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CalPERS Board receives recommendations to investigate use of placement agents by outside firm's managing pension's investments

Monday, December 13, 2010
Opalesque Industry Update - The recommendations address a variety of governance and operational matters at CalPERS and are meant to further safeguard the institution and the assets held for its beneficiaries. Many of the recommended measures regarding risk management, staff gifts and travel, and placement agent regulation have been addressed, at least in part, by CalPERS. Since some will require changes in state law, the recommendations were offered in advance of the 2011-12 legislative session. The special review, led by law firm Steptoe & Johnson LLP, remains underway and is expected to be completed early next year. The recommendations include that:

The CalPERS Board of Administration assume formal oversight responsibility for the risk management function at CalPERS by either creating a standing risk management committee, or formally assigning risk management oversight to an existing committee of the Board;

The institution enhance training and certifications regarding gift bans, and similar policies be adopted to apply to Board members. Failure to comply should have disciplinary consequences for all, including the external manager or other firm in question;

CalPERS seek "cooling off" legislation similar to federal government standards that would prohibit officials from working for any company and/or its placement agent that does significant business with CalPERS for a period of time after leaving CalPERS;

Additional staff be trained and dedicated to respond to public record requests and that staff who are responsible for the issues contained in a request are not also responsible for the final response;

The Office of Audit Services be required to report regularly to the CalPERS Board, and that there be greater accountability and timely resolution of findings by managers. The Chief Risk Office should play an active role in this effort, as well;

CalPERS include in every request for proposal a requirement that proposers disclose the names of any third party agent or consultant used in connection with the proposal and the terms of the arrangement;

CalPERS implement a placement agent resolution program to allow managers that paid placement agents to resolve outstanding issues in a manner consistent with precedents set during the special review. Where managers with outstanding placement agent issues decline to cooperate, CalPERS should actively consider ending its relationships with those managers;

CalPERS insist that nearly all fees it pays to external managers be incentive fees based on successfully investing CalPERS assets and not in management or other fees, and that fees should be documented in a transparent and straightforward manner at the time the investment is first proposed;

CalPERS prohibit direct or indirect payment of placement agent fees from the assets of partnerships or other funds in which it invests;

CalPERS encourage its external managers to hold investment meetings at the offices of limited or general partners and not expensive settings;

Outside consultants only be permitted to fulfill one function with respect to an investment - either providing opinions on the prudence of an investment being considered by CalPERS or assisting in the monitoring of the investment once made by CalPERS, but not both. Outside investment consultants also should not be permitted to serve as external money managers for CalPERS; and

Sponsor legislation to streamline the discipline and termination process for investment staff at the portfolio level and above, including substantial downward salary adjustments to general civil service pay scales during that process.

"We embrace this effort and look forward to our discussion and we fully support the ongoing review," said Rob Feckner, President of the Board. "I have therefore directed staff to bring back an implementation plan that the Board can discuss as soon as possible."

Chief Executive Officer Anne Stausboll said, "our goal is to restore trust and make sure that there is never again any doubt about CalPERS living up to its core values of openness and accountability. These recommendations provide us with more than lessons learned. They are a blueprint for restoring that trust and the respect of everyone we serve."

The observations which accompanied the recommendations acknowledge several steps that CalPERS has already taken to address these issues. They include:

Creating an Enterprise Risk Management Office and the position of Chief Risk Officer with overarching responsibility for risk management throughout CalPERS;

Banning gifts to employees from business partners and potential business partners;

Creating an ethics hotline for reporting concerns about possible workplace misconduct;

Stringent new policies when traveling for meetings with investment managers, including prohibiting staff from accepting gifts of entertainment and meals held apart from business meetings;

Establishing new rules for communications between Board Members and staff about investment proposals;

Granting new authority to discipline Board Members who violate policy;

Adopting state law that requires placement agents to register as lobbyists and prohibits them from being paid fees based on whether CalPERS invests with their clients; and

Obtaining, through the special review, over $200 million in fee concessions from leading external managers, and an additional $100 million in fee reductions from a number of other large external money managers, with these managers agreeing to not use a placement agent when seeking CalPERS business in the future.

(press release)

A copy of the special review recommendations can be found in CalPERS Press Room on its website at:Source

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