SEC opens inquiry into Kentucky Retirement Systems' use of middlemen

The U.S. Securities and Exchange Commission, which regulates investment markets, has opened "an informal inquiry" into the Kentucky Retirement Systems' use of middlemen known as placement agents.

The SEC's Division of Enforcement in New York on Thursday sent a letter asking for documents from KRS, which oversees the $12.5 billion fund that provides benefits to state and county retirees.

Specifically, the SEC asked for a copy of an internal audit conducted this year that identified nearly $15 million in fees paid to placement agents, the middlemen who help private investment companies sell their products to KRS. The fees are paid by the investment companies, who then are paid by KRS.

The SEC also asked for contracts held by KRS that list placement agents' fees and minutes of KRS Board of Trustees' meetings at which placement agents were discussed. The SEC said this is a voluntary matter and it's not accusing anyone of wrongdoing, but it would like the documents no later than Sept. 22.

Several KRS trustees have criticized the size of fees paid to placement agents, which they said was unknown to them until the internal audit was released last month. The board, at the request of Gov. Steve Beshear, is talking to State Auditor Crit Luallen about her office performing an outside review of KRS.

On Friday, KRS general counsel Schuyler Olt, to whom the SEC sent its letter, would not comment. The nine-member Board of Trustees is holding a special meeting Monday to discuss the letter.

SEC spokesman Kevin Callahan said the agency cannot confirm or deny investigations.

However, Callahan said, the SEC is taking an increased interest in the role of placement agents at public pension funds, following pay-to-play scandals in other states.

In June, the SEC enacted a new rule that prohibits placement agents from working with public pension systems for two years after they give campaign contributions to politicians connected to those systems, he said.

KRS Trustee Christopher Tobe, who has called for KRS to stop working with placement agents, on Friday said he welcomed the SEC's interest.

"I believe the SEC shares my concerns that 12 separate deals of over $600,000 were struck — five over $1 million — that may imply more than simple commissions," Tobe said. "I also believe that the fact that the staff and selected trustees concealed the fact we had placement agents for over six years is of concern."

The KRS internal audit released in August revealed a previously existing relationship between New York placement agent Glen Sergeon, who made nearly $6 million from Kentucky pension deals, and Adam Tosh, who resigned in July as KRS' chief investment officer.

During the audit process this year, Sergeon and Tosh disclosed that they knew each other because they had teamed up several years ago on market strategies in Pennsylvania, when Tosh was employed by that state's pension fund. Sergeon has won more fees in Kentucky than any other placement agent.

In the future, the internal auditors wrote in their report, KRS investment staff should announce their relationships with placement agents before deals are enacted, not afterward.

"Due to this prior working relationship and the continuous use of Mr. Sergeon, there could be a perceived appearance of preferential treatment," the audit report said.

However, Olt, the KRS general counsel, told the trustees that he interviewed Sergeon and did a computer database check of Sergeon and other placement agents — including their campaign donations — and he found no other connections between them and KRS or Kentucky elected officials.

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