Key Assembly panel backs bill to outlaw commissions paid to CalPERS investment go-betweens
A bill that would outlaw payments of sometimes huge commissions to the intermediaries that broker investments by California’s two big public pension funds was approved by a key Assembly committee without a vote to spare Wednesday.
The measure, sponsored by the California Public Employees’ Retirement System, the country’s largest government pension fund, barely overcame opposition from lobbyists for Wall Street investment firms, led by the powerful private equity firm Blackstone Group.
Blackstone earns fees for managing $4.4 billion in investments by the $210-billion CalPERS and the $130-billion California State Teachers’ Retirement System. Blackstone also operates its own investment marketing subsidiary that acts as a go-between, or placement agent, for investment deals.
Such agents, Blackstone said, play an important role by helping smaller funds and those run by women and minorities pitch their products to public and private pension funds, university endowments and other institutional investors.
Outlawing commissions for successfully winning an investment from CalPERS effectively would kill the placement agent business in California, Dan J. Prendergast, a San Francisco managing director of Blackstone’s Park Hill Group placement agent unit, said in testimony Wednesday.
Prompted by a spreading scandal involving alleged influence peddling in California and pay-to-play corruption in New York, the legislation would make placement agents register as lobbyists under the state’s 1974 Political Reform Act.
That law bans lobbyists at the statehouse and state government agencies from collecting “success” or “contingency” commissions after they fulfill clients’ desires to pass, defeat or modify proposed legislation.
Opponents of the new measure, including the Securities Industry and Financial Markets Assn., a Washington trade group, said they support the bill’s lobbyist registration and disclosure requirements but not the prohibition on contingency commissions.
After a lengthy hearing and debate, the measure by Assemblyman Edward Hernandez (D-West Covina) won votes from the four Democratic members of the state Assembly’s Public Employees, Retirement and Social Security Committee. One Republican voted no, and a second did not vote.
The bill now moves to the Assembly Elections Committee. Meantime, Hernandez has offered to fine-tune his proposal to overcome some concerns that it might make it harder for small investment funds to gain access to key pension fund investment decision makers.
For its part, CalPERS countered that no small investor should worry about getting a fair hearing at the giant fund. “Investment managers don’t need placement agents to talk to us,” Chief Investment Officer Joseph Dear testified at the hearing.
Although placement agents have been marketing to the state’s pension funds for years, their activities didn’t capture public attention until late last year, when CalPERS disclosed that one politically connected former board member, Alfred J.R. Villalobos, earned nearly $70 million in fees from investment managers for helping snag state business.
The bulk of those fees came from Apollo Group Inc., an investment fund holding company that has invested or committed to invest about $4 billion with CalPERS for more than a decade.
With that kind of money, it’s no surprise that “Wall Street is defending their fees,” said state Treasurer Bill Lockyer, a key backer of the Hernandez bill. He called such commissions “an invitation to corruption.”