Illinois Gov. Rod Blagojevich proposed prohibiting money managers from making contingency fee payments to placement agents to help gain access to state pension investment boards, a ban that is part of sweeping ethical, disclosure and other reforms to the investment practices of the five state retirement systems.
The proposed reforms, announced today, are designed to address "concerns raised in reports involving a placement agent between a money management firm and financial advisers" to the Illinois Teachers Retirement System board, "and then made $4.5 million in fees," according to a statement from Mr. Blagojevich's office.
Mr. Blagojevich also seek to eliminate conflicts of interest by investment advisers "by prohibiting state pension systems from hiring any adviser (or subsidiary or affiliate) that receives revenue from sources other than consulting fees or engages in any business relationship with firms that manage state pension funds," according to the statement.
Another proposal would toughen penalties for fraud and ethical violations, also addressing recent improprieties associated with the pension systems.
The governor also proposed increased disclosure requirements for trustees, managers and others, "requiring online posting of such disclosures" and requiring the state auditor general to "perform frequent and comprehensive audits of the systems." Enhanced disclosure would include requiring each trustee to file a statement of economic interest.
"This proposal would address the perception that investment firms must use placement agents to get access to TRS," the statement noted.
On Aug. 12, the board of $34 billion teachers' fund, Springfield, approved in principle banning payment of placement, marketing or finder's fees across all asset classes, among several other changes related to fiduciary responsibility for its investment policy.
John Day, assistant to Jon Bauman, executive director of the Illinois teachers' fund, said, "Several things in the governor's proposal are very similar to the principles adopted by our board."
"We will be very supportive of some things in the proposals, and other things will require some study," Mr. Day said. "There might be areas that bear study for unintended consequences."
"It was inevitable the governor would have a reform proposal to maintain public confidence in the system," said William Atwood, executive director of the $10.8 billion Illinois State Board of Investment, Chicago.
The Illinois State Board already proposed changes to its policy, including requiring third-party marketing firms to be registered investment advisers, disclosing the relationship of the marketer to managers, disclosing any communication with trustees and see that managers are made aware of such policies, said Mr. Atwood. The proposals wouldn't ban contingency fees, he said.
ISBI will consider its proposals at its Sept. 7 meeting, he said.
Becky Carroll, spokeswoman for Mr. Blagojevich, said the governor would seek legislative approval when the General Assembly returns to session in October.
