pay to play violations

Timothy Geithner To Speak at New Jersey Pension Meeting

Ex-U.S. Secretary of Treasury Timothy Geithner will speak at Thursday’s meeting of the New Jersey State Investment Council, the entity that oversees the state’s pension investments.

From NJ.com:

Geithner is president of private equity firm Warburg Pincus, which counts New Jersey as a client.

“It’s an important relationship for them, and it’s certainly an important relationship for us,” said Tom Byrne, vice chairman of the investment council.

Watchdogs are hoping the meeting will also mark the release of a long-awaited audit into the potential pay-to-play violations of Charlie Baker.

From NJ.com:

Seven months before the state decided to invest $15 million from its pension fund with the firm General Catalyst, which listed Baker as an “entrepreneur in residence,” Baker had donated $10,000 to the New Jersey Republican Senate Committee. The state has since sold its investment with the firm.

The results of the audit have been delayed for months. The investment council announced the audit in May, saying it was expected to take several weeks.

The meeting agenda can be read here.

How Pension Trustees Can Ensure Compliance With SEC Pay-to-Play Rules

Raymond M. Sarola, an attorney and former trustee of New York City’s pension systems, has penned a column explaining how trustees can ensure they don’t violate the SEC’s pay-to-play rules, and how they can handle a violation if one does occurs.

The column, published in Pensions & Investments, begins with an overview of the rule in question:

The rule — Securities and Exchange Commission Rule 206(4)-5…prohibits investment advisers from receiving compensation for advisory services to a government entity for two years after the advisory firm or any covered employee makes a political contribution to a public official or candidate who is or would be in a position to influence the award of investment advisory business by public retirement funds. The rule allows covered employees to make contributions up to $350 per official or candidate per election in which they can vote, or $150 for other elections. Contributions by investment firms in any amount would trigger a violation of the rule.

Sarola then lays out options for how trustees can ensure compliance, and what steps to take if a violation has occurred:

Public retirement plan executives should become familiar with the options available if a violation of the SEC rule occurs.

The rule provides for advisory firms that violated the rule to give the public plan sufficient time to redeem or transfer its assets on an uncompensated basis. This provision is particularly important with alternative investment vehicles that invest in illiquid assets and typically restrict the ability of limited partners to redeem committed capital.

Public retirement plans should develop and implement written policies that confirm compliance with this rule by investment advisers. These policies may include a requirement that advisers make a certification of compliance before an initial investment is made, with an ongoing obligation to recertify throughout the life of the investment.

Public plans might also wish to include in their policies a ban on future investment transactions with investment managers who fail to comply with the procedural or substantive requirements of the rule. And public plans should consider including in investment advisory contracts or side letters provisions that address remedial actions if a violation of the rule occurs. For instance, a contract might specify that if a violation occurs, the adviser will continue to provide services under the contract without compensation for up to two years while the pension fund seeks efficient means to transfer its assets. Other remedial measures might require the investment manager to repay the amount paid or promised to a placement agent involved in winning the business.

The full column can be read here.

Robert Grady Steps Down From New Jersey Pension Investment Board

Robert Grady has resigned from his position as chairman of the New Jersey State Investment Council. He announced his decision during the council’s meeting on Wednesday.

The Council formulates investment polices that govern New Jersey’s Division of Investment, which manages the state’s pension assets.

The rest of the board members collectively commented on Grady’s tenure with the Council, according to ai-cio.com:

“The members of the council acknowledge and appreciate Chairman Grady’s unique blend of outstanding investment and communication skills, which will be deeply missed,” the resolution stated. “We are grateful for his leadership, will miss his warmth and wisdom and good humor, and thank him for his selfless and exemplary service.”

Grady’s tenure was marked by the outperformance of benchmarks – but also controversy. From Chief Investment Officer:

For the four years ending May 30, 2014, the fund has outperformed its policy benchmark by an annualized rate of 1%, generating an additional $3 billion in alpha. New Jersey’s pension returned 17% in the 2014 fiscal year—in line with the median large public plan, according to Wilshire Associates—while taking less risk than 85% of its peers.

[…]

Earlier this year, Grady was the target of criticism from a major New Jersey union, which accused the fund of pay-to-play violations during his and prior chairman’s tenures. The state ethics commission has taken no action on the union’s allegations, which it addressed to the department.

More on the controversy surrounding Grady, from the International Business Times:

In recent months, campaign finance documents revealed that under Grady’s leadership, the state has awarded lucrative pension management contracts to hedge fund, private equity, venture capital and other so-called “alternative investment” firms whose executives made campaign contributions to Christie’s campaign, his state party, the Christie-led Republican Governors Association and the Republican National Committee. The donations included a $10,000 contribution from Massachusetts Republican Gov.-elect Charlie Baker to the New Jersey Republican State Committee just months before Baker’s firm was given a New Jersey pension investment.

The donations were made despite New Jersey and federal rules aiming to restrict contributions to state officials like Christie who oversee pension investment decisions. Documents uncovered by International Business Times showed that Grady, a former Carlyle Group executive, was in regular communication with Christie’s campaign officials at the time the campaign was raising money and he was overseeing the state’s pension investments. Grady pushed New Jersey to move pension money into an investment in which his private financial firm was also investing, documents revealed. New Jersey also invested in Carlyle Group funds during Grady’s tenure, though he recused himself from final votes on those investments.

Grady has categorically denied the pay-to-play allegations, saying that his position doesn’t give him the power to give pension money to investment firms.

It’s likely that Grady will become a bigger part of Chris Christie’s potential campaign for the presidency.

Photo by Opine Needles Blog via Wikimedia Commons

Chicago Lawmakers Request SEC Investigation Into Donations to Emanuel From Investment Firms With City Pension Contracts

Chicago aldermen announced yesterday they were requesting an SEC investigation into donations received by city Mayor Rahm Emanuel from investment firms that manage the city’s pension money.

From the International Business Times:

The aldermen scheduled a City Hall news conference Tuesday to announce the action.

In a letter to Andrew Ceresney, who directs the SEC’s division of enforcement, Aldermen Bob Fioretti, Scott Waguespack and John Arena write the donations constitute “pay-to-play actions” that “have violated the public trust and are a breach of the fiduciary duty” by the Emanuel administration officials who oversee the city pension systems. They say “Chicago has a deep history of pay-to-play” and that their “goal is to end these tactics and protect the citizens of Chicago and employees’ investments.”

In a speech last week, Ceresney vowed increased enforcement of the SEC’s pay-to-play rule, which was passed in 2011 after an influence-peddling scandal at the New York State pension system.

The SEC and Emanuel’s office did not respond to IBTimes’ request for comment. In a statement about the donations emailed to Bloomberg News, Emanuel’s campaign manager asserted the donations comply with “the higher standards the mayor voluntarily imposes on himself per his executive order” banning contributions from city contractors.

[…]

On top of the request for an SEC investigation, the aldermen are asking for the city’s inspector general to conduct a review of whether the donations violate Emanuel’s own executive order barring campaign donations from city contractors and subcontractors.

They are also asking Emanuel to release a full list of all the financial firms managing the city’s $23 billion pension system — including the firms in pooled investments known as a “fund-of-funds.” IBTimes obtained documents showing executives at a firm managing Chicago pension money through two Chicago pension systems’ fund-of-funds had made significant campaign contributions to Emanuel.

A copy of the letter sent to the SEC can be read below:

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Photo by Pete Souza