CalPERS Requires Money Managers to Open Up

August 20, 2002 ( - Financial service providers will have to adopt new conflict of interest principles if they want to do business with the nation's largest public pension fund.

Yesterday the Board of Administration of the $150 billion California Public Employees’ Retirement System (CalPERS) voted to adopt a set of investor protection principles that CalPERS staff will implement – with the intent of requiring contracting money management firms to be more transparent and more responsive to corporate governance and financial reporting variables.

State Statements

California State Treasurer Philip Angelides sent a signal to the financial services community when he joined with chief investment officials from the New York and North Carolina state funds in supporting the conflict of interest principles set forth in the agreement New York State attorney general Eliot Spitzer reached with Merrill Lynch in May.

At the time the state officials said they would urge other public and private pension funds to adopt the same principles.  Angelides, who manages the Golden State’s $50 billion pooled money investment account and selects investment banks for $25 billion in state bonds and debt, is also a member of the governing board for the California State Teachers’ Retirement System (CalSTRS).

Fuller Disclosures
Following the decision, CalPERS’ current and new money managers will be required to disclose a number of items, including:

  • Client relationships, including management of corporate 401(k) plans, where the money manager could invest CalPERS’ assets in securities of the client;
  • How portfolio managers and research analysts are compensated, including any compensation resulting from the solicitation or acquisition of new clients or the retention of existing clients;
  • The amount of commission paid and percentage related to CalPERS’ assets to broker dealers;

According to CalPERS, equity and bond managers will be required to:

  • Adopt safeguards to ensure that client relationships of any affiliated company do not influence the investment decisions of the firm; and
  • Seriously consider the integrity and quality of a company’s accounting and financial data and corporate governance policies before investing CalPERS’ assets in the company.

Broker dealers with investment analysis will be required to:

  • Sever the link between compensation for analysts and investment banking;
  • Prohibit investment banking input into analyst compensation;
  • Create a review committee to approve all research recommendations;
  • Require that upon discontinuation of research coverage of a company, firms will disclose the coverage termination and the rationale for such termination;
  • Disclose in research reports whether a firm has received or is entitled to receive any compensation from a covered company over the past twelve months; and,
  • Establish a monitoring process to ensure compliance with the principles.

A copy of CalPERS’ investor protection principles can be found on the System’s Shareowner Forum web site at , and click “Financial Market Reform Principles.”  You can also find a list at .