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Public Pension Fund Reform Code of Conduct

By Harvard Law School Program on Corporate Governance

(Editor’s Note: this memo is based on a client memorandum by Robert Raymond of Cleary Gottlieb Steen & Hamilton LLP.)

Recently, New York Attorney General Andrew M. Cuomo announced an agreement with private equity firm The Carlyle Group (?Carlyle?) in connection with the Attorney General?s investigation, started in 2007, into relationships between New York State?s Common Retirement Fund (?NYCRF?) and investment firms doing business with it.[1] Carlyle agreed to pay $20 million to resolve its part in the investigation, and to abide by the Attorney General?s ?Public Pension Plan Reform Code of Conduct? (the ?Reform Code?). The Reform Code imposes strict requirements and prohibitions on dealings with retirement plans for federal or state governmental employees (?Public Pension Funds?),[2] including an outright ban on the use of placement agents, finders, lobbyists and other intermediaries (collectively referred to as ?placement agents?) in arranging investments by Public Pension Funds.

The principles reflected in the Reform Code are likely to extend beyond the agreement with Carlyle, whether other industry participants voluntarily agree to abide by them or they are incorporated into new federal and/or state legislation or regulations. The Attorney General?s office has indicated that it expects the Reform Code to establish a generally applicable framework for relationships between Public Pension Funds and investment firms going forward; at a minimum, it appears likely that firms seeking to do business with New York Public Pension Funds will be asked to be bound by the Reform Code. Attorney General Cuomo has described the Reform Code as representing the ?new rules of the game? [3] and praised Carlyle for ?leading the industry toward critical change of the public pension investment system.? [4] However, as noted below, the Reform Code includes a number of provisions that are ambiguous or may be difficult to implement in practice. It remains to be seen whether other jurisdictions will adopt new rules similar to the Reform Code and, if so, whether and how they may refine the details and mechanics of these rules.

In our memorandum entitled “The New York Attorney General’s Public Pension Fund Reform Code of Conduct: “New Rules of the Game“” we outline the key provisions of the Reform Code and suggest action steps for investment firms that do business (or seek to do business) with Public Pension Funds and may become subject to its requirements or similar requirements. The full text of the Reform Code and the Assurance of Discontinuance issued by the New York Attorney General in respect of Carlyle (?Assurance of Discontinuance?), are available here and here, respectively.

The memorandum is available here.

Footnotes:

[1] The investigation is being conducted under New York?s ?blue sky? law, the Martin Act, which permits very broad pre-lawsuit discovery by the Attorney General.
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[2] The term ?Public Pension Fund,? as used in the Code of Conduct, means ?any retirement plan established or maintained for its employees (current or former) by the Government of the United States, the government of any State or political subdivision thereof, or by any agency or instrumentality of the foregoing.? Thus, the restrictions that Carlyle agreed to by adopting the Code of Conduct are not, by their terms, limited to New York plans but purport to apply to any federal or state governmental pension plan. In a related development, New York State Comptroller Thomas P. DiNapoli announced on April 22, 2009 that he has banned the involvement of placement agents, paid intermediaries and registered lobbyists in investments with NYCRF.
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[3] ?Cuomo Announces Carlyle Settlement; Firm Will Adopt Code of Conduct for Funds,? Pension & Benefits Daily (May 18, 2009).
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[4] ?Cuomo Announces Landmark Agreement With the Carlyle Group to Eliminate Pay-to-Play in Public Pension Funds Nationwide? (announcement on New York Office of the Attorney General website, May 14, 2009), available here.
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Full post as published by The Harvard Law School Corporate Governance Blog on June 17, 2009 (boomark / email).