{"id":931493,"date":"2022-12-23T12:15:35","date_gmt":"2022-12-23T12:15:35","guid":{"rendered":"https:\/\/jacobin.com\/2022\/12\/wall-street-side-letter-scam-sec-regulation-pensions-private-equity\/"},"modified":"2022-12-23T16:29:59","modified_gmt":"2022-12-23T16:29:59","slug":"inside-wall-streets-side-letter-scam","status":"publish","type":"post","link":"https:\/\/radiofree.asia\/2022\/12\/23\/inside-wall-streets-side-letter-scam\/","title":{"rendered":"Inside Wall Street\u2019s \u201cSide Letter\u201d Scam"},"content":{"rendered":"\n \n\n\n\n

For years, Wall Street firms have inked secret deals to give certain investors preferential treatment. The SEC proposed reforms to regulate these \u201cside letters\u201d \u2014 but the industry wants to maintain its ability to enrich some investors at the expense of others.<\/h3>\n\n\n
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\n Private equity, hedge fund, and real estate firms are making secret deals with individual investors, giving them privileges not afforded to others in the same investment funds. (Spencer Platt \/ Getty Images)\n <\/figcaption> \n<\/figure>\n\n\n\n\n \n

For years, the retirement savings of teachers, firefighters, and other government workers have been funneled by public officials to secretive Wall Street firms that charge high fees in exchange for the\u00a0false promise<\/a>\u00a0of outsized returns. But as the stock market plummets and\u00a0asset values drop<\/a>, there are new fears that pensioners will be unable to access their cash, while insiders will be allowed to pull their money out before things get worse.<\/p>\n

Now, Wall Street firms and their political allies \u2014 including a US senator with substantial private equity holdings \u2014 are trying to stop federal regulators from intervening to protect retirees by banning firms from giving some investors preferential treatment. And there are no rules requiring lawmakers with investments in private equity to disclose whether they are being given special investment preferences while they lobby to protect those asset managers.<\/p>\n

The new battle revolves around the secret \u201cside letters\u201d that private equity, hedge fund, and real estate firms ink with individual investors, giving them privileges not afforded to others in the same investment funds.<\/p>\n

In disclosure documents reviewed by the\u00a0Lever<\/em>, many firms managing millions of workers\u2019 retirement savings say they can give certain well-connected investors or family members lower fees than other investors. Regulators say those letters can also give well-connected investors special rights to withdraw their money \u2014 rights that may not be given to the pension funds of government workers.<\/p>\n

After years of\u00a0complaints<\/a>\u00a0by retiree groups, the Securities and Exchange Commission (SEC)\u00a0proposed<\/a>\u00a0new rules to crack down on the practice, noting that \u201cpreferential terms do not necessarily benefit the fund or other investors that are not party to the side letter agreement and, at times, we believe these terms can have a material, negative effect on other investors.\u201d<\/p>\n

The SEC is now\u00a0proposing<\/a> two specific reforms: side letters would now have to be disclosed to all investors, and firms would no longer be permitted to ink side letters giving confidential information to some investors or allowing some investors to get their money out when they need it and not others.<\/p>\n

SEC chair Gary Gensler\u2019s proposed reforms have drawn aggressive pushback from investment firms making big fees off pension systems. Pension funds are sometimes referred to on Wall Street as \u201cdumb money<\/a>,\u201d\u00a0because their overseers don\u2019t negotiate the same sort of tough investment terms for retirees that individual billionaires often negotiate for themselves.<\/p>\n

In all, private equity, real estate, and hedge funds managing billions of dollars of government workers\u2019 savings have dumped at least $14 million on federal lobbying efforts in 2022 alone,\u00a0according<\/a>\u00a0to data collected by OpenSecrets. The asset management industry is so committed to keeping side letters secret, their lobbyists have successfully fought for special exemptions from\u00a0state public records laws<\/a>\u00a0around the country, so that pensioners and news organizations cannot see the terms of public investments.<\/p>\n

By fighting the new federal rules, the industry is hoping to maintain its ability to enrich some investors at the expense of others \u2014 a practice that helps them reward their friends, whoever they may be.<\/p>\n\n \n\n \n \n \n

\u201cIn These Funds, Every Investor Can Be Treated Differently\u201d<\/h2>\n \n

When the average investor buys a share of a stock on a public stock exchange, they are assured they get the same rights as any other buyer of the same stock. But the open secret on Wall Street is that outside the public markets, private \u201calternative investment\u201d firms that manage government workers\u2019 pension savings can treat certain investors \u2014 usually insiders like company allies and relatives \u2014 better than others.<\/p>\n

It is a system that critics say allows financial managers to pick winners and losers among their own investors, and use public pension money to effectively subsidize the gains of more sophisticated, politically connected investors. These financial giants say in regulatory filings that they can make such decisions based on everything from familial connections to political considerations to sheer self-interest.<\/p>\n