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CalPERS official urges new state law to change how placement agents are paid

The proposed legislation would keep the financial middlemen from being paid multimillion-dollar contingency fees.

November 12, 2009|Marc Lifsher

SACRAMENTO — The board president of the California Public Employees' Retirement System wants fellow board members to get behind efforts to better regulate the financial intermediaries who are paid millions by private equity firms to help them get big pension fund investments.

The proposal Wednesday by CalPERS board President Rob Feckner comes in direct response to a growing uproar over disclosures by CalPERS that investment funds it does business with have paid tens of millions of dollars in fees to so-called placement agents in recent years.

About $70 million has gone to one former CalPERS board member, Alfred J.R. Villalobos.

CalPERS is investigating the activities of Villalobos and other placement agents. Broader probes are underway at the U.S. Securities and Exchange Commission and with the attorneys general of New York and California. In New York, a number of placement agents and pension officials have been caught up in a pay-to-play scandal that has brought allegations of political corruption and bribery.

The proposed bill, if passed by the Legislature and signed by the governor, would prohibit such intermediaries from being paid sometimes multimillion-dollar contingency fees, calculated as a percentage of the amount of money that CalPERS invests with an outside fund.

The placement-agent industry is expected to object to such stringent regulation.

Many of the firms say they support increased disclosure of their activities, including fees paid to them. But they oppose efforts that they say could possibly push them out of business.

Placement agents, they argue, play a useful role in helping investment funds, especially small, cutting-edge firms, receive a fair hearing from large pensions, including the $200-billion CalPERS, the biggest in the nation.

Fees to placement agents under Feckner's proposal would be part of a monthly retainer or a flat charge for representing an investment fund before CalPERS or other public pension funds. Fees could not be contingent on the placement agent successfully completing an investment deal.

"Recent events and news articles have alleged undue influence by placement agents and others attempting to sway the investment decisions of pension funds across the nation," Feckner wrote in a letter released by CalPERS on Wednesday.

The proposed legislation, which is expected to be introduced before the end of the year, probably will be discussed at a CalPERS board meeting Monday. The board's agenda also lists a number of recommendations from CalPERS staff and outside advisors to tighten a placement-agent disclosure policy approved in May.

Feckner, with support from state Treasurer Bill Lockyer and Controller John Chiang, both CalPERS board members, wants placement agents to be registered as lobbyists with the California secretary of state's office. The firms that employ placement agents as well as the private equity and real estate funds that use them also would be required to register.

By becoming registered lobbyists, placement agents would be governed by the same laws and regulations that cover all professional advocates at the state Capitol and before state government agencies. Those rules include the reporting of gifts, speech-making fees and other compensation. They also would prohibit placement agents from making political contributions to members of a pension fund board.

Mike Naple, a spokesman for Gov. Arnold Schwarzenegger, said the administration "supports the concept" behind the Feckner proposal but cautioned that registering placement agents as lobbyists "does not go far enough to solve the problem." He declined to detail the administration's criticism.


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