NJ Adopts New Placement Agent Standards

July 10, 2009 (PLANSPONSOR.com) - New Jersey's State Investment Council voted to continue using third-party placement agents to arrange pension fund business as long as the firms meet new disclosure and qualifications requirements.

Bloomberg reports that Investment Council members opted to impose new standards instead of following the lead of states such as New York and New Mexico, which have banned the agents altogether as the result of criminal and civil investigations into their roles in investment deals. The Council adopted six criteria their placement agents must meet, including the requirement that all agents be registered with state or national regulators, such as the SEC or the Financial Industry Regulatory Authority (FINRA).

The policy also requires that all the placement agent firms’ professionals hold securities licenses, that top managers at the firms have at least three years’ experience in the securities industry, and that the agents sign and disclose a “detailed contract” specifying the work the agent is expected to do for the fund managers they represent, Bloomberg said. Placement agents have been involved in about one-fifth of the $8.8 billion in investments the state has made with private managers since 2005, William Clark, director of the state Division of Investment, reported to the Council, according to the news report .

New Jersey decided to review its policies for placement agents in May, as probes by New York Attorney General Andrew Cuomo and the U.S. Securities and Exchange Commission expanded to other states. Cuomo and the SEC are examining money managers and placement agents who allegedly used ties to public officials and kickbacks to win business with New York state’s pension fund (see Another Firm Agrees to Cuomo’s Pay-to-Play Code of Conduct ).

New York Comptroller Thomas DiNapoli banned the use of placement agents in April.

New Jersey has used 16 placement agents since it began hiring private managers to handle pension fund investments in 2005, a list produced by the state treasury shows, according to Bloomberg. Four of the firms have ties to the probes of placement agents and their political connections.

Clark said in a memo to the council that New Jersey’s existing prohibition on political contributions by investors and their agents has shielded the state from scandal. New Jersey adopted regulations in 2004 prohibiting investment managers, their employees, and placement agents from contributing to candidates for governor or Legislature or any state party or political action committee, but the regulations do not prohibit contributions to federal candidates.

“We believe New Jersey’s policy pertaining to political contributions by investment firms (both actual and potential) and their placement agents remains the toughest in the nation,” Clark said, according to the news report.

Additionally, Investment Council members said prohibiting the use of agents would hinder the ability of smaller firms to win work managing a share of the state pension fund, which had an asset value of $63 billion as of June 30.