Governor Granholm Announces Tougher Standards For Financial Organizations Doing Business With State

Governor Jennifer M. Granholm has signed an executive directive to promote strict corporate responsibility standards for the financial organizations that are retained or utilized by the state for investment banking, brokerage services, money management, and investments.

“We won’t wait for Michigan citizens to start losing money before we question the companies in which we invest,” Granholm explained. “We’re sending a message that if you want Michigan’s investment business, you must have the mechanisms in place to ensure that you’re operating as a good corporate actor.”

Granholm said the executive directive will safeguard state investments and pensions and will help restore investor confidence by taking a pro-active approach toward advancing corporate reform.

Under Executive Directive 2003-11, issued today, every investment banking firm retained or broker research service utilized by the state will be required to adopt the following Investment Protection Principles:

• Sever any link between compensation for analysts and investment banking.
• Prohibit investment banking input into analyst compensation.
• Create a review committee to approve all research recommendations.
• Require that upon discontinuation of research coverage of a company, the firm will disclose the coverage termination and rationale for the termination.
• Disclose in research reports whether the firm has received or is entitled to receive any compensation from a covered company over the past 12 months.
• Establish a monitoring process to ensure compliance with the above principles.

Money management firms or investment firms retained by state departments and agencies would be asked to disclose any client relationship, including management of corporate 401(k) plans, where the money management firm or investment fiduciary could invest state or retirement system funds in the securities of the client. The firms also would be asked to 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.

The firms also would be required to report quarterly the amount of commissions paid to broker-dealers and the percentage of commissions paid to broker-dealers who have publicly announced they have adopted the Investment Protection Principles. The firms also would be required to adopt safeguards to ensure that client relationships of any affiliate company do not influence investment decisions, and each firm will provide a copy of its safeguard plan to the State Treasurer. Money management and investment firms also would be required to consider the quality and integrity of the accounting and financial data of the company they are investing state funds in.

State departments and agencies are directed in the directive to consider the quality and integrity of the company’s accounting and financial data, determine whether the company’s outside auditors also provide consulting or other services to the company, determine the company’s corporate governance policies and practices, and determine whether the company has relocated off-shore – outside of the United States – in name only to avoid taxes and weaken shareholder protections.

“The bottom line is that these Investment Protection Principles will help us better protect our citizens and retirees,” Granholm said. “Michigan residents have the right to peace of mind when it comes to the state’s investments and their own personal financial matters. This directive makes sure that state government is doing all it can to protect our citizens’ financial interests.”