New York State’s financial services regulator is investigating asset consultants to its public pension funds. The regulator has subpoenaed 20 firms, including the biggest names in global asset consulting, for information on their processes.
While details of the investigation are sketchy, there is concern that it may damage the reputation of the consulting firms and send ripples around the world.
New York caused a stir several years ago when it banned its state public funds from using placement agents after a corruption scandal. The wider impact of this was difficult to attribute because it coincided with the first cracks in the US financial system in 2007 and was followed by a complete drying up of the use of illiquid assets and other alternatives by pension funds around the world. Most placement agents around either shut up shop or morphed into third-party marketers.
Placement agents tend to act like investment banks, placing certain closed-end offerings with funds, usually with limited time to assess the arrangement, unlike third-party marketers which act as permanent representatives of funds management firms in other jurisdictions. Another key difference is to do with their remuneration: placement agents are remunerated out of the deal whereas third-party marketers get a share of the manager’s negotiated fee.
Consulting firms subpoenaed, by Benjamin Lawsky, superintendent of the regulator’s office, include: Mercer, Towers Watson, and Russell as well as major US-centric firms Callan and Wilshire Associates.
It is unclear what the investigation is seeking. One possibility is whether the consultants show bias towards their own funds and whether this impacts on the returns of their consulting clients. Another is that they unduly pressure funds into implemented consulting-type arrangements.
Russell and Mercer have well-established funds in Australia. Towers Watson has no such funds but operates an “outsourced CIO” service in the US and Europe. Callan and Wilshire also have funds.
Cambridge Associates, a big advisor which does not have funds or any type of implemented service, was not subpoenaed.
The New York Times said in its report on the investigation last week: “In recent years, concerns have been raised that general consultants have been encouraging trustees to shift more pension money into aggressive investments in hopes of earning higher annual returns than can be achieved with stocks and bonds. That exposes taxpayers to greater risks because assets that promise the biggest potential rewards are also generally the most volatile.
“In banking and insurance, which Lawsky also regulates, riskier assets are counted at less than their full value, and financial institutions can be downgraded or even forced to take corrective action if their portfolios are too volatile. Those principles have so far not been applied to public pensions, but Mr Lawsky said in his October letter that he had ‘decided to take a new approach to pension fund oversight’.
“Where we find areas that need urgent and prompt corrective action, we may propose new regulations to increase accountability and transparency at those funds,” he wrote.
