Last August the Investment Committee of the California Public Employees’ Retirement System (CalPERS) approved revisions to its External Investment Resource Conflict of Interest Policy. A week later, I asked the Office of Administrative Law to make a determination that the policy was an illegal “underground regulation” (i.e., a rule that has not been adopted in accordance with the rulemaking provisions of the California Administrative Procedure Act, Cal. Govt. Code § 11340 et seq.). After the OAL agreed to make a determination, CalPERS notified the OAL that it would not attempt to enforce the policy.

Next week, the Investment Committee will consider whether to proceed with adoption of the policy in compliance with the APA. This will have several salutary consequences. First, any rule will be required to meet the six statutory standards for all rules set forth in Section 11349 of the Government Code (necessity, authority, clarity, consistency, reference and nonduplication). Second, CalPERS will be required to assess “the potential for adverse economic impact on California business enterprises and individuals . . . “. Cal. Govt. Code § 11346.3(a). Most importantly, there will be greater transparency and accountability because the public will have a chance to comment on the proposed rule and CalPERS will be required to respond to those comments.

In general, the proposed rule would apply to “external managers”. This would include persons retained by CalPERS to manage securities portfolios and managers of investment funds that offer or sell to CalPERS. Accordingly this proposed rule should be of interest to investment advisors as well as managers of private equity funds, public equity funds, venture capital funds, hedge funds, fixed income funds, real estate funds, infrastructure funds, or similar pooled investment entities.


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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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