PERAC Memo #20 - 2007: Board Annual Compliance Memorandum

MEMORANDUM #20, 2007 M E M O R A N D U M TO: All Retirement Boards FROM: Joseph E. Connarton, Executive Director RE: Board Annual Compliance Memorandum DATE: March 7, 2007 PERAC would like to provide you with an update on the issues we have addressed this past year, and our commitments in the year ahead. PERAC had an opportunity this past year to address several issues concerning compliance, including: ethics, directed brokerage and disclosure statements. We also delved into various compliance issues throughout the public pension fund community and continue to work with various governmental agencies to ensure that all public pension boards are meeting their fiduciary duties. PERAC’s Compliance Officer attended one of the Ethics Commission seminars. PERAC believes these seminars would be extremely beneficial to the public pension fund boards, and these seminars will be included as part of the PERAC educational classes. Further, after speaking with the Ethics Commission, we were able to ascertain that they are willing to perform this seminar at the request of any public agency. We addressed the issue of Disclosure Statements in PERAC Memoranda #42/2006 as well. PERAC Memorandum #47/2006 dealt with a rash of directed brokerage incidents within the pension community. In view of the fact that these directed brokerage incidents occurred, we felt it was prudent for all boards to review their disclosure statements, address the issue with their investment managers/consultants and remind them that PERAC Regulation 840 CMR 16.05 requires this review on an on-going basis. We further requested that the boards notify us as to whether they are in compliance with the aforementioned regulation. PERAC sets out this year with the intention of continuing to work with all of the public pension funds in understanding the need for compliance and how together we can attain compliance of all boards. We have proposed more educational requirements in the current pension reform bill filed in January of this year. We will continue to monitor the current state of the pension community and follow up on issues that arise. PERAC further would like to remind all Massachusetts public pension systems that there is a need for continued persistence in complying with all PERAC Regulations 840 CMR. The areas PERAC feels a current review of compliance with would include the following: 840 CMR 1.03: Prohibition Against Certain Persons Holding Certain Positions A review should be commenced to ensure that all public pension systems are in compliance with this section. All boards should review this section carefully, to avoid any perceived problems arising out of a failure to comply. Over the past couple of years, there have been a few instances where PERAC has had to act regarding this section. 840 CMR 16.02: Employment of Qualified Investment Manager; When Permitted or Required; Delegation of Responsibility; Expenses; Contract All boards should review all investment contracts in their entirety under 840 CMR 16.02(5). These contracts should include, but not be limited to, investment objectives, brokerage practices, proxy voting, tender offer exercise procedures, terms of employment, fees and termination provisions. All contracts shall provide that the investment manager is a fiduciary with respect to the funds invested by the board. No contracts shall contain any provisions for indemnification by the retirement board. Further, under 840 CMR 16.02(6) all boards should review and confirm that all investment managers have submitted a current Form ADV Part II of the Uniform Application for Investment Adviser Registration. These forms must be compliant with PERAC regulations. 840 CMR 16.05: Use of Brokers As was presented within Memorandum #47/2006, each board shall ensure that they have not ordered their investment managers or consultants to direct brokerage. They must further evaluate all investment managers and consultants as to their use of brokerage. It is important that each of the regulations found within 840 CMR 16.05 are followed by all fiduciaries of the boards’ funds. PERAC is aware of the commission recapture programs that several public pension systems are involved in, and continue to monitor and work with those public pension systems in ensuring compliance with all PERAC regulations. 840 CMR 16.08: Procurement of Investment Related Services PERAC reminds all boards of the need for a competitive process in the selection and hiring of investment managers, consultants, custodian banks and other investment related services. This process is to include requests for proposals, the selection process, selection criteria and all other relative information necessary to make this decision. It is essential that this procedure be followed concerning any selection and hiring process, as these individuals, entities or corporations will be acting in a fiduciary capacity in regard to the board’s funds. 840 CMR 17.02: Code of Ethics for Fiduciaries Each fiduciary shall: conduct themselves with integrity and act in an ethical manner; perform their functions in a professional and ethical manner; act with competence and strive to maintain and improve their competence and that of others in their profession; and use proper care and exercise independent professional judgment. Each board should review and ensure that their fiduciaries are knowledgeable of these codes of ethics. 840 CMR 17.03: Standards of Conduct for Fiduciaries All boards should review and discuss their knowledge and compliance with M.G.L. c. 268A, the conflict of interest law. Each board member, employee, or fiduciary should be aware of any possibility of a conflict of interest, and if action(s) should be taken to correct or prevent any conflicts from existing. Further, each board should review the standards of conduct set forth in 840 CMR 17.03 concerning fiduciaries of the public pension fund systems. 840 CMR 17.04: Standards of Conduct for Qualified Investment Managers and Consultants All boards should review and discuss with their investment managers and consultants how the investment managers and consultants comply with the provisions set forth in 840 CMR 17.04. This regulation sets forth the need for compliance with all applicable law, regulations, codes of ethics and standards of conduct for investment managers and consultants. It further regulates that each investment manager and consultant shall exercise reasonable care over its employees; that each shall exercise diligence and thoroughness in investment recommendations and portfolio investment recommendations and actions; that no investment manager or consultant shall misrepresent the services provided to the board; that all board transactions have priority over that of personal transactions of the investment managers and consultants; that each investment manager and consultant shall disclose to the board any conflicts of interest; that each investment manager and consultant shall disclose all compensation agreements and arrangements concerning the boards investments; that each investment manager and consultant shall preserve the confidentiality of information communicated by the board and maintain independence and objectivity in relationships and contacts with issuer of securities; that each investment manager and consultant shall understand the enforcement and liability of each investment manager and consultant retained by the retirement board; and that each investment manager and consultant shall understand the need for fair dealings with the retirement board. 840 CMR 26.04: Qualified Consultant All boards shall continue to review all consultants every fifth year, and shall request authorization from the Commission to continue to retain said consultant. This review shall include, but not be limited to, any regulatory action, litigation, or legal proceedings involving the consultant in the past five years and any other matters relating to the qualifications of the consultant. PERAC is committed to working with the Massachusetts Retirement Systems in an effort to protect the retirement funds. It is only through continued diligence by all facets of the public pension fund community that we can remain resolute in ensuring the future of all Massachusetts public pension funds. This continued diligence includes the need to adhere to the laws and regulations of the Commonwealth of Massachusetts and its regulating agencies, as well as respecting good corporate governance procedures. PERAC is also enclosing a fact sheet from the US Department of Labor Employee Benefits Security Administration titled: Selecting and Monitoring Pension Consultants – Tips for Plan Fiduciaries. This fact sheet contains a series of questions that PERAC feels may be beneficial in assisting the public pension systems in the hiring and retaining of investment managers and consultants. If you have any questions, comments, or suggestions, please do not hesitate to contact PERAC’s Compliance Officer Dana Mahoney. He may be reached via e-mail (DKMahoney@per.state.ma.us) or at 617.666.4446 ext.933.