Pension fund middlemen: new controls, no ban

A new bill backed by CalPERS and CalSTRS makes a second attempt to tighten control of placement agents, the middlemen who collect multi-million dollar fees for helping investment firms get pension fund money.

But the big California pension funds, wanting an open door for pitches from small investment firms unable to afford their own marketing staff, are not following the lead of New York with an outright ban on placement agents.

The new bill was introduced yesterday (Feb. 08) as New York announced a settlement with two Los Angeles firms. Markstone will return $18 million to a New York pension fund. Wetherly will return $1 million and no longer be a placement agent.

The little-known placement agents moved into the national spotlight last year when New York Attorney General Andrew Cuomo revealed a “pay-to-play” scandal, payments to get pension fund investments, resulting in five guilty pleas so far.

After the problem first surfaced, New York in 2007 began requiring that investment firms report the use of placement agents — their fees, services and whether the agents had been recommended by anyone at the state pension fund.

Then last April after a lengthy investigation resulted in charges and the first guilty plea, New York officials banned the use of placement agents by investment firms seeking money from the state pension fund.

Reacting to the New York scandal, the California Public Employees Retirement System adopted a policy last May requiring that investment firms disclose the use of placement agents along with their fees and other information.

The California State Teachers Retirement System had adopted a similar policy in 2006 and was able to respond to a request from state Treasurer Bill Lockyer, who sits on both pension boards, for information about placement agents.

A bill supported by CalPERS last year, AB 1584, required all public pension funds in California to adopt a placement agent disclosure policy and, among other things, report placement agent gifts and campaign contributions to board members.

In October, CalPERS announced a “special review” after a request for voluntary disclosures from investment firms revealed that the placement agent firm of a former CalPERS board member, Al Villalobos, had received more than $50 million in fees.

A month later CalPERS board president Rob Feckner called for legislation requiring placement agents to register as lobbyists and prohibiting “contingency” fees based on pension fund decisions.

Placement agent fees typically are based on the amount of money their clients get from a pension fund, often around 2 percent. For example, Villalobos reportedly received a fee of more than $13 million for a single CalPERS investment in a client’s fund.

The reforms urged by Feckner in November were introduced yesterday (AB 1743 by Assemblyman Ed Hernandez, D-West Covina) with the co-sponsorship of CalPERS, Lockyer and state Controller John Chiang, who also sits on both pension boards.

“Public pension fund investments should not carry even the faintest whiff of secret handshakes in the shadows with politically connected influence peddlers,” Lockyer said in a news release.

Last September, the CalPERS and CalSTRS boards both took no position on a proposal by the U.S. Securities and Exchange Commission to ban placement agents. The CalPERS board remained neutral on a rare split vote.

Some CalPERS board members wanted to oppose the ban, arguing that placement agents would be unreported, driven underground, and that large investment firms with their own marketing staff would have an advantage over small firms.

The CalSTRS board heard a panel presentation on placement agents last week while implementing last year’s bill, deciding to support the new proposal with reservations about eliminating the contingency fee, and adopting a code of conduct.

Why New York switched from a disclosure policy to a ban of placement agents was explained via video hookup by Suzanne Dugan, special counsel for ethics in the office of New York Comptroller Thomas DiNapoli.

She said a review by an independent consultant in 2008 found that the New York policy was a “best practice.” The comptroller’s staff did extensive background checks of placement agents, sometimes compiling several 3-inch binders on a single firm.

But after the scandal broke, said Dugan, DiNapoli decided a ban “was the best way to feel certain he was exercising his fiduciary duty … to be certain there was no opportunity for undue influence by eliminating any potential for pay-to-play.”

Luke Bierman, DiNapoli’s general counsel, said a factor in the decision to ban placement agents was the New York fund’s “very active and aggressive emerging managers program.”

CalPERS and CalSTRS have similar programs, relatively small with $1 billion to $2 billion, that are intended to help small investment firms compete for managing pension fund money.

The two big California funds were praised for helping new firms by David Perez, chairman of the National Association of Investment Companies, which represents about 45 investment firms owned by minorities and women.

But Perez said placement agents help new firms market their investment products during fund-raising periods that often take 18 to 24 months or longer. He said some would-be managers run out of money and have to go back to work for big firms.

“Many of the top performers (in private equity) started with wealthy families,” Perez told the CalSTRS board. “The minority and women space that we represent have unfortunately never had real access to that capital to do it themselves.”

The fee based on the amount of the investment helps startup firms because placement agents work without pay during lengthy fund-raising periods, said Frank Minard of the Third Party Marketers Association representing 72 placement agents.

“Who will fail and who will succeed will not simply be a matter of the team’s past performance and investment skill,” said Minard. “Success often will primarily be determined by the quality and effectiveness of their marketing and sales strategy.”

As the CalSTRS board considered a code of conduct for itself, board member Peter Reinke raised the issue of adding language aimed at discouraging former board members from marketing products to CalSTRS.

“We want to make sure the public understands this board is not for sale either while we are board members or after we leave,” Reinke said.

But other board members, acknowledging that some of their former colleagues have marketed to CalSTRS, said improper influence is not likely and young board members should not face limited opportunities later because of their public service now.

“I am very apprehensive about anything that restricts people from their future activities,” said board member Roger Kozberg. “There are certain things that don’t have to be written down to be applicable. I think people that have good morals will tend to extend those into anything that they do.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 9 Feb 10

One Response to “Pension fund middlemen: new controls, no ban”

  1. Joe Pensioner Says:

    Thank God we have these Public Servants like Police, Firefighters, Caltrans, Dept. of Corrections to do these dangerous jobs that 99% of us would never do. Would you want to be a prison guard or run across the freeway with Caltrans. Thank you Civil Servants, you deserve every penny. We love you guys & gals

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