Big Apple's new CIO Schloss is point man on easing placement agent ban

When New York City Comptroller John C. Liu wanted to revise rules governing the role of private equity placement-agent relationships with the city's five pension plans, the logical point man — a person with extensive private equity experience — was the new chief investment officer, Lawrence M. Schloss.

"John said, 'This is right up your alley. Why don't you take the lead on this?'" Mr. Schloss said in an interview.

Mr. Schloss joined Mr. Liu's staff Jan. 19 after having been chairman, chief executive and co-founder of private equity firm Diamond Castle. “I know the placement agent business as well as anyone,” Mr. Schloss said. “I have negotiated partnership agreements, so I know how this works.”

Mr. Liu unveiled proposals Feb. 18 to ease restrictions of placement agents doing business with city pension plans. He recommended that a ban on placement agents be replaced with rules that “allow legitimate placement agents who provide value-added services.”

Mr. Liu is the investment adviser and custodian of the five city pension plans, which had a total of $98 billion in assets as of Jan. 31. He was elected comptroller in November, replacing William C. Thompson Jr., who ran an unsuccessful campaign against Michael Bloomberg for New York mayor.

Several policy changes, some of which, such as a prohibition on gifts from fund managers to comptroller's office employees, took effect immediately. But proposals affecting placement agents and third-party marketers will require approval by the city's various pension boards, and Mr. Liu credited Mr. Schloss with “formulating these changes.”

In the interview, Mr. Schloss said the comptroller's legal staff had been looking into “the evolving rules on placement agents” soon after city and state pension boards suspended dealing with the agents. Last year, both New York City and New York state pension funds banned the use of placement agents after state Attorney General Andrew Cuomo issued a code of conduct as part of his investigation into alleged “pay-to-play” political influence on the state's pension fund investments.

Mr. Schloss said the key elements to New York City's proposed rules include making sure placement agents have a track record and that placement agents that failed to follow the city's guidelines can be dropped.

“We want to define a legitimate placement agent,” Mr. Schloss said.

The city's plans won't deal with placement agents or third-party marketers that are exclusively providing so-called finder or introduction services, according to a Feb. 18 news release. Also, placement agents and third-party marketers must prove they had raised $500 million in at least two of the past three years from entities other than the city's pension system.

Under the proposed rules, contracts with private equity funds would basically say, “If you mislead us, our commitment expires,” explained Mr. Schloss.

Agreements with investment managers will enable the city's pension system to “rescind an investment or commitment and recoup management and performance fees for failure to disclose pertinent contact or relationship information with the pension systems,” said the release.

“We also thought penalties should be severe,” said Mr. Schloss. “We put in the penalty so we could take action to protect ourselves and our pensioners,” he said,

Mr. Schloss based the penalty proposal on his own private-sector experience.

“Investors in private equity funds typically have a five-year commitment,” he said. “If you find out in the second year that you have been misled, the current partnership agreement does not allow you to terminate your unfunded commitment.”

To address this issue, Mr. Schloss said he prepared “side letters” to partnership agreements that “would give us the ability to terminate our unfunded agreement.”