California lawmakers took a step Wednesday toward cracking down on the middlemen that help private investment firms land lucrative contracts with the state's giant pension funds.
The use of so-called "placement agents" has erupted into a scandal in California and New York, where allegations of cronyism and exorbitant fees have prompted investigations.
On Wednesday, the state Assembly's Public Employees, Retirement and Social Security Committee voted 4-1, with one member abstaining, to improve oversight of the way California public pension funds invest money.
The California Public Employees Retirement System is the nation's largest pension fund, with about $210 billion in assets under management.
The California bill would require placement agents to register as lobbyists and file quarterly reports stating any gifts or fees they received.
It also would prohibit the practice of allowing outside investment managers to pay those agents contingency fees for winning business with the funds. Placement agents typically earn 1 percent of the total investment they win for their clients, which can mean millions of dollars for landing a deal.
Instead, those agents would be paid a flat fee.
Investment firms are lining up against the proposal.
Lawmakers said the intent is to ensure that fund managers are making sound investment decisions, rather than handing out money to dubious firms recommended by friends and insiders.
"Continuing revelations have underscored the need for full disclosure of the finances and other activities of placement agents," said Assemblyman Ed Hernandez, a Democrat from Baldwin Park who sponsored the bill.
In New York, a pay-to-play scandal involving state pension fund managers has led to six people pleading guilty and an inquiry from the U.S. Securities and Exchange Commission.
California's pension funds are also being investigated by the SEC for their use of placement agents.
CalPERS has hired a law firm to conduct its own internal investigation into how the agency has used placement agents in the past 15 years. Results from that inquiry are expected within the next two months.
