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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) today announced that it has implemented Auditor General Robert P. Casey, 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 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, 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 of North Carolina, the Comptroller of the State of New York, and the State Treasurer of California on July 1, 2002. As embodied in the agreement between Merrill Lynch and New York State Attorney General Eliot Spitzer 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 above supplant 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 investment recommendations and decisions made by money managers doing business with the funds.

Given the present climate of corporate malfeasance and accounting scandals, 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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