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New York will require investment banking and money management firms to adopt conflict-of-interest rules if they want to do business with the state’s pension fund. State Comptroller H. Carl McCall, who manages $112 billion in investments for New York — the second largest state pension fund in the country — said Monday that investment banking firms will be asked to embrace the conflict-of-interest principles set forth in the agreement that New York State Attorney General Eliot Spitzer reached with Merrill Lynch in late May. “Just as you need to prevent setting a fire to avoid getting burned, we need to prevent corporate abuse before investors get burned again,” McCall said at a press conference to announce the initiative. Money management firms that work with the state will also be required to abide by conflict-of-interest standards. McCall said later that he would be sending letters and questionnaires to 60 firms with which the state does business. McCall reassured the firms that they would not lose New York’s business overnight. He said “eight out of 10″ firms were already in compliance with the guidelines, and he planned to negotiate with the rest. “There’s no drop-dead deadline,” he said. Spitzer used the opportunity to fault Congress and federal regulators for their inaction, and made it clear that he had no plans to back off his crusade for reform. “We have yet to see leadership from Washington,” he said, adding that until Congress and the Securities and Exchange Commission set a national standard, “we will continue to take aggressive action.” OTHER STATES INVOLVED North Carolina and California are also taking part in the initiative. McCall said he expected that most other state pension funds would jump on board “very quickly.” He had gotten calls from “at least a dozen other states” since word about the plan leaked out last week, he said. California Treasurer Philip Angelides, who is a board member of the California Public Employees’ Retirement System and the California State Teachers’ Retirement System, said at the press conference that he would recommend that they too ratify the guidelines. CalPERS, with $149 billion, and CalSTRS, with $100 billion, are respectively the first and third largest pension funds in the country. “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,” said Angelides. “We are committed to rooting out the abuses which have rocked the financial markets and which have left families, pensioners and taxpayers to pick up the pieces.” The initiative comes on the heels of a series of scandals that have shaken the financial industry and caused the state pension funds to take a combined hit estimated at well over a billion dollars. Attorney General Spitzer, who has been working with the other states to investigate and reform Wall Street business practices, said North Carolina State Treasurer Richard Moore approached him with the initial idea of using the considerable clout of the pension funds to pressure firms into compliance. In total, state pension funds control $2.3 trillion in assets. Under the new guidelines, money management firms must disclose portfolio manager and analyst compensation, the use of any broker-dealer that has adopted the Merrill Lynch standards, and potential conflicts of interest arising from client and corporate parent relationships. The states are also demanding that money managers put safeguards in place to ensure that potential conflicts of interest do not influence investment decisions made on behalf of the state funds. They also want managers to consider the accounting practices and corporate governance policies of the companies in which they invest. While using the guidelines might not uncover the accounting abuses at an Enron Corp. or a WorldCom Inc., asking these types of questions might help managers think twice about the companies they invest in, the officials said. The Merrill Lynch reforms that investment banking firms will be asked to adopt include severing the link between investment banking and analyst compensation, creating a review committee to approve all research recommendations, disclosing when and why the firm discontinues research coverage of a company, and disclosing whether the firm has received compensation from a covered company. The initiative represents a major shift in management philosophy among large institutional investors who traditionally have taken a much more passive role, based on their faith in the honesty of the market, Angelides said. “Expect a much more engaged base of institutional investors,” he said.

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