Third-Party Marketers and Hedge Funds

The SEC has reversed its position and will now allow public pension fund managers to hire third-party marketers (3PMs) that are registered as investment advisors or broker-dealers. However, the new rule prohibits a 3PM from providing advisory services for two years if the advisor, or employees from the firm, make a political contribution to an elected official who may be in a position to influence the selection of the advisor.

The new ruling comes in the wake of scandals in both New York State and California where so-called advisors lavished perks and gifts on officials with relationships with public pension funds. It’s aimed at eliminating “pay-for-play” improprieties, according to Doug Rothschild, managing director for the hedge fund third-party marketer Agecroft Partners, who wrote an article on this topic for

Third-party marketers play an important role for hedge funds. Hedge funds can choose to create their own sales teams in-house, or outsource the fundraising and marketing efforts to a third-party marketing firm, or use some sort of hybrid approach.

However, third-party marketers are required to be licensed and regulated by both the SEC and FINRA, the Financial Industry Regulatory Authority (FINRA), the largest independent regulator for all securities firms doing business in the United States. Whereas most hedge funds are not regulated and their sales staff are often not licensed.

Third-party marketers also do extensive screening and due diligence on the hedge fund managers they represent. Rothschild estimates that they end up promoting fewer than 1 percent of the firms they research. So if they have any concerns about a particular fund manager, they have the flexibility to drop them. Whereas an in-house salesperson would have to keep selling the firm’s funds or look for another hedge fund job.

Third-party marketers have argued that this high degree of regulatory oversight, combined with greater objectivity, help 3PMs provide a very valuable service to potential investors, including large public pension funds.

What’s your opinion? Does your firm use third-party marketers? Do you think the new ruling is the right direction for the industry? Add your comments below.

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