe of emerging talent."

DiNapoli increased the Fund's use of emerging managers soon after taking office in 2007, and it now has approximately $5 billion committed to emerging managers. He increased the Fund's emerging managers commitments in private equities by $1 billion, bringing the total in that asset class to approximately $2 billion. The Fund also has approximately $3 billion committed to emerging managers in public equities. DiNapoli said the Fund is now developing a similar program in its real estate portfolio.

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EEOC data indicate that overall diversity at the management level in the financial services industry did not change substantially from 1993 through 2008, and diversity in senior positions remains limited. In general, EEOC data show that management-level representation by minority women and men increased from 11.1 percent to 17.4 percent during that period...

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CLICK HERE TO READ:
TESTIMONY OF
ORIM GRAVES, CFA
EXECUTIVE DIRECTOR,
NATIONAL ASSOCIATION OF SECURITIES PROFESSIONALS

BEFORE THE
HOUSE FINANCIAL SERVICES COMMITTEE
SUBCOMMITTEES ON OVERSIGHT AND INVESTIGATIONS AND HOUSING AND COMMUNITY OPPORTUNITY
"MINORITIES AND WOMEN IN FINANCIAL REGULATORY REFORM: THE NEED FOR INCREASING PARTICIPATION AND OPPORTUNITIES FOR QUALIFIED PERSONS AND BUSINESSES"
MAY 12, 2010

2nd Quarter 2009

• Conference updates and highlights on attendees
• See what's changing in NASP
• Read the latest on our efforts to bring about change in the Capitol

More»

F.A.S.T. TRACK NEWSLETTER - JULY 2009, ISSUE 3

• Special Graduation Edition
• A moment with the students
• About F.A.S.T. Track

(download F.A.S.T. Track Newsletter)

NASP responded to the SEC’s proposed  Rulemaking action regarding—Political Contributions by Certain Investment Advisers (Release No. IA-2910) and Third Party Placement Agent Ban.

Click for more info.

Congress Supports New Hedge Fund Rules

Fundfire/October 28, 2009


Mandatory registration of hedge fund, private equity and offshore fund advisors moved a step closer to becoming reality yesterday when the House Financial Services Committee voted 67-1 in favor of the requirement. Lawmakers say the bill will bring increased transparency for investors. So reports Reuters.
The bill was amended to add offshore funds, but it exempted venture capital funds and funds with less than $150 million in assets.

But Securities and Exchange Commission Chairman Mary Schapiro told a New York conference yesterday that she was not in favor of allowing too many exemptions to the registration requirement. She says she will work with Congress to avoid creating exceptions that "could come back to haunt investors in later years."
The bill would also impose new record-keeping and disclosure requirements for private advisors. Lawmakers say the move would allow the SEC to assess potential risks that private funds may pose to the market, Dow Jones Newswires reports.

Exempted advisors will be required to keep records and supply the SEC with annual reports or other information it decides is necessary. A committee will be established to determine the costs of the new reporting requirements, but Capital Markets Subcommittee Chairman Paul Kanjorski says he expects the reporting costs will range from $5,000 to $15,000 for most hedge funds. But he acknowledges the cost for "complicated" hedge funds may hit several hundred thousand dollars, Dow Jones reports.

Among the amendments approved by the lawmakers is a requirement that pools of private capital must periodically adjust for inflation the minimum net worth thresholds of individuals investing in hedge funds and other sophisticated investments. The bill is expected to go before the full House for a vote in November, Reuters reports.

The committee also debated a bill to regulate credit ratings agencies yesterday. The committee voted to require the SEC to establish a board to ensure it is properly supervising the ratings agencies.

The finance committee is also drafting an investor protection bill that will strengthen the SEC and create a fiduciary standard for all financial professionals who provide investment advice, Reuters reports.

An attempt by the SEC to regulate hedge funds in 2004, which included a requirement that they register with the agency, was later quashed by a U.S. appeals court, Dow Jones reports.