US – CalPERS, the largest US pension fund, says its investment managers and consultants must now follow a code of ethics following recent trading scandals.

“Responding to recent trading scandals in the money
management industry, the California Public Employees' Retirement System's board today adopted a code of ethics that external managers and consultants must follow if they are to continue doing business with CalPERS,” the fund said.

It said the standards address short-term trading by portfolio managers and other improper activities that threaten the security of CalPERS members' assets.

Asset managers and consultants will be required to report “biannually” to the fund on their adherence to the code, from December 31 this year.

"This code of ethics advances the process that we began last
November when we terminated our contracts with Putnam Investments for improper trading activities to the detriment of long term investors," said CalPERS’ president Sean Harrigan.

"We have a responsibility to ensure our managers follow the industry's best practices - and this code will help accomplish that."

The code, developed with input from 66 managers and advisors, will mean that managers and consultants will have to implement policy and procedures to ensure “fair and equitable allocation” of investment opportunity.

They would also have to designate an officer to address all potential conflicts of interest and “design management structures to promote an environment of compliance and culture of integrity”.

Also required: an independent ombudsman, a biannual review of compliance, using a third party expert and independent reporting of the chief legal officer and internal audit to the board.

In addition, asset managers would also have to disclose all soft dollar use, align the interests of investment professionals with clients and disclose compensation polices.

"Relatively few of the firms identified by federal regulators for improper trading activities have been under contract with CalPERS," said Rob Feckner, chair of the Sacramento-based fund’s investment committee.

"But we're concerned that current ethics policies in the industry fall short of best practices. Requiring that all of our managers and consultants comply with this code is the best way to address that concern."

Meanwhile, a report by Wilshire Associates found that US state pension systems are likely to strengthen this year thanks to rising US asset prices since the middle of 2003.

"Many state pension plans report with a significant time lag, the funding ratios in the study do not fully reflect the recent bull market in stocks and consequently it is very likely that unfunded liabilities will decrease in future studies," said Wilshire’s senior managing director Julia Bonafede.

The study covers 123 retirement systems with about 1.7 trillion dollars in assets as of the middle of 2003.