CalPERS, Blackstone on Opposite Sides of Placement Agent Battle

(April 5, 2010) – The use of placement agents has spurred a heated debate ahead of a bill that will get its first hearing in the California state Legislature this week. A lobbying war has erupted from legislation to ban commissions paid to intermediaries, or middlemen who represent investment funds and exert influence over public pension fund money.

While the California Public Employees’ Retirement System (CalPERS) and some state officials say the fee system causes corruption, Blackstone, Wells Fargo & Co., and other firms disagree, asserting that placement agents play useful roles, The Los Angles Times reported.

To fight the legislation, Blackstone Group has hired a Sacramento powerhouse in government relations and lobbying, according to The LA Times. Blackstone not only invests state pension money but also owns a placement agent firm, California Strategies.

On the other side of the battle, the $206-billion fund CalPERS is seeking to ban paying commissions to middlemen. The fund giant aims to eliminate the incentives that spurred allegations of influence peddling, leading the U.S. Securities and Exchange Commission (SEC) to investigate millions of dollars in fees paid by money managers to middlemen for more than 10 years. The SEC has proposed a nationwide ban on the use of placement agents.

The controversy over fees for so-called placement agents started from a string of federal and state investigations at major public pension funds in New York and California. Attorney General Andrew Cuomo’s probe into the $129 billion New York state’s retirement fund, for example, revealed corruption and influence peddling and has already collected settlements of more than $100 million from at least nine investment firms and two individuals.

Partly in response to the corruption scandal at the New York state pension fund, the CalPERS board has sought to increase transparency, seeking details about placement agents hired by its investment partners, the investments they promoted and the fees they were paid.