Personal trading rules for the investment staff of superannuation funds are largely unregulated in Australia. The general trend is for super funds to abide by the unwritten laws of common sense and good governance. But, asks CATHERINE JAMES, would that change if funds continue to grow at the rates they have been?
One of the United States’ largest pension funds, CalPERS, recently tried to introduce tougher guidelines for its staff around personal trading accounts. However, the pushback from staff has been so strong that even the Office of Administrative Law (OAL) in California has been called upon to step in. As first reported in Pension and Investment online, the Californian Public Employees’ Retirement System brought in new guidelines for its investment staff that sought to increase protocols around how staff were to check trades and put limits on how much they could trade on any one stock.
A staff member took the complaint to the OAL requesting the legislative authority to override CalPERS’ new guideline on the grounds the pension fund’s move went beyond its legal right. J.J. Jelincic, a real estate investment officer with the US$250 billion fund, filed documents filed with the OAL, the agency responsible for checking that administrative regulations proposed by California state agencies comply with the state’s Administrative Procedure Act, on the grounds the policy was an “underground regulation”. “The restrictions go well beyond the authority of CalPERS, those needed to protect CalPERS or industry standards,” Jelincic says in the documents dated April 4.
According to P&I, the new regulations “tightened the personal trading policy to prohibit employees from trading — without first getting approval — a security in their personal portfolios worth more than US$2,000 if CalPERS has traded or plans to trade that security within seven days. If approved, the trade can only be completed the same day approval is given.”
Jelincic contests in his application to OAL that the regulation “interferes with the efficient operation of the public securities market. This area of activity, relative to public markets, is within the jurisdiction of the federal Securities and Exchange Commission and the Commodity Futures Trading Commission. It imposes limits beyond the authority of CalPERS. “It purports to give CalPERS the authority to control the actions of any person acting as a fiduciary on behalf of any ‘Key Access Person’. It makes the private transactions of both employees and non–employees a public record. It requires the reporting of requested permissions even if transactions did not occur or had been denied.”
The OAL is yet to hand down its findings, (although it originally stated it would do so on June 30). The fund has declined to make any comments until then. “CalPERS temporarily rescinded the personal trading policy to allow time for review and to be responsive to staff who raised questions about it. We have received no word about a decision by the OAL. This is all we have to say at this time,” CalPERS told Investment & Technology at the end of last month. For some people, having a separate personal investment account while managing huge amounts of money for others is a clear conflict of interest. Sam Sicilia, chief investment officer at HostPlus, says he never has and never will run a personal investment account.
Sicilia is the sole member of the HostPlus investment team who makes investment decisions, while two other staff members run the administrative functions of the investments. Sicilia says all three are covered by typical good corporate governance standards when it comes to operating one’s own investment portfolio outside of work – namely, disclosure of personal holdings and activities.
However, Sicilia says, while corporations can exact minimum standards from their employees, as an individual you can do more if you wish. As a consequence, he has taken the high road. “I personally don’t have any investments outside of my super. Period,” he says.
Nor does anyone in Sicilia’s immediate family, still living in his household, hold any investments outside of super – except the family home. Sicilia believes having a separate account outside of the professional fund he is running would be “fraught with danger”.
Investment teams were sometimes privy to information before the market – from discussion with fund managers and the like about their next move – and acting on that information could easily become insider trading. “The ice can be pretty thin in some places and sometimes it’s just better to steer clear altogether,” he says. Yet Sicilia does not say his standard should be the norm. He was clear it was a personal decision he was more comfortable with but would not expect from his own investment team. As for the superannuation side of his investments, Silicia has his account with HostPlus and is treated like any other member. There are no perks for being the chief investment officer of the fund. “I have the same investment choice options as other members and have to go through the same process if I want to switch those options,” he says.
This process ruled out any grey area of the possibility of manipulating switch options within the super fund based on inside information. To switch options, Sicilia must file an application to SuperPartners. If the application is received before the last five days of the month, the change is made half way through the month after the request. If the application is received with less than five days of the month to go, the change is not made until the start of the second month after the request is made.
Maged Girgis, a partner at Minter Ellison Lawyers who specialises in superannuation, recounts a situation at a super fund – which he declined to name – in the days when the rate of return was capped by the fund and announced during the year as an interim rate of return, before the end of year’s final rate was announced to members. Wherever a member’s money was at that end of year cutoff, whether they had recently subscribed to that investment option or not, was the rate of return their account was topped up with.
Girgis says some of the investment staff knew the fund was going to declare a certain rate of return on the investment option they were in. It was going to be less than the interim rate the fund had declared earlier. So they pulled their money out to get a better rate elsewhere before the fund had made the information public. “These people were never prosecuted – they weren’t taken to court – but they were asked to leave,” he says. Girgis assists funds in formulating standards around how to manage employees’ personal trading accounts. He had not seen or heard of a CalPERS-like directive involving a dollar threshold over which trades required more disclosure.
The law in Australia generally is not prescriptive on how funds should manage the possibility of a staff member front-running the market. The clause related to insider trading was repealed from the Superannuation Industry Supervision Act when the Financial Services Reform Act was passed in 2001. But while it was taken out of the SIS Act, the reference to insider trading in Corporations Act – point 7.10 – was expanded from dealing with securities to dealing with financial products.
However, the law is not unambiguous.
Leo de Bever, chief investment officer of Victorian Funds Management Corporation, says part of the problem some funds managers have in applying behavioural codes around the personal trading rules is that the law is not laboriously clear – a good thing in some respects – but which nevertheless can create ambiguity.
He says VFMC is reviewing its own requirements for staff, but there are some questions around how far you spread the net of who is captured by the disclosure requirements and investment restrictions.
“For example, to what extent do the Chinese walls extend to the staff member’s family?” he asks. “We’re still working on it.”