(as amended 9/3/03)
A. Effective January 1, 2004, every financial organization that provides investment banking services and is retained or utilized by the State Treasurer of North Carolina, including but not limited to organizations retained by the North Carolina Public Employees Retirement should adopt the terms of the settlement between the New York Attorney General, the Securities and Exchange Commission, the New York Stock Exchange, NASD, and the North American Securities Administrators Association and ten of the nation’s largest investment firms, dated April 28, 2003 (hereinafter “the Investment Protection Principles”). In retaining and evaluating any such financial organization, the State Treasurer will give significant consideration to whether such organization has adopted principles set forth below:
- Severing the link between compensation for analysts and investment banking;
- Completely separating Research and Investment Banking, including physical separation. Research will not report directly or indirectly to or through Investment Banking.
- Requiring that Research have its own dedicated legal and compliance staff.
- Requiring firms to create and enforce firewalls reasonably designed to prohibit all communications between Research and Investment Banking.
- Prohibiting Research from participating in efforts to solicit investment banking business. Analysts may not participate in “pitches” or Investment Banking sponsored road shows.
- Prohibiting investment banking input into analyst compensation;
- Establishing written criteria (exclusive of Investment Banking input) to be used for compensation decisions.
- Compensating analysts in significant part based on the quality and accuracy of their work.
- Investment Banking shall have no input into an analyst’s evaluation.
- Decisions concerning compensation shall be documented.
- Creating a review committee to approve all research recommendations.
- The review committee will review all changes in ratings, if any, and material changes in price targets, if any, contained in the firm’s research reports.
- The review committee will conduct periodic reviews of research reports to determine whether changes in ratings or price targets, if any, should be considered.
- The review committee will monitor the overall quality and accuracy of the firm’s research reports.
- Requiring that upon discontinuation of research coverage of a company, firms will disclose the coverage termination and the rationale for such termination.
- Prohibiting Investment Banking input into company-specific coverage decisions (i.e., whether or not to initiate or terminate coverage of a particular company in research reports furnished by the firm).
- Disclosing in research reports whether the firm has received or is entitled to receive any compensation from a covered company over the past 12 months.
- Each quarter, firms shall publish on their websites a chart showing their analysts’ performance, including each analyst’s name, ratings, price targets, and earnings per share forecasts for each covered company, as well as an explanation of the firm’s rating system.
- Establishing a monitoring process to ensure compliance with the principles.
- Each firm shall conduct an annual review to provide reasonable assurance that the firm is in compliance.
- The Treasurer reserves the right to request an independent audit or confirmation of compliance with these Standards and in the case of those firms party to the Global Settlement, a copy of the report prepared by the Independent Monitor.
B. The State Treasurer will give significant consideration in retaining and evaluating active equity managers as to whether such managers conform to the following:
1. Money management firms must disclose any client relationship, including management of corporate 401(k) plans, where the money manager could invest North Carolina Retirement System Assets in the securities of the client. In cases where the asset management firm may be affiliated with or owned by another firm, this item pertains strictly to the clients of the asset management operation as long as Section B-4 (below) is satisfied. As an alternative means to implement this principle, the manager may opt to disclose client relationships based on the following criteria:
a) When a client's position held in the North Carolina Retirement System portfolio is greater than 1.5 times the benchmark weighting, or;
b) When a client's position not held by the benchmark is greater than 2% of the North Carolina Retirement System portfolio.
In cases where confidentiality agreements exist that prohibit the disclosure of a client relationship, disclosure should be made in such a way as to not violate the confidentiality agreement, or a request should be made to the client to waive the existing confidentiality agreement.
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. Disclosure of the parameters of the compensation plans for portfolio managers and analysts is adequate to address this item. This disclosure is intended to apply strictly to the money management firm, not to affiliated companies.
3. Money management firms shall report quarterly the amount of commissions paid related to North Carolina Retirement System assets to broker-dealers, and the percentage of commissions paid to broker-dealers that have publicly announced they have adopted the Investment Protection Principles.
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 for the money management firm. Each manager to which this point applies shall provide the Investment Division with a copy of the safeguards plan and shall certify annually to State Treasurer that such a 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 auditor also provides consulting or other services to the company. It will be considered consistent with this point to evaluate these issues as a component of the risk profile of an investment in the subject company.
6. In deciding whether to invest North Carolina Retirement System assets in a company, money management firms must consider the corporate governance policies and practices of the subject company. It will be considered consistent with this point to evaluate these issues as a component of the risk profile of an investment in the subject company.
The principles set forth in paragraphs 5 and 6 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 company.