The California Public Employees’ Retirement System has adopted a new policy to prevent conflicts of interest with its investment consultants.
CalPERS – which consults with 28 advisors for its investments in real estate, private equity and other asset classes, as well as for corporate governance – announced last week that it is requiring its advisors to disclose any circumstances that may create “actual, potential or perceived” conflicts.
A statement from the pension funds reads: “Under the new 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.”
The policy requires CalPERS’ consultants to disclose any conflicts of interest prior to providing investment, as part of the bidding process for contracts with the pension fund. CalPERS, the nation’s largest public pension, says the new policy goes above and beyond its current practices, which rely on disclosures and U.S. Securities and Exchange Commission documents.
CalPERS’ announcement cited a report last month by the SEC that found more than half of the pension consultants examined, or their associates, served both pension funds and money managers.
But some legal observers note that in its efforts to insure uncorrupted investment decisions, 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 really 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. “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,” Littenberg says.
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 the pension fund’s Permissible Market Equity Policy and authoring a study of the effects of the pension fund’s policies. The firm’s newest contract takes effect July 1 and lasts three years with the option of two one-year extensions. Grove Street Advisors, Pacific Corporate Group, the PrivateEdge Group and Hamilton Lane Advisors have also served the pension giant.
CalPERS has about $182 billion under management and about $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.