Missouri Treasurer: Show Me You're Anti-Terror

From John Curry, July 14, 2007
Remember Rep. Mandel mentioning the Missouri divestment...well, check this out!

Business In The Beltway
Missouri Treasurer: Show Me You're Anti-Terror
Matthew Swibel, 07.12.06
Forbes.com

WASHINGTON, D.C. - Local pols love to use their control of pension and investment funds to score political points and weigh in on the big issues. Boycott this. Invest in that. Now, Missouri State Treasurer Sarah Steelman, a Republican, is using the technique to wage her own war on terror. Her crusade should prompt some nail-biting from corporate interests worried about the interference of shareholder activism in a global marketplace.

By August, a $24 million portfolio within the Missouri Investment Trust--a state fund that taxes entertainers and athletes' income and makes earnings from investment of such monies available to state cultural organizations--will adopt an anti-terrorism screen developed by Conflict Securities Advisory Group (CSAG), an investment research firm in Washington, D.C.

Specifically, State Street Global Advisors will manage the enhanced index of its international large-cap Alpha Select Fund of about 125 stocks, with CSAG as a subcontractor providing a list of stocks with "global security risk"--that's federal regulator speak for terrorist-related risks.

Since taking office in 2004, Steelman has made no secret of her distaste for investments with any possible terror link. She made a ruckus over the Missouri State Employees Retirement System owning shares of France's BNP Paribas, which was involved in the Iraqi oil-for-food scandal and development loans in Iran, and of Arab Bank, which has been sanctioned by the U.S. Treasury Department for financial involvement with terrorist groups. As a result, those holdings have been reduced or eliminated, her office says.

The retirement plan has more than $6 billion in assets. But Steelman has complained that it has $20 million in foreign companies with direct ties to Iran.

Steelman has a higher standard on this than the U.S. Securities and Exchange Commission, which doesn't require companies trading on U.S. markets to disclose the level of investments and operations in countries considered terrorist hubs. The SEC does have an Office of Global Security Risk, created by Congress as part of the 2003 SEC budget bill. The office monitors voluntary disclosure of activities in countries linked to terrorism and human-rights abuses. It's hardly a large operation--it is now fully staffed with one supervisor, three attorneys and a research specialist.

"My main objective was to make sure we are not using public dollars to fund terrorists," Steelman says. "I don't view it as setting foreign policy."

And maybe it isn't. But these moves arguably amount to effective sanctions--a dicey area of the law that has created a dustup between a prominent business trade group and Missouri's neighbor, the State of Illinois.

Later this month, the National Foreign Trade Council, based in Washington, D.C., is expected to file a lawsuit in federal court in Chicago challenging the constitutionality of a 2005 Illinois law barring public pension funds from investing in companies doing business with the Sudanese government--deemed by the U.S. State Department as a sponsor of terrorism.

Arizona, Connecticut, Louisiana, New Jersey and Oregon have followed Illinois' lead on Sudan, and similar laws are pending in 18 other states.

The NTFC finds this case equally as strong as the one it brought against a Massachusetts law blackballing Burma. In that case, the U.S. Supreme Court ruled unanimously in favor of NTFC and held that states are preempted under the Supremacy Clause of the Constitution from acting where Congress and the president have already addressed the question of sanctions. (The Clinton administration began restricting the flow of most goods to and from Sudan in 1997. President George W. Bush has extended sanctions through November 2006.)

Even the investor activists don't all agree on what level of meddling is appropriate. The California Public Employees' Retirement System (CalPERS), a case study of shareholder activism, opposes a Sudan divestment bill in California because it would limit the CalPERS board's authority to make investment decisions. It also worries that the transaction cost of divestment would be $1.9 million per year, and that annual administrative costs would run up to $150,000, according to a June 19 internal CalPERS memo.

A further knot: "Terror-free" investing isn't quite so cut-and-dry.

For example, the Missouri Investment Trust currently owns shares of UBS through a European Index. UBS routinely gets red-flagged by terrorist watchdog CSAG because of the company's financial services activities in Iran.

So will Missouri dump it? Not necessarily, says Mark Mathers, director of investments for the Missouri Investment Trust. First, he'll wait to see if public statements from UBS sufficiently illustrate an intent to vacate Iran--and weigh the data and counsel he gets from CSAG, which collects a $10,000 annual fee for its role.