The ethical standards address short-term trading by portfolio managers and other improper activities that threaten the security of CalPERS members’ assets.
They are intended to ensure fair treatment, promote alignment of interests between CalPERS and managers, and establish a management structure in firms to handle conflicts.
They also will require external managers and consultants to report biannually to CalPERS on their adherence to the code, beginning December 31, 2004.
“This code of ethics advances the process that we began last November when we terminated our contracts with Putnam investments for improper trading activities to the detriment of long term investors,” said Sean Harrigan, President of the CalPERS Board of Administration. “We have a responsibility to ensure our managers follow the industry’s best practices – and this code will help accomplish that.”
The code was developed following correspondence with 66 equity, fixed income, and corporate governance managers and advisors who invest approximately $50 billion for CalPERS. It requires managers and consultants to:
- Implement policy and procedures to ensure fair and equitable allocation of investment opportunity and pending transactions among clients;
- Designate an officer to address all potential conflicts of interest;
- Design management structures to promote an environment of compliance and culture of integrity from the top, including ethics and compliance committees;
- Establish an independent ombudsman or facility to receive reported problems or compliance issues;
- Conduct a biannual review of compliance, using a third party expert;
• Ensure that the Chief Legal Officer and internal audit function report independently to the Board; and - Create an organizational chart showing reporting relationships and
establishing clear lines of authority and responsibility.
Additional ethical standards for external managers only requires companies to: - Disclose all soft dollar use, and costs, with comparisons to industry standards;
- Implement polices to promote an alignment of interests of investment professionals with clients including compensation structures that are sensitive to investment performance; and
- Disclose compensation polices requiring the investment or deferral of current income into the company’s products.
“Relatively few of the firms identified by federal regulators for improper trading activities have been under contract with CalPERS,” said Rob Feckner, Chair of CalPERS Investment Committee. “But we’re concerned that current ethics policies in the industry fall short of best practices. Requiring that all of our managers and consultants comply with this code is the best way to address that concern.”
A copy of CalPERS Code of Ethics can be found here.
In other actions, CalPERS Board endorsed a set of Mutual Fund Protection Principles that were launched in January by California State Treasurer Philip Angelides, North Carolina State Treasurer Richard Moore, and New York State Comptroller Alan Hevesi.
The principles are aimed at protecting the interests of mutual fund investors, and call for reforms at mutual fund companies including higher standards of disclosure, trading costs, and soft dollar practices among other things.
CalPERS is the nation’s largest public pension fund with assets totaling approximately $167 billion and serving more than 1.4 million public employees, retirees, and their families.
