Netherlands Regulator: Some Pension Funds Not Doing Enough to Manage Conflicts of Interest

Netherlands

The Nederlandsche Bank (DNB), the entity that regulates the Netherlands’ pension funds, is concerned that some pension funds have not implemented adequate policies protecting against conflicts of interest.

From Investments and Pensions Europe:

Most pension funds’ boards pay insufficient attention to potential conflicts of interest of policy makers, pensions regulator De Nederlandsche Bank (DNB) has suggested.

It indicated it was not satisfied with the outcome of a sector-wide survey, during which it checked whether schemes had conducted a risk analysis or had formulated a policy on conflicts of interest.

DNB concluded that a large number of pension funds had not conducted an analysis, and had at best a policy that was not based on such a risk assessment.

Additionally, it found that many schemes did not declare and register the main functions and jobs on the site of board members and other decision makers, and did not have a view on their private interests either.

However, almost all pension funds had rules in place for how to deal with gifts, according to DNB.

In its opinion, merely a handful of pension funds fully managed the risks posed by conflicts of interest.

The watchdog commented that conflicts of interest could lead to “impure decision-making, which could harm pension funds”. Therefore, trustees must actively fight conflicts of interest, it said.

DNB added that, during discussions with trustees, it had noted that the subject is charged, and that the sector needed clear examples as to what constituted a conflict of interest.

DNB now says it will come up with a list of “good practices” for combating conflicts of interest.

Private Equity Firm Allows Investors to Hire Advisor to Monitor Governance, Review Financial Records

face

A New York Times report over the weekend posed the question: is private equity becoming less private?

One private equity firm, Freeman Spogli & Company, recently revealed that it allowed investors in one of its funds to hire an outside adviser to “monitor the fund’s practices”.

Investors in the fund include several of the country’s largest pension funds, including the New York State Common Retirement Fund.

From the New York Times:

Is private equity about to get a little less private?

Perhaps so, judging by the decision of a venerable private equity firm to allow investors in one of its funds to hire an independent adviser to monitor the fund’s practices. Beyond reviewing the books and financial records at the fund, the outside adviser would also be permitted to scrutinize the fund’s governance practices for conflicts of interest, the firm said.

This shift in practice, which has not been previously reported, was disclosed to investors in June by Freeman Spogli & Company, a $4 billion private equity firm created more than 30 years ago, in a letter laced with legal jargon that obscured the import of the decision.

The new policy applied to the firm’s newest fund: FS Equity Partners VII, which opened for investment this year and has closed with $1.3 billion in committed funds. Investors in that fund include pension funds and public investments, such as the Kansas Public Employees Retirement System, the New Mexico State Investment Council and the New York State Common Retirement Fund.

[…]

Allowing the appointment of a monitor is no small matter. Giving an outsider routine access to internal fund operations is practically unknown in the $3.5 trillion private equity industry, where powerful firms operate in near secrecy and hold so much sway that many investors say they feel fortunate to be allowed to put money into the funds. The independent adviser will report to the fund’s investors.

Karl Olson is a partner at Ram, Olson, Cereghino & Kopczynski who has sued the California Public Employees’ Retirement System, known as Calpers, to force it to disclose fees paid to hedge fund, venture capital and private equity managers. He said he had never seen a provision allowing an independent monitor at a private equity fund.

“It does seem like a step in the right direction because too often the limited partners are unduly passive,” he said, referring to investors. “They should feel they are in the driver’s seat and that they have an obligation to drive a hard bargain with the funds.”Phone calls seeking comment at both the New York and Los Angeles offices of Freeman Spogli were not returned.

The NY Times report speculates that the firm may have allowed the hiring of the independent adviser after the SEC began asking questions about “several of the firm’s practices”.

UK Environmental Regulator Accused of “Clear Conflict of Interest” In Pension Fund Investments

big ben

A report by the Independent claims that the pension portfolio of the UK’s Environment Agency – the government body charged with protection of the environment in England – contains numerous investments in industries that the Agency regulates.

The portfolio holdings may present a conflict of interest for the Agency.

From the Independent:

The Environment Agency (EA) has been accused of having a “clear conflict of interest” after an Independent on Sunday investigation found the UK regulator’s pension fund invests millions in controversial industries which it then regulates. In the UK the EA’s pension fund – worth a huge £2.3bn – invests in companies investing in fracking, incineration and nuclear power, all of which the Agency is involved in regulating.

Globally, the fund also invests millions in chemical and mining companies, including diamond mining; tobacco and alcohol companies; arms manufacturers; a gambling company, as well as Starbucks which has been repeatedly accused of tax avoidance.

The pension details are contained in a response to a Freedom of Information request from the EA, which lists the companies it had a stake in as of March this year, its latest available audited information. And its investments are in marked contrast to the Agency’s public image of being a leading “responsible” investor that integrates “environmental, social and governance considerations into all decision-making.” The Agency champions its commitment that by 2015 “25 per cent of the fund will be invested in the sustainable and green economy”.

Despite these bold claims, the list reveals that the EA, which was heavily criticised last year for its response to flooding, holds £50m direct investments in oil and gas companies such as Shell, BP and BG Group, as well as millions more in indirect oil and gas funds.

[…]

The fund is investing in two companies financially intertwined with fracking giant Cuadrilla, the company that has been the subject of fierce protests in Lancashire and West Sussex. The first is Centrica, which is investing £60m in Cuadrilla’s Lancashire operations and the second is Riverstone Energy, which owns 44 per cent of Cuadrilla.

The Cuadrilla relationship is further complicated as Lord Browne of Madingley, who sits on Cuadrilla and Riverstone’s board, has been accused of having privileged access to Lord Chris Smith, the head of the EA. Browne, a former BP boss, met Smith on numerous occasions when Cuadrilla was trying to get a permit to frack. The minutes of one telephone meeting between Browne, Smith and other government ministers reveal that the EA offered to “shorten the consultation process prior to determining permits”, although this was rejected by Cuadrilla, which was worried about legal action.

The Agency hired consultants this year to look into the impact of divesting from fossil fuels. But the consultants advised against divesting from fossil fuel assets.

Read the entire investigation here.

 

Photo by  @Doug88888 via Flickr CC License

New Jersey Pension Encounters Difficulty Exiting Investment With Firm At Which Mary Pat Christie Holds Top Job

No Exit

It’s been nearly four years since New Jersey’s pension system terminated an investment with Angelo, Gordon & Co, an investment firm where Mary Pat Christie, wife of Gov. Chris Christie, is managing director.

But as the International Business Times reports, the pension system is still paying fees to the firm because certain portions of the investment are particularly illiquid – the pension system has yet to be able to exit them fully.

Some say the situation is a troubling conflict of interest. Others say it is emblematic of one of the criticisms of alternative investments: pension funds can’t exit whenever they like.

From the International Business Times:

When the New Jersey pension system terminated a $150 million investment in a fund called Angelo, Gordon & Co. in 2011, that did not close the books on the deal. In the three years since state officials ordered the withdrawal of that state money, New Jersey taxpayers have forked over hundreds of thousands of dollars in fees to the firm. As those fees kept flowing, Angelo Gordon made a prominent hire: Mary Pat Christie, wife of Gov. Chris Christie, who joined the company in 2012 as a managing director and now earns $475,000 annually, according to the governor’s most recent tax return.

The disclosure that New Jersey taxpayers have been paying substantial fees to a firm that employs the governor’s spouse — years after state officials said the investment was terminated — emerged in documents released by the Christie administration to International Business Times through a public records request.

[…]

New Jersey’s original $150 million investment in Angelo Gordon was initiated in 2006, under Gov. Jon Corzine, a Democrat. By October 2011, state records show, the investment — which was in a multi-strategy hedge fund called AG Garden Partners — had generated just a 5.5 percent return in six years. That month, New Jersey investment officials sent a letter telling the firm to “withdraw, as of December 31, 2011, one hundred percent of the [state’s] capital account.” Yet the state subsequently paid Angelo Gordon management fees of more than $255,000 in 2012, more than $132,000 in 2013 and more than $82,000 for the first three quarters of 2014.

[New Jersey Treasury Department] Spokesman Santarelli told IBTimes that while “New Jersey redeemed its interest in the AG fund and ended its investment [in 2011] we still have a remaining market value of $6.6 million invested related to illiquid investments, which have been winding down slowly over the last few years.”

New Jersey State Investment Council chairman Thomas Byrne gave his reaction to the IB Times:

“This is standard; we are not doing something different here that is outside the norms of the financial industry and the world of private partnerships,” he said.

“We are paying fees on whatever money is left in there, so it could be an asset that could be increasing in value,” Byrne said. “So why should the manager work for free if they are hamstrung in the short term but they have made an investment that makes sense? A contract is a contract and presumably both sides are working in good faith to get out of it, and a deal is a deal.”

Read the entire IB Times report here.

 

Photo by  Timothy Appnel via Flickr CC License

Questions Raised About “Dual Structure” of Governance At San Diego Pension Fund

puzzle pieces, question marks

Most of the news surrounding the San Diego County Employees Retirement Association (SDCERA) has been about the board’s decision to move on from its outsourced CIO, Salient Partners.

But also noteworthy are parts of SDCERA’s governance structure. At least one expert has raised concerns about the effectiveness of the fund’s “dual” reporting structure.

Dan McSwain of the San Diego Union-Tribune writes:

Structural woes were the main take-away from a parade of experts at a two-day workshop held last month by the system’s nine-member board of trustees.

[…]

One expert at the workshop, hired by the board to evaluate its governance, said the chief executive wasn’t clearly accountable for the fund’s investments. Indeed, the Houston-based chief investment officer appeared to report directly to the board.

This “dual structure” is found almost nowhere else. Instead, the CIO reports to the CEO, in a straight line of authority, at nearly every public or corporate pension fund in the world, not to mention insurance companies and private endowments.

Another expert said conflicts of interest were “inherent” in the county’s outsourced investment management structure. Yet another questioned the oversight of the retirement system’s outside lawyers, one of whom also reports directly to the board.

Still, the most obvious problem was the one nobody talked about, at least explicitly: Responsibility for this chronic buck-spreading lands squarely on White, the chief executive officer since 1996. If the county’s pension system has structural flaws, it’s hard to imagine how that’s not also a CEO problem.

Fund CEO Brian White defended the structure:

The outsourced CIO, Lee Partridge of Salient Partners, does in fact report to the CEO, White said, so the system already had the “linear” structure recommended by several governance experts.

“We’ve had a linear structure here, and I think what the board did Friday was confirm or reaffirm the linear structure,” he said, referring to the board’s vote on Nov. 21 to hire an internal CIO and have the position report directly to the chief executive.

White also said that, acting as investment strategist, Partridge was indeed supervising his own firm’s direct management of leveraged investments. But this wasn’t the “inherent” conflict of interest one expert asserted, because no money changed hands as additional fees, White said. Besides, the board of trustees endorsed the idea.

“I’m here to serve the board and support their decision,” he said. “That’s what they wanted.”

SDCERA manages $10.5 billion in assets.

 

Photo by Roland O’Daniel via Flickr CC License

Brazil Fines Pension Fund Over Board Voting Violation

Brazil

Brazil’s securities regulator fined one of the country’s largest pension funds Tuesday for violating rules regarding the election of board members of Brazilian companies in which the pension fund is invested.

Reuters reports:

Brazil’s securities industry watchdog CVM fined late on Tuesday the pension fund owned by workers of state-controlled oil producer Petróleo Brasileiro SA (PETR4.SA) for participating on the election of board and fiscal council members that was reserved only for minority shareholders.

In a statement, the CVM imposed total fines of 800,000 reais ($311,700) on Petros, as the fund is known. The watchdog also issued warnings to but did not fine the workers’ pension funds of state-run banks Banco do Brasil SA (BBAS3.SA) and Caixa Econômica Federal SA [CEF.UL] for the same cases.

The decision underpins the mounting conflict of interest between pension funds like Petros and the government, which joined forces in recent years to boost their decision-making power in Petrobras, as the oil producer is known, at the expense of minority shareholders.

[…]

While funds belong to workers in those state-run companies, their management is usually tapped among union members with strong ties to the government.

The hefty stakes that Previ, Petros and other funds in state companies have amassed in a handful of Brazilian companies for years allow them to appoint board members and key personnel.

Petros and the other two funds, known as Previ and Funcef, respectively, can appeal the CVM decision before the National Monetary Council – which is Brazil’s highest economic policy-making body.

Petros is Brazil’s second-largest pension fund.

Firms Managing Illinois Pension Money May Have Skirted Pay-to-Play Rules By Donating To Rauner Campaign

Bruce Rauner

Over the course of his campaign, Illinois governor-elect Bruce Rauner accepted contributions from executives from firms that manage portions of the state’s pension money, according to a new report from David Sirota.

Those contributions may violate SEC pay-to-play rules, under which investment firms can’t make donations to politicians that have any influence—direct or indirect—over the hiring of firms to handle pension investments.

As Illinois governor, Rauner will have that influence – the governor has the power to appoint trustees to the state’s pension boards.

More from David Sirota on the donations:

During his gubernatorial campaign, Rauner raised millions of dollars from executives in the financial sector — and, despite the pay-to-play rule, some of the money came from executives at firms affiliated with funds that receive state pension investments. That includes:

$1,000 from Mesirow Financial senior managing director Mark Kmety and $2,000 from Mesirow Financial managing director David Wanger. ISBI’s 2013 annual report lists Mesirow Financial as a hedge fund-of-fund manager for the pension system, and lists $271 million in holdings in Mesirow investment vehicles. In an emailed statement, a Mesirow spokeswoman told IBTimes that a separate branch of Mesirow works with the Illinois pension system and that therefore “we do not believe these contributions violate the pay to play laws.” Neither Rauner donor from Mesirow Financial “has any relationship with and/or receives any compensation from any state entity, nor do they pursue state business,” she wrote.

$2,500 from Sofinnova general partner James Healy. TRS lists Sofinnova as a private equity manager. The system’s 2013 annual report says the firm manages $8.1 million of state pension money, and was paid more than $900,000 in fees that year. In June, TRS committed to invest another $50 million of state pension cash in Sofinnova. Healy did not respond to IBTimes’ interview request.

$5,000 from Northern Trust’s Senior Vice President Brayton Alley. Illinois TRS lists Northern Trust Investments as an equity manager. The system’s 2013 annual report says Northern Trust manages $2.3 billion of state money, and made $548,000 in fees from the system that year. A spokesman for the firm told IBTimes, “We are aware of the obligations under various Illinois and federal laws and regulations” and “we are unaware of any violation to such requirements.”

$9,600 from employees of the real estate firm CBRE. The 2013 annual reports of TRS and ISBI show a combined $184 million worth of state pension investments in CBRE investment vehicles. A representative for CBRE told IBTimes that the employees are not covered by the SEC rule because they are not involved in state pension business and not employed by the subsidiary of CBRE that does pension investment work.

More than $90,000 in in-kind contributions from John Buck of the John Buck Company, which is listed as an investment manager for TRS. A spokesman for TRS, David Urbanek, told IBTimes that the pension system’s investment in the John Buck Company “is now in wind-down mode” and added that “the company is no longer actively managing TRS money.” A representative for the John Buck company said, “We do not manage money for TRS.”

While some of the contributions are relatively small, the SEC recently prosecuted its first pay-to-play case over donations totaling just $4,500. SEC sanctions can be strong: The rule can compel investment managers to return all fees they have collected from the pension systems after the political contributions were made.

Illinois state law also restricts contributions from state contractors to candidates for governor, though the executive director of ISBI, William Atwood, told IBTimes that the pension systems are exempt from the statute.

Specifics of the SEC rule in question, as explained by law firm Bracewell & Giuliani:

Rule 206 (4)-5, which was adopted in 2010, prohibits investment advisers from providing compensatory advisory services to a government client for a period of two years following a campaign contribution from the firm, or from defined investment advisers, to any government officials, or political candidates in a position to influence the selection or retention of advisers to manage public pension funds or other government client assets. Some de minimus contributions are permitted, topping out at $350 if the contributor is eligible to vote for the candidate, and the contribution is from the person’s personal funds.

Read Sirota’s entire report here.

 

By Steven Vance [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

New Jersey Blocks Public Release of Pension Pay-to-Play Investigation

magnifying glass over twenty dollar bill

In 2011, politician and businessman Charlie Baker made a $10,000 contribution to the New Jersey Republican State Committee. At the time, he was a partner at General Catalyst, a venture capital firm.

Months later, New Jersey’s pension system gave a contract to General Catalyst to manage the state’s pension money.

After the potential conflict of interest was uncovered by journalist David Sirota, New Jersey launched an investigation into the situation.

But the state is now refusing to release the findings of the investigation. From David Sirota:

Christie officials have denied an open records request for the findings of the investigation.

In a reply to International Business Times’ request for the findings of the audit under New Jersey’s Open Public Records Act, Christie’s Treasury Department said the request is being denied on the grounds that the documents in question are “consultative and deliberative material.” Despite officials’ assurances in May that the probe would take only weeks, the New Jersey Treasury said in September that the investigation is still “ongoing” — a designation the department says lets it stop the records from being released.

IBTimes is appealing the open-records denial to the state’s Government Records Council. Neither Baker nor Christie responded to requests for comment on the issue.

General Catalyst and Baker have denied that Baker had anything to do with persuading Christie officials to invest in the firm. To try to verify that assertion, IBTimes filed a separate request for any General Catalyst documents sent to the New Jersey Department of Treasury prior to its investment. Those documents would show whether General Catalyst specifically promoted Baker’s involvement in the firm when pitching its investment to New Jersey.

Christie officials are pushing back the due date to release those documents to Nov. 6 — two days after the election.

New Jersey has fallen into a habit recently of denying public records requests. From the International Business Times:

The denial letters to IBTimes come only weeks after the Associated Press documented a spike in the number of open records requests that have been rejected by Christie officials. Since 2012, Christie’s administration has paid out $441,000 in taxpayer funds to reimburse open-records plaintiffs who were unlawfully denied access to government records.

“Open records requests to the executive branch have become even more highly politicized than usual,” said Walter Leurs, president of the New Jersey Foundation for Open Government. “These documents are subject to the open records laws and they are supposed to be disclosed within seven days, so this is stonewalling. They know that any lawsuit challenging the denials wouldn’t be heard for 60 days — which is well after the election.”

Charlie Baker has denied he worked for General Catalyst when New Jersey decided to give the firm a contract. But the firm’s website listed him as a partner, and Baker himself called himself a partner in  documentation related to his $10,000 contribution back in 2011.

CalPERS Board Member Faces Quadrupled Fine After Repeatedly Failing To Disclose Campaign Finances

board room chair

CalPERS board member Priya Mathur failed to turn in campaign finance and conflict of interest statements in 2002, 2007, 2008, 2010, 2012 and 2013.

She’s been fined numerous times, but her next one is going to be bigger the biggest yet: the panel that levies the fines has agreed to quadruple Mathur’s latest fine, from $1000 to $4000. From the Sacramento Bee:

The Fair Political Practices Commission plans to impose a $4,000 fine at its Oct. 16 meeting. Mathur has agreed to the fine, according to FPPC documents.

The agency’s staff had proposed a $1,000 fine for Mathur’s most recent violation, in which she failed to file campaign finance statements on time. But the commissioners decided at their August meeting that Mathur’s repeat offenses warranted a penalty of $4,000. The fine comes to $1,000 for each of the four campaign finance statements that she was late in filing.

In a Sacramento Bee interview earlier this summer, she blamed the latest problems on a paperwork snafu. But FPPC staff said it took “numerous requests” from investigators to get Mathur to finally submit the documents.

Mathur last week was declared the winner, based on preliminary results, in her bid for re-election. An official with the Bay Area Rapid Transit district, Mathur will serve another four-year term starting in January.

Mathur has been fined $13,000 by the Comission during her time on the CalPERS board.

Documents Shed New Light on Alleged Conflicts of Interest In New Jersey Pension System

two silhouetted men shaking hands in front of an American flag

Gov. Chris Christie has shielded his state’s pension system in recent weeks from allegations of conflicts of interest by asserting one thing: the State Investment Board doesn’t have input in pension investment decisions, it only loosely oversees them.

But new documents obtained by the International Business Times suggest that the Council does have an active hand in guiding pension money.

David Sirota writes:

The minutes of the State Investment Council (which Christie appoints, and whose official mission is to “formulate policies governing the investment of [state] funds”), show his appointees not only oversee the state’s due diligence reviews of specific managers but also offer guidance to New Jersey Treasury Department officials about managers. Christie appointees at times cast votes on specific investments and have spearheaded the recruitment and subsequent appointment of the official who runs the state’s Division of Investment.

According to minutes of the State Investment Council, most of New Jersey’s investments in private equity, hedge funds, venture capital and other so-called alternative investments are reviewed by Christie appointees on the Investment Policy Committee (a subcommittee of the State Investment Council). Typically, the minutes show State Investment Council Chairman Robert Grady reports the committee “discussed the investment and was satisfied that the due diligence that was performed was adequate and appropriate.”

Grady was appointed to the council by Christie. He also serves as the Chairman of the Governor’s Council of Economic Advisers, and state documents show he was in regular contact with Christie administration and campaign officials. The governor has described him as a longtime friend.

The State Investment Council debates the merits of specific investments in open session, offering advice to Department of Treasury staffers about the specific money manager being given a New Jersey pension contract. Because the council has influence over the selection of specific managers, Grady and another Christie appointee, real estate investor Jeffrey Oram, have recused themselves from deliberations that involve managers to whom they might have a financial connection.

The documents also reveal a few examples of members explicitly voting to approve (or disapprove) big investments with money managers. From the report:

– On Dec. 8, 2011, Grady spearheaded a proposal to invest as much as $1.8 billion of New Jersey money in the Blackstone Group. State records show “a motion was made by Chair Grady to approve the Blackstone investments,” the motion “was seconded by Council Member Oram,” and the investment in Blackstone was subsequently approved on a 7-2 vote. As IBTimes previously reported, Grady’s private firm was investing in one of the same Blackstone funds though Grady did not disclose that at the time of the vote.

– On July 21, 2011, the council voted on a quarter-billion-dollar investment in Blackstone Resources Select Fund. After a debate, the council voted against a motion to halt the investment.

– On June 11, 2011, the council voted to approve a financial maneuver to facilitate a specific transaction with a firm called RLJ Lodging Trust.

In addition to overseeing and voting on specific investments, Christie appointees oversee the appointment of the state official who runs the state’s Division of Investment.

Christie yesterday offered his first extensive defense against conflict of interest allegations.

 

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