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Cuomo Wants Placement Agents Barred From NY Pension

New York elected officials, lobbyists and placement agents would be permanently barred from dealing with the giant $141 billion New York State Common Retirement Fund under new rules proposed by Gov. Andrew Cuomo.

The proposed rules would also prohibit the so-called revolving door, which lets pension fund officials immediately begin working for investment firms, and prevent investment firms from making improper gifts to pension officials. “The pension fund should be kept pure, and money belonging to taxpayers should not be the plaything of elected officials,” the freshman Democratic governor said.

The strengthening of rules in New York is the latest in a national trend toward tighter restrictions on those who seek to manage public pension money, both by federal agencies such as the Securities and Exchange Commission and at the state level (see table, below). The new rules follow a series of “pay-to-play” scandals in New York, California and New Mexico, where officials received money or gifts in exchange for allocating funds to particular money managers.

While attorney general in New York, Cuomo investigated how the process of selecting money managers for the New York Common Retirement Fund became corrupted.

New York CRF has just one trustee, the state comptroller. On April 15th, the former state comptroller, Alan Hevesi, was sentenced to serve as much as four years in jail for accepting luxury trips from a California venture capitalist who sought to manage some of the state’s pension money.

Cuomo’s investigation sparked similar probes around the United States and prompted a crackdown on placement agents, who were often able to exploit political allies to reap millions of dollars of fees from investment firms, including prominent private equity firms.

In California, which had its own pay to play scandal, lawmakers passed a law that forces placement agents to register as lobbyists if they wish to do business with the state’s two largest pension funds, the $228 billion California Public Employees’ Retirement System and the $150 billion California State Teachers’ Retirement System. In addition, the law bans contingency fees, the main way placement agents were paid for bringing in new investors. Some placement agents have complained that a ban on contingency fees eliminates all the incentives to secure commitments.

In New Mexico, which also had a pay-to-play scandal, the state passed more stringent requirements on placement agents seeking commitments from the New Mexico State Investment Council, although it recently softened an outright ban that was originally imposed in 2009. Under the revised rules, placement agents may not earn fees for procuring funds from the state, although they may earn fees for marketing to other limited partners (although such fees must be disclosed).

These rules merely augment stricter rules at the federal level, which apply to all placement agents nationally. The SEC mandates that placement agents must now register as broker-dealers and submit to oversight by the Financial Industry Regulatory Agency (FINRA), the industry’s self-funded watchdog. The deadline for placement agents to register as broker dealers is Sept. 13, 2011.

In addition, the SEC has restricted private equity managers, as well as placement agents, from contributing to the political campaigns of officals who have influence in determining pension fund allocations. If political donations of $350 or more are made to such officials, the donors are prohibited from soliciting or managing public pension money for two years from the time of the donation.