Above board or 'pay to play'? Firm that guides North Dakota's $19.4B portfolio comes under fire

The firm that works closely with the North Dakota State Investment Board to select investment fund managers receives payments from some firms it recommends to the state — an arrangement coming under scrutiny.

An exterior view of the North Dakota State Capitol building
The North Dakota State Capitol is seen Jan. 17, 2021. Michelle Griffith / The Forum

BISMARCK — Questions have been raised about potential conflicts of interest involving a key financial adviser that recommends fund managers for the state of North Dakota’s $19.4 billion investment portfolio.

A firm called Callan, whose advisory role has been described as a “manager of managers,” has received payments from 12 of the 14 companies that manage the investments for the $8.7 billion Legacy Fund, the state's oil tax savings account, according to a Forum analysis of public records.

As the North Dakota State Investment Board's leading financial adviser, Callan plays an influential role in advising the investment board on selecting fund management firms for the Legacy Fund, public employee pension funds and state insurance funds.

Callan, headquartered in San Francisco, makes recommendations to the staff of the North Dakota Retirement and Investment Office as well as the board, which ultimately decides which managers to hire.

The fees that firms pay, which a Callan official said can total up to $60,000 per firm per year, are made to an educational arm of the company that includes Callan Institute and Callan College, and became a flashpoint after the State Investment Board selected a firm in April that pays Callan an undisclosed amount for research and other services.


On Callan's recommendation, the State Investment Board hired 50 Capital South to review in-state investment opportunities for the Legacy Fund. 50 Capital South is a firm owned by Northern Trust, which Callan lists as one of the many firms that pay Callan for a variety of services.

A review of documents by The Forum found that at least a dozen firms that pay Callan also actively manage investments for North Dakota, and were selected by the State Investment Board with input from Callan, which has advised the state for more than two decades and is considered a leading investment adviser.

“It gives me a little pause,” said Rep. Mike Nathe, R-Bismarck, a leading legislative advocate for using the Legacy Fund to invest inside North Dakota, who added that he was “not comfortable” with the situation. “This is something the State Investment advisory board and the State Investment Board need to take a hard look at. The authority lies with the State Investment Board.”

The Legacy Fund is an investment fund that sets aside 30% of state oil and gas revenues that voters approved in 2010 to make lasting use of the state's finite petroleum wealth.

Rep. Mike Nathe, R-Bismarck, at the North Dakota Capitol on March 19, 2021. Jeremy Turley / Forum News Service

Thomas Beadle, the state treasurer and a member of the 11-member investment board, wrote to Callan asking them for information to “avoid a cloud of doubt,” including lingering concerns about “pay to play” scandals that confronted Callan in the early 2000s.

Several states raised concerns about the payments to Callan by fund management firms it recommends. Callan paid a $4.25 million settlement to the city of San Diego, California, but said it did nothing wrong. The Securities and Exchange Commission considered complaints concerning what some have called “pay to play” and decided to take no action.


“One concern brought to my attention is regarding past headlines referencing previous involvement by Callan in a number of conflicts of interest and ‘pay-to-play’ scandals in other states,” Beadle wrote in an April 28 letter to a senior Callan executive.

“The scandals have revolved around the Callan Institute, Callan College and other so-called educational or consulting services. I trust that those issues are firmly in the rear view mirror, but I would like some assurances of that,” Beadle added.

In a response letter on May 10, Callan’s chief compliance officer wrote that the firm maintains a strict separation between its investment management division and Callan Institute — the two don’t communicate with each other, according to the firm — in order to avoid conflicts of interest.

“This is one of the many ways we maintain strict separation of business lines to insure that any potential conflicts are never realized in Callan’s consulting advice,” Ann DeLuce, Callan’s chief compliance officer, wrote to Beadle.

Also, Callan regularly discloses to its investment clients, including the North Dakota State Investment Board, the investment managers that pay Callan. Those disclosures are available upon request by investment clients and also are issued quarterly, DeLuce wrote.

The amount of the Callan Institute’s fees paid by investment firms for “high-quality events, research, and education for the purpose of creating a more informed, transparent, and integrated investment community” ranges from “$3,500 per person, per session for ‘Callan College’ and up to $60,000 per organization per year for the Callan Institute,” she wrote.

North Dakota State Treasurer Thomas Beadle


Fees that firms pay Callan kept confidential

Callan asked North Dakota officials to keep confidential the amounts investment managers pay Callan for Callan Institute and Callan College, and those amounts were not provided in response to public records requests from The Forum, with officials citing an exemption to open records law that protects proprietary information in state files.

“We are pleased to note that SIB” — the North Dakota State Investment Board — “Trustees and staff have attended many of our events over the years,” DeLuce wrote.

But some observers aren’t persuaded that Callan’s disclosures and “strict separation” can avoid what at least gives the appearance of a conflict of interest involving management of crucial state investments.

“It certainly is giving off the appearance of a conflict at a minimum,” said Luke Heck, a Fargo lawyer who has been an advocate of investing Legacy Fund earnings in North Dakota. “I think it warrants further review to see how they’re doing this ‘firewall.’”

Letter to Callan by inforumdocs on Scribd

Heck said the public should be given detailed assurances that there is, in fact, a system of checks and balances that prevents payments Callan receives from investment managers from tainting the advice it gives about which firms to hire to manage state funds.

Without that, he added, “How is it healthy?”


Mike Fedorchak, state director of Americans for Prosperity-North Dakota, which advocates for free markets, had similar concerns.

“I think this is a conflict of interest,” Fedorchak said. He said State Investment Board members were resistant to opening up the Legacy Fund to direct investments into North Dakota businesses. From its inception, the Legacy Fund has invested in Wall Street and global investment funds.

Despite assurances from Callan and state officials, “It’s wildly inappropriate,” Fedorchak said. “You can’t put lipstick on a pig.”

Callan Response May 10 2021 by inforumdocs on Scribd

David Hunter, North Dakota’s chief investment officer, said State Investment Board members are given the disclosure lists of firms that pay Callan quarterly as part of packets of materials the members receive.

“It’s all a matter of public record,” he said. “It’s been published in our informational materials every quarter.”

North Dakota’s Legacy Fund earned a top score on a transparency index for sovereign wealth funds from an organization called SWFI, indicating the state has been recognized for openness in the way it oversees the fund.


Beadle, who asked for clarification from Callan and joined the board when he took office as state treasurer in January, said he is “comfortable” with the arrangement. His main concern, he said, was “If we had an overweight concentration of funds that Callan had a relationship with,” and concluded that the dozen or so examples were not of concern.

“I do think there is a mix,” he said. “I think we are getting a little more variety than I was thinking might be the case. That gave me a little more comfort.”

Still, Beadle said, he thinks it would be good practice if staff would disclose any financial relationship Callan has with investment managers it recommends to the board at the meetings when board members hire managers.

In the April meeting when 50 South Capital was hired, Beadle doesn’t recall discussion that the firm and another finalist, GCM Grosvenor, appear on disclosure lists as paying Callan for services.

“That question didn’t come up with regard to that conversation,” he said. “We still felt very comfortable” with 50 South Capital.

A third finalist, which Callan did not recommend as strongly, Sun Mountain Capital Advisors, does not appear on Callan’s latest disclosure statement.

Lt. Gov. Brent Sanford speaks during an event at the North Dakota Capitol on May 7, 2019. John Hageman / Forum News Service


'Nothing inherently wrong' with firms working together

Lt. Gov. Brent Sanford, who heads the State Investment Board, said Callan’s “firewalls” prevent conflicts of interest.

"There’s nothing inherently wrong with those companies working together,” Sanford said. Also, he said, there would be more potential conflicts if North Dakota businesses seeking state investments appeared directly before the board and were not vetted by a third party.

Asked whether the investment board would discuss taking additional steps to make board members more aware of ties between Callan and firms it recommends, Sanford said, “I think that conversation is going to be ongoing, whether it’s with Callan or anybody else.”

New legislation to allow Legacy Fund investments in North Dakota businesses means up to $800 million will be available, with $250 million eligible so far. That compares to an estimated $30 million in existing venture capital investment in North Dakota, ranking it near the bottom of states, Sanford said.

“So there’s a reason to do this,” he said, referring to investing to strengthen the state’s economy.

State officials were worried, however, that opening the fund to North Dakota investments would introduce “politics” into the process, and that’s why it’s best to use firms like Callan and the firms it recommends to evaluate and manage investment opportunities, Sanford said.

“Callan is committed to ensuring that it does not consider an investment manager’s business relationship with Callan when making suggestions or recommendations to its clients. It’s also Callan’s long standing policy to provide transparency and information to clients, all of which is described in our code of ethics on our website ,” said Elizabeth Anathan, Callan’s vice president for corporate communications.

Besides disclosing its business relationships with investment managers upon request, Callan also discloses these manager relationships as part of each manager search, in quarterly performance evaluation reports provided to its institutional investor clients and in annual mailings, Anathan said.

“Integrity and transparency are at the heart of everything Callan does,” she said. “We are very proud of the long, productive consulting relationship that exists between the SIB and Callan.”

In time, North Dakota might develop more in-state investment management expertise, but to get the in-state investment program going quickly, officials decided to have Callan recommend qualified, established out-of-state investment firms, Sanford said.

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