Reining in investing agents
Highly paid financial intermediaries at the center of a growing uproar over the way California’s huge public pension plan invests its money may soon be required to register as government lobbyists and regularly report their fees and clients.
In recent months, disclosures have shown that some of these politically connected intermediaries, known as placement agents, are paid millions of dollars to help private-equity investment firms win lucrative contracts with the California Public Employees’ Retirement System -- the $200-billion fund known as CalPERS -- and other government pension funds.
The registration plan is expected to be discussed at a Nov. 16 CalPERS board meeting.
“Requiring placement agents to register as lobbyists, and comply with all laws governing lobbying, is an appropriate step to take to help clean up this mess,” said state Treasurer Bill Lockyer, who sits on the 13-member CalPERS board.
But critics call the plan an overreaction to what they say are isolated cases of political corruption and bribery in New York state involving a few pension fund investment intermediaries.
“I think all this is a reaction to a few bad apples,” said Steven Standbridge, a partner in Capstone Partners of Dallas. In New York, “the political guys created this problem,” he said. “Their gut reaction is to blame the industry versus solving the problem.”
No allegations of criminal activity have arisen in California. But that doesn’t mean that CalPERS’ leaders have escaped criticism for being susceptible to alleged political pressure in approving investments that contributed to a loss of about 20% of their fund’s value in the last two years.
The board also has been rocked by recent revelations that a former member got more than $70 million in fees from investment firms that he helped to secure large contracts with CalPERS.
The discussion comes as CalPERS conducts an internal investigation of the fees paid to Alfred J.R. Villalobos, a Stateline, Nev.-based go-between who served on the CalPERS board between 1993 and 1995. Villalobos also was deputy mayor of Los Angeles in the mid-1990s.
CalPERS says its outside inquiry, being done by a Washington law firm, is looking at placement agents that did business with the fund.
Related investigations are underway by the Securities and Exchange Commission and the attorneys general of California and New York state.
New York City’s comptroller, William C. Thompson Jr., has proposed banning the use of placement agents altogether with the city’s pension fund. The SEC is considering a similar prohibition.
On Thursday, CalPERS board President Rob Feckner issued a more limited directive, telling his members to avoid private meetings with placement agents at least until the fund’s internal investigation is completed.
CalPERS should consider making that ban permanent rather than trying to register investment intermediaries as lobbyists, said David Elder, a former lawmaker and onetime chairman of the state Assembly’s Public Employees and Retirement Committee.
“Having placement agents registered as lobbyists doesn’t do anything,” he said. “It just means you have to have a license to do it.”
Feckner is working with CalPERS Chief Executive Anne Stausboll and two key board members, Lockyer and state Controller John Chiang, to draft ideas for a new law in time to be included with agenda material being prepared for the upcoming board meeting.
Forcing placement agents to register with the California secretary of state would take the little-known profession out of the shadows, backers of the proposal contend.
It would also drastically change the way that placement agents get paid. Currently, they are paid a commission, usually from half a percentage point to 2% of the investment deals with CalPERS that they help arrange.
State lobbying law prohibits the payment of such contingency fees for lobbyists attempting to influence the state Legislature, the governor or state agencies. They are paid monthly retainers or flat fees, which must be reported to the secretary of state each quarter.
Registered lobbyists are prohibited from making political campaign contributions to lawmakers or giving gifts of more than nominal value. They must report the names of clients and the bills they work to pass or defeat.
The call to register placement agents as lobbyists goes far beyond strictures in a CalPERS policy approved last May. The new rules require investment funds to disclose the names and financial arrangements with placement agents who make pitches at CalPERS. The State Teachers’ Retirement System adopted a similar policy in 2006.
In January, a new law requiring similar disclosures takes effect for all government pension funds statewide.
Increasing transparency of how investment decisions get made at CalPERS is laudable, said former Assembly Speaker Willie Brown, who served on the CalPERS board while mayor of San Francisco from 1990 to 1995.
But banning the payment of contingency fees to intermediaries who make successful sales pitches to the CalPERS board and staff is counterproductive, he said.
“If I was hiring somebody to assist me in trying to get an allotment [of money] to manage, I certainly would not want to pay for it unless he produced,” Brown said.
“Imposing greater rules and restrictions,” he predicted, would make it harder for newcomers, including women and members of racial minority groups, to break into the “old-timers’ ” hold on CalPERS’ business.
--
