N.H. Attorney General Backs Off Dartmouth for Fee Details
Hanover — New Hampshire regulators have backed away from their request that Dartmouth College disclose fees paid to alumni leaders whose firms manage and profit from college investments.
State officials last year asked for details about the fees after the Valley News reported that Dartmouth may have failed to provide the fee disclosures required by the state’s nonprofit law in mandatory filings about the college’s tax-exempt $3.5 billion endowment.
A recent filing by the college again did not detail fee payments in connection with two transactions in which the college invested $40 million with firms affiliated with the chairman of the Dartmouth board of trustees and another trustee. The college said such fees were not detailed because they “cannot be quantified.”
After pressing the college for such information last year, Anthony Blenkinsop, director of the New Hampshire Attorney General’s Charitable Trusts Unit, said in an email interview that he has concluded that Dartmouth’s latest filing did not run afoul of a requirement in the state’s nonprofit law that mandates disclosure of all “pecuniary benefits” received by a firm owned or managed by a nonprofit trustee.
If the amount cannot be quantified, Blenkinsop said, it needn’t be reported. “Dartmouth represented in its disclosure that, for this reporting year, such an amount was not quantifiable given the nature of the transaction,” Blenkinsop wrote.
That appears to put to rest a question about whether Dartmouth was required to report some payments to trustee-affiliated firms that, according to a recent disclosure, manage an estimated 13.5 percent of the college’s $3.5 billion endowment.
In a July 2011 letter, Blenkinsop told Dartmouth that it must disclose fees paid to trustees’ firms that handle investments from the college endowment. In April, however, a lawyer for Dartmouth wrote to Blenkinsop that the complexity of fee arrangements with investment funds made it impossible to compute and disclose the fees paid to the trustees.
When the college subsequently filed its annual report with the Charitable Trusts Unit, it listed several transactions between Dartmouth and trustee-related firms, including an investment of $30 million in a hedge fund managed by Stephen Mandel Jr., chairman of Dartmouth’s board of trustees, and a $10 million investment in a fund managed by a firm where trustee William Helman is a partner. The filing omitted any information about fees paid to the firms of Mandel and Helman or other trustee-affiliated firms in connection with these 2011 investments, or investments made in earlier years.
The college asserted in its report that “in no case is the investment company compensation received by any trustee with whose firm Dartmouth invests tied, directly or indirectly, to the amount of the investment or management fee paid by Dartmouth. The firms that sponsor the investment funds may be entitled, over the life of a fund, to certain management fees or sharing of profits. However, these amounts cannot be quantified for any fiscal year.”
That persuaded Blenkinsop, who told the Valley News that he has requested no additional disclosures from the college.
Dartmouth’s argument didn’t persuade Martin Gross, a Concord lawyer and former chairman of the New Hampshire Charitable Foundation who helped to craft the 1996 law aimed at curbing nonprofit conflicts of interest. At the very least, he said, the college should disclose the overall fee paid to a trustee’s private firm.
“My view is that although it may not be possible for Dartmouth to trace the precise amount of compensation realized by the individual trustee from having the investment placed with his firm, it certainly should be possible for Dartmouth to identify and report the amount paid in any given year to the trustee’s firm for managing the investment,” Gross told the Valley News.
Gross said that the regulator’s acceptance of Dartmouth’s disclaimer reflected “an extremely literal and restrictive translation of the statute,” and pointed out that the law defined a pecuniary benefit as “an interest in a transaction exceeding $500 in value” each year. Gross questioned how Dartmouth could say it was unable to “calculate the fees paid to an investment manager in the course of a year.” Gross added, “These are not rocket science questions.”
New Hampshire law prohibits nonprofit organizations from engaging in transactions in which a director or officer has a direct or indirect financial interest, except under specified conditions:
∎ To be permissible, two-thirds of a nonprofit organization’s governors not involved in that transaction must determine that it is in the organization’s best interest and fairly priced.
∎ Transactions of more than $5,000 must be publicly disclosed in advance.
∎ In addition, the law requires that the organization keep a list of all transactions, the amount of the transaction, the interested party and the fees paid to him or her, and submit that list to the state along with its annual report, which is available for public review. That list must also be made available to all trustees and to an organization’s contributors.
It was the last requirement — the compilation of a list of transactions with firms affiliated with college governors that specified the fees and other pecuniary benefits received by those governors — that prompted Blenkinsop’s letter to Dartmouth last year.
The disclosure requirement was enacted in 1996 in the wake of a short-lived ban on all transactions between nonprofits and their directors or officers. State officials and many nonprofit executives deemed the ban overly strict and, ultimately, unworkable.
Jim Rubens, of Hanover, a former state senator who helped shepherd the bill through a divided Legislature, said the revised law was a product of a key compromise: “freedom in return for sunlight.” Nonprofit organizations were allowed to do business with companies affiliated with their directors and officers, but only in exchange for “a very high-grade disclosure.”
‘PECUNIARY BENEFIT TRANSACTIONS’
Dartmouth officials said they have taken pains to avoid conflicts of interests among trustees and other alumni leaders, and to provide state regulators with information about cases in which the trustees’ college duties intersect with their private businesses.
That information would include investment fees collected by college leaders, Dartmouth said — but only if they could be quantified.
“It is Dartmouth’s view that the Pecuniary Benefit Law requires charities to disclose the benefits provided directly to trustees and officers with whom the charity has financial transactions, as well as the benefits provided to a firm with which the trustee or officer is affiliated as a proprietor, partner, employee or officer where the amount of the benefit can be quantified,” said Justin Anderson, a college spokesman.
The difficulties Dartmouth says it faces in computing pecuniary benefits paid to trustee-affiliated firms were spelled out in a 1,100-word letter dated April 18 by Robert Wells, a Concord attorney representing Dartmouth. “The sponsors of Private Equity Funds and Hedge Funds may be entitled over the life of a fund to certain management fees or sharing of profits which amounts cannot be quantified,” Wells wrote.
Wells did not respond to a request for comment.
A recent study posted on the web site of the Private Equity Growth Capital Council, a trade organization, found that investors in private equity funds typically pay annual management fees equal to about 2 percent of committed capital. Managers also typically keep about 20 percent of investment profits.
Wells, in his letter, noted that Dartmouth’s private equity funds’ annual management fees range from 1 to 2 percent and that hedge funds “have a different mechanism but reach the same economic result as Private Equity funds.”
In a recent interview, Blenkinsop acknowledged that the computation of fees paid to investment managers is “constantly fluid” and “incredibly complex,” but added that he expects Dartmouth to at least disclose the amount of each transaction and that it might pay benefits to a trustee. “Give the public as much information as you can,” Blenkinsop said.
In an email to the Valley News, Blenkinsop spelled out his position: “Pecuniary benefit transactions, by definition, concern transactions involving directors, officers, or trustees of the charitable trust in which they have a financial interest, direct or indirect,” he wrote. “The amount of the transaction and any quantifiable pecuniary benefit should be disclosed.”
Other investors routinely compute and disclose fees paid to managers of investment funds. For example, the California Public Employees Retirement System regularly discloses the fees it pays to Apollo Investment Fund VII, a fund in which Dartmouth also has a stake.
According to its public filings, the California system valued its Apollo VII stake at $489 million at the end of fiscal 2011, and paid the fund’s managers $10.7 million in management fees during calendar 2011 and $9 million in 2010.
Dartmouth revealed its stake in Apollo VII because Leon Black, the founder and CEO of Apollo Global Management, which manages the Apollo VII fund, was a Dartmouth trustee in 2007 when the college committed to invest $25 million in Apollo VII. However, Dartmouth has not publicly disclosed its fee formula or payments to Black’s firm.
In other settings, Dartmouth has quantified investment fee payments. For example, the college’s publicly released audited financial report for fiscal 2011 says that the college paid $11.7 for “investment management and custody services.” That figure included “investment management fees related to the endowment” as well as “fees that were paid by investment pools outside of the endowment,” Anderson said in an email.
“The $11.7 million includes internal expenses and some, but not all, fees paid to external managers across the investment pools, including the endowment,” Anderson explained in a later email. “It does not include management fees with respect to private equity, hedge funds, or other investments for which fees are disbursed from the investment account and not paid directly by Dartmouth.”
An anonymous letter recently sent to state officials offered its own esti
mate on fees paid to trustees and other alumni active in Dartmouth College governance. Without citing a source for its assertion, the letter said that the firms in which nine influential Dartmouth alumni, including seven current or former trustees, were owners or managers collected $87 million in management fees and profit sharing related to investments by the college.
Asked about the anonymous letter’s estimate of fees paid, Anderson said that the college did “not comment on the fees of individual investments specifically and Dartmouth invests on industry standard terms.” However, he added, “We receive the same terms as all of the other investors in each of these funds.”
Dartmouth has vigorously defended its efforts to avoid conflicts of interest in dealings with trustee-affiliated firms. Wells, the lawyer representing Dartmouth, wrote in an April letter to Blenkinsop that the college imposes its own “rigorous requirements on the Trustees.” The college prohibits attempts to influence its professional investment managers, weighs related-party investments by the same criteria used on other deals, requires written reviews and approval of related-party deals by three panels and mandates the preparation of an annual report on the performance of related-party investments, Wells wrote.
During the course of the exchanges between state regulators and Dartmouth officials, Dartmouth General Counsel Robert Donin made an unusual disclosure. He provided a table showing that, as of June 30, 2011, the college had $460.5 million from the endowment invested in funds affiliated with college trustees or members of that board’s investment committee. Donin noted that New Hampshire’s nonprofit law requires public disclosure of trustee-affiliated investments only if those transactions occur while a trustee is in office.
According to Donin, only about $43 million — 1.3 percent of the endowment’s value at the end of fiscal 2011 — represented investments Dartmouth made in trustee-affiliated funds while those alumni leaders served on the board of trustees.
The college’s most recent annual report, submitted May 16 for the fiscal year that ended June 30, 2011, included an attachment that listed two investments of endowment funds in trustee-related firms: up to $10 million in Greylock Fund XIII and $30 million in Lone Pine Capital’s Lone Dragon Pine fund.
The filing identified Helman, who chaired the trustees’ investment committee in fiscal 2011, as the interested party in the Greylock transaction, and included board minutes showing that Helman did not participate in the discussion or vote on that transaction. Helman is a partner and one of the 16 men whose pictures appear on Greylock’s web page showing its “investing team.”
Dartmouth’s filing also identified Mandel as the interested party in the Lone Pine transaction. Mandel, who is chairman of the Dartmouth board of trustees and an ex officio member of the trustees’ investment committee, did not participate in the discussion or vote on that transaction, according to board minutes. Mandel founded and manages the portfolio at Lone Pine, a hedge fund company with $17 billion in assets, according to an August submission to securities regulators.