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The policy requires current consultants to identify any future circumstances that may create actual, potential or perceived conflict of interests prior to providing advice on a specific subject or investment, including a recommendation on a money manager. Consultants seeking to do business with CalPERS would also be required to disclose conflicts as part of the bidding process.
CalPERS policy goes beyond its current practices. Currently, the pension fund relies on Statement of Economic Interests disclosures, SEC filings and disclosures by consultants during the contract process.
“This policy is designed to ensure that CalPERS investment advisors are giving advice that is solely in the interest of CalPERS members and beneficiaries and is not influenced by the advisors’ own financial interests,” said Rob Feckner, President of the CalPERS Board. “It will help us identify future problems and provide tremendous confidence to our members and the public that investment advice adheres to the highest standards.”
Under CalPERS policy a “conflict” exists when a consultant knows or has reason to know that he or she, his or her spouse, or a close relative, domestic partner or other significant personal or business relationship, has a financial or other interest that is likely to bias the consultant’s advice to CalPERS.
Some examples of potential conflicts that would have to be reported include instances when the consultant recommends its own propriety products and services, enters into a business arrangement that is competitive with CalPERS interests, or has a financial relationship with a placement agent who has an investment opportunity under consideration by CalPERS.
The policy further directs CalPERS staff to follow specific protocols to determine whether an actual conflict exists, whether it could give rise to a future conflict, and how such a conflict could be properly managed to prevent it from resulting in an actual conflict in the future.
The new policy also places some proactive responsibilities on the pension fund’s investment staff, including reviewing with each consultant annually all of its disclosable interests to discuss any potential ongoing or cumulative effect such an interest could present. In addition, the staff would be required to provide annually, or more frequently if needed, to CalPERS Investment Committee a summary of the types of disclosable interests and actions taken by the staff in response to such interests.
“The success of our investment program is strengthened by the accuracy, integrity and independence of our pension consultants’ advice,” said Charles P. Valdes, Chair of CalPERS Investment Committee.
CalPERS currently relies on approximately 28 pension consultants for its investment portfolio. They include consultants for real estate, private equity, corporate governance, and general pension issues.
The adoption of CalPERS policy is timely following a report in May by the Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations.
The SEC found that more than half of 24 pension consultants examined or their affiliates provided products and services to both pension plan advisory clients and to money managers and mutual funds on an ongoing basis. It also found that many pension consultants have affiliates that also provide services to pension plan clients and do not adequately disclose conflicts of interest arising from these practices.
A copy of CalPERS policy and a list of its current consultants can be found on in the System’s press room on its web site at www.calpers.ca.gov. CalPERS is the nation’s largest public pension fund. The System provides retirement and health benefits to more than 1.4 million State and local public employees and their families.
