CalPERS would pay fees to external money managers based only on performance, rather than management or other fees, and the system's staff or board members would be barred from working for placement agents or money managers for two years after leaving the system, according to preliminary recommendations made to the $215 billion system on Monday.
The recommendations of the law firm Steptoe & Johnson would affect the relationships of the California Public Employees' Retirement System, Sacramento, with placement agents. They also would affect how private equity deals are conducted.
Among other recommendations, CalPERS should implement a “placement agent resolution program” to allow those managers that paid placement agents to resolve outstanding issues with retirement system. “In certain cases, CalPERS may need to end existing business relationships,” according to a report from the law firm.
The report says money managers with outstanding placement agent issues that decline to cooperate with CalPERS should be banned from participating in new investment relationships with the retirement system.
For staff or board members who leave the system, the two-year ban would extend to any money manager or placement agent that had a contract with CalPERS that exceeded $10 million in value in the five years before the staff member or board member's departure. California law currently does not prohibit staff or board members from going to work for external managers, placement agents or other financial services companies immediately upon leaving CalPERS as long as they had not represented those firms before CalPERS.
Also, fees would be documented in a transparent and straightforward manner at the time an investment is first proposed.
CalPERS' staff members also would be prohibited from attending meetings between officials of the private equity partnership in which they invest that are held at opulent resorts.
“Lavish meetings are inconsistent with the mission of CalPERS to prudently invest in manager trust funds,” according to the report. The report says CalPERS should encourage its external managers to hold all of these meetings, including annual and advisory board meetings, at the offices of one of the limited partners, including its own in Sacramento, or at the general partner's office.
Rob Feckner, CalPERS board chairman, said he endorses the concepts in general.
Philip Khinda, a lawyer with Steptoe & Johnson, said a full report on the law firm's findings is expected in early 2011. Some of these changes will require legislative approval.
The law firm's report stems from bribery allegations against placement agent Alfred Villalobos and former CalPERS CEO Fred Buenrostro.
Separately, CalPERS's board agreed to reduce its allocation to bonds to 15.9%, down from its 20% target. To reach that goal, the system would have to sell about $14.6 billion of the fixed-income holdings it reported as of Oct. 31. The board also decided to increase investments in U.S. Treasuries and cash to 4% from 2%.
The board agreed to keep its private equity holdings at about 14% of assets and real estate at 10%.
Bloomberg contributed to this story.