Placement agents: to ban or not to ban

(UPDATE: A firm headed by a former CalPERS board member, Al Villalobos, collected $50 million in fees over five years for helping money managers get investments from CalPERS. The giant pension fund said it will conduct a “special review” of fees paid to placement agents by its external money managers. To see story, click here.)

The CalPERS board narrowly voted to be neutral, rather than opposed, to a proposed federal ban on placement agents, who introduce investment managers to pension funds.

CalPERS board president Rob Feckner led the drive for neutrality, a 5-to-4 vote, arguing that opposing the ban would likely result in “media spin” about the nation’s biggest pension fund opposing reform.

“The last thing we want to be is in front of the media train again,“ said Feckner.

The proposed SEC ban on placement agents produced a sharp split yesterday (Sept. 16) in a 13-member CalPERS board that has had few serious public disagreements this year, often acting with unanimous votes.

State Treasurer Bill Lockyer’s representative on the board, Steve Coony, made a motion to reject a staff recommendation of neutrality and “emphatically” oppose the placement agent ban proposed by the U.S. Securities and Exchange Commission.

Coony argued that a policy adopted by CalPERS in May provides adequate regulation by requiring placement agents to register and disclose fees. He said a bill sent to the governor, AB 1584, provides similar regulation for all California pension funds.

Feckner, agreeing that placement agents “play an important part,” nonetheless made a substitute motion for neutrality, urging support of the staff recommendation. He said CalPERS should encourage a compromise on the ban and participate in discussions.

“My concern is that if we take an opposed position that’s all anybody is going to see and hear,” said Feckner, “and I don’t think that’s the mantra this organization should have.”.

Placement agents are middlemen. They get paid by investment firms, who seek money to manage, for arranging introductions to pension funds and other deep pockets, who are looking for ways to invest their money.

A typical agent’s fee is said to be 2 percent of the amount invested, sometimes amounting to several million dollars. The little-known but lucrative business moved into the spotlight earlier this year in a New York scandal that has rippled into California.

A CalPERS board member, Charles Valdes, is being investigated by a state agency for campaign donations from, among others, associates of Alfred Villalobos, a placement agent and former CalPERS board member, the Sacramento Bee reported last month.

A former CalPERS board president, Sean Harrigan, resigned from a Los Angeles pension board last May after the U.S. Securities and Exchange Commission asked for his communications with Wetherly, a placement agent mentioned in the New York scandal, the Los Angeles Times reported.

Coony said a ban would simply push the agents “underground,” giving them little or no public visibility. He said big investment firms, banks and others with large payrolls would have staff members do the work of placement agents.

Board member Tony Oliveira, a Kings County supervisor, said placement agents can do valuable work by helping small investment firms in the Central Valley and other locations find business.

Board member Louis Moret, who said he rarely disagrees with Feckner, argued that neutrality is indeed “hedging our bets,” a reference to a Wall Street Journal article last week. “Sitting on the sideline shouldn’t be our job,” he said.

State Controller John Chiang’s representative on the board, Terry McGuire, said CalPERS should not remain neutral after adopting a policy and supporting similar legislation, with more “in depth” work than may be done at the federal level.

But Feckner urged the board to consider the environment created by the financial crisis and big losses in the CalPERS investment portfolio. He spoke passionately about “wrongdoing” in the marketplace, unnamed “bad actors,” and the need for reform.

“These people have made mistakes,” Feckner said. “They cost this organization money. They caused our annuitants a lot of consternation — the amount of phone calls and e-mails we have gotten the last 12 months over these issues and concerns.”

Feckner was the only member of the California Public Employees Retirement System board who spoke in favor of neutrality as the investment committee, which is the full board, considered a response to the placement agent ban and other SEC reform proposals.

“It’s obviously a very difficult issue,” said George Diehr, the committee chairman. “I think most of us are in fact opposed to the outright ban. But it’s an issue of what position we take and what the press will pick up on.”

Joining Feckner in the vote for neutrality were Dan Dunmoyer, Henry Jones, Kurato Shimada and Greg Beatty, representing the personnel administration director. Diehr did not vote. Absent were Priya Mathur, Pat Clarey and Valdes.

When the committee met earlier in the week, Valdes, who reportedly is being investigated, got a subdued laugh from some in the CalPERS auditorium by answering the roll call: “I deny it all.”

At a meeting of the board of the California State Teachers Retirement System earlier this month, the nation’s second largest public pension fund also considered a response to the SEC proposals.

The CalSTRS board took no formal position but will send the SEC the placement agent disclosure policy adopted by CalSTRS three years ago, long before the pension scandal in New York.

The CalSTRS chief investment officer, Chris Ailman, said that placement agents are asked to fill out a form. He said there has been no “pushback” or complaints from the placement agents.

“They think they provide a valuable service,” said Ailman. “So they are wanting to be very open with us and honest with us. So we appreciate it.”

Ailman told the board members that he wants to give them a comprehensive list of placement agents.

“You are interacting with them,” he said, “and I’ve realized from discussions you don’t realize they are a placement agent.”

Ailman said board members must record meals and gifts from placement agents. If the agents talk about an investment, he said, board members must disclose the conversation if they consider the investment while sitting on the board.

“I’m not trying to pick on people,” Ailman said as he gave some examples of placement agents that might not be recognized as such by board members.

He said some are ex-pension staff, such as Fred Buenrostro, a former CalPERS chief executive officer, and Pat Mitchell, a former CalSTRS chief investment officer who has a money management firm. Among the others are former elected officials.

“Gov. Gray Davis has been not a placement agent but an introducing agent service already with us,” said Ailman. “That’s another one that you will probably run into. Just track your conversations if they relate to investments.”

At a CalPERS committee meeting earlier this week, Controller Chiang was skeptical about some of the proposed SEC reforms. He said safeguards already in place in California are adequate if they are followed.

“I get requests all the time,” Chiang said. “I pass them on to staff, and I refuse to comment as to whether it’s a good or bad investment. It’s not my place until staff has an evaluation.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Posted 17 Sep 09

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