Ex-CalPERS CEO Sentenced to Prison | Chief Investment Officer

buenrostro A federal court has sentenced the former CEO of the California Public Employees’ Retirement System (CalPERS) on charges that he accepted bribes from a former board member and placement agent.

Ex-CEO Fred Buenrostro, who led the $293 billion fund from 2002 to 2008, confessed in 2014 to taking $200,000 in cash and a series of other bribes from Alfred Villalobos, then a placement agent for Apollo Global Management.

He was sentenced Tuesday to four-and-a-half years in prison, according to the Sacramento Bee. Buenrostro was already being held in jail on unrelated charges of committing battery against an ex-girlfriend, the report said.

“This chapter in our history is now behind us, and CalPERS has emerged a stronger, more dynamic organization,” said current CEO Anne Stausboll in a statement. “Over the past seven years, we have built a lasting, principled foundation for future success. More than ever, we’re focused on our service to our members and employers and to ensuring that the CalPERS fund is secure for generations to come.”

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Stausboll, who is retiring this month, had previously condemned the misconduct of Buenrostro and Villalobos, promising in 2012 that CalPERS leaders would “do everything in our power to never allow the system to be compromised by personal gain.”

Since 2009, CalPERS said it has put in place several “critical measures” to strengthen internal controls and risk management, including requiring external managers to disclose placement agent terms and requiring those agents to register as lobbyists. Board members and staff have also been limited to a total of $50 per calendar year in gifts from any one person doing business or seeking to do business with the fund.

“We are stewards of a sacred trust, and it must never be compromised for personal gain,” said CalPERS Board of Administration President Rob Feckner in a statement. “As an organization, we’ve taken meaningful steps to strengthen accountability and transparency throughout CalPERS. We’ll continue to work to make sure these measures are rigorously followed and that we hold ourselves to the highest ethical standards.”

Investors should only pay for factor-based indexes if they prove they are superior to traditional cap-weighted benchmarks—so says EDHEC Risk Institute (ERI).

“Smart beta providers’ claims on the quality and robustness of their strategies should materialize in their live performance.”ERI Scientific Beta, the nonprofit’s smart beta index provider, has introduced a new pricing model for its benchmarks that it claims will “disrupt the traditional model of fixed fees.”

Investors who choose the new “variable fees” option—available from today—will pay “zero fixed fees,” the group said. Fees will kick in once the multi-strategy index outperforms its cap-weighted benchmark.

“Our rationale for this mandate offer is that smart beta providers’ claims on the quality and robustness of their strategies should materialize in their live performance,” said Noël Amenc, CEO of ERI Scientific Beta. “Our initiative is intended to provide consistency between the smart beta provider’s revenues and the quality of its offering. It is also testimony to the confidence we have in the performance of our smart beta indexes.”

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It is not the first time a product provider has attempted a performance-fee only approach. In 2011, UK boutique Vinculum Asset Management launched a quantitative fund promising to charge only a quarterly performance fee. However, after a lack of support from retail investors and inconsistent returns, the group shut down in 2014.

Amenc was bullish in his group’s ability to make this fee approach stick. Speaking to journalists in London last week, he pointed to ERI’s well-established business, which has $10 billion of assets linked to its indexes.

“The fixed costs are already paid,” Amenc said, adding that ERI’s nonprofit status meant it was not required to take more in charges than necessary. Replication costs are “probably nothing,” he argued, meaning the implementation of a service should be the only thing for which clients pay.

“We are aligning remuneration with the promise of outperformance, and affirming our confidence in the robustness of our indexes,” Amenc said.

Earlier this year, a report from Morningstar argued that some exchange-traded fund providers were charging up to three times more for “strategic beta” strategies than for traditional index trackers. There was little justification for the higher fees beyond a lack of pricing pressure, Morningstar claimed.