New Jersey Bill, Now on Christie’s Desk, Would Expand Pay-to-Play Rules for Pension Investments

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With all the drama surrounding New Jersey Gov. Chris Christie’s latest round of pension changes, one big pension-related development has been overlooked: on Monday, state lawmakers approved a bill that would expand pay-to-play rules as they relate to pension investments.

The bill, which would increase transparency around fees paid to private investment managers, was sent to Christie’s desk on Monday.

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[The bill] would expand restrictions on investments of state pension funds with outside money managers who donate to national political committees.

The legislation also would require the state Treasury Department to regularly publish reports disclosing fees paid to private managers who invest state pension funds.

Pay-to-play rules already prohibit the Division of Investment from awarding contracts to firms or investment managers who have donated to New Jersey political parties or campaigns in the preceding two years.

A 2010 federal law imposed a similar ban. Under that law, the Securities and Exchange Commission in June ordered Wayne-based TL Ventures Inc. to repay $250,000 in pension fees collected from Philadelphia and Pennsylvania after learning the firm’s founder had donated to Mayor Nutter and then-Gov. Tom Corbett.

But managers can still donate to national committees such as the Republican Governors Association or Democratic National Committee, which can spend money on and influence state politics. Legislation passed Monday by the Assembly on a 53-15 vote would close that loophole by extending the State Investment Council’s pay-to-play regulations to cover investors’ donations to national political committees.

The bill passed the Senate in October on a 25-8 vote, with seven abstentions.

Lawmakers believe the SEC pay-to-play rules are too lenient.

State pension officials, however, say the rules could harm the fund’s alternative investment portfolio; the fee disclosure requirement runs the risk of dissuading some investment managers from doing business with the fund.

Alternatives account for 28 percent of New Jersey’s pension investments.


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CalSTRS Updates Corporate Governance Principles; Supports Board Nomination Power For Prominent Shareholders

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CalSTRS has updated its set of corporate governance principles to include support for proxy access – the right of a shareholder to nominate corporate board members.

The pension fund supports giving proxy access to shareholders that own at least three percent of a company’s shares for at least three years.

More from a release:

The updated principles, for the first time, specify CalSTRS support of proposals giving a group of shareholders, owning three percent of a company’s shares for at least three years, access to board nominations and to the company’s proxy statement. The CalSTRS Corporate Governance Principles lay out the basis for how the fund carries out its corporate governance initiatives. The Investment Committee adopted the updates at its February 6 meeting.

“CalSTRS has steadfastly supported the 2011 rule, proposed by the Securities and Exchange Commission, that allows shareholder groups access to board director nominations with what we call a three-and-three ownership structure,” said CalSTRS Director of Corporate Governance Anne Sheehan. “We firmly believe this is the most appropriate threshold for proxy access.”


Without a universal rule from regulators, CalSTRS and like-minded institutional investors have waged proxy access efforts, company by company.

“CalSTRS will, in the coming proxy season, support any shareholder proposal that includes a three-and-three group structure,” said Ms. Sheehan. “Our intention is to oppose any proxy access proposal with a structure more onerous than three-and-three ownership by a group of shareholders.”


CalSTRS Corporate Governance unit will also urge fellow shareholders to withhold their votes from company directors who either exclude a three-and-three shareholder proposal from the proxy statement, or who deliberately preempt such a shareholder proposal with one of their own that establishes more excessive thresholds.

Read the full release here.

Read the pension fund’s Corporate Governance Principles here.

Pensions Criticize KKR Over Fee Refund Spurred by SEC Exam


Some pension funds are criticizing KKR’s communication with investors regarding “erroneously” charged fees; the firm refunded those fees last year, but waited a year tell investors that the refund was the result of an SEC exam.

From the Wall Street Journal:

KKR & Co. is getting unusually pointed criticism from some of its public-pension fund investors, after they discovered that KKR didn’t tell them for almost a year that its decision to refund some money was prompted by a regulatory exam.

The contretemps, rare in the tightly-controlled world of private equity, stems from a Securities and Exchange Commission exam of the industry giant in late 2013. Regulators found that the firm had erroneously charged some expenses and didn’t fully disclose it was collecting certain fees, according to a document obtained from one of KKR’s largest investors, the Washington State Investment Board.

As a result of the SEC findings, the private-equity giant in early 2014 refunded money to investors in some of its buyout funds.

As a result of the SEC findings, the private-equity giant in early 2014 refunded money to investors in some of its buyout funds.

Several KKR investors said they were informed of a fee credit but didn’t learn the reason until after The Wall Street Journal last month broke the news about the SEC exam findings and the refunds.

Read the full Journal article here.


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Pension Funds, Other Shareholders Pressure Oracle CEO Over High Pay With Letter to SEC


The CEO of the Oracle software company, Larry Ellison, is one of the highest paid executives in the United States ($67.3 million in 2014) despite numerous calls by shareholders to reduce his compensation package.

Shareholders are fed up. They, led by two of Europe’s largest pension funds, are on Monday filing a letter with the Securities and Exchange Commission (SEC) regarding their concerns with the Oracle’s corporate governance.

From the Financial Times:

Larry Ellison, one of the highest paid executives in the US and co-founder of the Oracle software company, has come under renewed pressure from shareholders over his “excessive” remuneration and “unprecedented” failure to engage with investors.

The Netherlands’ second-largest asset manager and one of the UK’s largest pension funds, will on Monday file a letter to Oracle with the Securities and Exchange Commission, outlining their corporate governance concerns.

More than half of the group’s shareholders have voted against the executive compensation scheme in each of the past three years.


PGGM of the Netherlands and Railpen, the UK’s Railway Pension Trustee Company, say the company’s “lack of communication” has heightened their concern over pay, boardroom accountability and the independence of non-executive directors.

It is rare for such groups to go public with criticism of a company they invest in, underlining their anger and frustration after four years of trying to engage with the board and company executives.

In their letter to the company, they say: “As global investors, we believe that governance risk is particularly heightened in companies in which the founder serves as CEO or otherwise remains in a leadership role with the company.”

The pension funds aren’t a particularly large shareholder in Oracle – combined they only own about a 0.16 stake in the company, according to the Financial Times.


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Private Equity Firms May Inflate Returns, Claims Research

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Private equity firms now manage hundreds of billions of dollars of public pension money, in part because the asset class advertises its ability to deliver strong returns without the volatility of the stock market.

Due to the illiquid nature of private equity, the industry’s return figures are often estimates – a valuation of what the firm’s investment would have sold for, had it been sold.

But new research from George Washington University suggests that private equity firms inflate the on-paper value of their investments.

More details from the International Business Times, which received an advanced look at the soon-to-be-released research:

Now comes new data from [investment banker Jeffrey] Hooke and George Washington University’s Ted Barnhill and Binzi Shu that purports to prove mathematically that the private equity industry’s books are misleading.

The researchers essentially created a portfolio of publicly traded companies that they say closely resembles the kinds of privately owned companies that private equity investors buy. The researchers then weighted their public companies’ returns to reflect the same level of debt that private equity firms typically impose on their portfolio companies.

The researchers argue that their index of public companies should show roughly the same returns as the private equity industry. “All things being equal, an auto parts company that is publicly traded will have the same value as an identical auto parts company that is privately owned,” Hooke, who is an executive at Focus Investment Banking, said.

Instead, though, the private equity industry’s stated returns were noticeably less volatile than the publicly traded companies’ returns. The researchers assert that the private equity industry uses its latitude to self-value its own portfolios in order to make their returns look “smoother” than they actually are. “Investors may have been unfairly induced into placing monies into these investment vehicles,” they conclude.

The CalPERS website says “there are no generally accepted standards, practices or policies for reporting private equity valuations.”

The SEC has taken notice, as well:

At the Securities and Exchange Commission, a top enforcement official in 2013 declared that the private equity companies that the agency had been scrutinizing were “exaggerat(ing)” the reported values of their portfolios. That declaration followed the release of studies by academic researchers finding evidence that valuations were being manipulated. The SEC subsequently reported that it found “violations of law or material weaknesses in controls” at more than half of the private equity firms that the agency investigated.

Read the full IBT report here.


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Massachusetts Pension Waited a Year to Disclose Hedge Fund Troubles


For more than a year, the Massachusetts Bay Transportation Authority (MBTA) Retirement Fund didn’t publicly disclose the problems plaguing a hedge fund that held MBTA money.

Those problems included civil fraud charges filed against the firm, Weston Capital Asset Management, which is now shutting down.

From the Boston Globe:

In its annual report, released Dec. 10, the $1.6 billion pension fund for transit workers said that it removed its money from Weston Capital Asset Management in September 2013. Nine months later, Weston Capital unraveled as federal securities regulators filed civil fraud charges against the firm and its top executives for allegedly draining $17 million from one of its hedge funds to other accounts and to themselves.


With Weston Capital, the T fund appears to have escaped unharmed. But investment specialists said changes in leadership and ownership at the firm at the time the agency was investing should have raised suspicions.

For instance, the firm’s chief investment officer left just months before the MBTA pension committed money to it. And five months after the T invested, Weston Capital’s founder and chief executive, Albert Hallac, agreed to sell the firm to a financially troubled company — a deal that would ultimately fall apart.

“Turnover is never good in that kind of a situation. You’re [investing] based on their record and their proven results,’’ said Timothy Vaill, the former chief executive of Boston Private Financial Holdings Inc., a banking and investment firm. “If you’re going to be hiring third-party managers, you’ve got to deeply dive into their world.”

A spokesman for the pension fund, Steve Crawford, said in an e-mailed statement that officials did not learn of the Securities and Exchange Commission’s investigation of Weston Capital until this year. But sometime in 2013, he said, the pension fund “initiated discussions with other” investors in the same hedge fund to withdraw their money.

It’s not the first time the MBTA fund has invested money with a troubled hedge fund. From the Boston Globe:

The T’s pension fund said it did not lose money on its 2009 Weston Capital investment. But this is the second time in a year the secretive MBTA retirement fund has belatedly acknowledged problems with its investments.

Last December, the Globe reported that the pension fund had lost $25 million on a hedge fund run by Fletcher Asset Management in New York — an investment recommended by the T fund’s former executive director, Karl White.

In that case, too, the pension fund did not keep close tabs on a risky investment. White had persuaded the trustees in 2007 to commit $25 million to Fletcher, his new employer. White left Fletcher the next year without telling the T. By 2011, the pension fund could not get its money out of Fletcher, which filed for bankruptcy protection in 2012. It was another year before the pension fund disclosed the loss to the public.

The MBTA Retirement Fund manages $1.6 billion in assets.


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Kentucky Chamber of Commerce Calls For Audit of State Pension System

Kentucky flag

The Kentucky Chamber of Commerce is pushing for an audit of the Kentucky Retirement Systems – specifically, a review of its investment performance and policies.

Reported by the Courier-Journal:

Chamber President and CEO Dave Adkisson announced Thursday that the group wants a review of the investment performance and use of outside investment managers — among other issues — at Kentucky Retirement Systems, which has amassed more than $17 billion in unfunded liabilities.

While the state has made progress in addressing pensions, “serious problems persist that pose a significant threat to the state’s financial future,” Adkisson said. “The business community is concerned about the overall financial condition of our state.”

[State Auditor Adam] Edelen said in a statement Thursday that he shares the chamber’s concerns, but he also noted that at least three major reviews of KRS have occurred over the past few years.


KRS Executive Director Bill Thielen said officials will fully cooperate if Edelen decides to perform an audit. But also he pointed out that the system has been subject to continuous examinations, including audits, legislative reviews and a two-year investigation of investment managers by the federal Securities and Exchange Commission.

“None of those have turned up anything that is out-of-sorts,” he said. “A lot of the questions or concerns that the chamber seemingly raised have been answered numerous times.”

Thielen added that KRS doesn’t disclose the individual fees it pays managers because confidentiality helps officials negotiate lower rates.

State Auditor Adam Edelen said Thursday he hadn’t made a decision on whether to begin an audit of KRS. He said in a press release:

“For this proposed exam to add value and bring about real fixes to the system, it will require broad, bipartisan support and additional resources for our office to conduct the highly technical work…We have begun discussing the matter with stakeholders. No final decision has been made at this time.”

The founder of one retiree advocate group laid blame for the system’s underfunding on the state’s contributions, not investment policy, and was skeptical that the audit would yield fruitful results. Quoted in the Courier-Journal:

Jim Carroll, co-founder Kentucky Government Retirees, a pension watchdog group organized on Facebook, called the proposed audit a “red-herring” and argued that the financial problems in KERS non-hazardous are the result of year of employer underfunding.

He said KRS investments don’t yield the returns of some other systems because the low funding levels force them to invest defensively.

“I’m skeptical that anything useful would come out of another audit,” he said. “Not to say that there shouldn’t be more transparency, but that’s a separate issue.”

KRS’ largest sub-plan – KERS non-hazardous – is 21 percent funded.