Greater scrutiny at pensions creates more compliance work

Private equity managers must consider a new set of compliance measures to ensure they – and their investment staff contacts – don’t fall foul of rules dictating how pension staff interact with GPs.

What happens in Sacramento doesn’t stay in Sacramento.

Last week, PE Manager reported that 14 officials of the $227 billion California Public Employees' Retirement System (CalPERS) could be fined thousands of dollars for not properly reporting gifts received from investment firms. An additional 15 officials were sent warning letters.

To be sure, it’s a headache and image problem for the pension staff, which allegedly slipped up on properly disclosing acceptance of items like free meals, wine, clothes and tickets to sporting events or concerts.

However, the other side of the story is that the increased scrutiny on pension staff is creating more compliance-related work for private equity managers. For example, to meet a requirement of the Texas Teachers’ pension fund, GPs’ expense reports must now detail not only how much was spent on a meal with an LP, but the transportation arrangements and distance from the LP’s office to the destination.

“It’s getting to the point where we tell our guys that you can discuss business in a boardroom or through a glass partition,” joked one New York-based compliance manager.“The process has certainly become more sanitised when dealing with [LPs] in New Mexico, California, New York and even Texas.” The four states each have specific and sometimes cumbersome guidelines to LP/GP relationships, including whether placement agents could be used, how fees are billed and transparency measures including webcasting board meetings.

Few would argue that greater transparency in GP-LP relationships is a bad thing, but it’s beginning to create yet another layer of compliance for fund managers.