Pension Funds Put Money Managers on Notice

July 2, 2002 ( - Two large pension funds have put their investment management firms on notice that they are expecting greater scrutiny of the auditing and corporate governance practices of the companies in which pension fund monies are invested.

In addition, the chief investment officials of North Carolina and New York were joined by California State Treasurer Philip Angelides in stating that all investment banking firms that do business with the states will be expected to adopt the conflict of interest principles set forth in the agreement New York State attorney general Eliot Spitzer reached with Merrill Lynch in May. 

New York State Comptroller H. Carl McCall, sole trustee of his state’s $112 billion pension fund (second largest state public pension fund in the nation) the and North Carolina Treasurer Richard Moore, sole trustee of his state’s $60 billion pension fund (the country’s tenth largest state public pension plan), made the announcement. 

Angelides manages the Golden State’s $50 billion pooled money investment account, selects investment banks for $25 billion in state bonds and debt, and is a member of the governing boards for the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS).

The state officials said they would urge other public and private pension funds to adopt the same principles.

McCall and Moore said they would require that investment banks and money management firms that do business with the New York and North Carolina pension funds follow guidelines that go beyond the Merrill Lynch principles.

According to BNA, the additional principles for financial firms doing business with the pension funds must:

  • consider “the quality and integrity of the subject company’s accounting and financial data” and the corporate governance policies and practices of the company, when investing pension dollars
  • disclose any client relationship they have, including management of corporate 401(k) plans, with a company in which they might invest pension funds 
  • annually disclose the manner in which they compensate their portfolio managers and research analysts
  • report quarterly the amount of commissions paid to broker-dealers and the amount paid to those that have adopted the Merrill Lynch principles
  • adopt safeguards to ensure that client relationships of affiliates do not influence investment decisions, where applicable.

In addition, firms will be required to create a review committee to approve research recommendations, establish a monitoring process to ensure compliance with the principles, and disclose in research reports whether the company has received any compensation from the covered company over the previous 12 months.

A copy of the announcement and the principles are available.