Retirement insights from a Colorado PERA perspective

A distant view shows a mountainous landscape with sloping peaks, green trees in the foreground, and a cloudy sky above.

Advocating for fair and transparent markets is one of the cornerstones of Colorado PERA’s approach to <a href="https://www.copera.org/investments/investment-stewardship" target="_blank" rel="noreferrer noopener">investment stewardship</a>, and Chief Investment Officer/Chief Operating Officer Amy C. McGarrity has taken on a new role to help further that mission at the federal level.



The Securities and Exchange Commission (SEC) announced in September that McGarrity is one of six new members selected to join the SEC’s <a href="https://www.sec.gov/about/advisory-committees/investor-advisory-committee" target="_blank" rel="noreferrer noopener" class="broken_link">Investor Advisory Committee</a>.



The committee was created under the Dodd-Frank Wall Street Reform and Consumer Protection Act, and its members include professionals and public officials with a range of experience and expertise in finance, investing and law. Members are tasked with advising the SEC and making recommendations on matters such as effective regulation, promoting market integrity, and protecting investor interests. Past recommendations have covered topics such as climate-related disclosures, investor education, and the rules governing financial account statements.



In addition to the SEC Investor Advisory Committee, PERA staff have been active in a number of industry organizations and advisory boards, such as the <a href="https://www.cii.org/" target="_blank" rel="noreferrer noopener">Council of Institutional Investors</a>, <a href="https://healthymarkets.org/" target="_blank" rel="noreferrer noopener">Healthy Markets Association</a>, and the <a href="https://pcaobus.org/" target="_blank" rel="noreferrer noopener">Public Company Accounting Oversight Board</a>, advocating for practices that benefit our members.



“At Colorado PERA, we firmly believe in using our influence as an institutional investor to advocate for strong and fair markets on behalf of the nearly 700,000 members we’re investing for,” McGarrity said. “I’m honored to be selected to serve on the Investor Advisory Committee and I look forward to working with my fellow committee members on some meaningful recommendations in the years ahead.”



McGarrity and the other members of the committee will serve four-year terms.

PERA CIO/COO Amy C. McGarrity Named to SEC Advisory Committee

What rights do you
have when you own shares of a company?



That’s the central question at the heart of a recent <a href="https://www.cii.org/files/issues_and_advocacy/correspondence/2019/201910015proxy_advisor_sign_on_final.pdf">letter</a> to the Securities and Exchange Commission (SEC) that Colorado PERA Executive Director Ron Baker cosigned as part of a coalition of investors and other organizations.



The tone and subject of the letter—which addresses “proxy adviser interpretation and guidance” and “proxy adviser rulemaking”—is technical and measured. But that buttoned-up surface belies an important debate underneath.



Proxy voting: What it is, and why it
matters



When an individual
owns a share of a company, he or she owns a piece of that company. Institutional
investors, like Colorado PERA, also hold shares—lots of them. For example, at
the end of 2018, <a href="https://content.copera.org/proxy-voting-an-obscure-term-with-real-implications-for-pera/">PERA held</a> millions of shares of Microsoft.



When ownership of
a company is divided among multiple investors, important decisions are often made
using shareholder ballots. Owning a share means having the right and
responsibility to vote in important company decisions. Institutional investors
like PERA vote a lot. In 2018, PERA staff cast votes on 63,031 individual
proposals for 6,025 companies.



Voting allows
investors to hold companies accountable to shareholders and decide on important
issues such as executive pay and who sits on a company’s board of directors.
“We don’t want to promote excessive risk taking with executive compensation,”
said Luz Rodriguez, Colorado PERA’s Senior Corporate Governance Analyst. “We
think pay should be aligned with performance. Those decisions ultimately affect
profits, which can, in turn, affect PERA’s members.”



PERA takes voting
on issues like this seriously. For example, it voted against about 18 percent
of management proposals in 2018. <a href="https://content.copera.org/burritos-boardrooms-and-ballots-the-story-of-one-shareholder-proposal/">Encouraging strong corporate governance</a> is a concrete way to align board decisions
with shareholder interests.



Exercising that right to vote is an essential component of owning a company. However, it would take significant resources to research every one of the tens of thousands of votes institutional investors like Colorado PERA make every year. So, for more than three decades, large investors have employed “proxy advisers”—third-party firms that do the research necessary to inform the votes institutional shareholders cast. PERA’s investment staff can disagree with the research and advice they receive from proxy advisers, and, in the end, PERA&#8217;s investment staff are the ones who cast the votes in accordance with the PERA Board’s <a href="https://content.copera.org/pera-joins-a-lawsuit-to-defend-transparency-and-shareholder-rights/">Policy on Proxy Voting</a>. Proxy advisory services simply allow institutional investors to be better-informed voters at a fraction of the cost of performing all of the research in-house. “Being cost conscious protects the assets of the plan,” Rodriguez said.



The SEC issues new guidance



Earlier this year, the SEC issued <a href="https://content.copera.org/proxy-voting-an-obscure-term-with-real-implications-for-pera/">guidance</a> and <a href="https://www.copera.org/proxy-voting-an-obscure-term-with-real-implications-for-pera" class="broken_link">interpretation</a> statements that could add administrative layers and regulatory burdens to this process. Many institutional investors are concerned about the effects this potential regulation could have. For example, proxy advisers could be required to share their research with the very companies that are the subject of their research before the research is shared with the institutional investors who paid for the research. “Why should companies have the chance to influence the product we’re buying?” said Rodriguez. “It affects the independence of that research.”



The Council of Institutional Investors (CII) sent a letter to the SEC in response to this guidance (Ron Baker is a member of CII’s board of directors). In the letter, the group expressed disappointment that the SEC did not ask for public comment before issuing its new Proxy Adviser Interpretation and Guidance. They also expressed concern that the SEC issued the Interpretation and Guidance without a demonstrated need to do so. The letter asked the SEC to reconsider its position and the opportunity for CII to provide comment. In addition to cosigning CII’s letter, Baker sent a letter on behalf of Colorado PERA to the SEC. The SEC will address this topic next on <a href="https://content.copera.org/proxy-voting-an-obscure-term-with-real-implications-for-pera/">November 5</a>.



In an interview with <a href="https://content.copera.org/proxy-voting-an-obscure-term-with-real-implications-for-pera/">Pensions &amp; Investments</a>, Amy Borrus, Deputy Director of CII, summed up the issue when she said: “Many institutional investors rely on proxy advisory reports to help inform their voting decisions and they have a stake in ensuring these votes are independent and as objective as possible and timely. If rules make it more difficult for proxy advisers to get reports to investors in a timely fashion or make proxy advisers more inclined to tilt more toward companies they review, then that&#8217;s a problem.&#8221;

Proxy voting: An obscure term with real implications for PERA

Colorado PERA recently submitted two comment letters to the <a href="https://www.copera.org/protecting-shareholder-rights-pera-advocates-for-members-and-investors" class="broken_link">Securities and Exchange
Commission</a> (SEC). Together, the letters argue for increased
transparency in financial markets that would benefit PERA members and other
investors alike. 



The first letter, sent in late January and signed by PERA
Chief Investment Officer <a href="https://content.copera.org/protecting-shareholder-rights-pera-advocates-for-members-and-investors/">AmyMcGarrity</a>, called for the SEC to allow U.S. investment managers to separate
payments for trade executions from investment research costs. This echoed previous
PERA views on the most recent <a href="https://www.investopedia.com/terms/m/mifid-ii.asp">Markets in Financial
Instruments Directive, or MiFID II</a>, which has required asset
managers in Europe to separate out the cost of research from the commissions
paid to brokers for executing trades.



As discussed in a <a href="https://content.copera.org/protecting-shareholder-rights-pera-advocates-for-members-and-investors/">previous PERA on the Issues post</a>,
McGarrity has called for the SEC to increase pricing transparency by providing
clear guidance that would allow U.S. investors to pay directly for research,
rather than receiving research as part of a bundle of services paid for by
commissions.



McGarrity noted concerns about the “bundling” of investment
research with trading costs, which she had also expressed back in 2017. In her
January 2019 letter, she wrote that “U.S. investors should not be at an
unnecessary disadvantage relative to our European peers.” McGarrity’s actions
on behalf of the investor community and the PERA membership were highlighted in
a recent article in <a href="https://www.ft.com/content/f2a46c41-4bd4-3580-92a0-3dd0bae8daf3">The
Financial Times</a>. 



<a href="https://peraontheissues.com/wp-content/uploads/2020/07/SEC-Document.pdf">Read McGarrity’s letter.</a>



Continuing the theme of pressing for more disclosure and
transparency that benefits both investors and PERA stakeholders, PERA Executive
Director Ron Baker joined three dozen public retirement system directors and
chief investment officers in signing a letter to the SEC penned by the <a href="https://ilpa.org/">International Limited Partners
Association</a> (ILPA). The ILPA is an organization created “to enhance
and improve investor reporting and transparency” for private equity investors
and stakeholders.



In the ILPA letter to the SEC, institutional investors
called for the SEC to clearly define the fiduciary protections investors require
in the <a href="https://content.copera.org/pera-board-meeting-notes-setting-peras-portfolio-mix/">private
equity</a> market and outlined the actions the Commission should take to
ensure investor confidence in the marketplace.



“Strong fiduciary duties are the foundation of the vibrant
private markets in the United States,” the letter stated. “These duties of
care, loyalty, and good faith foster the trust that give investors confidence
to invest with fund managers,” the letter continued.



<a href="https://peraontheissues.com/wp-content/uploads/2019/02/2019.2.12-ILPA-Member-Letter-on-Fiduciary-Duty-Submission-Copy.pdf">Read the ILPA letter.</a>



PERA will continue to advocate for investor transparency by joining
forces with other institutional investors and investment industry organizations
for the benefit of its members and retirees.



For more details on PERA’s investment program, see <a href="https://www.copera.org/protecting-shareholder-rights-pera-advocates-for-members-and-investors" class="broken_link">A closer look at PERA’s investment expenses</a>.

Protecting Shareholder Rights: PERA Advocates for Members and Investors

On June 1, 2018, Colorado PERA sent a&nbsp;<a href="https://peraontheissues.com/wp-content/uploads/2018/06/COPERA-letter-to-Chairman-Clayton-re-Forced-Arbitration-FINAL-6.1.18.pdf" target="_blank" rel="noreferrer noopener">letter</a> to Hon. Jay Clayton, Chair of the Securities and Exchange Commission (SEC), to express concern about a possible shift in policy away from opposing forced arbitration provisions in public companies’ governance documents.



Forced arbitration provisions would prevent shareholders from suing public companies by requiring investors to settle disputes through arbitration rather than litigation. Some public companies consider arbitration as a way to avoid costly legal disputes and bad publicity as well as discourage lawsuits that they consider frivolous. However, forced arbitration would cost shareholders, including public retirement plans and their members, in the loss of critical transparency and important protections against corporate fraud.



The issue of forced arbitration has been a matter of serious deliberation at the SEC over the past year and, if changed, would mark a considerable turn for the enforcement agency. In a <a href="https://content.copera.org/protecting-shareholder-rights-comment-letter-to-sec-advocates-for-investors-retirement-plan-members/">letter</a> to Congresswoman Carolyn Maloney (D-NY) sent earlier this year, Clayton wrote that he has not “formed a definitive view on whether or not mandatory arbitration for shareholder disputes is appropriate in the context of an [initial public offering] for a U.S. company.”



Allowing forced arbitration would be a serious change in longstanding SEC policy that has historically refused to accelerate the effective date of a company’s registration statement if it contained a mandatory arbitration provision. In doing so, the SEC has demonstrated a preference for maintaining the right to sue, which has long been considered a crucial shareholder protection against fraud and other securities violations.



As PERA General Counsel Adam Franklin notes, “Colorado PERA has long recognized the importance of securities litigation, and specifically securities class actions, due to the role it plays in creating a culture of accountability and deterring corporate fraud.”



Forced arbitration “is private and confidential, preventing investors and the public from having access,” Franklin continues. “In order to protect our investments and to deter future fraud it is imperative that investors retain our ability to bring suit in court against corporations under the federal securities laws.”



PERA has <a href="https://www.copera.org/fee-shifting-in-litigation-disturbing-decision-in-delaware" target="_blank" rel="noreferrer noopener" class="broken_link">long been active</a> in advocating for strong corporate governance policies and has recognized the importance of securities litigation and securities class action in creating a culture of accountability and deterring corporate fraud. Earlier this year, PERA Interim Executive Director Ron Baker <a href="https://www.copera.org/protecting-shareholder-rights-comment-letter-to-sec-advocates-for-investors-retirement-plan-members" target="_blank" rel="noreferrer noopener" class="broken_link">joined</a> the <a href="https://www.cii.org/board_of_directors" target="_blank" rel="noreferrer noopener">board</a> of the Council of Institutional Investors (CII). CII supports strong governance standards at public companies and strong shareholder rights and includes membership of more than 125 public, union and corporate employee benefit plans, endowments and foundations.



PERA staff will continue to monitor the SEC’s position on forced arbitration provisions and we’ll update readers of PERA on the Issues if there are further developments about this issue.

Protecting shareholder rights: Comment letter to SEC advocates for investors, retirement plan members

PERA CIO sends comments to the SEC to improve transparency in equity trading and research after MiFID II impacts European markets



New government regulations are rarely thought of as transformational, but a recent regulatory change out of Europe is proving the exception. New rules for the investment community have increased transparency and, ultimately, fairness for investors – including the members and retirees who belong to PERA.



PERA staff work diligently to stay aware of the latest trends in investment markets and to advocate for increased <a href="https://www.copera.org/pera-advocates-for-increased-transparency-at-the-federal-level" target="_blank" rel="noreferrer noopener" class="broken_link">shareholder rights</a>, transparency in <a href="https://www.copera.org/retirement-roundup-long-1-million-last" target="_blank" rel="noreferrer noopener" class="broken_link">investments</a>, and <a href="https://www.copera.org/pera-advocates-for-increased-transparency-at-the-federal-level" target="_blank" rel="noreferrer noopener" class="broken_link">strong corporate governance</a>. Recently, PERA Chief Investment Officer (CIO) Amy McGarrity wrote to the Securities and Exchange Commission (SEC) asking for guidance that would increase pricing transparency in investment research.



McGarrity wrote the letter in part as a response to the regulation known as <a href="https://mifidii.thomsonreuters.com/en/what-is-mifid-ii.html" target="_blank" rel="noreferrer noopener" class="broken_link">MiFID II</a>. On January 3, 2018, the Markets in Financial Instruments Directive came into effect impacting the UK and European markets. The intent is to provide greater transparency and protection to investors in various asset classes, including the equities, bonds, and currencies in which Colorado PERA invests. While the new rules directly apply to European investors, banks, asset managers, and other market participants, McGarrity’s letter was a direct result of the impact of MiFID II on the investment landscape across the globe.



PERA is particularly interested in sections of MiFID II related to the distribution of investment research and how such research is compensated. Why is PERA focused on this area? PERA invests a significant portion of Fund assets “in house,” including the internal management of approximately 70 percent PERA’s stock investments. In their active asset manager roles, PERA analysts use broker-generated research to help explore investment ideas in detail. This research can range from data in specific industries to company-specific research that would be burdensome and redundant for PERA to replicate.



Traditionally, investment research generated by brokers has been paid via a “bundled” relationship. That is, when PERA would need to trade stocks, the broker or investment bank that executed the trade would then allow PERA access to their research products. MiFID II prohibits this bundling of trading and research. Instead, trading must be compensated for on its own merits, as must research. Consequently, in Europe, research is now paid for primarily by asset managers out of their profits. Similarly, trading relationships must rest solely on the best, or most cost-effective, execution of stock trades.



The benefits of this disruption of the status quo are being felt. Direct payment for research has already greatly improved the transparency of research service pricing, as specific research charges are negotiated. In the bundled model, research pricing has been opaque, with banks avoiding any discussion of explicit costs, thus limiting the ability of investors such as PERA to determine if they have been paying an appropriate amount for the product. MiFID II also has liberated the trading side of the equation by making the choice of transacting broker clearly based on execution skill, rather than unrelated research quality and access. Again, when bundling, trading decisions are less transparent given that the research product cost must be considered.



In the letter from PERA to the SEC, McGarrity recommended that the SEC increase pricing transparency by providing clear guidance that would allow U.S. investors to pay directly for research, rather than receiving research as part of a bundle of services paid for by commissions. PERA’s Equities Division is already in the process of negotiating clear, specific research arrangements with a variety of providers, and form of payment remains a topic of debate. While many of PERA’s research relationships will accept a check from PERA, others have interpreted the latest SEC guidance as limiting the ability of investors to directly pay for research due to on-going regulations.



PERA will continue discussions with the “holdout” brokers still requiring trade commissions to access research, while also engaging with the SEC on the issue. In the meantime, PERA will set firm expectations with research providers, pay for research directly where permitted, and create as much transparency as possible where bundling remains. These efforts will continue to ensure that investment costs are low, ultimately benefiting the PERA membership and Colorado taxpayers.



Read PERA Chief Investment Officer’s <a href="https://content.copera.org/pera-advocates-for-increased-transparency-at-the-federal-level/" target="_blank" rel="noreferrer noopener">letter to the SEC</a>.

PERA advocates for increased transparency at the federal level

Three members of PERA’s leadership team have recently been tapped to serve national organizations. These appointments and elections underscore PERA executives’ retirement, investment, and financial industry knowledge.



Amy McGarrity, PERA Chief Investment Officer (CIO), has been named to serve on the U.S. Securities and Exchange Commission’s (<a href="https://www.copera.org/protecting-shareholder-rights-pera-advocates-for-members-and-investors" target="_blank" rel="noreferrer noopener" class="broken_link">SEC</a>) newly created Fixed Income Market Structure Advisory Committee. McGarrity joins other retail and institutional investors to “provide advice to the SEC on the efficiency and resiliency of fixed income [bond] markets and identify opportunities for regulatory improvements,” according to the SEC’s <a href="https://content.copera.org/pera-staff-selected-to-serve/" target="_blank" rel="noreferrer noopener">news release</a>.



McGarrity was named PERA CIO in March of this year after a nationwide search. McGarrity previously worked for PERA as the Deputy Chief Investment Officer and first came to PERA after the merger of the Denver Public Schools Retirement System in 2010. McGarrity is a <a href="https://www.copera.org/pera-staff-selected-to-serve" target="_blank" rel="noreferrer noopener" class="broken_link">CFA Charterholder</a> and has served on the<a href="https://content.copera.org/pera-staff-selected-to-serve/" target="_blank" rel="noreferrer noopener"> Public Company Accounting Oversight Board (PCAOB) Investor Advisory Group.</a>



Lawrence Mundy, PERA Chief Financial Officer (CFO), was recently elected to the board of directors of the <a href="http://www.p2f2.org/" target="_blank" rel="noreferrer noopener">Public Pension Financial Forum (P2F2)</a>. P2F2’s mission is to “serve its membership through education, pension advocacy, and networking by promoting financial excellence for public pension plans.”



Mundy was selected as PERA CFO in February 2017 and first came to PERA in 2012. Mundy is a licensed CPA in Colorado and also serves on the <a href="https://www.copera.org/pera-staff-selected-to-serve" target="_blank" rel="noreferrer noopener" class="broken_link">Colorado Society of CPA’s Government Issues Forum</a> as well as on the <a href="http://www.gfoa.org/committee-retirement-and-benefits-administration-corba" target="_blank" rel="noreferrer noopener">GFOA Committee on Retirement and Benefits Administration</a>.



In October, Gregory W. Smith, PERA Executive Director/CEO, was elected to serve as a member of the Executive Committee of the <a href="http://www.nctr.org" target="_blank" rel="noreferrer noopener" class="broken_link">National Council on Teacher Retirement</a> (NCTR). NCTR was formed in 1924 and is “dedicated to safeguarding the integrity of public retirement systems in the United States and its territories to which teachers belong and to promoting the rights and benefits of all present and future members of the systems.”



Smith was named PERA’s sixth executive director in 2012 and, prior to leading PERA, was PERA’s General Counsel and Chief Operating Officer. Smith currently serves as the Chair of the Board of Directors of the <a href="http://www.nirsonline.org">National Institute on Retirement Security</a> (NIRS) and as a Co-Chair of the Board of Directors for the <a href="http://www.cii.org/board_of_directors" target="_blank" rel="noreferrer noopener">Council of Institutional Investors</a> (CII).



See also PERA on the Issues: <a href="https://www.copera.org/pera-staff-selected-to-serve" target="_blank" rel="noreferrer noopener" class="broken_link">PERA General Counsel Elected by National Pension Group</a>

Tag Archives:

PERA CIO/COO Amy C. McGarrity Named to SEC Advisory Committee

Proxy voting: An obscure term with real implications for PERA

Protecting Shareholder Rights: PERA Advocates for Members and Investors

Protecting shareholder rights: Comment letter to SEC advocates for investors, retirement plan members

PERA advocates for increased transparency at the federal level

PERA staff selected to serve

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