NY Comptroller Unveils Reform Plan

New York City Comptroller John Liu on Feb. 18 unveiled his plan to reform the city’s pension fund system in the wake of a “pay-to-play” corruption probe of the state pension system.

Liu, a Democrat who took over as city comptroller in January, is proposing partially lifting a ban on placement agents, or middlemen that help investment firms win business from the city’s $98 billion pension fund, he said in a statement.

New York state and city banned the use of placement agents last year in response to a probe by New York State Attorney General Andrew Cuomo of the way that the agents allegedly exploited political ties to win business for their clients under former Democratic State Comptroller Alan Hevesi.

So far, five people have pleaded guilty to charges in the two-year probe that has sparked similar investigations in other states, including New Mexico and California. Cuomo said in early February that he has recovered $120 million in settlements with firms that wished to end their involvement in the investigation, a list that includes The Carlyle Group, one of the world’s biggest private equity managers.

Eleven firms have agreed to comply with a code of conduct drawn up by Cuomo to eliminate kickbacks and improve transparency in investing fund money. Two of these, Ares Management LLC and Freeman Spogli & Co., signed the code on Feb. 17.

Under Liu’s proposal, a ban will continue on placement agents that exclusively offer “finder” services for the pension fund, and the ban will cover all investments, including private equity, real estate, public equity and debt securities and real assets, said the statement.

However, Liu would lift the ban on placement agents who provide genuine advisory or other professional services, he said. These agents will be obliged to comply with strict new disclosure rules that are aimed at blocking any possible use of pay-to-play, he said.

In conjunction with the SEC scaling back its ban on placement agents, citing the work provided by these entities, New York City will now lead the way in implementing rigorous standards as it relates to placement agents and third party marketers.

John Liu

“In conjunction with the SEC scaling back its ban on placement agents, citing the work provided by these entities, New York City will now lead the way in implementing rigorous standards as it relates to placement agents and third party marketers,” Liu said.

The Securities & Exchange Commission said in early February that it is mulling exemptions to its ban on placement agents helping firms win business with government pensions funds, in an effort to ruffle fewer feathers in the broker-dealer community.

Specifically, the SEC is reviewing whether to allow registered broker-dealers to act as legitimate placement agents if the Financial Industry Regulatory Authority (FINRA), the broker-dealer watchdog, implements strict pay-to-play rules.

Liu’s proposal would require placement agents to register with the SEC or FINRA. They must demonstrate their fund-raising ability outside New York City by showing they raised $500 million in capital in two of the past three years from organizations other than the pension fund.

The comptroller’s proposal also includes a full ban on campaign contributions from any investment manager or agent doing business with or seeking to do business with the pension fund.

Fund managers will follow a strict policy on gift-giving and will be required to disclose all contacts with employees of the comptroller’s office or pension trustees, as well as the use of placement agents and any related fees.

Liu is a member of the board of trustees of four of the city’s five pensions funds, the New York City Employees’ Retirement System, Teachers’ Retirement System, New York City Police Pension Fund, New York City Fire Department Pension Fund and the Board of Education Retirement System. The public pensions provide benefits to about 700,000 people. —Ciara Linnane, Reuters