The California Public Employees’ Retirement System (CalPERS) announced last week that its Board of Administration adopted new policies regarding disclosure of potential conflicts of interest among its investment advisors
The new policy requires investment consultants to “identify any future circumstances that may create actual, potential or perceived conflict of interests prior to providing advice in a specific subject or investment.” Any potential future investment consultants would be required to disclose such conflicts as part of the bidding process for contracts. The new policies go above and beyond CalPERS’ current practices, which rely on disclosures and U.S. Securities and Exchange Commission (SEC) documents.
CalPERS’ policy says a conflict exists when an advisor knows or has reason to know that any kind of friend or close relative or associate has an interest that is likely to bias the advice they give to the pension system.
The pension system’s announcement cited a report last month by the SEC that found more than 50% of the pension consultants they examined or their associates served both pension funds and money managers.
But in its efforts to insure uncorrupted investment decisions, some legal observers note that the pension system may be putting too heavy a burden on its advisors. “It’s safe to say that the conflict of interest policy adopted by CalPERS does go beyond what they’re required to do under law and it’s questionable whether there’s any real corresponding benefit to what investment consultants are being asked to provide,” says Attorney Michael Littenberg, a partner with Schulte, Rogh & Zabel. He warns that CalPERS’ definition of what constitutes a conflict may be too broad and cause advisors to take a more narrow view of what constitutes a conflict. “Notwithstanding the staff inspection that was referred to, existing policies and procedures that they have in place are probably effective with a little bit of ad hoc supplementing on a case-by case basis.”
CalPERS uses approximately 28 pension consultants for its investment portfolio. In April, the pension system again picked Santa Monica, Calif.-based Wilshire Associates as its primary pension consultant. Wilshire has served CalPERS in that capacity for the past 22 years and is credited with overseeing CalPERS Permissible Market Equity Policy and authoring a study of the effects of the pension fund’s policies. The firm’s contract will be effective July 1 and last three years with the option of two one-year extensions. Grove Street Advisors, Pacific Corp
Corporate Group, the PrivateEdge Group and Hamilton Lane Advisors have also served the pension giant.
CalPERS has approximately $182 billion under management and approximately $8.5 billion in alternative investments and private equity. It is a limited partner in funds managed by firms such as Austin Ventures, Blackstone Group, the Carlyle Group, Coller Capital, Lexington Partners and U.S. Venture Partners.