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Thursday, October 26, 2006

Alan Hevesi's Other Skeleton in the Closet

It has now come to light that Alan Hevesi, Comptroller of New York State and outspoken critic of Dick Grasso's compensation package, has been using the considerable powers of his office for personal benefit egregiously using state funds to pay for his wife's chauffer. Missing in the reports is how he may also be a major beneficiary of "pay-to-play" agreements as the administrator of the $140 billion retirement system for state and local government employees. Indeed, Hevesi authorized a $130 million investment into a private equity firm which contributed more than $100,000 to his 2001 mayoral campaign fund.

This practice is currently legal, if not encouraged. Therefore, a logical question is where has the SEC been in stopping these practices? In 1994, the SEC passed Rule G-37, the "pay to play" rule which prohibited municipal bond underwriters from contributing to the campaigns of elected officials who may influence the award of bond underwriting contracts. This rule is widely credited with cleaning up the municipal bond industry.

However, the SEC is also responsible for regulating money managers and mutual funds. In August 1999, the SEC proposed to prohibit money managers from engaging in "pay to play". The SEC proposal would have required that money managers give up any compensation they received for managing public money for two years after the firm, its executives or agents, made a campaign contribution to an elected official or candidate who could have influenced the selection of the money manager.

The SEC federal "pay to play" rule has gone nowhere since 1999 and no one is even talking about it. The attorneys who wrote the rule have long since departed from the SEC and we were told the rule was "not finalized." The reason is obvious; the pay to play rule has no natural constituency. Incumbent politicians want to maintain all potential sources of campaign money. Money managers who benefit from pay to play like the status quo, and those who don't benefit risk retaliation if they criticize the system.

As if the latest ethics scandal surrounding Alan Hevesi wasn't proof enough that state treasurer's can't be trusted with managing a conflict between their political ambitions and fiscal responsibilities, one only has to plug in a Google search to find other examples of pay-to-play shenanigans. California State Comptroller Kathleen Connel, while serving on the boards of CALPERS and CALSTERS ($165 billion and $110 billion pension funds respectively) reportedly received over $250,000 in campaign donations from a firm doing business with the two pension funds. The ugliest example was seen in Ohio where a major fundraiser for the former Governor Bob Taft was provided $50 million of pension fund monies to invest in rare coins. Needless to say the investment went south and many of the coins went missing.

It's laughable that scandals continue to surround the administrators of public pension funds and regulators remain inactive. The SEC should revisit the "pay-to-play" rule and make the same requirements of pension funds that they do for municipal bond business. No investment advisors should receive pension fund investments if they have donated to government officials involved in the fund's administration within two years. Let's not wait for another scandal before this rule is enacted.


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