Pension Funds Demand Wall Street Reforms
Officials in California, New York and North Carolina--with collective oversight of $220 billion of public pension assets and other funds--said Monday that Wall Street needs to clean up conflicts of interest between research and investment banking units, or lose state business.
In the wake of Enron Corp.’s downfall and the collapse of WorldCom Inc., state officials want to protect the retirement funds of their residents. State pension funds lost more than $2 billion on investments in WorldCom’s stocks and bonds alone, with the California Public Employees’ Retirement System accounting for $565 million.
Under the proposal, investment banking firms that do business with the three states will be asked to adopt rules that clearly separate their research and investment banking divisions. The rules are similar to those agreed on by Merrill Lynch & Co. and New York Atty. Gen. Eliot Spitzer. Critics say Wall Street firms often use favorable analyst coverage to attract investment banking clients, tainting the objectivity of the research.
“Our message today is simple and clear: If you wish to do business with our state, we expect you to adhere to the highest standards of integrity and disclosure,” California State Treasurer Phil Angelides said in a statement.
But Margaret Draper, a spokeswoman for the Securities Industry Assn., a trade group representing investment banks, broker-dealers and mutual fund companies, said the rules may “pose a problem because states could be essentially superceding federal laws involving the regulation of securities analysts.”
State officials said the effects of the new measures will trickle down to individual investors because their pension funds invest in many of the same mutual funds as small investors.
For California, which expects to have sold more than $25 billion of debt by the end of 2002, the broker-dealer rules are especially important as it chooses debt underwriters.
The three states also want investment companies that oversee pension assets to clean up their act.
North Carolina Treasurer Richard Moore said he expects the banking and investment community to adopt the rules within two to four months.
“Most of our managers are eager to satisfy us,” Moore said, and have said they will put the proposal in place.
