California passes placement agent disclosure bill

Bill LockyerIn the latest chapter regarding the role of third-party placement agents, the California Senate has passed a bill supported by the state’s largest pension fund, CalPERS, aimed at increasing transparency
around the fees paid to these agents doing business with public pension plans.

The bill, which was passed 38-0 after a third reading and is now with the Assembly, requires all state and local pension funds to adopt a policy requiring the disclosure of fees paid to investment
placement agents, campaign contributions and gifts made by placement agents to public retirement board members for the 24 month period prior to solicitation.

It also prohibits public retirement board members from selling investment products to other public retirement systems, and lengthens “post-employment restrictions” for fund board members and executive officers who leave for the private sector, preventing them from lobbying former colleagues for business until five years after their departure.

The measure was proposed by California Treasurer Bill Lockyer and State Controller John Chiang and follows an
investigation by the US Securities and Exchange Commission (SEC) and the New York Attorney General into agents placing state investments with private equity firms.

New York State Comptroller Thomas P. DiNapoli subsequently banned the involvement of placement agents, paid
intermediaries and registered lobbyists in investments with the New York State Common Retirement Fund (CRF).

CalPERS embraced the measures in a policy adopted in May which requires external investment managers to disclose fees and other information about the placement agents they hire to seek business from the fund.

At the time, CalPERS board president Rob Feckner said the policy would help the fund ensure its decisions were made
“solely on the merits of proposed investments with full transparency and disclosure”.

“We want to know who’s being hired, how much they’re being paid, what they’re paid for, and who pays them,” he said.

DiNapoli last week released details of 12 direct private equity investments the New York CRF made during the Alan Hevesi administration.The fund made 12 direct private equity investments with committed capital of more than $2.8 billion during the controversial Hevesi administration.

He said his office was continuing to evaluate the fund’s options regarding the Hevesi-era investment relationships
on a case by case basis.

“We want to clear the clouds left hanging over the fund by the prior administration with as much sunlight and transparency as possible,” he said.

While the funds listed have appeared in public documents related to the investigation, DiNapoli said the firms were
included in the interest of transparency, and not as an indication of potential misconduct.

DiNapoli announced in April that the fund had hired the law firm Day Pitney LLP and adviser Pension Consulting Alliance to help staff review investments with firms under investigation by the Senate Attorney General and the SEC.

A number of large public pension plans in the US have already banned the use of placement agents – including the New York  City Employees’ Retirement System, the New York City Police Pension Fund and the New Mexico state funds. However there has been some mixed reaction to this wave of prohibition.

The Missouri State Employees Retirement System has spoken out against the SEC’s proposal to ban the use of placement agents, with its CIO, Rick Dahl, stating unintended consequences such as reducing the fund’s ability to access better managers could result from some action.

Last week’s featured research by Preqin which canvassed public pension fund and other

US investors to examine the specific effects of the SEC’s proposed rules relating to the introduction of the Advisers Act Rule 206(4)-5 on the private equity industry.

The report includes key statistics on the use of placement agents, the importance of private equity and other
alternative investment funds using third-party marketing to the portfolios of public pension plans, and the size of the placement industry.

To read the report, click here