According to the New Jersey Superior Court, Appellate Division, the New Jersey Division of Investment went beyond its authority with its rules allowing the division director to hire external managers to oversee pension fund investments. The panel however, did uphold the rules allowing the division to invest in private equity funds, hedge funds, as well as other alternative investment vehicles.
In June 2005, the New Jersey Securities Investment Council adopted regulations allowing investments in hedge funds or an absolute return strategy, as well as private equity funds. Soon after, pension funds were committed to private equity partnerships Warburg Pincus IX LLC, Blackstone Capital Partners V L.P., Quadrangle Capital Partners II L.P., and Oak Hill Capital Partners II L.P.
In 2006, the SIC put into effect procedures to bring in external investment managers to supervise pension funds in publicly traded securities. In 2007, the SIC adopted rules allowing the Division of Investment and the director to hire the managers.
The New Jersey Education Association and the Communication Workers of America appealed the actions made by the SIC, the New Jersey Treasurer, and the Division of Investment to adopt and implement the rules. After looking at the statutes, the New Jersey Court found that while the Director has the authority to invest, he or she does not have the authority to give that power to another party. Therefore, not only were any regulations giving the director this authority invalid, but any agreements made by the external managers because of such regulations were also not valid.
The court noted that while the director had the authority to invest in private equity funds and alternative investment management strategies, the director was subject to specific limitations, per N.J.S.A. 52:18A-89c.
Related Web Resources:
Court: No outside hedge fund managers for N.J., Pensions and Investments, August 25, 2008
Court Says US Pension Funds Can Invest in Alternatives, Online Financial News, August 26, 2008
Division of Investment, State of New Jersey Department of the Treasury
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