Finance board balks at open-ended 'investment adviser' law

The state Board of Finance was warned Tuesday that approving "investment advisers" for small local governments would sidestep all the checks and balances designed to protect those entities financially.

The issue was raised when Paragon Asset Management Co. applied to become a registered investment adviser to handle securities purchases for small governmental entities in Nevada.

Treasurer Brian Krolicki urged the rest of the board, which includes Gov. Kenny Guinn and Controller Kathy Augustine, not to grant the approval. He said Paragon is a reputable firm but that approving them would open the door to many such applications.

He said once a company has that designation, it can contract to handle investments for a number of small improvement districts and local governments without state oversight. He said that sidesteps all of the controls in place through the old law which gave the Treasurer's Office power to control what types of investments small governmental entities put their money in.

"The intent of the original law was to make sure there was a safety net for the less sophisticated investors," he said, pointing out that many small governmental entities don't have money managers on staff.

He was joined by Steve McCoy of GIF Services, which is under state contract to manage and oversee those types of investments through the Treasurer's Office.

"Currently, every trade is monitored by the Treasurer's Office and the assets are in the custody of the state," he said. "Once you approve this, they would be outside all of those controls."

Krolicki said an investment adviser could sell a local entity on a certain type of investment without that entity understanding how risky it might be.

"They don't look at that. They just look at the yield and it looks very attractive," he said.

Krolicki, chief deputy John Adkins and deputy attorney general Kateri Cavin also told the board they currently have no regulations for deciding who is qualified to become an investment adviser. Adding that they are not certain the law gives them the power to make those regulations.

Guinn, Augustine and other members of the board agreed they should hold off on approving any investment advisers to deal with local governments until they take a much better look at the law and establish regulations.

Krolicki said he would prefer to go back to the 2005 Legislature and ask them to eliminate the option entirely.

Guinn appeared to agree, saying, "This law seems to me to be in conflict with the first law."

In other business:

-- Krolicki told the Finance Board the state's investment income for the first three quarters of this fiscal year is slightly above his staff's projections. With interest rates still as low as 1 percent, general fund interest revenue was $3.11 million for the nine-month period - a bit higher than the $2.92 million projected.

That is fraction of the millions earned in some years during the 1990s.

-- The board approved just under $362 million worth of bonds. The bulk of the bonds are highway fund money needed to pay for ongoing road construction projects - $199 million.

The list also includes $2 million for 18 cultural affairs projects, $74 million in capital improvement projects and $65.4 million in refunding of old bonds to take advantage of lower interest rates. The refunding will save the state about $3.5 million.

Contact Geoff Dornan at gdornan@nevadaappeal.com or 687-8750.