Survey: No to sole trustee

The New York State Common Retirement Fund, Albany, should scrap its sole trustee system, respondents to a Pensions & Investments' survey believe.

Some 91% agreed that New York Attorney General Andrew Cuomo's proposal to replace the sole trustee of the $116.5 billion pension fund with a 13-member board of trustees to help guard against “play-to-pay” activities by placement agents was a good idea. Nearly the same amount (90%) said they favor eliminating all sole trustee systems at state pension funds.

“This is not rocket science, it's common sense,” said Roger Levy, CEO of consultancy Cambridge Fiduciary Services LLC, Greenwich, Conn. “When dealing with a large state pension fund, there is a need for a depth and breadth of knowledge. A board also provides a system of checks and balances, with people watching over each other to prevent any corruption.”

Scott Griffiths, managing partner at Houston-based private equity firm Gryphon Venture Partners, agreed. “It's difficult to argue that one person overseeing a fund — no matter how smart he or she is — is better than several people. It's preferable to have a whole bench of experts to work with.”

Sixty-two percent of respondents agreed that banning the use of placement agents is a good idea for the New York state fund, while 60% said they supported banning placement agents for public pension plans in general.

Only three other states — Michigan, North Carolina and Connecticut — have sole trustees, rather than boards, according to Keith Brainard, research director at the National Association of State Retirement Administrators, who is based in Georgetown, Texas.

Under Mr. Cuomo's proposed legislation, the New York state comptroller, currently Thomas P. DiNapoli, would become chairman of the board of trustees. The proposal, called Taxpayers' Reform for Upholding Security and Transparency, also would ban investment firms from using placement agents, lobbyists or any other third-party intermediaries to interact with the state pension fund.

“For decades, the state pension fund has been weakened and corrupted by the sole trustee model,” Mr. Cuomo said last week in a news release announcing the proposed legislation. “The model has allowed pay-to-play to flourish in a system meant to protect the retirement accounts of thousands of hard-working public employees. To put it simply — the model doesn't work.”

Earlier this month, Saul M. Meyer, a founding partner of private equity manager Aldus Equity, pleaded guilty to New York state felony securities fraud charges in connection with pay-to-play allegations related to investments by the New York state fund. Mr. Meyer faces four years in prison.

Most survey respondents said they believed eliminating the sole trustee structure in favor of a board will help reduce corruption at the New York State Common Retirement Fund.

Some 65% said changing the structure would reduce pay-to-play schemes, while 77% said it would improve on the fund's transparency. Just 30% of respondents, however, thought the change would have a material effect on the fund's return on assets.

“I'm not sure having a sole trustee is ever a good idea, just from a transparency rule,” said Tina Anderson, president of the $9.5 million Winona Community Foundation, Winona, Minn. “It never should just be one person doing all the management of a fund.”

Not everyone, however, believed the sole trustee system is to blame for the corruption allegations at the state fund. R. Charles Tschampion, former managing director of General Motors Asset Management, New York, and a longtime member of the New York state fund's investment advisory committee, said Mr. Cuomo's proposal “seemed to vilify the sole trustee structure as the cause of corruption. My belief is that a board could work, but I've also seen the sole trustee system work fine as well.”

Having a board is not a panacea. Last week, the $201.5 billion California Public Employees' Retirement System, Sacramento — which is administered by a 13-member board — announced that it plans to review fees paid by its external managers to placement agents. The move follows revelations that some of its managers paid a total of more than $50 million in fees over five years to ARVCO Financial Ventures, a placement agent headed by former CalPERS board member Al Villalobos.

“My area of expertise is fiduciary responsibility, and I simply don't see the need for a placement agent,” said Mr. Levy of Cambridge Fiduciary Services.

And while the majority of respondents said they were in favor of banning placement agents for public pension funds, several experts contacted by P&I these third-party marketers play an important role in the investment management industry.

Richard Kos, president of investment advisory firm Kos Consultants, Madison, Conn., said for smaller, emerging investment managers — or managers that have spun out of a larger firm — placement agents help with marketing and raising capital.

“If the legislation was to ban all corrupt placement agents, I'd be all for it,” said Mr. Kos. “But banning all placement agents is a mistake. If the agents are legitimate investment professionals, and the relationship is properly managed and transparent, they add a lot of value.”

The survey, which was conducted Oct. 11-13, was based on the responses of 183 P&I readers.