CalPERS is attempting to untangle knotty issues surrounding how to prevent insider trading by staff and board members based on information obtained through due diligence on private market investments.
It's not purely an academic exercise for the $456.6 billion California Public Employees' Retirement System, Sacramento, which is looking to institute policies more in line with its consultants and managers.
CalPERS' last chief investment officer, Yu "Ben" Meng, resigned in August 2020 amid questions surrounding his reports of personal investments in stocks of three alternative investment firms: Carlyle Group Inc., Blackstone Inc. and Ares Management's business development company, Ares Capital Corp.
"It's always wise for a board to step back periodically and ask 'what does good look like,'" said Amy McDuffee, Denver-based founder and CEO of governance consulting firm Mosaic Governance Advi- sors LLC, which works with pension funds but was not involved with CalPERS' proposed policy.
In the private markets arena, asset owners have to be especially careful, given the opacity of such investments. With asset owners moving more aggressively into alternative investment asset classes in search of returns, governance experts said it's crucial for these investors to have strong policies and procedures in place to guard against information leakage or even the appearance of insider trading.
The best time for pension funds to revisit these frameworks is when they are expanding their allocations, Ms. McDuffee said. It's a good time to step back and understand how the new allocations will be implemented "and what could go wrong," she noted. Doing so is a way to mitigate risk, she added.
CalPERS isn't alone. There is a "slow trend" among public pension funds taking another look at their insider-trading policies, given their larger exposure to private assets and many funds' expansion of their internal investment staffs, said Keith Johnson, St. Paul, Minn.-based senior adviser at governance consulting firm Funston Advisory Services LLC.
"Together that increases the relevance of having good insider-trading and front-running policies," said Mr. Johnson, who is also a retired fiduciary and governance attorney.