Critics Say Magaziner’s Reforms are Public Relations, Not Substance
Sunday, July 26, 2015
Rhode Island General Treasurer Seth Magaziner says he’s leading a nationwide effort to create and foster more transparency around the world of alternative investments—specifically, with respect to disclosure of fees to state pension funds.
But some national critics are calling his well-publicized efforts a publicity stunt, saying that treasurers like Magaziner already have the power to enact the changes they’re asking others to give them.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTMagaziner recently wrote a letter, and put together a group of twelve other state treasurers who cosigned it this week, that calls on the US Securities and Exchange Commission (SEC) to enact regulations making private equity fees more clear, transparent, and uniform among states. The letter was signed by managers of massive pension funds such as the California State Treasurer and New York City Comptroller.
Magaziner said during an interview on Friday that he was inspired to write the letter asking for greater transparency around private equity fund fees after the SEC charged Kohlberg Kravis Roberts & Co. with misallocating $17 million in deal expenses and fees back in June, to the detriment of their investors. (The state pension fund isn’t invested in KKR, but Magaziner said more transparency around private equity would prevent similar situations from arising elsewhere.)
Better Disclosure?
“As state Treasurers and Comptrollers, we hereby urge the SEC to require general partners to make better disclosure of private equity expenses,” Magaziner wrote in the letter, signed by the 12 other treasurers and comptrollers.
“Nothing like elected officials using letter-writing to a weak agency and asking it to exceed its powers to hide the fact that they aren’t willing to do their jobs,” writes Susan Webber, under the pen name Yves Smith, on her blog Naked Capitalism.com. Webber, a principal at the New York City management firm Aurora Advisors Ic., is a harsh Wall Street critic.
Her blog, Naked Capitalism, is focused on finance and economics news and analysis. It’s been listed on CNBC’s top 25, Best Alternative Financial Blogs. New York Times financial reporter Gretchen Morgenson has referred to the blog as one of “two must-read financial blogs”.
Contacted yesterday, Webber said that appealing to the SEC is a useless gesture because the body doesn’t have the statutory capability to write regulations forcing more transparency, nor the desire to do such a thing even if it had the ability.
No Comment From SEC
SEC Spokeswoman Judith Burns declined comment on the Magaziner proposal on Friday.
“We’re declining to comment on that letter in question,” said Burns.
Asked why and on what grounds, Burns refused to answer.
Webber said she wasn’t surprised.
Webber believes the Treasurers in question, including Magaziner, are looking for public relations victories and lack the actual desire to force more disclosure of private equity fees.
“The private equity industry has gotten laws passed and they’ve gotten Attorney General opinions across the country saying that they don’t have to disclose the information in question here,” said Webber, adding that it's "naïve" to think that the SEC is going to somehow make that a reality.
(In July of last year, Rhode Island Attorney General Peter Kilmartin issued an opinion that The Providence Journal couldn’t gain access to redacted information of hedge fund records pertaining to fees.)
Webber pointed out that only “accredited” investors (the wealthy, large institutions like an endowment or a state pension fund), are allowed to invest in sophisticated, alternative investments, like private equity funds. That, she said, implies that they’re either unable, or unwilling to do their duties.
“Assuming for a second that this isn’t, in fact, a publicity stunt, than the state treasurers are trying to have their cake and eat it too…The fact that they’re crying to the SEC suggests that they’re not able or not willing to do their jobs as accredited investors. In they want retail disclosure, than they shouldn’t be investing in alternatives,” said Webber.
Look To The Legislature?
To solve the problem, Webber suggests that treasurers like Magaziner look to their own legislatures to pass the laws they’re asking the SEC to implement.
Magaziner, however, rejected the notion that his reforms have been toothless publicity stunts. Magaziner said that going forward, the state will only invest with funds that agree to disclose performance, fees, and expenses, and list those on the state’s website.
“That’s not a publicity stunt. That’s something very real,” said Magaziner.
But to force private equity firms to disclose its non-traditional fees that are difficult to ascertain, the state needs help from an outside regulatory body such as the SEC. Magaziner disputes the assertion that the SEC doesn’t have the capability to write regulations regarding fee disclosure, arguing that the Dodd-Frank law gives the SEC the authority to regulate private equity funds.
Magaziner: Private Equity Needed
Magaziner also pointed out that private equity funds are among the best performing asset classes in for public pension funds, and therefore it would be irresponsible for pension funds to jettison them. That’s why, Magaziner said, he doesn’t yet have the leverage to simply refuse to do business with a private equity fund that refuses to disclose its fees in the way he would prefer.
Magaziner doesn’t think it would be wise for the state of Rhode Island to enact its own laws regarding the fee reporting of private equity forms. The fact that certain states would have stricter reporting laws with respect to fees from alternative investments would likely put those states at a competitive disadvantage, he said.
“There really need to be national standards,” said Magaziner.
He wrote something similar in the letter.
“In the absence of a clearly defined standard, states that voluntarily disclose more comprehensive accounts of total fees and expenses are put at a disadvantage in state-to-state comparisons,” the letter reads.
Siedle Weighs In
Forbes columnist Edward Siedle, a critic of the alternative investment industry, former Treasurer and now Governor Gina Raimondo, and as of late, Magaziner himself, isn’t buying his arguments. Siedle, a former SEC lawyer, doesn’t believe that the SEC has the authority to enact the regulations he proposes.
Siedle argues that the state should simply demand the information in question from the private equity funds they’re investing with. According to Siedle, should those firms refuse, Magaziner should remove the money from the firms in question. If that’s not possible due to contractual agreements, then the state should just list the funds that refuse to comply on its website.
“Just put them on the bad boy list,” said Siedle.
But Magaziner brushed off the suggestion, saying that the state needs to look at the big picture. Doing so, he fears, could result in a lesser return on investment because good earners would take their investing elsewhere.
“We are in a progression right now. We have already gone further than any other state (with respect to fee disclosure), and we will continue to push further. But it would be much easier to have some national standards and uniformity,” said Magaziner.
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