Cuomo’s pay-to-play saga comes full circle

New York Governor Andrew Cuomo instructed the state’s insurance department last week to issue a permanent regulation banning “pay-to-play” activity at New York’s $140 billion pension fund. While the regulation is not surprising, it does put an end to an embarrassing chapter for New York state and the private equity industry.

The regulation prohibits improper relationships between pension fund officials and an investment firm's personnel, “revolving door” employment by investment firms of former public pension fund officials and employees and improper gifts by investment firms to public pension fund employees.

In many ways the pension fund scandal was the centerpiece of Cuomo’s term as New York’s attorney general. Over a four-year period, he tackled the state’s culture of corruption and collected millions of dollars in ill-gotten fees. The state collected more than $170 million from 19 private equity firms and five individuals who settled their cases.

While the practices of a few grabbed headlines, it has been a stain on the entire US private equity industry. The aftermath of ‘pay-to-play’ has made it more difficult to win business from US public pensions.

In February 2010, New York City comptroller John Liu laid out new requirements to ensure that all placement agents that work with the pension fund are vetted, with fund managers who use them disclosing the nature of their contracts and relationships.

Specifically, placement agents are only allowed to interact with New York City pension funds if they provide legitimate value-added services such as due diligence, if they have raised $500 million in at least two of the past three years from entities other than New York City pension funds, and if they are registered with either the Securities and Exchange Commission or the Financial Industry Regulatory Authority.

And new regulation stretches beyond New York.

Last September, then California Governor Arnold Schwarzenegger signed a bill that will regulate the activities of placement agents who help private equity managers win business from public pension funds. The legislation forces placement agents hired by private equity firms to win business from the state's public pensions to be paid flat fees up front instead of compensation based on successful fundraisings.

The California Public Employees’ Retirement System co-sponsored the bill in the wake of allegations that a former member of the pension’s board had been paid millions of dollars in fees to solicit commitments from the pension for Apollo Management and other firms.

Cuomo’s investigation has reshaped the way private equity managers are allowed to interact with pensions in New York and California.

But now that cases have been settled, fines have been paid and the ban is permanent, it’s time to move on, get back to business and accept the new normal.