Cowell limits placement agent use

Lengthy review prompts wholesale reforms at North Carolina pension fund

The $83.1 billion North Carolina Retirement Systems, after three years of study, has banned eight money managers it works with from using placement agents, negotiated lower fees with others and is moving toward having placement agents register as lobbyists.

The system is changing its relationship with placement agents — as have other states in recent years. Revisiting the ethics involved in using agents “is increasingly a trend that we see” with other public pension plans, said attorney Suzanne Dugan, an ethics adviser to the North Carolina fund.

Ms. Dugan, who leads the ethics and fiduciary counseling practice at Cohen Milstein Sellers & Toll PLLC in Washington, said public fund administrators and boards “are being proactive instead of responding to problems,” which is particularly important for smaller funds with limited resources.

“They really have to get out in front,” she said.

On Dec. 16, North Carolina Treasurer Janet Cowell, sole trustee of the pension fund, announced the conclusion of a multiyear review of placement practices and the beginning of wholesale reforms. The review, conducted by the North Carolina Department of Justice and outside counsel Kellogg, Huber, Hansen, Todd, Evans & Figel PLLC, a Washington law firm, led to policy changes for investment managers working with agents, including bans on gifts or charitable donations made on behalf of NCRS employees and bans on political contributions to the treasurer or candidates for the office.

Also as a result of the review, use of placement agents was banned for money managers Angelo, Gordon & Co.; Apollo Global Management; Horsley Bridge Partners; Robeco Institutional Asset Management; and StarVest Partners. The firms, which all now manage assets for North Carolina, either used placement agents or had relationships with agents that helped obtain business with North Carolina. The firms, which all cooperated voluntarily in the review, were singled out for a variety of lapses, including not disclosing personal relationships and not disclosing gifts or political and charitable contributions.

More changes

North Carolina officials said CB Richard Ellis Global Investors, Los Angeles, declined to reach an agreement with the fund, and no longer will be eligible to manage assets for the system once its current contract ends. But a CBRE statement said company officials advised Ms. Cowell's office in November that the firm planned to adopt the policy changes, and implemented them before the report was issued.

In addition to the policy changes, Avista Capital Holdings agreed to replace or discount fees totaling $4.2 million, while EARNEST Partners agreed to rebate $660,000 in fees and Longview Partners agreed to $10 million in refunds.

Changing the sole trustee system in North Carolina is one of many steps Ms. Cowell is considering, along with more enforcement measures. The likely next steps, to come after consulting with the General Assembly next spring, include setting up a fiduciary investment committee and having placement agents register as lobbyists.

Ms. Cowell said she has learned from other states on the use of placement agents, with the notable examples of pay-to-play scandals involving public retirement systems in New York, New Mexico and California, and is now hoping to share North Carolina's experience with others. Instead of waiting for problems to develop, “we are going back to the basics, making sure the systems are in place and making sure there is a proper culture,” she said. “We hope to be at the forefront.”

Preventive medicine is a good idea, agreed Luke Bierman, who served as general counsel of the $160.7 billion New York State Common Retirement Fund, Albany, as officials there sought to recover from placement agent scandals that started in 2006. “It's a lot easier to put things in place when you're thinking about them rather than scrambling and answering subpoenas,” said Mr. Bierman, who is now associate dean for experiential education and a law professor at Northeastern University in Boston. He is also of counsel to Cohen Milstein.

For placement agent ethics, “the real methodology is to make sure there are redundant systems. There have to be multiple checks and balances,” said Mr. Bierman. After New York's scandal, “we had multiple points of contact for review, and we created a culture of being sensitive to those. This is all about trust.”

He and Ms. Dugan, who was the New York system's special counsel for ethics during that crisis, are active in the National Association of Public Pension Attorneys, whose members are looking for opportunities to get ahead of problems and to get best practices in place. Lawyers who advise public funds also are getting more calls for ethics training for staff and board members.

“I think there are very cutting-edge reforms,” said Ms. Dugan. “It's really about putting into place internal controls and policies and procedures that will help to build a culture. From my perspective, you really want to change the culture. That takes strong leadership.”

Placement agents are also paying more attention, said Donna DiMaria, chairwoman and treasurer of the Third Party Marketers Association in Princeton Junction, N.J.

“It's unfortunate that we get lumped in with a few bad actors. I think for the most part the industry has come a long way,” she said. The association is spending more time educating pension funds and money managers on the proper use of placement agents, and disseminating best practices for agents, such as protocols for disclosing personal relationships, political contributions and financial interests, codes of ethics and conduct, and sanctions for false statements.

With so many plans having so many different policies, her advice is “be sure to check every policy.” Ms. DiMaria said she would like to see investment managers pay closer attention, too. “At the end of the day, it's their responsibility. You have to set expectations up front.”

Sole trustee a "red herring'

While both the North Carolina and New York pension funds have sole trustees, Mr. Bierman calls that similarity “a bit of a red herring. There are plenty of examples of problems with a board. One could argue there are a lot more opportunities. With a sole trustee, you know where the buck stops.”

Placement agents were an issue during Ms. Cowell's first campaign for state treasurer in 2008, when a growing financial crisis and the New York pay-to-play headlines were lively topics. “It was an interesting time to be running,” said Ms. Cowell. “When I took office, the first piece of advice I got was, "audit, audit, audit.' It definitely highlighted this issue.”

Since then, she instituted several rounds of reforms related to placement practices and fees. “We have subjected ourselves to much scrutiny,” said Ms. Cowell, who is already seeing more disclosure from money managers about working with placement agents and from staff about such transactions, which represent roughly half of investments.

“If people want to do mischief, people will figure out ways to do it,” said Mr. Bierman. “That's why it requires attention.” n

This article originally appeared in the December 23, 2013 print issue as, "Cowell limits placement agent use".