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PENSION FUNDS : CalPERS to consider stiffer rules : Its consulting firm urges penalties for investment managers that fail to disclose ties with placement agents.

November 16, 2009|Marc Lifsher

SACRAMENTO — Amid a growing public uproar over the way it invests its money, the California Public Employees' Retirement System is expected to toughen its 6-month-old policy requiring outside investment managers to more fully disclose their relationships with the intermediaries who pitch their products.

The tougher proposals are to be discussed by the CalPERS board today as the country's largest government pension fund overhauls the way it manages its massive investments, which total $200 billion.

CalPERS' principal outside investment consulting firm is calling for changes. Wilshire Consulting, a unit of Wilshire Associates of Santa Monica, recommends that CalPERS subject investment managers to stiff monetary penalties if they fail to tell it about all fees paid to the intermediaries, known as placement agents.

A number of placement agents and private equity fund managers contacted by The Times declined to comment on the proposed CalPERS disclosure rules.

But Peter Rose, a spokesman for the New York-based placement agent Park Hill Group, said his company supports transparency in placement agent activities and backs Wilshire's recommendation that malefactors be penalized.

"We're in favor of increased disclosure," Rose said. "It will help weed out political fixers and influence peddlers masquerading as placement agents."

The proposed changes are likely to find support on the CalPERS board. Several members including board President Rob Feckner, state Treasurer Bill Lockyer and state Controller John Chiang are already on record as supporting requirements for stricter reporting and for sales intermediaries to register as lobbyists.

The growing controversy over huge fees paid to placement agents, including $70 million to Alfred J.R. Villalobos, a former CalPERS board member, has triggered an internal CalPERS probe and investigations by the U.S. Securities and Exchange Commission and the attorneys general of California and New York.

The current rules require private equity and real estate funds, such as Apollo Management of New York and CIM Group Inc. of Los Angeles, to submit documents with the names of placement agents used, the fees paid to the agents and the terms of agreements between the agents and the fund managers.

But the current policy could use more teeth because CalPERS cannot assume that all its investment partners are trustworthy, Wilshire said.

"To the extent possible, strengthening the punishment will cause external managers to take the disclosure more seriously," Andrew Junkin, Wilshire's managing director, wrote to the pension fund's 13-member board.

Junkin suggested that the penalty for a wayward investment manager be a set percentage of the money CalPERS committed to that manager. Companies would also be required to refund all management fees paid to them by CalPERS over the life of the relationship and return all investment funds to CalPERS.

Simply withdrawing money from the wayward manager may not be a big enough deterrent, Junkin said, because "the external investment partner has no more at risk than CalPERS' own money."

The tougher monetary penalty "may seem onerous at first glance," but "we believe that it will force external parties to seriously undertake compliance efforts," Junkin wrote.

None of the proposed rules in California would ban the use of placement agents, something the SEC is pondering.

Such a ban would go too far, said Junkin, because it would "penalize smaller or emerging [private equity] firms who may not be able to afford dedicated marketing support."

George Diehr, chairman of the CalPERS board's Investment Committee and a business professor at Cal State San Marcos, said he needed to hear more testimony and debate before opting for the heightened penalties on investment funds.

Diehr said he supports increased disclosure, including the reporting of gifts and campaign contributions from placement agents to CalPERS board members.

Sweeping reforms are ahead, Diehr predicted. "I think we're moving in the direction of greater transparency."


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