The pension kick-back scandal that has raged through the US since March has resulted in many public pensions enacting tougher rules governing how private investment firms solicit their money.
The furore reached such a pitch that even the federal government got involved, with the US Securities and Exchange Commission (SEC) proposing a new rule barring investment management firms from using placement agents to solicit commitments from public pensions.
This is unfortunate, as legitimate placement agents serve an important role in helping investment firms – especially small and new firms – to meet potential investors.
People in the industry are mostly opposed to the placement agent ban, with one apparent exception being the biggest pension in the US, the California Public Employees' Retirement System (CalPERS), which has taken a “neutral” stance on the issue.
The main purpose of the SEC rule is to ban investment firms and their executives from soliciting money from pensions if they've contributed political campaign money to officials with decision-making power over pension investments.
Regulators are right to pursue this issue. A recent example perfectly illustrates why regulators should make every effort to kick politics out of the fundraising process.
Last month it came to light that a political watchdog group in California is investigating the campaign account of a board member with CalPERS, Charles Valdes. Valdes received $38,600 in campaign donations in 2005, the year he was re-elected to the CalPERS board. He has been a board member of the pension for 25 years.
The group running the investigation, the Fair Political Practices Commission (FPPC), would not disclose the focus of the probe. The investigation began after the FPPC ran a mandatory audit on Valdes' campaign account.
A large chunk of campaign contributions came from associates of former CalPERS board member Alfred Villalobos, who runs a Nevada-based placement agency called ARVCO Capital Research. The Villalobos-tied campaign contributions were made in 2005.
After Villalobos' associates contributed to Valdes' campaign, ARVCO went on to score more than $4 billion worth of commitments from the pension. Did the political support lead to the pension approving investments with clients of the placement agent? That much is unclear. Perhaps Valdes and the rest of the CalPERS board simply liked and respected the private equity firms Villalobos represented.
Apollo Management appears to have benefitted most from its relationship with ARVCO, collecting more than $3 billion from CalPERS for various funds using Villalobos' company as placement agent.
Again, Valdes may well have believed and trusted in Apollo and felt it was the right manager for the capital. He may have sincerely believed ARVCO did a superb job of vetting potential investment managers for the pension. He has 25 years of experience, after all.
Villalobos, ARVCO and Apollo are not accused of any wrongdoing. The investigation into Valdes' 2005 campaign account is ongoing.
But even in the absence of actual guilt, does the situation smell right? Is it not appropriate to raise an eyebrow when a former insider of a governmental agency lobbies to the same agency on behalf of clients? This may happen in Washington, DC all too often – former military officials and heads of federal agencies often move seamlessly into lobbying roles on behalf of private industry. They know who to talk to; they have access.
But in the case of CalPERS, and any other public pension, we're talking about public officials acting as custodians of money committed by average workers investing in their futures.
If the process of getting access to that money is no harder than simply engaging a fund recommended by a guy who was once “one of us”, does that not also imply some easing of the due diligence required to ensure investment in the best quality firms possible? The system appears to have been open to that kind of irresponsibility.
Once the new SEC rules move from draft form to legislation, political manipulation – perceived and real – should disappear.
There should never be – and should never have been – a grey area as to whether a political contribution to a member of a pension board might get you subsequent access to pension money.