Public Pension Demands I-Bank Reform

Three of the nation’s largest public pension funds – CalPERS, the New York State Common Retirement Fund and CalSTRS – may take the lead in demanding that the investment banks they do business with adopt a series of reforms to limit conflict of interest issues.

With a combined heft of more than $400 billion in investment capital, if the pension funds adopt the measures proposed last week together by the state treasurers of California, New York and North Carolina, they may force other institutional investors to adopt the proposals and possibly spark market-wide reform.

Phil Angelides of California, Carl McCall of New York and North Carolina’s Richard Moore said their offices would no longer do business with investment banks that do not comply with a set of investment protection principles that seek to sever the relationships between analysts and investment bankers. The state treasurers’ offices are responsible for managing each state’s pooled money investment accounts and for choosing investment banks to underwrite state bond and debt issues. They also control the investment activities of their states’ pension funds. Angelides sits on the boards of both CalPERS and CalSTRS. Combined, the two Sacramento-based pension funds control approximately $150 billion of investment capital. McCall is the sole trustee of Albany’s New York State Common Retirement Fund, a pension fund with $106 billion under management. Moore is the sole trustee of the $52 billion North Carolina Retirement System in Raleigh.

The New York and North Carolina pension funds adopted the principles July 1. They are currently at work to see whether the banks that manage their investment funds comply with the new set of standards.

The California pension funds have spoken out in favor of the proposals, but cannot adopt the measures until after a vote of the entire investment committees – something that is not yet on either of their agendas. Both CalPERS and CalSTRS have been pursuing corporate governance reform since the technology meltdown two years ago. “The treasurer’s proposal is very much in line with our market reform initiative,” says Brad Pacheco, a spokesman for CalPERS. “Anything that’s going to ensure the integrity of the financial markets is a good thing,” says Sherry Reser, CalSTRS’ public information officer.

Until the measures appear before the investment committees and are adopted, it will remain unclear what actions the two California LPs will have to take to make sure their money managers comply with the new principles.

Contact Carolina Braunschweig