Kentucky Bill Aims to Ban Pension Middlemen

(February 16, 2011) — Kentucky lawmakers have proposed legislative amendments to ban the use of placement agents by the State’s retirement systems.

The proposals draw further attention to the controversial use of placement agents and associated pay-to-play scandals in the US, which have become one of the most contentious governance issues for pension funds around the country.

“I’m fully supportive of this bill,” Kentucky Retirement Systems (KRS) trustee Chris Tobe told aiCIO. “Placement agents were hidden from me as a trustee. The Securities and Exchange Commission’s (SEC) pending investigation is really the key to prevent anything further,” he said, referring to the “informal inquiry” launched in September in Kentucky by the SEC after an internal review disclosed nearly $15 million in agent fees.

Cherry’s House Bill 480 would ban payments to placement agents and impose term limits and greater transparency on the boards of the KRS – including the Kentucky Teachers Retirement System and the Judicial Form Retirement System. The bill would limit retirement systems’ board members to three terms, while board chairmen would be limited to six consecutive years as chairman.

Government and pension officials have been aggressively trying to weed out conflicts of interest over the use of placement agents resulting from an investigation of the $110 billion New York State Common Retirement Fund (CRF) in 2009 that revealed the role of middlemen. Since then, the SEC and New York Attorney General Andrew Cuomo have been investigating state pension fund corruption.

In December, two Detroit pension funds – one designated for police and firemen, the other for various municipal employees – reported having lost more than $2 billion combined, or 27% of total assets, since 2008. The SEC, the Federal Bureau of Investigations, and a federal grand jury subsequently investigated use of placement agents, one of which was was affiliated with private equity firm Onyx Capital Advisors, a firm that has been charged by the SEC with stealing millions in pension money obtained via placement agents and possibly through a payment to a fund tied to then-Detroit Mayor Kwame Kilpatrick.

In October, the $216 billion California Public Employees Retirement System (CalPERS), the nation’s largest public pension plan, said it was “severing its ties” with the Pacific Corporate Group (PCG) over issues of pay-to-play and has since found new managers for the $2 billion committed to five PCG funds.

New Jersey pension chairman and advisor to the President, Orin Kramer recently told Bloomberg News: “When you look at some of who the placement agents are, you say these are people who are really not in the financial business these are politically connected intermediaries, and that’s not a way it ought to operate.”

Opponents to an outright ban on the use of private-placement agents argue instead for a level playing field, where all investment sales activity to public pension funds is regulated, and rules are aimed at keeping securities firms from engaging in improper pay-to-play practices. In February 2010, former Senate Banking Committee Chairman and Senator Christopher Dodd, said in a letter to the SEC that banning placement agents risked eliminating the only “cost-effective way for smaller funds” to compete with bigger rivals in winning contracts to manage pension-fund assets, Bloomberg reported.