IVCA Legislative Update: Illinois Pension Ethics Reform

IVCA Legislative Update: Illinois Pension Ethics Reform

April 22, 2009

CHICAGO - “ Illinois pension ethics reform legislation quickly moved through the General Assembly the last few days of March and was signed by the Governor within 24 hours.  Public Act 96-0006 provides significant reforms to how Illinois pension funds select investment consultants and advisors among other provisions.  IVCA is generally supportive of the new law.

IVCA strongly supports pension ethics reform to make the investment selection process more objective, competitive, transparent and performance based.  IVCA provided ongoing input into the pension ethics reform debate focusing on how the pension funds gain access to private equity funds and preserving that access.  Some of our suggestions were incorporated into the final bill.

Among other provisions, the law:
- ¢    requires ethics training for the funds' Trustees and staff;
- ¢    sets forth extensive disclosure requirements;
- ¢    requires both investment consultants and advisors be selected by a competitive process that is substantially similar to the process required for the procurement of professional and artistic services under the Illinois Procurement Code (as determined by the pension funds' Boards of Trustees);
- ¢    sets forth professional requirements for both investment consultants and advisors; and
- ¢    limits consultants' contracts to a term of no more than five years, with the opportunity to bid for a new contract at the end of that period.  To view the law, please click here.
 
Two potential problem areas for private equity
 
The legislation correctly excludes from the definition of consultant "investment fund of funds where the board has no direct contractual relationship with the investment advisors or partnerships."   It does not, however, provide a similar exclusion from the definition of investment adviser with regard to investment fund of funds.  So consultants as sellers of securities or fund of funds are exempted from the Procurement Code requirements of the legislation, but investment advisers as sellers of securities are not.  If left unchanged, fund of funds likely will not be able to accept state pension funds' investments since they cannot sell their funds through the Procurement Code.

IVCA believes that this is an oversight.  Although there were several pension ethics reform proposals pending in the General Assembly, the bill that passed was introduced on March 31st by House Amendment 1 to SB 324 and amended by House Amendment 2 on April 2.  It passed the House the same day and was agreed to immediately by the Senate and sent to the Governor who signed it within 24 hours.  The final bill appeared to be a compilation of portions from the various pending proposals and we believe the exclusion for investment fund of funds from being subject to the Illinois Procurement Code was unintentionally overlooked or dropped.

IVCA is cautiously optimistic that the law can be amended to correct this oversight prior to the end of the current legislative session.

The new law also prohibits the payment of contingent or placement fees - ¦- No person or entity shall retain a person or entity to attempt to influence the outcome of an investment decision of or the procurement of investment advice or services of a retirement system, pension fund, or investment board of this Code for compensation, contingent in whole or in part upon the decision or procurement.- 

IVCA had successfully lobbied to retain the use of placement agents in previous pension ethics reform proposals but reportedly the Speaker wanted the prohibition in the final bill. IVCA will again try to educate legislators about the legitimacy and necessity of placement agents but we are not optimistic that this prohibition will be lifted in light of the Speaker's intent and the current press coverage of ongoing investigations into illegal payments to placement agents by private equity and hedge funds to secure investments from New York pension funds.