U.S. pension funds need curbs on campaign donations: NY

NEW YORK (Reuters) - Investment firms should be barred for two years from managing U.S. public pension funds if they make campaign contributions to the politicians who make the investment decisions, a spokesman for New York's state comptroller urged on Monday.

New York Attorney General Andrew Cuomo and the Securities and Exchange Commission are probing kickbacks they say that firms paid to be chosen to make investments for New York's $122 billion pension fund under the former state comptroller. The investigation has gone national, reaching Texas, New Mexico and California.

"'Pay to play' has absolutely no place in the management of public pension funds," said the current state comptroller, Thomas DiNapoli, who urged the SEC to subject public pensions to the same rules that limit campaign donations by broker-dealers who underwrite municipal bonds.

"The SEC can help restore public confidence in state and local government pension plans all across the nation," added DiNapoli, a Democrat.

The kickback probe is scrutinizing ties between lobbyists, lawyers, investment firms and placement agents -- middlemen hired by firms eager to manage public pension funds' assets, which total nearly $3 trillion.

DECADE-OLD RULE MAY GET AN ENCORE

A spokesman for the SEC, which joined Cuomo's ongoing investigation, said the agency in July could issue rules for a reform that it dropped a decade ago.

"We are seriously reconsidering the 1999 proposal that would have triggered a ban on investment advisers from managing state pension funds for two years on the basis of certain political contributions," the SEC spokesman said by e-mail.

On Monday, the board of Calpers, the biggest U.S. pension fund, started requiring its investment managers to disclose any placement agents they hired to win its business and the fees they were paid.

New York state's comptroller already has banned placement agents from meetings or transactions with the New York State Common Retirement Fund, and New York City's pension funds have begun doing so regarding those seeking to do business with the pension funds for police, firefighters, municipal employees and teachers.

Peter Pendergast, a Boston-based lawyer with Mintz Levin, defended placement agents. Only one person has pleaded guilty in the Cuomo-SEC probe. Lawyers for the three men facing criminal and civil charges say their clients are innocent.

"It's very dangerous to put this entire industry in terms of 'pay to play,' the implication being that everyone who is successful has paid somebody (for the opportunity) to manage pension fund investments," Pendergast said.

Further, prohibiting political contributions raises First Amendment concerns, he said.

Some banks are major donors. In New York, for example, Goldman Sachs was the most generous bank, ranking seventh on the list of the top 10 lobbyists and donors in 2008, according to the New York Public Interest Group.

A Goldman spokesman had no comment on the civic advocacy group's report.

(Additional reporting by Jim Christie in San Francisco)

(Reporting by Joan Gralla; Editing by Jan Paschal)