NM initiates "Greed & Fraud Prevention" Program

NM agency bans placement agents on investments

By BARRY MASSEY Associated Press Writer

A state agency is banning the use of third-party marketing agents by firms trying to obtain investment business from New Mexico's $11 billion permanent funds.

The State Investment Council also will prohibit certain campaign contributions by investment firms that have contracts with the agency.

The council approved the policies Tuesday in response to an expanding corruption scandal involving a New York state pension fund. Fees paid to placement agents by money management firms are at the heart of an alleged kickback scheme in New York. Some placement agents and investment firms implicated in the New York pension probe also did business with New Mexico's public investment and pension funds.

A company that served as the council's financial adviser on private equity investments was fired after the firm and one of its co-founders were charged in the New York case. The Dallas-based firm, Aldus Equity Partners, has denied wrongdoing.

Questions have been raised in New Mexico about the large fees paid to some placement and marketing agents. One politically connected Santa Fe broker potentially shared in more than $15 million in fees from firms that won investment deals from the state.

"The practice of fund managers paying huge fees to third-party agents may be legal and may be commonplace but the potential for a conflict of interest is troubling," said Gov. Bill Richardson, who backed the ban. "The size of these fees is alarming and the concentration of business among a handful of placement agents is troubling too."

The governor said, "I quite frankly never knew they existed. But it's best that they go away. I think we can do business effectively without them."

Pension funds in New York state and New York City announced in April that they were barring the use of placement agents, which are intermediaries hired by money management firms to help solicit investment business from public pension and endowment funds.

The council's campaign contribution restrictions will apply to investment firms as well as their principals, employees and their family members.

Under policies taking effect immediately:

_The agency will not award new investments to firms that have made political contributions within two years to any elected or appointed official that "may have influence over" the council, its committees and investment office staff. The governor, state treasurer and land commissioner serve on the council, which oversees investments of the state's permanent or endowment funds.

_Firms that already have investment deals with the council cannot make new political contributions during the term of the investment and for two years afterward. A similar ban on campaign contributions will cover third-party sales agents of the companies doing business with the council.

_Firms seeking to do business with the state will be required to make disclosures of third-party fees of more than $50,000 that were paid during the previous year. Other information must be provided such as the name of the individual or company that received the payments, a description of the services they provided and a justification for why they were hired. The information will be publicly disclosed on the council's Web site.

Companies also must disclose the name of their in-house marketing employees. That is intended to prevent firms from circumventing New Mexico's placement agent ban and hiring an outside marketing agent as a temporary employee while the company solicits business from the state.

The council will end its investment or contract with firms that violate the new policies or provide false information to the council.

The policies are broader than a new state law that will require the recipients of investments by the council and New Mexico's two public pension funds to disclose third-party marketers they used in obtaining the investment. Under the new law, which takes effect June 19, the amount of any fee, commission or retainer paid to the marketer must be disclosed to the council and the pension funds — the Public Employee Retirement Association and the Educational Retirement Board.

Earlier this month, the nation's largest pension fund — the California Public Employees' Retirement System — approved a requirement that money management firms disclose their use of third-party placement agents and fees paid to them.

In New Mexico, the governor has a controlling influence over the investment council because he, his administration officials and gubernatorial appointees account for seven of the council's nine members. The governor appoints the state investment officer, who runs day-to-day operations of the investment agency.

Richardson reiterated Tuesday that he will support legislation to expand the membership of the council with legislative appointees.

However, Richardson vowed to veto any proposal if it eliminated the executive branch's majority control over the council. The governor vetoed a bill earlier this year that would have weakened his influence over the council.

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On the Net:

State Investment Council: http://www.sic.state.nm.us


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