(November 6, 2013) — The New York financial services superintendent has issued subpoenas to consultants working with the state’s pension funds to ask them to clarify their working practices.
Benjamin Lawsky has turned his attention to pension trustees and their advisers, the New York Times reported, some three months after announcing a thorough investigation into the state’s funds.
Around 20 firms have been targeted, ranging from the largest multinational companies such as Callan Associates, Russell Investments, Towers Watson, and Wilshire Associates to smaller advisers that work on specific asset classes. None of the firms were available for comment at the time of going to press.
The superintendent is reported to want to discover the practices behind the mandate-bidding processes and whether advisory firms receive any kind of kickback from companies they recommend to their clients.
Lawsky has also written to the trustees of the funds—who collectively oversee around $350 billion—saying he wanted to look at “controls to prevent conflicts of interest, as well as the use of consultants, advisory councils and other similar structures”, the newspaper said.
The move comes a year after a New York State Supreme Court judge sentenced David Loglisci, the former CIO of the state’s $150.6 billion employee pension system, to a conditional discharge for allowing a “culture of corruption” at the fund.
Alan Hevesi, the former New York Comptroller and head of the $129.4 billion New York State Common Retirement Fund, was be released from prison a year ago after serving 19 months on corruption charges for misuse of pension fund assets. Hevesi pleaded guilty in a pay-to-play scandal in 2010 after an investigation led by then-Attorney General Andrew Cuomo turned up “unlicensed placement agents, secret fees,” and favorable treatment of certain money managers who were major campaign contributors, according to a release from the attorney general’s office.
Earlier this year however, a review of the New York State Common Retirement Fund, required as part of robust oversight reforms pushed by New York State Comptroller Thomas DiNapoli, found that the fund was “thinly staffed,” relying more on consultants than its peers. However, it also said the fund was “highly effective”.
There has been growing scrutiny over the impartiality of pension investment consultants and advisers.
Last year, a report by the Diligence Review Corporation highlighted 10 pension consulting firms found to be registered representatives of broker-dealers, 33 pension consulting firms that had broker-dealer affiliates, and 12 pension consulting firms that receive compensation for client referrals.
Consultants named in the report refuted any notion of conflict of interest. The report concluded, however, that the solution would be a greater awareness and eagerness for the investment consulting industry to appropriately manage potential conflicts of interest.
There have been multiple lawsuits brought against investment consultants by pension funds that have accused their advisers of offering poor guidance. A litany of funds has also been prosecuted for being part of “pay-to-play” set-ups.
Additionally, the value of consultants has also come under question. A study by Oxford Said Business School found consultant recommendations did not automatically mean the best outcomes for clients.
Active US public equity products that had the backing of consultants showed “insignificant outperformance” relative to benchmarks, the study found. On an equally-weighted basis, “we find that average returns of recommended products are actually around 1% lower than those of other products,” the authors wrote. This result stayed consistent when they used one, three, and four factor pricing models, and were in every case statistically significant.
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