Home ListingJuly 22, 2013

SEC Lets Kentucky off the Hook Over Placement Fees

After a multi-year inquiry, the regulator will not charge Kentucky's pension system with any violations over the millions it has paid indirectly to placement agents.

Reported by Featured Author

(July 22, 2013) – The US Securities and Exchange Commission (SEC) has ended its investigation into the Kentucky Retirement Systems’ (KRS) use of placement agents.

The regulator will not pursue enforcement action against the $11.3 billion fund, according to a letter from the SEC to the KRS’ external counsel, which was obtained by aiCIO.

KRS Executive Director William Thielen said the fund was “pleased” at the result, takes any allegation of wrongdoing seriously, and fully cooperated with the SEC investigation. “It was very welcome news that the SEC’s investigation resulted in a determination that no violations of the securities laws should be pursued,” he concluded.

The SEC subpoenaed KRS retirement officials in 2011 as part of an extensive inquiry into placement agents.

The same year, Kentucky’s Auditor of Public Accounts (APA) determined the pension fund paid $11.5 million in placement agent fees, which were charged in 20 of 50 alternative investments the KRS made from July 1, 2004 to December 31, 2010. These were indirect expenditures and before 2010 not disclosed in KRS publications.

Managers paid agents who acted as intermediaries between the fund and firm, and passed on the costs to investors via management fees. According to the audit, placement fees ranged from 0.18% to 3% of committed assets.

“The use of placement agents was not transparent at KRS,” the auditor wrote. “One placement agent worked closely with the former CIO and was involved in numerous KRS investments without the knowledge of other KRS investment staff, KRS management, or the board. Transparency is needed to ensure that investment decisions are made in the best interests of KRS and not the interests of placement agents or other parties.”

However, the auditor found no evidence of a pay-to-play scheme, as had occurred with public pensions in Illinois, New York, California, and other states. The APA did, however, send its report to the SEC to assist with its ongoing investigation.

Another—much more critical—report on the KRS’ use of placement agents arrived on the regulator’s desk from former trustee Chris Tobe and former SEC attorney Edward Siedle.

This report estimated agent fees totaled more than $14 million for the 2004 through 2010 period.

“It is unfathomable that the APA could have recited the facts related to a classic ‘pay-to-play’ scenario and yet concluded none existed,” Tobe concluded in the report. “I can only assume that the APA lacked expertise in investigating pension abuses and did not retain a qualified expert to assist in its examination.”

The SEC did make it clear to the KRS that while the investigation had ended, the case was not truly closed.

“This letter must not be construed as indicating that your clients have been exonerated, and investigations that staff believe to have been concluded may be reactivated as a result of unforeseen developments.”