This past Friday, New York Attorney General Andrew Cuomo made two announcements regarding his expanding investigation of the pension fund industry. First, in a press release on the Attorney General's web site [http://www.oag.state.ny.us/], Cuomo announced that his office has issued more than 100 subpoenas to investment firms and their placement agents with respect to investments made by the New York Common Retirement Fund (NYCRF) and various New York City public pension plans. Over the past few weeks, Cuomo's office has issued a 123-count indictment against two aides of former New York Comptroller Alan Hevesi (accompanied by an SEC civil complaint); charged the former head of a state political party with receiving illegal payments; and induced a felony guilty plea by a former hedge fund manager.
A particular focus of this new stage of the investigation, which Attorney General Cuomo has been coordinating with the SEC, appears to be the use of unregistered placement agents to secure business from New York state and local pension plans. With few exceptions, placement agents are required to be federally registered as broker-dealers under the Securities Exchange Act of 1934 (or associated with an entity so registered) and under the laws of the states in which they solicit potential investors.
In addition, both NYCRF and the New York City Employee Retirement System (NYCERS) have announced prohibitions on the future use of placement agents to secure investments from the plans. The Illinois legislature has passed legislation effectively prohibiting interaction between its state retirement plans and placement agents. In New Mexico, Governor Bill Richardson has signed legislation requiring investment managers seeking investments from the state's public pension plans to disclose the use of placement agents. The California Public Employees Retirement System (CalPERS), with more than $177 billion in investments, has adopted a policy requiring disclosure of the use of placement agents. And yesterday, Connecticut Treasurer Denise Nappier announced that all fund of funds managers will be required to provide additional disclosure of third-party payments made in connection with investments on behalf of the Connecticut Retirement Plans and Trust Funds, with such disclosure to be publicly available.
Second, also this past Friday, Cuomo briefed representatives of 35 state attorney general's offices on the progress of his pension fund investigation. These officials have "decided to create a multi-state task force to explore pension fund abuse so states can share vital information to prosecute wrongdoing and facilitate nationwide reform." See [http://www.oag.state.ny.us/]. This raises the specter that investigations on the use of placement agents to solicit public pension plans will take on a nationwide scale.
Investment managers that have used placement agents in the past with respect to public plan investments, or that may engage placement agents in the future, should ensure that written placement agent agreements contain comprehensive representations and covenants by the agent regarding registration, disclosure and compliance with all applicable laws. Investment managers should also be alert to their disclosure obligations, which may vary depending on the state or the particular pension fund. In addition, to conform with best practices, investment managers should consistently perform and document appropriate due diligence regarding a potential placement agent's registration, investment licenses and background.
We will keep our clients informed of further developments and evolving best practices in this regard. If you have any specific questions concerning these matters, please feel free to contact your Proskauer Rose lawyer.
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