CalPERS may force next CIO to unload personal holdings

The California Public Employees’ Retirement System, or CalPERS, may force its next chief investment officer to sell securities that could pose conflicts of interest, as the pension giant considers new rules in the wake of last month’s departure of CIO Ben Meng.

The CalPERS board will for the first time publicly discuss measures addressing the issues surrounding Meng’s exit at its Sept. 14-16 meeting, according to an agenda posted Friday. Under another proposal, trustees may require that all board members be told whenever the system opens a probe into one of its top executives.

“There are always potential perceived conflicts” of interest for a CalPERS CIO, chief executive Marcie Frost said in an interview. “Reputation is really important. It’s very difficult to negate a perception problem, even if it isn’t an actual problem.”

Meng’s surprise resignation raised questions about oversight at the $400-billion pension system, the largest in the United States. He left after approving an investment in a fund managed by Blackstone Group Inc. while holding shares of the private equity firm in his personal account. The California Fair Political Practices Commission plans to investigate allegations that Meng violated rules governing disclosure of personal investments.

The sales requirement would apply to any incoming CIO, potentially mandating that the proceeds go into a blind trust. The policy may be extended to Frost’s post and to others after more analysis for the board to review, she said.

Asked why CalPERS didn’t have such rules already, Frost said it isn’t illegal for a CIO to hold personal investments, but “the actual problem, if there is one, comes from when those conflicts are not managed.”

She declined to comment on whether Meng had properly managed potential conflicts, citing the investigation. In April, a compliance team uncovered at least one conflict-of-interest violation for Meng.

Regarding internal investigations, Frost said that as her “best practice,” she notifies the board president and the chairs of affected committees, adding that she did so in Meng’s case.

Board members have said they want quicker notification.

At least one trustee, state Controller Betty Yee, is pursuing more changes. In a Wednesday letter to Henry Jones, president of the CalPERS board, Yee asked for additional governance items, including how the CIO reports to the board, to be discussed at the next meeting, to ensure “appropriate” oversight.

Those items will be discussed at the September meeting.