If a pension fund has a policy, trustees and staff ought to evaluate and enforce it. Even if a money manager or trustee disagrees with the policy, once adopted by trustees, the policy ought to be enforced.
The $9.3 billion Chicago Public School Teachers' Pension and Retirement Fund has had a policy for years on the use of minority- and women-owned brokerage firms by the money managers the pension fund hires. But it has no specific enforcement procedure.
The policy was revised for domestic large-capitalization equity managers following an October roundtable, in which some of the fund's managers criticized some aspects. With the revision, trustees adopted an enforcement procedure, but still without any designated penalty for noncompliance.
The new policy, effective Jan. 1, calls for large-cap managers to direct at least35% of their total brokerage commissions to minority- and women-owned brokerage firms that have a significant local presence. The old policy requires these managers to direct 40% of commissions to Illinois firms, with 40% of that to be directed to in-stateminority- and women-owned brokers.
Still, the new policydoesn't directly address the problems some money managers haveencountered in trying to comply.
John V. McLaughlin, executive director, Brinson Partners Inc., said at the roundtable his firm doesn't direct more than 30% of trades because to do more would jeopardize its investment goals, indicating the difficulty of trading some stocks.
"There are too many categories for us to meet your objective," he told trustees.
It appears Brinson will fall short again under the new policy, albeit not as far.
Michael J. Nehf, executive director of the Chicago teachers' fund, said the new policy calls for a compliance review every six months. As for enforcement, he said the new policy provides that any manager failing to comply will have to send a representative to explain to the board why it missed the target.
Mr. Nehf said trustees adopted no particular penalties.
"We will take each case individually," he said.
The policy as designed is one-size-fits-all, but enforcement seems to be anything but that.
Mr. McLaughlin worries about the policy interfering with Brinson's performance, he said at the roundtable. He said Brinson is willing to participate but believes directing any more than 30% of brokerage would affect its investing.
Brinson executives couldn't be reached for further comment.
Also at the roundtable, a number of managers expressed concern about best execution, but the board didn't provide any guidance.
Gene R. Saffold, a trustee who is a managing director in public finance at Salomon Smith Barney, Chicago, asked without getting any acceptable reply for a definition of best execution.
The board had adopted the brokerage policy without having a definition of best execution and without evaluating its managers' trading execution quality. Mr. Nehf said the board is leaving it up to managers to determine best execution. He said the board has no plans to hire an expert service to evaluate trading execution.
One has to wonder if the minority brokeragepolicy, with its ambiguity, is designed more for appearances, to assuage a group looking for a way to participate in institutional brokerage trading, rather than adopted as a genuine effort to promote a goal with public pension money, without sacrificing best execution however it is defined.
