The decision by the Securities and Exchange Commission not to ban placement agents from marketing fund managers they represent to public pension plans is excellent news for the public fund community. Better yet, the commissioners voted unanimously to restrict placement agents’ ability to donate to the campaigns of elected officials with oversight of those funds.
The SEC took action in response to an investigation spearheaded by New York State Attorney General Andrew Cuomo into so-called pay-to-play activities at the New York State Common Retirement Fund. The inquiry focused on 2003 through 2006, when Alan Hevesi was the state’s comptroller and the sole fiduciary for the now $132.6 billion system.
Initially, the SEC had proposed preventing third-party marketers from soliciting business from public plans. As Institutional Investor pointed out in our October 2009 U.S. cover story, “Shadow Lands,” a ban on third-party marketers to public funds would disproportionately affect small, often women- and minority-owned money managers seeking business from public funds, while not necessarily solving the problem. Instead, II’s investigative team recommended that the SEC try to stop the flow of political money.
Not everyone named in the pay-to-play investigation has been damaged by association, nor was every firm equally culpable. Take the Carlyle Group. In its 2009 annual report, published in May, the $90.5 billion Washington-based private equity firm announced that despite the difficult investment climate, it had closed on nine new funds totaling $15.6 billion from January 2009 through March 2010 — not bad, considering Carlyle was the first money management firm to reach an agreement with Cuomo’s office over the investigation.
“Carlyle employees made campaign contributions to Alan Hevesi before and after Carlyle received investments” from the Common Retirement Fund, said the statement, signed last May. (Such donations were not illegal in New York State.) Carlyle agreed to make a $20 million payment to the state of New York and signed Cuomo’s code of conduct for firms seeking money from public pension systems, including a ban on the use of placement agents. It neither admitted nor denied guilt and was not, in fact, accused of any wrongdoing by the AG’s office.
Some industry insiders say the investigation should raise the bar for conduct throughout the money management industry. “While gathering assets is part of the business, the process also has to be held to the highest ethical standard,” says Michael Rosen, CIO of Angeles Investment Advisors, which advises public pension plans and other institutional investors.
