Massive California Pension Fund Blocks Initiative to Disclose Fees Charged by Private Equity Firms

The U.S. economy is so thoroughly corrupt and incestuous, each and every attempt to bring forward even the least bit of transparency is immediately stifled and quashed. The latest example is the thwarted attempt to bring some level of clarity surrounding private equity fees charged to California pensioners, which have amounted to $3.4 billion over the past two decades.

As reported by International Business Times:

Earlier this month, the nation’s largest public pension fund roiled the financial world: Officials overseeing $300 billion of California public employees’ retirement savings disclosed that the fund had paid $3.4 billion in fees to private equity firms over the last two decades. The news of the fees — and a call by California Treasurer John Chiang for legislation requiring more ongoing disclosure — seemed to herald a new trend toward greater transparency at a time when the Securities and Exchange Commission has warned that private equity investors may be getting hit hard by hidden fees.

That momentum toward transparency at the California Public Employees’ Retirement System (CalPERS), however, appeared to abruptly halt last week when pension overseers quietly rejected a measure that would have required Wall Street firms to disclose all possible levies before they get their hands on the retirement savings of the system’s 1.7 million members. Some CalPERS board members said they were concerned the measure might alienate private equity firms, thereby denying pensioners the benefits of those investments. 

Can you believe this ridiculous argument? It’s the exact type of absurd reasoning bank lobbyists use when they claim the government shouldn’t regulate them more or they’ll just move overseas and the U.S. economy will lose all that GDP from their criminal activities.

The initiative, introduced on December 14 by CalPERS board member J.J. Jelincic, would have blocked the pension fund from signing any new deals with private equity firms that do not disclose “any and all types of types of fees, carry, discounts, rebates and/or any other forms of economic rent” charged to investors. The move came after Jelincic compelled a top CalPERS official to publicly admit that the state does not know the total amount in fees pensioners are now paying to firms in its $28 billion private equity portfolio.

In recent years, the Securities and Exchange Commission (SEC) has sounded the alarm about hidden fees charged by private equity firms. An agency review last year of 400 private equity firms found a majority of them had charged unnecessary and undisclosed fees. But in assessing Jelincic’s measure, CalPERS board members cautioned that added disclosure requirements might drive off some private equity firms.

Indeed, recall what we learned from last year’s post, SEC Official Claims Over 50% of Private Equity Audits Reveal Criminal Behavior:

Despite the at times disconcertingly polite tone, the SEC has now announced that more than 50 percent of private equity firms it has audited have engaged in serious infractions of securities laws. These abuses were detected thanks to to Dodd Frank. Private equity general partners had been unregulated until early 2012, when they were required to SEC regulation as investment advisers.

Bowden pointed out that private equity is unique among the investment advisers the SEC supervises. The general partners’ control of portfolio companies gives them access to their cash flows, which the GPs can divert into their own pockets in numerous ways.

State legislators need to understand what is going on here. They have granted public pension funds and public endowments across the U.S. the exorbitant privilege of secrecy in private equity investing, even to the point of making these contracts virtually the only ones that are exempt from state-level Freedom of Information Act laws.

Finally, here’s the ultimate kick in the face to California pensioners.

CalPERS’ outside consultant — which advises the pension fund on how to invest — recommended the board oppose the fee disclosure proposal because it might overwhelm the board with too much information about how much the pension system is paying in fees.

You truly can’t make this stuff up.

Just another day in…

For related articles, see:

Caught on Tape – SEC Director Grovels for a Private Equity Job for His Teenage Son While Speaking on Panel

Pensions and Private Equity – A Letter to the New York Times Editor

New Jersey’s Debt is Downgraded by Fitch as Chris Christie Funnels Pension Money to Private Equity and Hedge Funds

SEC Official Claims Over 50% of Private Equity Audits Reveal Criminal Behavior

The Revolving Door Spins Again – Former SEC Enforcer to Join Private Equity Giant KKR

In Liberty,
Michael Krieger

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