MassPRIM’s CIO Says Pay-to-Play Regulation Is Not a Focus for Discussion

(July 13, 2010) — Despite the fund being scrutinized by the public eye earlier this year regarding questions of pay-to-play, Chief Investment Officer Stanley Mavromates of the Massachusetts Pension Reserves Investment Management (MassPRIM) told ai5000 that the issue is not an imperative topic of discussion for the fund.

New regulation by the Securities and Exchange Commission (SEC) aimed at curtailing pay-to-play practices limits political donations by investment advisers, reflecting a growing concern that such practices were causing public plans and their beneficiaries to receive subpar advisory services for excessive fees. The regulator’s recent action also highlights an increase in enforcement efforts by the SEC against investment advisers, placement agents and government officials who were involved in illegal kickback schemes in association with public funds.

While MassPRIM told ai5000 that they are not currently taking action following the SEC’s decision, a variety of public pension funds, such as the California Public Employees Retirement System (CalPERS) and the New York State Common Retirement Fund, have adopted (or are working to adopt) policies limiting the use of placement agents by the investment advisers that desire to do business with such funds. Many of these public funds have provided comments to the SEC on its proposed rule.

“We’re supposed to brief our board on pay-to-play, but we don’t view the SEC’s decision with any more importance than anything else the SEC has ever done – the new regulations may or may not be talked about at our board meeting to find out if the board wants to do anything differently,” said Mavromates, referring to MassPRIM’s next board meeting on August 3.

In March, MassPRIM Treasurer Timothy P. Cahill was criticized for reportedly accepting more than $100,000 in contributions from across the country from real estate lawyers, property managers, and realtors, all dedicated to his election for governor, revealing a popular practice that many say crosses ethical lines and presents a conflict of interest.

Mavromates, who has worked with the fund for more than 10 years, serving as CIO for nearly half of that time, said MassPRIM staff is informed of pay-to-play conflicts of interest and is expected to abide on an honor system. “We don’t have a stance on pay-to-play,” he said, adding that the fund’s disclosure form for staff is identical to the form used when he started at the fund a decade ago, excluding minor changes to details about compensation arrangements with third party marketers. “From a decision-making point of view, the SEC’s decision doesn’t change our decision-making process at all,” he said.

Under the SEC’s new rule, if investment advisers or employees of an advisory firm contribute to a politician with hiring influence, they cannot be paid to the pension fund for two years. Additionally, the rule prohibits advisers from bundling donations from other people or political action committees for the officeholder or a party.

SEC Chairman Mary Schapiro said pay-to-play arrangements “reward political connections rather than management skill,” and foster fraud and corruption.