California's $125 Million Middlemen

More evidence of influence-peddling in the Golden State's pension fund
January 21, 2010 AT 3:00 AM
Girard Miller
By Girard Miller  |  Finance Columnist
The finance columnist for Governing.

The ongoing saga of California's failure to control influence-peddlers added a new chapter last week with the release by the largest state pension fund, CalPERS, of thousands of pages of documents revealing that $125 million had been received by the top 10 influence-peddlers retained by money managers. (Just the top 10, mind you.) These so-called "placement agents" included former public officials who are now trading on their connections to win entrée for investment advisors.

According to a report by the Los Angeles Times , the recipients of this marketing money were both large and small firms, and included a former board member. I've written previously on this issue and won't repeat old news. What the latest release by CalPERS should illuminate is that disclosure is not enough. That's always the easy answer offered by public officials who don't want to rock the boat. Those who see nothing wrong with the status quo are satisfied by making the payments transparent, but they somehow equate freedom of speech with allowing firms to buy their way into the business of investing public money.

Sadly, CalPERS has not even come clean on the full-disclosure standard that most of us would expect. As their hometown paper in Sacramento reported, CalPERS has not even required all its investment managers to disclose names of their placement agents. So the total tab for these middlemen will ultimately prove to be more than $125 million and may well include other political operatives once all the facts are disclosed.

I'm sure they will eventually set the record straight, but this pussyfooting seems hypocritical for an investment organization that has brazenly told corporate America how to runs its governance. If a Fortune 500 company behaved this badly, the CalPERS governance goon squad would be all over them. "Do what I say, not as I do" is still their clear message, and at some point CalPERS could lose its thin reed of remaining credibility in the institutional investment community. It's just not obvious to outsiders why this is taking so long, and CalPERS would do itself a big favor by explaining its delays, if they are procedurally beyond control.

I continue to urge public pension funds to adopt stricter ethical and business codes. So does New York Attorney General Andrew Cuomo, whose proposed Code of Conduct for pension funds should be the starting point for any state's pension-reform initiatives. Cuomo's proposal would prohibit public officials from trading on their contacts list, and prohibit excessive campaign contributions.

Professional associations are beginning to address this issue, although efforts thus far have been watered down by the reluctance of appointed administrators to stand up to their elected trustees -- who are the root of many of these problems. That's why all eyes should focus next week on the important work of the Government Finance Officers Association's committee on benefits/retirement administration, which is considering a "best practice" on governance that could set a new standard for how these conflict of interest issues should be addressed. Next month, I'll report on any constructive developments that emerge from that committee (whose recommendations must then be approved by the GFOA executive board and its general members before adoption).

Meanwhile, pension trustees and administrators should focus on these precepts:

1. Placement agents have no business meeting with trustees. Limit their contacts to the independent investment consultant and/or the professional staff to keep politics out of the game.

2. Campaign contributions above the statewide average for individuals, to anybody involved in the pension fund governance process, should be prohibited.

3. Gifts and perks that exceed the $100 annual limit imposed on registered investment representatives by the FINRA regulators should apply to all pension plan vendors. If it's appropriate for securities salespeople, it should apply to all peddlers.

4. Trustees who receive campaign funds or gifts from anybody directly or indirectly related to the investment process must be barred from voting on any issue in which they have such an obvious conflict of interest. Better yet, they should be barred from voting on any investment decision as a matter of censure.

5. Former employees or trustees of a retirement system should be barred from any professional relationship with that plan for 3 years. Revolving-door lobbyists and peddlers are a disgrace to the profession.

Hopefully, the Securities and Exchange Commission will soon crack down on the placement agent industry with rules comparable to those enforced for securities representatives. Until then, state and local government leaders and their pension fund trustees must take the initiative and provide the leadership needed to clean up this dirty nest.

Girard Miller
Girard Miller | Finance Columnist |