Tuesday, June 10, 2014

NYC Pension Bans Placement Agents

NYC Pension Bans Placement Agents

New York City’s five pension plans have banned placement agents from representing any money manager in any asset class.[1]  The City Comptroller Scott Stringer claims that “Ending the involvement of intermediaries in pension funds' transactions will ensure that the integrity and independence of our investment decisions are beyond reproach and without conflict.”  While I’m no fan of placement agents and always tried to work around them when I was chief investment officer for North Carolina, an outright ban is good politics and bad policy.

Placement agents have been vilified after a series of improprieties at New York State Common Retirement, CalPERS, and New Mexico Permanent Fund.  A few money managers conspired with politically connected individuals to funnel payments through placement agents.  These episodes were outrageous examples of undue influence.  The SEC and criminal authorities charged the various individuals.  Moreover, pension plans adopted reporting and disclosure provisions so that fiduciaries and the public would be aware when any placement agent was involved in the marketing process in order to ferret out politically connected transactions.

The problem with New York City’s ban is twofold.  First, it provides a false sense that Comptroller Springer has done something to improve the integrity and independence of the investment process.  The run-of-the-mill placement agents are among the least influential characters in the investment process.  Money managers and consultants have more political clout in winning and retaining investment mandates.  Banning placement agents will do nothing to drive away the politically connected.  There are plenty of other ways for those with influence to get paid.

Second, the ban helps to entrench established money managers.  Established managers already have the means of gaining access to the investment process.  They employ seasoned marketers.  If anything, the ban will save them money because they’ll drop the belt and suspenders approach of using internal marketers and placement agents.  New, minority, and women-owned firms will be the losers under this ban.  Foreign managers, who often rely on placement agents to provide compliance services, will also be handicapped.  If a manager doesn’t have an “in” at New York City, she’ll no longer be able to employ a placement agent to help get a hearing.  In short, she’ll be shut out.

Some critics of placement agents claim that management fees may fall as the result of banishing placement agents.  Since the money manager pays the placement agent, critics suggest that the money manager may pass along the savings to their clients.  The critics are dreaming; they probably haven’t been money managers.

Comptroller Springer probably feels like he’s accomplished something on behalf of New York City’s pensions.  I doubt it.

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