June 16, 2015 / 12:40 PM / 5 years ago

Real estate lobby group deposes pro-regulation critic

* Deutsche Bank arm cuts ties with lobby group

* Worries about return of pre-crisis practices

By Joy Wiltermuth

NEW YORK, June 16 (IFR) - Deutsche Bank’s asset management arm has cut ties with the commercial real estate industry’s top lobbying group after it deposed a leading critic who favors stricter market regulation.

Deutsche’s Adam Smith was elected to a key position at the Commercial Real Estate Finance Council (CREFC), which styles itself as the main voice of the US$3.4bn CRE industry.

But he was removed in May after completing just one year of a typical three-year stint after a series of disagreements, including over the controversial practice of “ratings shopping” in the selling of CRE bonds.

According to nearly two dozen emails seen by IFR, Smith was forced to step down in an unprecedented move by CREFC, which counts 2,700 members across the commercial real estate industry.

In response, Deutsche Asset & Wealth Management - a leading player in the CRE securitization market and also Smith’s employer - severed its relations with the group.

“I can no longer allow my name to be associated with this organization or its leadership as a result of their conduct in this matter,” Deutsche Asset’s head of structured finance, James Grady, wrote to CREFC members.

He called Smith’s ouster “completely unwarranted”.


Several group members said that internal tensions have been bubbling over the revival of ratings shopping, a technique that regulators blame for contributing to the last financial crisis.

Before the crisis, would-be sellers of bonds shopped deals to the ratings agencies, letting them rate deals - and earn the associated fees - only if the issuer agreed with the ratings.

In the latest iteration of the practice, sellers of CMBS keep only the most favorable credit ratings on the deal. By omitting the lower marks, they hope to pay less to raise debt.

The agencies have been critical of the practice and so, according to his colleagues within CREFC, has Smith.

He met with US Securities and Exchange Commission officials in December to discuss the matter - a trip that CREFC president and CEO Stephen Renna said was “obviously” a concern.

“Had he come to us on the heels of conversations on ratings shopping, we would have tried to resolve it all at CREFC,” Renna said. “It got to a head where he was going to do it his way.”

There were other points of contention centering on the group’s efforts to lobby against tighter industry restrictions.

In a nutshell, one veteran CREFC member who asked not to be named told IFR, the issue was simple: “They want no regulation.”


Smith was selected last year as chair-elect of CREFC’s investment-grade forum. The chairmanship of the forum is divided into three roles: chair-elect, chair and prior-chair.

In what appears to have been a maneuver to orchestrate Smith’s departure, CREFC put forward a new code of conduct sent to him in late April, just weeks before he was expected to be elevated to chair.

According to the emails, anyone taking up the position as head of the forum would have to agree to the new code. Renna told IFR it had been drafted explicitly with Smith in mind.

Far from being a generic statement about good conduct, though, the document is a wide-ranging pledge that critics said amounts to a virtual oath of loyalty to the CREFC.

In particular it requires all forum leaders to serve the CREFC “primarily” and “not to put first the promotion of one self (sic), company or company’s viewpoint or positions”.

One lawyer contacted by IFR said the document would interfere with the fiduciary and legal responsibilities of any SEC-registered investment manager such as Smith.

In an April 30 email to Renna, Smith’s boss Grady called some of the demands in the code of conduct “disingenuous at best and hypocritical at worst”.

After some further back and forth, Smith ultimately did not agree to the terms.

Renna notified Smith by email on May 15 that he had been removed as chair-elect of the forum.

“As a money manager, my paramount responsibility is to be a steward of the capital entrusted to me and my firm,” Smith replied four days later.

“No money manager can be expected to promote policies that may weaken the investment profile of its clients.”

In what seems to be an effort to prevent another such dispute in the future, CREFC’s board ratified changes to the organization’s bylaws.

Now chairpersons of the forum will be nominated by the group’s executive committee rather than by the forum itself. (Reporting by Joy Wiltermuth; Editing by Marc Carnegie and Natalie Harrison)

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below