Senator Eliot Shapleigh - El Paso, Texas

Legislature must be set to 'intervene early' if problems develop, says Robert Duncan.

State Sen. Robert Duncan on Wednesday expressed concern about the Teacher Retirement System of Texas' recent replacement of its longtime fiduciary counsel.

At a hearing of the Senate State Affairs Committee, which he chairs, the Lubbock Republican said it appeared the system's new outside law firm, Cooley Godward Kronish LLP, is rife with potential conflicts of interest.

Duncan also said that the Legislature should be ready to "intervene early" if problems surface at the $113 billion retirement system, which pays benefits to 1.3 million public school and higher education employees.

Duncan had called retirement system officials to the Capitol to talk about the switch in fiduciary counsel and to question officials about the system's planned modernization of its ethics and disclosure policies.

Roel Campos, a former U.S. Securities and Exchange commissioner based in Cooley Godward's Washington office, will be the system's primary fiduciary counsel. The retirement system board last month hired Cooley Godward after voting 5-4 to jettison its then-counsel, Ian Lanoff of the Groom Law Group in Washington. Lanoff, who represents most of the 15 largest public pensions in the U.S., had served as fiduciary counsel for 12 years.

A fiduciary counsel advises clients on governance and ethics. The position is viewed as a critically important and more complex job today as pension funds such as the Teacher Retirement System invest more in private equity, venture capital, natural resources and other alternatives to stocks and bonds.

At the committee hearing, Duncan said Campos' firm, Cooley Godward, "has one of the nation's largest practices in venture capital and private equity," which could cause conflicts as the retirement system continues its push to move about 30 percent of its assets in harder-to-value alternative investments.

"If (the retirement system) invests in a private equity firm that is a client of your firm, is that not a conflict of interest?" Duncan asked Campos.

"It could be," said Campos, who added that law firms, including Cooley Godward, are experienced in setting up "Chinese walls" to prevent the sharing of information between lawyers whose clients have competing interests.

Duncan, a lawyer, said he has found such barriers "to often be ineffective."

James Lee, the Houston investor and Republican fundraiser who chairs the retirement system's board, said Campos was chosen because of his experience as a SEC commissioner and because he has "expertise in the broader area of investments where TRS has moved into."

"We made the right decision, and we made it for the right reasons," Lee told the panel.

The Legislature in 2007 passed legislation authored by Duncan that expanded the types of investments the retirement system could put money into and allow the system to invest more money with outside managers.

Duncan warned system officials that the Legislature could withdraw its support for expanded investment authority if lawmakers decide the fund is heading in the wrong direction. He asked Lee to bring the system's proposed new ethics policies to the State Affairs Committee before the board acts on them.

"If the agency is moving in a direction that would cause risk in a $100 billion fund, we want to intervene early rather than do a postmortem," Duncan said.