Apr. 19, 2022
Vanessa Countryman, Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-0609
Dear Ms. Countryman:
This letter responds to SEC rule-making proposal "Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews" [Release Nos. IA-5955; File No. S7-03-22].
I am writing on behalf of the Retired Public Employees' Association of California ("RPEA"). We represent approximately 30,000 retirees of the California Public Employees' Retirement System ("CalPERS"). Via their participation in CalPERS, our members have significant exposure to CalPERS' private equity and real estate investments, which together comprise one of the world's largest private fund portfolios.
We have long observed a degree of reluctance among institutional investors to speak forcefully in favor of private fund regulatory reform. Supposedly, this reluctance is attributable to institutional investors' need to curry favor with private fund managers, who have historically opposed such initiatives. At RPEA, we are unconstrained by such conflicts and are therefore free to convey in the strongest possible terms our support for the SEC's proposal. We firmly believe that the SEC's rule-making proposal serves the interests of RPEA members and private fund investment beneficiaries generally.
Our members have suffered well-documented harm from the traditionally opaque fee and expense disclosure practices of private funds. In 2014, the former CEO of CalPERS pled guilty to fraud in federal court and was sentenced to prison. The fraud occurred in connection with $87 million of undisclosed placement agent expenses that a private fund manager charged to funds in which CalPERS had invested. These placement agent costs were hidden from CalPERS, and these unconscionable amounts would likely have never been charged, and the associated bribery never occurred, had the placement costs been disclosed in the manner the SEC is now proposing.
We have observed a sorry history among other public pension funds of undisclosed placement agent fees also leading to criminality. In 2010, the New York State comptroller, the sole trustee of the state pension system there, was sentenced to federal prison for corruption related to undisclosed placement agent expenses.
In 2005 and 2006, a former board member of the Illinois Teachers Retirement System and several other individuals pleaded guilty in federal court to corruption charges. As in the other examples, the charges against them centered on undisclosed placement expenses and associated bribery at the Retirement System.
In 2003, the former treasurer of Connecticut, also a sole trustee of his state's pension system, was sentenced to federal prison for corruption involving undisclosed placement agent expenses.
We are concerned that the problem of undisclosed placement agent charges was never fully resolved. After the convictions of the New York State comptroller and the CalPERS CEO, many public pension funds moved to prohibit charging placement expenses to funds in which they invested, or, at a minimum, to require disclosure of any fund placement charges. We suspect that some private fund managers responded by allocating placement fees down to portfolio investments, causing investors to continue bearing the economic cost of placement fees but in a manner totally invisible to them. The proposed SEC regulations would provide needed transparency into such efforts to evade placement agent fee disclosure.
On behalf of 30,000 beneficiaries of private fund investments, we urge the SEC to adopt the proposed regulations.
Respectfully submitted
Rosemary Knox
President