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SERS Adopts Investment Protection Principles Urged by Pennsylvania Auditor General Casey Last July.

HARRISBURG, Pa. -- The Board of the State Employees' Retirement System (SERS SERS State Employees’ Retirement System (Commonwealth of Pennsylvania)
SERS Surface-Enhanced Raman Spectroscopy
SERS School Employees Retirement System
SERS Science and Engineering Research Semester
) today announced that it has implemented Auditor General Auditor general may refer to,
  • Comptroller and Auditor-General
  • Auditor General for Scotland
  • Auditor General of Canada
  • Auditor General of Pakistan
 Robert P. Casey Robert Patrick Casey, Sr. (January 9, 1932 – May 30, 2000), better known as Bob Casey (or Bob Casey, Sr. to distinguish him from his son) was an American politician and member of the Democratic Party who served Pennsylvania in several capacities, most notably as , Jr.'s recommendation to adopt investment protection principles to better protect state taxpayer and retirement funds. Last July 19th, Casey wrote to SERS Chairman Nick Maiale and the heads of Pennsylvania's two other public pension plans to ask that they consider adopting conflict of interest requirements for the money management firms retained by their respective state investment officers.

"The adoption of these principles will send a strong message to investment advisors and money management firms that if they wish to play a role in managing the pension funds supporting retired Pennsylvania teachers and government employees, they will be expected to adhere to adhere to
verb 1. follow, keep, maintain, respect, observe, be true, fulfil, obey, heed, keep to, abide by, be loyal, mind, be constant, be faithful

 the highest of ethical standards," Casey said.
  A copy of Casey's July 19th letter to SERS Chairman Maiale is attached.
                                             July 19, 2002
   The Honorable Barbara Hafer
   Public School Employees' Retirement System
   5 North Fifth Street
   Post Office Box 125
   Harrisburg, Pennsylvania  17108-0125
   Mr. Nicholas J. Maiale
   State Employees' Retirement System
   30 North Third Street
   Post Office Box 1147
   Harrisburg, Pennsylvania  17108-1147
   Mr. George E. Gift, Jr.
   Pennsylvania Municipal Retirement System
   Eastgate Building, Suite 301
   1010 North Seventh Street
   Post Office Box 1165
   Harrisburg, Pennsylvania  17108-1165
  Dear Chairpersons Hafer, Maiale and Gift:

As you well know, recent corporate accounting abuses at companies such as Enron and WorldCom, as well as allegations of tainted investment advice given by firms such as Merrill Lynch Merrill Lynch & Co., Inc. (NYSE: MER TYO: 8675 ), through its subsidiaries and affiliates, provides capital markets services, investment banking and advisory services, wealth management, asset management, insurance, banking and related products and services on a global basis. , have shaken investor confidence and eroded the integrity of our national financial markets.

Recently, I asked Governor Schweiker and Treasurer Hafer to join with me -- as officials responsible for issuing Commonwealth debt -- in adopting initiatives to protect Pennsylvania investors and billions of dollars in state investments from conflicts of interest which may develop when financial firms provide both investment analysis and corporate investment banking services. As issuing officials, we can use Pennsylvania's position as a substantial client of financial firms underwriting Commonwealth debt to demand that these firms maintain proper separation between their corporate investment banking activities and the investment analysis and management services they provide to individual and institutional investment clients.

Specifically, I proposed that, in selecting firms to manage the issuance of Commonwealth debt, Pennsylvania adopt a standard such as the "Merrill Lynch principles" adopted by the State Treasurer Noun 1. state treasurer - the treasurer for a state government
financial officer, treasurer - an officer charged with receiving and disbursing funds
 of North Carolina North Carolina, state in the SE United States. It is bordered by the Atlantic Ocean (E), South Carolina and Georgia (S), Tennessee (W), and Virginia (N). Facts and Figures

Area, 52,586 sq mi (136,198 sq km). Pop.
, the Comptroller of the State of New York New York, state, United States
New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of
, and the State Treasurer of California on July 1, 2002. As embodied in the agreement between Merrill Lynch and New York State Attorney General The New York State Attorney General is the chief legal officer of the State of New York. The office has been in existence in some form since 1626, under the Dutch colonial government of New York.  Eliot Spitzer Eliot Laurence Spitzer (born June 10 1959 ) is an American lawyer, politician and the current Governor of New York. Spitzer was elected governor in the November 2006 election.  dated May 21, 2002, the "Merrill Lynch principles" are outlined as follows:
   --  Sever the link between compensation for analysts and investment
   --  Prohibit investment banking input into analyst compensation;
   --  Create a review committee to approve all research recommendations;
   --  Require that upon discontinuation of research coverage of a company,
       firms will disclose the coverage termination and the rationale for
       such termination;
   --  Disclose in research reports whether the firm has received or is
       entitled to receive any compensation from a covered company over the
       past 12 months; and
   --  Establish a monitoring process to ensure compliance with the

As fiduciaries of public pension plans responsible for billions of dollars in retirement funds, I am sure that you are working diligently to ensure the investment advice these plans receive is untainted by any potential conflicts of interest. Additionally, because the pension plans you oversee are substantial clients of investment advisors and money management firms, you are in a position to aid investors throughout Pennsylvania by ensuring that advice these firms provide to individual investors is free of any potential conflicts of interest.

For example, many money management firms that handle investments for public pension funds also handle investments for corporate pension plans and 401(k) plans. This creates a potential conflict of interest, because the money managers may feel pressured to add the stocks of their corporate clients into the public pension fund portfolios, even if it is not in the best interest of the pension funds. Similarly, money manager research analysts may be reluctant to provide objective research advice, knowing that adverse recommendations may cause their firms to lose corporate clients. Other potential conflicts of interest exist with respect to those money management firms that are subsidiaries of investment banking firms.

In order to protect their state taxpayer and retirement funds, on July 2, 2002, North Carolina, New York and California, including the North Carolina Public Employees Retirement Systems and the New York State Common Retirement Fund adopted the following requirements for money management firms retained by their respective state investment officers:
   1.  Money management firms must disclose periodically any client
       relationship, including management of corporate 401(k) plans, where
       the money management firm could invest state or pension fund moneys
       in the securities of the client.
   2.  Money management firms must disclose annually the manner in which
       their portfolio managers and research analysts are compensated,
       including but not limited to any compensation resulting from the
       solicitation or acquisition of new clients or the retention of
       existing clients.
   3.  Money management firms shall report quarterly the amount of
       commissions paid to broker-dealers, and the percentage of commissions
       paid to broker-dealers that have publicly announced that they have
       adopted the Investment Protection Principles(1).
   4.  Money management firms affiliated with banks, investment banks,
       insurance companies or other financial services corporations shall
       adopt safeguards to ensure that client relationships of any affiliate
       company do not influence investment decisions of the money management
       firm.  Each money management firm shall provide the state investment
       officers with a copy of the safeguards plan and shall certify
       annually to the state investment officers that such plan is being
       fully enforced.
   5.  In making investment decisions, money management firms must consider
       the quality and integrity of the subject company's accounting and
       financial data, including its 10-K, 10-Q and other public filings and
       statements, as well as whether the company's outside auditors also
       provide consulting or other services to the company.
   6.  In deciding whether to invest state or pension fund moneys in a
       company, money management firms must consider the corporate
       governance policies and practices of the subject company.
   7.  The principles set forth in paragraphs five and six are designed to
       assure that in making investment decisions, the money management
       firms give specific consideration to the subject information and are
       not intended to preclude or require investment in any particular

I am writing to you today to ask you to consider similar requirements on the money management firms that do business with your pension funds. I understand that these firms are already subject to various fiduciary requirements pursuant to state law and contractual agreements, and it is not my intention to suggest that the requirements delineated de·lin·e·ate  
tr.v. de·lin·e·at·ed, de·lin·e·at·ing, de·lin·e·ates
1. To draw or trace the outline of; sketch out.

2. To represent pictorially; depict.

 above supplant sup·plant  
tr.v. sup·plant·ed, sup·plant·ing, sup·plants
1. To usurp the place of, especially through intrigue or underhanded tactics.

 or diminish any existing responsibilities placed on these firms. Additionally, I understand that some of the requirements listed above may have limited application to certain types of asset managers such as those managing indexed portfolios or hedge funds. At the same time, I believe that these requirements, properly applied, could provide an additional level of protection against potential conflicts of interest which may taint taint

an unpleasant odor and flavor in a human foodstuff of animal origin. Caused by the ingestion of the substance, commonly a plant such as Hexham scent, or while in storage, e.g. milk stored with pineapples, or as a result of animal metabolism, e.g. boar taint.
 investment recommendations and decisions made by money managers doing business with the funds.

Given the present climate of corporate malfeasance The commission of an act that is unequivocally illegal or completely wrongful.

Malfeasance is a comprehensive term used in both civil and Criminal Law to describe any act that is wrongful.
 and accounting scandals Accounting scandals, or corporate accounting scandals are political and business scandals which arise with the disclosure of misdeeds by trusted executives of large public corporations. , your leadership in establishing stronger investor protections such as those embodied in the principles and requirements cited above will send a message to investment advisors and money management firms that if they wish to play a role in managing the pension funds supporting retired Pennsylvania teachers and government employees, they will be expected to adhere to the highest of ethical standards.
                                        /s/ Robert P. Casey, Jr.
                                        Robert P. Casey, Jr.
                                        Auditor General
  1.  Referred to above as the "Merrill Lynch principles."

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CONTACT: Karen Walsh of the Pennsylvania Department of Auditor General, +1-717-787-1381 or

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Geographic Code:1U2PA
Date:Nov 4, 2002
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