FRANKFORT — A key lawmaker wants to prohibit the state government's pension funds from paying well-connected middlemen known as "placement agents," a practice that is the subject of an "informal inquiry" in Kentucky by the U.S. Securities and Exchange Commission.
House State Government chairman Mike Cherry, D-Princeton, said he intends to bring a bill containing such a ban before his committee for a vote Thursday.
Cherry's House Bill 480 would ban payments to placement agents and impose term limits and greater transparency on the boards overseeing many billions of dollars held by the Kentucky Retirement Systems, the Kentucky Teachers Retirement System and the Judicial Form Retirement System. State audits on a regular basis would be mandatory, as would, in some cases, the online publication of salaries and spending records.
"I'm always looking for good-government issues, and many of us think this would be appropriate for the retirement systems," Cherry said Tuesday.
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Chris Tobe, who sits on the Kentucky Retirement Systems board, said a ban on placement agents is long overdue.
"Nationally, placement-agent legislation has been supported by both parties," Tobe said. "While Democratic attorneys general have led the fight against placement agents in New York and California, Republicans have taken the lead on this legislation in Florida. I expect this bill to get strong bipartisan support in Kentucky."
In September, the SEC opened an "informal inquiry" into the Kentucky Retirement Systems' use of placement agents after an internal review disclosed nearly $15 million in agent fees, angering several KRS board trustees, who called the fees excessive or unnecessary.
Placement agents are middlemen — often politically connected — who help private investment companies sell their products to public pension systems. Their fees are paid by the investment companies, who then are paid by the pension systems. Cherry's bill would prohibit placement agents from being paid with state funds either directly or indirectly.
Placement agents have led to pay-to-play scandals in other states, although the SEC has not alleged wrongdoing in Kentucky. SEC officials have declined to discuss their Kentucky review specifically. In general, they have said, they are taking an increased interest in how placement agents benefit from public pension funds.
The bill also would limit retirement systems' board members — some appointed by the governor, others elected to represent state workers and retirees — to three terms. Board chairmen would be limited to six consecutive years as chairman.
The limits would take effect immediately at the pension funds for state workers and teachers, Cherry said, so board members who have been installed for more than a dozen years would be removed.
Given the huge sums of money they control, the boards should bring in fresh eyes and ears, Cherry said.
"Term limits as a practical matter are a good thing," Cherry said. "That's why most boards have some sort of term limits."
Cherry said Kentucky Retirement Systems officials have asked him to delay changes to their governing board until state Auditor Crit Luallen completes a sweeping review that her office has begun, examining all aspects of the agency, including its board, employees, business conduct, purchases, ethics policies and the adequacy of its audits and financial reports.
Cherry said he's willing to offer a compromise version of his bill at Thursday's committee hearing that keeps the placement-agents ban but puts off some of the other reforms until the 2012 legislative session, after he has been able to review Luallen's audit.
KRS executive director Mike Burnside confirmed talking with Cherry and said "it might be wise" to limit some of the suggested structural changes until the state audit is done and the auditor has made her recommendations.
Burnside said he has not been updated on the progress of the SEC inquiry or the state audit.