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Sacramento, CA - The California State Teachers' Retirement System today
expanded its financial market reform initiatives to include protections
against conflicts of interest by its brokers and investment managers.
CalSTRS will give significant consideration to compliance with the investment
protection principles when selecting and retaining brokers and investment
managers. CalSTRS will also conduct annual compliance reviews once the
principles are adopted by the firms.
The principles were derived from a settlement agreement between Merrill
Lynch and N.Y. Attorney General Eliot Spitzer announced in late May. They
call for brokers and investment management firms to separate research
analyst analysis, compensation and recommendations from the investment
banking areas. Investment managers that invest money on behalf of the
$100 billion CalSTRS portfolio would also have to disclose relationships
with corporations in which they invest, such as management of 401(k) plans.
"The investment protection principles will go far in our ongoing
efforts to improve the integrity of the market place," said Jack
Ehnes, CalSTRS chief executive officer. "We're happy to embrace the
principles and use the combined power of institutional investors for the
common good."
Other institutional investors that have adopted similar principles include
New York State Common Retirement Fund, North Carolina Public Employees
Retirement Systems and California's Pooled Money Investment Account.
The investment protection principles were added to market reforms initiatives
adopted by CalSTRS last April. These reforms deal mainly with the independence
of directors, audit committee members and external auditors.
"We've been shouting about good corporate governance for years and
now the criminal actions that have lately come to light have handed us
a megaphone," said Ehnes. "The momentum is on our side now and
we expect Wall Street recognizes the need to comply with these principles
to rebuild investor confidence."
CalSTRS administers retirement, disability and survivor benefits for
California's public school educators in grades kindergarten through community
college, serving approximately 687,000 members and benefit recipients.
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NOTE TEXT OF INVESTMENT PROTECTION PRINCIPLES FOLLOWS.
CALIFORNIA STATE TEACHERS' RETIREMENT SYSTEM
STATE AND PUBLIC PENSION FUND
INVESTMENT PROTECTION PRINCIPLES
A. Every financial organization that provides investment banking services
and is retained or utilized by the California State Teachers' Retirement
System (CalSTRS) should adopt the terms of the agreement between Merrill
Lynch & Co., Inc. and New York State Attorney General Eliot Spitzer
dated May 21, 2002 (hereinafter "the Investment Protection Principles").
In retaining and evaluating any such financial organization, CalSTRS will
give significant consideration to whether such organization has adopted
the Investment Protection Principles.
The Investment Protection Principles are as follows:
* sever the link between compensation for analysts and investment banking;
* prohibit investment banking input into analyst compensation;
* create a review committee to approve all research recommendations;
* require that upon discontinuation of research coverage of a company,
firms will disclose the coverage termination and the rationale for such
termination; and
* disclose in research reports whether the firm has received or is entitled
to receive any compensation from a covered company over the past 12 months.
* establish a monitoring process to ensure compliance with the principles;
B. CalSTRS will give significant consideration, in retaining and evaluating
money managers, as to whether such managers are abiding by the following:
1. Money management firms must disclose periodically any client relationship,
including management of corporate 401(k) plans, where the money management
firm could invest CalSTRS' moneys in the securities of the client.
2. Money management firms must disclose annually the manner in which
their portfolio managers and research analysts are compensated, including
but not limited to any compensation resulting from the solicitation or
acquisition of new clients or the retention of existing clients.
3. Money management firms shall report quarterly the amount of commissions
paid to broker-dealers, and the percentage of commissions paid to broker-dealers
that have publicly announced that they have adopted the Investment Protection
Principles.
4. Money management firms affiliated with banks, investment banks, insurance
companies or other financial services corporations shall adopt safeguards
to ensure that client relationships of any affiliate company do not influence
investment decisions for the money management firm. Each money management
firm shall provide CalSTRS with a copy of the safeguards plan and shall
certify annually to CalSTRS that such plan is being fully enforced.
5. In making investment decisions, money management firms must consider
the quality and integrity of the subject company's accounting and financial
data, including the its 10-K, 10-Q and other public filings and statements,
as well as whether the company's outside auditors also provide consulting
or other services to the company.
6. In deciding whether to invest CalSTRS moneys in a company, money management
firms must consider the corporate governance policies and practices of
the subject company.
The principles set forth in paragraphs 5 and 6 are designed to assure
that in making investment decisions, the money management firms give specific
consideration to the subject information and are not intended to preclude
or require investment in any particular company.
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