CalSTRS Adopts Investment Protection Principles

News release

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.





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.