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The Latest on Placement Agents
Thursday, May 5th, 2011
Robert Wechsler
It's been a year since I last wrote about placement agents, so it's
time for an update, based on an
article put up yesterday on the Forbes Magazine site, designated
for the May 23 issue.
Placement agents are intermediaries between pension boards and companies that invest pension boards' funds. They are paid by the investment companies to win pension boards over. They are especially useful to investment companies that are new, lack sales staff, or do not want to deal directly with pension boards due to disclosure and conflict rules.
Placement agents are not useful to pension boards, who should instead hire financial advisors loyal only to them, either in-house or as consultants.
The Forbes article focuses on one placement agent, who received about six million dollars for getting contracts for his clients with the Kentucky Retirement System, before the state took action to prevent this sort of thing. Two of the agent's clients were new start-ups, with no track record.
How does this system work? In Kentucky, according to the article, as in many local pension boards, the board members knew nothing about the $13 million in placement agent payments that were paid to the firms that handled the investment of their funds. It took a state auditor's report to bring transparency to this relationship.
Some board members do, however, learn about placement agents, and recognize a future career. According to the article, former directors of the largest pension fund, California Public Employees' Retirement System, earned $125 million as placement agents, showing that a little knowledge, and good contacts, can go a long way. These sales commissions, which is what they essentially are, also make an excellent argument for post-employment restrictions.
In Illinois, "the Teachers' Retirement System banned placement agents after three middlemen pleaded guilty in an extortion scheme that steered money from investment managers to public officials." New Mexico is seeking to recover tens of millions of dollars lost to kickback schemes. In other words, placement agents not only treat themselves well, but also spread the money, and the corruption, around.
Who becomes a pension board member? Kentucky's are primarily government employees and political appointees focused on benefits rather than investments. For several years, only one board member had a background in investments. He is quoted as saying, "Public pensions need placement agents like dogs need ticks." Often, staff members are either in on the deals or at least party to a conspiracy of silence.
According to the article, steps are being taken across the country. In January, California (see my blog post on 2009 reforms) began requiring placement agents to register as lobbyists, attend ethics training, and not take finder's fees from money managers. Some agents have said they will leave the state.
New York State has banned placement agents. But when the SEC proposed a similar ban in late 2009, it "ran into fierce industry resistance," according to the Forbes article. The SEC compromised by limiting the payment of placement fees to "regulated persons," who are registered with the SEC and subject to pay-to-play restrictions and disclosure requirements. A step in the right direction.
For more City Ethics blog posts on placement agents, click here.
For more City Ethics blog posts on pension boards, click here.
Robert Wechsler
Director of Research-Retired, City Ethics
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Placement agents are intermediaries between pension boards and companies that invest pension boards' funds. They are paid by the investment companies to win pension boards over. They are especially useful to investment companies that are new, lack sales staff, or do not want to deal directly with pension boards due to disclosure and conflict rules.
Placement agents are not useful to pension boards, who should instead hire financial advisors loyal only to them, either in-house or as consultants.
The Forbes article focuses on one placement agent, who received about six million dollars for getting contracts for his clients with the Kentucky Retirement System, before the state took action to prevent this sort of thing. Two of the agent's clients were new start-ups, with no track record.
How does this system work? In Kentucky, according to the article, as in many local pension boards, the board members knew nothing about the $13 million in placement agent payments that were paid to the firms that handled the investment of their funds. It took a state auditor's report to bring transparency to this relationship.
Some board members do, however, learn about placement agents, and recognize a future career. According to the article, former directors of the largest pension fund, California Public Employees' Retirement System, earned $125 million as placement agents, showing that a little knowledge, and good contacts, can go a long way. These sales commissions, which is what they essentially are, also make an excellent argument for post-employment restrictions.
In Illinois, "the Teachers' Retirement System banned placement agents after three middlemen pleaded guilty in an extortion scheme that steered money from investment managers to public officials." New Mexico is seeking to recover tens of millions of dollars lost to kickback schemes. In other words, placement agents not only treat themselves well, but also spread the money, and the corruption, around.
Who becomes a pension board member? Kentucky's are primarily government employees and political appointees focused on benefits rather than investments. For several years, only one board member had a background in investments. He is quoted as saying, "Public pensions need placement agents like dogs need ticks." Often, staff members are either in on the deals or at least party to a conspiracy of silence.
According to the article, steps are being taken across the country. In January, California (see my blog post on 2009 reforms) began requiring placement agents to register as lobbyists, attend ethics training, and not take finder's fees from money managers. Some agents have said they will leave the state.
New York State has banned placement agents. But when the SEC proposed a similar ban in late 2009, it "ran into fierce industry resistance," according to the Forbes article. The SEC compromised by limiting the payment of placement fees to "regulated persons," who are registered with the SEC and subject to pay-to-play restrictions and disclosure requirements. A step in the right direction.
For more City Ethics blog posts on placement agents, click here.
For more City Ethics blog posts on pension boards, click here.
Robert Wechsler
Director of Research-Retired, City Ethics
---
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