The principles will require broker-dealers and money managers retained by the FSBA to eliminate conflicts of interest, increase disclosure requirements, and consider the corporate governance practices of the companies in which they invest, according to the Board.
The move echoes steps taken by other public pension funds, including the $150 billion California Public Employees’ Retirement System (CalPERS) (see CalPERS Requires Money Managers to Open Up ).
The FSBA said that, effective September 10, every
financial organization that provides investment banking
services and is retained or utilized by the FSBA should
adopt terms of the agreement between Merrill Lynch and New
York State Attorney General dated May 21, 2002, according
to the FSBA (see
Pension Funds Put
Money Managers on Notice
). The board says it will give “significant
consideration” to whether such organization has adopted the
Investment Protection Principles.
The Investment Protection Principles adopted by the FSBA will require firms that do business with it 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 the firm has received, or is entitled to receive, any compensation from a covered company over the past 12 months
- establish a monitoring process to ensure compliance with the principles.
The FSBA also said that it will “give significant consideration” in retaining and evaluating active equity managers as to whether such managers conform to the following:
- money management firms must disclose periodically any client relationship, including management of corporate 401(k) plans, where the money management firm could invest FSBA assets in the securities of the client
- money management firms must disclose annually the manner in which their portfolio managers and research analysts are compensated, including but not limited to any compensation resulting from the solicitation or acquisition of new clients or the retention of existing clients. This disclosure is intended to apply strictly to the money management firm, not to affiliated companies, according to the FSBA
- money management firms shall report at least quarterly the amount of commissions related to FSBA assets paid to broker-dealers, and the percentage of commissions paid to broker-dealers that have publicly announced that they have adopted the Investment Protection Principles
- money management firms affiliated with banks, investment banks, insurance companies, or other financial services corporations shall adopt safeguards to ensure that client relationships of any affiliate company do not influence investment decisions of the money management firm. Each money management firm shall provide the FSBA with a copy of the safeguards plan and shall certify annually to the FSBA that such plan is being fully enforced
- In making investment decisions, money management firms must consider the quality and integrity of the subject company’s accounting and financial data, including its 10-K, 10-Q, and other public filings and statements, as well as whether the company’s outside auditors also provide consulting or other services to the company
- And finally, in deciding whether to invest FSBA assets in a company, money management firms must consider the corporate governance policies and practices of the subject company.
The FSBA Board is comprised of Governor Jeb Bush as Chairman, Treasurer Tom Gallagher as Treasurer, and Comptroller Bob Milligan as Secretary. The FSBA manages about $115 billion in assets, including the assets of the Florida Retirement System. The Florida Retirement System is the fourth-largest retirement system in the United States with nearly $84 billion in assets.