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Sen. Fasano's bill would cut out middleman in state pension investments

If state Sen. Mike Fasano has his way, money managers and funds seeking an investment from Florida's public pension not only won't have to pay a middleman to make introductions, they won't be allowed to.

Fasano has introduced legislation that would ban the use of such placement agents by the State Board of Administration, which oversees Florida's $117 billion pension. Fasano said he was shocked to read in a St. Petersburg Times story in October that such finder's fees average $1.5 million and in 2010 alone were paid to at least a dozen middlemen.

"Our bill says, 'No more, you can't do it,' " said Fasano, a New Port Richey Republican seeking a co-sponsor in the House. "Even if the fund manager is paying the middleman, the public pension can't use them. The SBA has to deal directly with the investment fund."

A spokesman for the SBA, which has repeatedly defended the use of placement agents, said the agency had no comment on Fasano's proposal.

Placement agents were little known players in the investment world until recently when such intermediaries were found to be at the center of kickback scandals at public pension funds. The SBA's executive director, Ashbel C. Williams Jr., told the agency's trustees last year that, "the existence of a placement agent doesn't connote impropriety. It is a very legitimate decision that is sometimes taken by investment managers."

But in New York and California, placement agents were integral to pay-to-play schemes that traded access to public pensions for multi-millions of dollars in hidden payments. New York's investigation has resulted in guilty pleas and the recovery of more than $160 million for the pension.

Fasano said his bill is not intended to accuse anyone of corruption. "But the perception is always there that someone is being taken care of when there's really no reason to have a middleman," he said.

The SBA's Williams has frequently dismissed concern about the expense of placement agents, saying that because they are paid by the fund managers, not the SBA, there is no cost to the public.

But with Florida typically paying a fund 1 to 2 percent to manage its investment, Fasano said anything the manager pays the placement agent ultimately comes from the public.

"If the SBA thinks the group investing tax dollars is swallowing that (placement agent) fee, then the SBA is not being honest or truthful," he said. "The bottom line is whatever fee is paid is going to come out of the rate of return to the investor. And the investor is the taxpayer."

A year ago, the SBA began requiring funds to disclose how much they paid placement agents to arrange investments with the state. In seven deals where the fees were disclosed, the agents received a total of about $12 million, or about 1.5 percent of Florida's total investment of $825 million. Individual commissions ranged from $250,000 to $3.65 million for services described as "scheduling meetings" and "establishing relationships."

In mid-year, the SBA began giving funds the option of exempting their placement fee information from public disclosure. Since then, all the funds have done so, saying such disclosure would be harmful for their business.

Though proponents of placement agents say their use ensures pensions have access to the broadest investment opportunities, including smaller and minority-owned funds, Fasano said he can't believe Florida's public pension, the country's fourth largest, will have trouble attracting potential investments.

"The SBA wields enormous power and influence because of the amount of monies it has available to invest," he said. "Money managers all over the world welcome them with open arms, without the need for a middleman to make introductions."

New York State Common Retirement Fund, bigger than Florida's at $133 billion, has proven it's possible to operate without placement agents. Following its ban on such intermediaries in April 2009, the pension beefed up its emerging manager program, designating a staff person to field inquiries from smaller funds that might not have internal marketing departments.

"That's been very successful for us," said Ola Fadahunsi, spokesman for the New York fund.

New Mexico and Illinois have banned the use of placement agents by their public pensions and Connecticut has severely restricted the practice. But recent efforts to ban agents have fared poorly. This year both the Securities and Exchange Commission and the California Legislature considered such actions but settled on increased regulation.

The SEC now requires placement agents to be registered as an investment adviser or broker-dealer and limits their political contributions. California, where a former CalPERS board member is accused of making $50 million by steering business to the pension, requires that placement agents be registered as lobbyists. The state also bans the payment of contingency fees tied to the size of the investment.

Fasano said he doesn't know how his proposed ban on placement agents will play among his colleagues in the Capitol, but he has no question about his constituents' feelings.

"When people read about these shenanigans with placement agents, they were flabbergasted this was being done in the state of Florida," he said. "It just boggles the mind."

Kris Hundley can be reached at [email protected] or (727)892-2996.

Sen. Fasano's bill would cut out middleman in state pension investments 12/01/10 [Last modified: Thursday, December 2, 2010 11:30am]
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