The Latest on Placement Agents
It's been a year since I last wrote about placement agents, so it's
time for an update, based on <a href="http://www.forbes.com/forbes/2011/0523/features-pensions-glen-sergeon-a…; target="”_blank”">an
article put up yesterday on the <i>Forbes Magazine</i> site</a>, designated
for the May 23 issue.<br>
<br>
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.<br>
<br>
Placement agents are not useful to pension boards, who should instead hire
financial advisors loyal only to them, either in-house or as
consultants.<br>
<br>
The <i>Forbes</i> 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.<br>
<br>
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.<br>
<br>
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.<br>
<br>
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.<br>
<br>
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.<br>
<br>
According to the article, steps are being taken across the country. In
January, California (see <a href="http://www.cityethics.org/content/pension-board-reform-california" target="”_blank”">my
blog post on 2009 reforms</a>) 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.<br>
<br>
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 <i>Forbes</i> 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.<br>
<br>
For more City Ethics blog posts on placement agents, <a href="http://www.cityethics.org/search/node/%22placement%20agent%22" target="”_blank”">click
here</a>.<br>
For more City Ethics blog posts on pension boards, <a href="http://www.cityethics.org/search/node/%22pension%20board%22" target="”_blank”">click
here</a>.<br>
<br>
Robert Wechsler<br>
Director of Research-Retired, City Ethics<br>
<br>
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