Placement Agents Threaten to Abandon CA Funds, But CalSTRS Disagrees

(March 25, 2011) — As the use of placement agents receive heightened scrutiny, a recent study by Preqin has revealed widespread discontent over new legislation that requires those working with public pension funds in the state to register as lobbyists.

While placement agent activity is not illegal, recent scandals involving public employee pension funds around the country have placed a spotlight on the industry, leading many funds to reassess their relationships. The new legislation referred to in the study, dubbed AB-1743, came into effect on January 1 with the goal of preventing corruption. The legislation subjects placement agents working with the nation’s two largest public pensions — the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) — the California Judges Retirement System, and the University of California Regent’s Retirement Fund to stringent compensation reporting procedures. While requiring placement agents to attend ethics training, the legislation further prevents them from making campaign contributions and outlaws contingency fees.

However, CalSTRS has indicated that the scheme’s experience following the legislation has differed from Preqin’s findings. Fund spokesperson Ricardo Duran told aiCIO: “While we understand it’s still too early to tell how this legislation will ultimately affect our relationship with CalSTRS’ investment partners, we have not seen the kind of reluctance reflected in the report. Several partners have commented on the need to more clearly outline procedures, but when told of the new law, they have been willing to register.”

Despite contrary findings from the second-biggest public pension in the US, Preqin’s head of communications Tim Friedman maintains that the majority of placement agents participating in the study are unhappy with certain, if not all, aspects of the legislation. “The prohibition of contingency fees is the most contentious aspect of AB-1743; most feel it is unfair that they should work with no incentive. The study suggests that many placement agents will no longer work with CalPERS and CalSTRS as a result,” Friedman warned in a statement. 

The survey revealed a general sentiment of discontent and antipathy among placement agents, who said they felt they were being punished for the wrongdoing of politicians. The most popular cause of discontent among those surveyed: contingency fees, with the results showing that 58% stated that they would cease doing business with California primarily for this reason. Furthermore, 92% of those surveyed said they expect their expenses to increase as a result of the legislation, while 84% stated that they would rely less on public funds as a result of the legislation.

Worries about lack of disclosure in the pension fund community exploded last year when a pension-fund scandal in New York exposed the role of placement agents in bribery and corruption charges. In May 2010, California’s attorney general filed a civil lawsuit that alleged CalPERS officials — Fred Buenrostro, a former chief executive, and Alfred Villalobos, former board member turned placement agent — participated in a scheme to obtain business for investment firms, providing pension officials with luxury trips and other gifts.

Earlier this month, CalPERS issued a report detailing the  use of placement agents, or middlemen that connect money managers with pensions and highlighting that there may have been influence peddling by a former CEO, Board members, and investment staff. Commissioned in the fall of 2009 to review the fees paid by its external managers to placement agents, the CalPERS review, conducted by the Steptoe & Johnson law firm and adviser Navigant Consulting, asserted that while at the giant pension, Buenrostro repeatedly “inserted himself in the investment process in a manner inconsistent with prior practice at CalPERS, pressing its investment staff to pursue particular investments without evident regard for their financial merits.”