In this more conscious era of disclosure and transparency, Bear Stearns Asset Management sought to make a disclosure about a third-party marketer to the $10.3 billion Illinois State Board of Investment, Chicago.
New York-based Bear Stearns wanted to make the disclosure so it could pay Richard Luft, the third-party marketer, a share of the fees from the account. The pension fund had hired Bear Stearns earlier this year to manage $395 million in active domestic large-cap value equities.
One problem: Mr. Luft didn't do any marketing to the board. He made no contact with board members, its staff or its consultant, Marquette Associates Inc., Chicago.
Another problem: Bear Stearns didn't follow the board's procedure. The request for proposals for the large-cap value mandate included a section that asks for disclosure concerning any third-party marketer and fee payments.
Bear Stearns didn't disclose any third-party marketer in its response to the RFP. Only after Bear Stearns won the mandate, and after the board and Bear Stearns signed and executed the contract, did Bear Stearns make the disclosure. It sought to amend the contract to pay Mr. Luft.
Bear Stearns, in making its request for the amendment, described its failure to previously disclose the third-party marketer as an oversight.
"We take them at their word that it's an honest mistake," said William Atwood, executive director of the board. "They say it was an oversight." Nevertheless, the board decided not to amend the contract, although it kept the firm as the manager for the assignment.
Without the board acceding to the amendment, Bear Stearns could not pay the marketer for the ISBI assignment, Mr. Atwood added.
Thomas R. Kiley, a Bear Stearns executive in Chicago who is the firm's contact with the board, declined to comment, deferring inquiries to the firm's media representatives, who didn't respond.
"Third-party marketers are a legitimate part of the business," Mr. Atwood said. "We have no problem with it." But he added, "managers have to disclose early in the marketing process their use of third-party marketers."
"The purpose is to let the client know the person contacting the fund is not with the firm (i.e., the money manager) and will not be running the money and is representing the firm as it wants to be represented," Mr. Atwood added.
Besides the money management firms, third-party marketers themselves are supposed to separately disclose to prospective clients their role with money managers, according to John Heine, Securities and Exchange Commission spokesman. Penalties for failure depend on the offense, he said.
A problem in the industry is that third-party marketers and money managers often don't disclose the relationships as required by the SEC, according to Edward A.H. Siedle, president, Center for Investment Management Investigations, which is part of Benchmark Financial Services Inc., Ocean Ridge, Fla.
"It is a violation of SEC rules" not to make third-party marketer disclosures to clients, Mr. Siedle said.
Bear Stearns would have paid the third-party marketer out of the fees its received from the ISBI mandate, although Bear Stearns would not have charged ISBI more, according to Mr. Atwood. Bear Stearns didn't inform the board how much it wanted to pay the marketer. The board pays Bear Stearns a fee of 22 basis points, the lowest of the board's active domestic equity managers, Mr. Atwood pointed out.
Mr. Luft, a former Illinois state senator, couldn't be reached for comment.