PERAC Memo #34 - 2010: Acknowledgement for Prospective Investment Managers

MEMORANDUM #34, 2010 M E M O R A N D U M TO: All Retirement Boards FROM: Joseph E. Connarton, Executive Director RE: Acknowledgement for Prospective Investment Managers DATE: August 17, 2010 Although this memo concerns matters of primary concern to the boards who invest with system assets we have circulated this to all boards, including those boards who invest through PRIT. PERAC has been informed that there has been some confusion about the “acknowledgement” letters PERAC issues to retirement boards upon receipt of regulatory documents (competitive process letter, disclosure form, vendor certification, and in some cases, exemption application) for prospective investment managers. This is an effort to clarify any misunderstanding. Our acknowledgement letter certifies that PERAC has received from the board a statement that the manager was selected through a legitimate competitive process, that required disclosures have been made, and in some asset classes, that the manager appears to have basic qualifications. The letter does not authorize the board to enter into an agreement with the manager without regard to whether or not that manager intends to comply with all the pertinent investment regulations contained in 840 CMR. It is appropriate that legal counsels for retirement boards seek separate legal assurance that prospective managers will be in compliance with 840 CMR. In instances where a manager’s subscription documents, fund prospectus, or other documents conflict with specific PERAC investment regulations, it is appropriate for the board to submit supplementary regulation requests to obtain authorization to proceed with the investment in light of the regulatory differences. Due to the way certain investments are structured, PERAC has frequently issued supplementary regulations pertaining to such issues as paying fees based on committed capital rather than contributed capital, the extent of fiduciary responsibility, matters pertaining to indemnification, and the limited use of futures, options, or shorting in the implementation of certain strategies. The bottom line is that while we believe that PERAC’s regulatory framework basically consists of standard and generally accepted investment practices and principles, we do acknowledge that there may be certain regulations that some investment managers are unable to comply with or are simply inappropriate for investments in certain asset classes. As noted above, we encourage boards to submit supplementary regulation requests to address these legitimate concerns. Such requests should be as specific as possible in citing which regulations need to be addressed and the rationale for the request. However, PERAC has never issued a blanket exemption from all investment regulations for a particular manager and it is impossible to imagine any circumstances under which we would.

Legal counsels for the boards and for managers should be careful to request supplementary regulations that are both specific and appropriately limited in scope. There have been some instances where counsels have sought supplementary regulations that would essentially give managers permission to engage in investment practices and strategies beyond the realm of the actual mandate. We also acknowledge that some regulations may be overly general or subject to different interpretations. A recent example involved whether certain regulations apply just to the general partners of a private equity vehicle or to all the underlying companies as well. (Generally, the regulations apply only to the GPs.) Any questions pertaining to the regulations should be addressed to Joe Martin or Bob Dennis.