Enhancing Public Retiree Pension Plan Security:




Best Practice Policies for
Trustees and Pension Systems
AFSCME’s 1.6 million members provide the vital services that          picture and gladly accept the responsibility of guar...
Contents
Executive Summary  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  ....
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      2   American Federation of State, County and Municipal Employees, AFL-CIO
Executive Summary



AFSCME                 represents 1.6-million        who oversee and administer these systems
state a...
addressing conflicts of interest. This report1          retirement systems have the time or resources
    provides a usefu...
Section I
              Overview and Discussion of
                    Best Practice Policies
1. BOARD MEMBER RESPONSIBILI...
What does the proposed policy do?                      education, primarily by attending a variety
    The proposed policy...
the Marin County Employees’ Retirement                  ensure trustees and staff are fulfilling their
Association (MCERA)...
Why is this language included?                        trading, prohibits the use of material, non-
    In dealing with pot...
a governmental decision involving a finan-                    at a minimum, the appearance of a conflict,
cial interest, b...
What alternative language was considered?             1. Requires written disclosure of any com-
     Several systems ban ...
board members on unequal footing with each           communications disclosure requirement to
other because one or more me...
was accompanied by an informal process in        Conduct” that, among other things, bans
     which the board member would...
an elected official or candidate for whom            Additional comments
the donor is entitled to vote. Because of        ...
the proper exercise by system trustees,               ‘However, an outright ban on the use of
     staff and advisors of t...
AFSCME does support robust disclosure                3. A copy of all agreements between the
provisions that provide full ...
former board members or staff seek to profit
     by serving as placement agents in connection
     with investment relati...
Section II
  Recommended Policy Language
1. BOARD MEMBER RESPONSIBILITIES
                                                ...
2. BOARD MEMBER EDUCATION
     •	 Fiduciary responsibility.
                                                          Purp...
their own educational needs and which             •	 Where applicable, health benefits program
   educational opportunitie...
Mentoring                                         First Year. In the board members’ first year of
     Any new board membe...
Retirement Industry Periodicals                         determination of the relevant facts, con-
Board members are encour...
•	 Acquisition, on behalf of the system, of                 gain or the advantage of another,
        any employer securit...
8. As a board member, having an ex parte             “Insider trading” has been defined as buying
   communication on the ...
Information is considered “nonpublic” if it         which the material nonpublic information
     is not available to the ...
Afscme Report Pension Best Practices
Afscme Report Pension Best Practices
Afscme Report Pension Best Practices
Afscme Report Pension Best Practices
Afscme Report Pension Best Practices
Afscme Report Pension Best Practices
Afscme Report Pension Best Practices
Afscme Report Pension Best Practices
Afscme Report Pension Best Practices
Afscme Report Pension Best Practices
Afscme Report Pension Best Practices
Afscme Report Pension Best Practices
Afscme Report Pension Best Practices
Afscme Report Pension Best Practices
Afscme Report Pension Best Practices
Afscme Report Pension Best Practices
Afscme Report Pension Best Practices
Afscme Report Pension Best Practices
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Afscme Report Pension Best Practices

  1. 1. Enhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems
  2. 2. AFSCME’s 1.6 million members provide the vital services that picture and gladly accept the responsibility of guarding and make America happen and advocate for prosperity and nurturing it — not because we expect to be recognized for our opportunity for all working families. sacrifice, but because we know the job needs to be done. That’s why we’re in the public service — to keep our families safe and We are nurses, corrections officers, child care providers, EMTs make our communities strong. and sanitation workers. For us, public service is not just a job, it’s a calling. At times we are right out front, and at other times While we work for justice in the workplace, we advocate for we are behind the scenes. Wherever we are, we’re proud to take prosperity and opportunity for all of America’s working families. on the responsibility of helping to keep this country strong. We not only stand for fairness at the bargaining table — we fight for fairness at the ballot box and in the halls of government. AFSCME is a union made up of a diverse group of people who share a common commitment to public service. We see the big
  3. 3. Contents Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Section I: Overview and Discussion of Best Practice Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1. Board Member Responsibilities and Core Competencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2. Board Member Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3. Ethical And Fiduciary Conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 A. Fiduciary Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 B. Statement of Ethical Conduct. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 C. Prohibition on Insider Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 D. State and/or Local Conflict of Interest Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 E. Avoidance of Appearance of Nepotism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 F. Limitation on Receipt of Gifts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 G. No-Contact Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 H. Disclosure of Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 I. Prohibition on Campaign Contributions (pay-to-play). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 J. Disclosure of Third-Party Relationships and Payments; Permanent Ban on Current or Former Board Members or Employees from Providing Placement Agent Services in Connection with the System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section II: Recommended Policy Language . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 1. Board Member Responsibilities and Core Competencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2. Board Member Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3. Ethical And Fiduciary Conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 A. Fiduciary Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 B. Statement of Ethical Conduct. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 C. Policy Prohibiting Insider Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 D. State and/or Local Conflict of Interest Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 E. Avoidance of Appearance of Nepotism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 F. Limitation on Receipt of Gifts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 G. No-Contact Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 H. Disclosure of Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 I. Prohibition on Campaign Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 J. Disclosure of Third-Party Relationships and Payments; Permanent Ban on Current or Former Board Members or Employees from Providing Placement Agent Services in Connection with the System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Attachment I: Board Member Knowledge Self-Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Attachment II: Insider Trading Policy Certification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Enhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems 1
  4. 4. zzz 2 American Federation of State, County and Municipal Employees, AFL-CIO
  5. 5. Executive Summary AFSCME represents 1.6-million who oversee and administer these systems state and local employees and retirees that even more difficult. share a common commitment to public For many years, AFSCME has been a leader service and who have invested in a finan- in the efforts to reform corporate gover- cially sound public retirement system for nance, working to improve the responsive- their financial security. AFSCME members ness of boards of directors and executives participate in more than 150 public pen- to shareholders. The time has come for a sion systems with assets totaling more than similar focus on the governance of public $1 trillion. Some of our members have the pension systems. The retirement security added responsibility of serving in a fidu- not only of our own members, but of public ciary capacity as a trustee of one of those employees and retirees generally, would be public retirement systems. As an organiza- enhanced by identifying and implementing tion, AFSCME works to ensure our mem- “best practices” governance policies that bers’ financial security and to give those lead to well-educated trustees and staff with members who serve as trustees on public a clear understanding of their responsibili- retirement systems the tools to be effective ties operating in a transparent environment in that position. with safeguards to prevent even the appear- ance of a conflict of interest. To fulfill their mission, trustees and staff of public pension systems in the United States AFSCME has reviewed the policies of leading must invest billions of dollars prudently, public pension funds, as well as public pen- ensure sufficient funds will be available to sion fund governance best practices research. pay retirement benefits many years into the The latter includes the Clapman Report, future, and make certain systems are in place released in 2007 by the Committee on Fund to pay retirement benefits in a timely and Governance of the Stanford Institutional accurate manner. Under the best of circum- Investors’ Forum. The Clapman Report sets stances this is a heavy burden, and in recent forth best practice principles in several areas, years public pension systems have had to including trustee core competencies and cope with additional economic and political challenges that have made the jobs of those Enhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems 3
  6. 6. addressing conflicts of interest. This report1 retirement systems have the time or resources provides a useful analytical framework to conduct an extensive development and/ against which to measure specific policies or overhaul of their governance and ethics appropriate to the needs of individual pen- policies. These recommendations can help sion systems. systems review their existing policies, iden- tify any gaps and revise them or develop new AFSCME has used this information to policies as appropriate. develop recommended best practices policy language for public pension funds in three While our report cites the policies of a num- key areas: ber of public pension systems from around the country, we want to acknowledge that 1. Board Member Responsibilities and Core many other systems have likewise developed Competencies strong policies in the ethics and governance areas. We hope systems do not simply “cut 2. Board Member Education and paste” this work into their own policies, 3. Ethical and Fiduciary Conduct, including: but instead use this report as a catalyst for development of policies specifically tailored A. Fiduciary Duties to their own needs. B. Statement of Ethical Conduct C. Prohibition on Insider Trading Throughout these recommended policies, D. State and/or Local Conflict of Interest Laws we refer to “board members” and “trustees” E. Avoidance of Appearance of Nepotism interchangeably. Also, we use the terms F. Limitation on Receipt of Gifts “chief executive officer,” “chief investment officer” and “general counsel” to refer to G. No-Contact Policy those persons with final staff-level authority H. Disclosure of Communications over administrative, investment and legal I. Prohibition on Campaign Contributions matters, respectively, in a public pension (Pay-to-Play) system. We recognize smaller systems in J. Disclosure of Third-Party Relationships and Pay- particular may utilize outside service pro- ments; Permanent Ban on Current or Former viders in lieu of in-house staff to fulfill the Board Members or Employees from Providing latter two functions. In those instances, the Placement Agent Services in system should determine whether a staff Connection with the System role that is identified in a recommended policy is best suited for the outside service We have two goals that led us to develop provider or available in-house staff. these recommended policies. Firstly, and most importantly, we want to ensure deci- sions by public pension fund fiduciaries are made solely in the best interests of plan members, retirees and beneficiaries. Sec- ondly, we wish to provide examples of best practice policies that meet that objective but do not inappropriately tie the hands of those fiduciaries. We recognize few public 1. The report may be found online at http://www.law. stanford.edu/program/executive/programs/Clapman_ Report-070316v6-Color.pdf 4 American Federation of State, County and Municipal Employees, AFL-CIO
  7. 7. Section I Overview and Discussion of Best Practice Policies 1. BOARD MEMBER RESPONSIBILITIES them.2 Further, such boards should be much AND CORE COMPETENCIES more immune to efforts by those who would In most public pension systems in the have them make decisions that are not in the United States, the membership of the best ultimate interest of the members, retirees board of trustees is set forth in law, and and beneficiaries of their system. typically involves some combination of elected, appointed and ex officio members. This is not to say that public pension systems Elected members are chosen by groups of should require expertise in such areas as active and/or retired employees covered by investments, actuarial matters or auditing as the system; appointed members may come a precondition to serve as a board member. from that group, plan sponsor management The principal function of a public pension or the public at large; and ex officio mem- fund trustee is to work with his/her peers on bers most often are elected or appointed the board to establish the strategic direction public officials. By design, therefore, trust- of the system, to hire the necessary staff and ees come into their positions with diverse consultants with the expertise to carry out skill sets, perspective and understanding of that direction and administer the system on their roles. a day-to-day basis, and then to oversee the work being done to ensure the direction is Trustees face demands immediately upon carried out. For the most part, board com- taking the oath of office. There is no time petency involves a completely different skill for a trustee to “get up to speed” before cru- set than those of professional investment cial decisions must be made and key votes manager, actuary or auditor. And, as a practi- must be cast. Consequently, leading pension cal matter, experience has shown that getting systems have adopted policies that describe such experts to serve on a board that is regu- exactly what is expected of a trustee (respon- larly in the public eye, requires public disclo- sibilities) and what a trustee needs to know sure of personal financial interests (including (core competencies). Pension boards com- client relationships) and pays little or nothing prised of trustees with this level of knowl- is extremely impractical. edge and understanding are able to evaluate effectively the complex issues presented to 2. Clapman Report at 12. Enhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems 5
  8. 8. What does the proposed policy do? education, primarily by attending a variety The proposed policy sets forth a recom- of conferences that are geared to public mended list of responsibilities and core funds and that focus on investments,” such competencies that are common to all board programs as a rule “neither encourage trust- members of a public retirement system. ees to develop the broad vision they need to set policy, nor do they provide the practical What is the source of the policy language? grounding a board needs to oversee a fund’s The proposed policy builds upon exist- operations.”5 Also, in our view, many pro- ing policies in place at the California State grams do not maximize “in the seat” educa- Teachers Retirement System (CalSTRS) and tion. They may rely heavily on for-profit the San Diego City Employees’ Retirement commercial sponsorships. Programs also System (SDCERS).3 Additional reference may tilt the balance toward recreation and points include the California Public Employ- entertainment. ees’ Retirement System (CalPERS) Board of What does the proposed policy do? Administration Code of Ethics, as well as the Clapman Report. The proposed education policy sets forth a comprehensive approach to educat- ing pension fund trustees so they can 2. BOARD MEMBER EDUCATION discharge their duties with the requisite The Clapman Report recommends that: knowledge, skills and abilities. It identi- “Trustees, on a regular basis, should obtain fies a new board member orientation pro- education that provides and improves core cess designed to get trustees quickly “up competencies, and that assists them in to speed,” as well as a mentoring process remaining current with regard to their evolv- for those new board members who desire ing obligations as fiduciaries.”4 The chal- a mentor. It sets forth a general curricu- lenges to fulfillment of this recommendation lum for trustees in their first and second are twofold. Firstly, education programs years of service as well as ongoing educa- must be identified or developed that address tion thereafter, including fiduciary and one or more of the above competencies. conflicts of interest training. Finally, it Secondly, there must be an evaluation of the includes a self-assessment tool to enable trustee’s own needs, given his or her knowl- trustees to identify their own areas of edu- edge, experience, the nature of issues facing cational need so they can work effectively the board and board responsibilities (i.e., with system staff to obtain such training. committee membership, committee chair, What is the source of the policy language? board chair or vice chair). The education policies of several public There is no lack of educational opportuni- retirement systems were reviewed and used ties available to public pension fund trust- in developing the recommended policy lan- ees, and trustees as a rule are diligent about guage, including those of CalSTRS, SDCERS, attending them. However, while trustees the Colorado Public Employees’ Retirement “devote considerable time and effort to Association (CoPERA), the Los Angeles Fire and Police Pension Plan (LAFPP) and 3. In the aftermath of the many problems facing SDCERS in the early part of this decade, the system has implemented a number of significant governance reforms and is gaining recognition as an exemplar of 5. Good Pension Governance: An Advocate’s Guide for best practices in many areas. Improvement, John Por and Tom Ianucci, The NAPPA 4. Clapman Report at 10. Report (Volume 13, Number 5, February 2001). 6 American Federation of State, County and Municipal Employees, AFL-CIO
  9. 9. the Marin County Employees’ Retirement ensure trustees and staff are fulfilling their Association (MCERA). fiduciary duties to beneficiaries.6 3. ETHICAL AND FIDUCIARY CONDUCT Many pension systems, particularly in recent years, have developed effective ethics and con- Stating that: “a clear and robust conflicts pol- flict of interest policies. Few, however, have icy is a fundamental defense against the mis- developed comprehensive policies address- use of fund assets,” the Clapman Report sets ing all facets of the ethics/conflicts landscape forth the following best practice principles and set them forth in a board policy manual for pension fund conflict of interest policies: that is available online. One system that has • A fund should establish and publicly dis- accomplished this, after more than a year of close its policy for dealing effectively and work by its board, is CalSTRS. Section 600 openly with situations that raise either an of the CalSTRS Board Policy Manual, com- actual conflict of interest or the potential pleted just prior to the release of the Clapman for the appearance of a conflict of interest. report,7 provides the foundation for the best practice policies proposed herein. The poli- • In order for a conflict of interest policy cies cover: A) Fiduciary Duties; B) Statement to be effective, appropriate authorities of Ethical Conduct; C) Prohibition on Insider with the ability to act independently of Trading; D) State and/or Local Conflict of any potential conflict must have access Interest Laws; E) Avoidance of Appearance of to information that adequately describes Nepotism; F) Disclosure of Charitable Contri- trustee and staff interests and relationships butions, Ban on Specified Gifts, and Recusal; that could, at a minimum, give rise to an G) No-Contact Policy; H) Disclosure of Com- appearance of impropriety. A fund should munications (including avoidance of undue therefore establish a regular, automatic influence); I) Prohibition on Campaign Con- process that requires all covered persons tributions (pay-to-play); and J) Disclosure of to report and disclose actual or potential Third-Party Relationships and Payments. Each conflicts of interest. of these policies will be discussed in turn. • Trustees and staff should periodically A. Fiduciary Duties affirm and verify compliance with conflict What does the proposed policy do? rules, regulatory reporting requirements and other policies intended to protect the The proposed policy identifies the fiduciary fund against the actuality or appearance of duties commonly applicable to public pen- self-interested transactions and conflicts. sion fund trustees and staff. The sources of such duties differ from system to system, and • Trustees and staff should under no cir- alternatively may be found in constitutional cumstances pressure anyone, whether or statutory provisions, rules or regulations or not a covered person, to engage in a and/or through the application of common transaction that creates an actual conflict law trust principles. or an appearance of impropriety. Trustees and staff should be required to disclose What is the source of the policy language? any such attempts to a proper compliance Policy language from CalSTRS and MCERA authority as determined by the board. was used in creating the policy. • A fund should publicly disclose neces- 6. Clapman Report at 13, 15. 7. The CalSTRS Board Policy Manual is available online sary information as specified below to at http://www.calstrs.com/About%20CalSTRS/Teach- ers%20Retirement%20Board/BoardPolicyManual.pdf Enhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems 7
  10. 10. Why is this language included? trading, prohibits the use of material, non- In dealing with potential conflicts issues or public information in the purchase or sale fiduciary law issues, the potential exists for a of publicly traded securities and requires an given situation to be permissible under one annual certification by board members and body of laws/rules and impermissible under staff that they have read and understood the other. AFSCME thinks a “one-stop-shop- the policy. ping” approach that combines all potentially Why is this language included? applicable laws and rules in one place facili- tates a comprehensive analysis of an issue This language is provided to remind board or concern and minimizes the potential for members and staff of their obligations under inadvertent wrongful conduct. federal and state/local law not to trade on inside information. B. Statement of Ethical Conduct What is the source of the policy language? What does the proposed policy do? This language originally was developed by The policy addresses a broad range of the CalSTRS after a survey of insider trading ethics and conflicts issues facing pension policies at pension funds around the country. board trustees and staff, including but not The recommended policy also includes some limited to using the prestige or influence of language from CalPERS’ policy. a board or staff position for personal gain and maintaining the confidentiality of private D. State and/or Local Conflict of information. Interest Laws What is the source of the policy language? What does the proposed policy do? While most systems have some form of this The proposed language essentially serves policy, this language in particular is grounded as a reminder that, in addition to the ethics in the language of California Government policies of the system, board members and Code 19990, which sets forth a “Statement of staff are subject to state and/or local laws that Incompatible Activities” for a state employee address conflicts involving such personal or officer. Both CalSTRS and CalPERS have financial interests as investments, sources of taken this language and developed their own income and gifts. statements of ethical conduct that are more Why is this language included? tailored to the needs of a public pension sys- tem, and the recommended policy language To remind board members and staff of their is adapted from these statements. obligations under applicable state or local conflict of interest laws. Why is this language included? What is the source of the policy language? This language is intended as a “catchall” pro- vision to cover those areas of potential con- The proposed language was adopted from the cern not specifically addressed elsewhere in CalSTRS language and made more generic in the ethics/conflicts policies. nature. Systems adapting such policy language should ensure they capture all of the applicable C. Prohibition on Insider Trading state and local laws regarding disclosure and reporting of financial interests as well as other What does the proposed policy do? conflict provisions. For example, most systems The proposed policy provides a background in California refer not only to the Political on the insider trading issue, defines insider Reform Act and the duty to not participate in 8 American Federation of State, County and Municipal Employees, AFL-CIO
  11. 11. a governmental decision involving a finan- at a minimum, the appearance of a conflict, cial interest, but additionally set forth: 1) the and under some circumstances can violate requirement in certain circumstances that a state or local law. It admonishes board and board member publicly announce the reason staff members that they must comply with for his/her recusal from an issue; and 2) the limitations on gifts and honoraria set forth prohibition in Government Code 1090 against in applicable law. The policy goes on to pro- participating in the making of a governmental hibit the acceptance of any gift if it could be contract in which the board member has a per- reasonably expected that it would influence sonal financial interest. the judgment of the board or staff member or be considered as a reward for action or inac- E. Avoidance of Appearance of Nepotism tion. The policy creates a hard annual limit What does the proposed policy do? of $150 of aggregate gifts from any single The proposed policy seeks to avoid an appear- source in a calendar year. It also sets forth ance of a conflict of interest that could arise criteria for the exercise of judgment by a if a matter pending before the board could board or staff member as to the propriety of affect the personal financial interest of a “close accepting a gift in “close cases.” relation” of a board member. Typically, state Why is this language included? or local conflict of interest laws define a board member’s financial interest to extend to imme- Gifts to board members and staff at pen- diate family but no farther, leaving open the sion systems from persons doing or seeking possibility that a board member could lawfully to do business with the system often are participate in a decision affecting the personal viewed by many as a form of pay-to-play financial interests of, for example, an in-law. and raise at a minimum an appearance of This policy adds a recusal requirement in that conflict. Several systems around the coun- situation that does not typically otherwise try have come under intense media scru- exist under state or local law. tiny when such gifts have been received by board members and staff. While many Why is this language included? state and local laws establish limits on the To safeguard both the system and indi- receipt of gifts by public officers, these vidual board members and staff from limits can be fairly high. The $150 limit allegations that the outcome of a decision is viewed as a more appropriate threshold was influenced by a familial or other close given the sensitive nature and fiduciary relationship.8 aspects of the positions held by board members and staff of a pension system. What is the source of the policy language? What is the source of the language? This language is taken from Section 500 of Numerous policies from pension systems the CalSTRS Board Policy Manual. around the country were reviewed prior to drafting this policy. The language of the F. Limitation on Receipt of Gifts proposed policy is based on elements of gift What does this policy do? policies from the Washington State Invest- The proposed policy reminds board and staff ment Board, MCERA and the Santa Barbara members that the receipt of gifts can create, Employees’ Retirement System. 8. If a board member were to participate in such a deci- sion, he or she could face a claim that this action would violate his or her exclusive duty of loyalty, thereby rais- ing fiduciary law concerns. Enhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems 9
  12. 12. What alternative language was considered? 1. Requires written disclosure of any com- Several systems ban the receipt of all gifts munication between a person financially regardless of dollar value. interested in an investment transaction that requires board approval and a board G. No-Contact Policy member concerning the transaction. What does the proposed policy do? Disclosure is required by both the board member and the financially interested The proposed policy prohibits any contact party. between a prospective bidder on a system request for proposal (RFP) or other procure- 2. Requires written disclosure of any com- ment for goods or services and board mem- munication between a person financially bers and staff, once the RFP has been issued. interested in an investment transaction Incidental social contact and/or communica- that does not require board approval and tions clearly not related to the procurement a board member concerning the transac- process are permissible. tion. Disclosure is required only by the financially interested party. Why is this language included? 3. Requires written disclosure by system staff This language is included to prevent a pro- or consultants of any conversation with a spective bidder from attempting to exert board member in which the board mem- undue influence on a procurement process ber is advocating for a specific outcome by having an ex parte communication with on a proposed investment transaction. decision makers in the process. Many sys- tems are subject to state or local laws on this 4. States that it is improper for a board subject and for such systems this provision member or third party to attempt to use will serve as a reminder. undue influence to coerce staff or another board member to a certain result or deci- What is the source of the language? sion; defines “undue influence” and “third The source of the language is the CalSTRS party” and establishes a procedure to Board Policy Manual, which in turn was follow if a staff member or board mem- adapted from statutory language applicable ber thinks he or she has been subject to to CalSTRS (California Government Code undue influence. Section 22364) and CalPERS (California Government Code Section 21053). Why is this language included? Subsections 1 through 3 reflect the principle H. Disclosure of Communications that board members serve as co-fiduciaries What does the proposed policy do? and act solely and exclusively for the benefit The proposed policy requires disclosure of system participants. The board is empow- of certain communications between board ered collectively to direct system manage- members and persons seeking to do busi- ment, staff and consultants on policy matters ness with the system. The proposed policy of system operations. Individual communica- also requires disclosure of certain com- tions by board members with staff, consul- munications between board members and tants and those influencing system actions staff and addresses attempts to exert undue or doing business with the system create the influence over board members and/or staff. potential for misunderstanding, misinforma- Specifically, the policy: tion and conflicting constructions. They also could be perceived as inappropriately affect- ing the board or staff, potentially placing 10 American Federation of State, County and Municipal Employees, AFL-CIO
  13. 13. board members on unequal footing with each communications disclosure requirement to other because one or more members could delegated investment transactions; 2) add a be in possession of information that is mate- requirement that communications involving rial to a decision the others do not have. a board member with staff and/or a consul- tant in which the board member is advocat- Conversely, communications between board ing for a specific outcome on an investment members and staff or consultants that are decision be disclosed; and 3) developed the initiated in the regular course of business undue influence provision. CalPERS adopted to help the board member gain a better similar policies in September 2008. understanding of an issue or transaction do not raise such concerns. As a result, Section I. Prohibition on Campaign Contributions H, Subsection 3 of the proposed policy is (pay-to-play) drafted to limit the disclosure obligation only The issue of alleged pay-to-play practices at to those communications in which a board public pension funds first received national member is advocating with staff or a consul- attention in 1999, when the Securities and tant for a specific outcome in an investment Exchange Commission (SEC) issued a pro- transaction. posed rule that would ban registered invest- ment advisors from providing advisory Section 4 was developed as a guard against services for compensation for two years after undue influence being placed on a board the advisor, or any of its partners, execu- member, staff or consultant in order to obtain tive officers or solicitors, make a contribu- a specific result from a system decision. tion to elected officials or candidates for office that could influence the selection of What is the source of the language? the advisor.11 The SEC proposed this rule The first disclosure of communications after receiving “reports that the selection rules we are aware of were enacted by the of investment advisors, which we regulate California Legislature in 1997 to require dis- under the Advisors Act, may be influenced closure of third-party communications with by political contributions, and as a result, board members of CalSTRS9 and CalPERS.10 the quality of management services pro- These laws did not require disclosure of vided to funds may be affected.” The SEC such communications involving investment observed that: “The record suggests strongly transactions that were within staff-delegated that political contributions can play a sig- authority and did not require an investment nificant role in the selection of investment committee/board vote. advisors. Allegations of pay-to-play have been reported in at least 17 states.” Thereafter, the Teachers’ Retirement System of Texas (TRS) adopted a comprehensive At that time, some pension systems already disclosure policy addressing all elements of had sought to address pay-to-play concerns, board/staff/consultant/third-party commu- either by banning campaign contribu- nications with the exception of the undue tions outright or by requiring that invest- influence issue. In its own 2006 compre- ment managers disclose any contributions hensive ethics policy review, CalSTRS evalu- made to board members or candidates ated that policy and elected not to adopt it for elected office that sat ex officio on the in its entirety, but instead to: 1) expand the board. In some instances, such disclosure 9. California Education Code Section 22364. 11. 17 CFR Part 275; Release No. IA-1819; File No. 10. California Government Code Section 20153. S7-19-19-99. Enhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems 11
  14. 14. was accompanied by an informal process in Conduct” that, among other things, bans which the board member would recuse his/ the use of placement agents and the making herself from voting on a matter affecting an of campaign contributions by investment investment manager from whom he/she had firms seeking to do business with public received a campaign contribution. But the pension funds. board member often would participate in discussions leading up to the vote, and the In the aftermath of the criminal indict- possibility for influencing the outcome of ments in New York, on Aug. 3, 2009, the the vote remained. SEC issued new proposed rules that would prohibit investment advisors from providing It ultimately became apparent the SEC advisory services for compensation to a gov- would not move forward with the rule- ernment client for two years after the advi- making proposal. Pay-to-play issues con- sor or certain of its executives or employees tinued to surface periodically. In 2004 make a campaign contribution to certain finding that with so much money at stake, elected officials or candidates for office. the system “…appeals to human weakness. The rule also would prevent an advisor It offers temptation to elected officials and from soliciting from others, or coordinating contractors to place their respective per- contributions to certain elected officials or sonal interests ahead of the interest of the candidates or payments to political parties state…,” then-New Jersey Governor Jim where the advisor is providing or seeking McGreevey issued Executive Order 134, government business. A de minimis excep- banning state vendors from contributing tion is provided that would permit covered to gubernatorial, state or county commit- persons to make aggregate contributions of tees. Pay-to-play allegations also surfaced in $250 or less per election to an elected offi- the “Coingate” scandal in Ohio, where the cial or candidate if the person making the state signed a contract with an investment contribution is entitled to vote for that offi- manager to buy and sell rare coins for the cial or candidate. Ohio Bureau of Workers’ Compensation and a few months later the manager made a AFSCME fully supports a ban on so called $2,000 campaign contribution to the state’s pay-to-play. However, AFSCME believes governor. In 2006, the U.S. Department of that the de minimis threshold of $250 is Justice accused a former board member of too low.12 Also, in our view the exception the Illinois Teachers’ Retirement System of should not be limited to contributions to using his ties to the system to extort fees and kickbacks from investment firms seek- 12. In part, this is based on a concern that the Supreme ing capital commitments from the system. Court and appellate cases that have affirmed $250 limits are 33 and 14 years old, respectively (Buckley v. Valeo (1976) 421 U.S. 1; Blount v. SEC (1995) 61 F 3d. It is against this background that recent 938). Failing to account for intervening inflation may allegations of pay-to-play and abusive place- make contribution limits more vulnerable to a legal ment agent relationships in the state of New challenge. Further, campaign contributions are a fact of life in the modern political process and AFSCME York and elsewhere have come to light. Led thinks any limits must draw a careful balance that by New York Attorney General Andrew seeks to avoid the risk of the exercise of undue influ- Cuomo, this investigation has led to indict- ence on a pension fiduciary while at the same time not foreclosing the exercise of First Amendment rights to ments, guilty pleas and an SEC investiga- communicate support for a political candidate and his tion. The attorney general has developed or her ideas through the making of a campaign contri- a “Public Pension Fund Reform Code of bution. We think the limits we have proposed strike an appropriate balance. 12 American Federation of State, County and Municipal Employees, AFL-CIO
  15. 15. an elected official or candidate for whom Additional comments the donor is entitled to vote. Because of Systems considering adopting such a policy these concerns, as well as the possibility should consider whether state or local laws that the SEC’s proposed rules either may not set different or conflicting dollar limits and/ be enacted or may be substantially revised, or require compliance with formal rulemak- AFSCME is recommending policy language ing procedures. in this area that may be adopted by a public pension system. J. Disclosure of Third-Party Relationships and Payments; Permanent Ban on Current or What does the proposed policy do? Former Board Members or Employees from The proposed policy would ban a person Providing Placement Agent Services in who is engaging or seeking to engage in Connection with the System an investment relationship with a public Proposed rules issued by the SEC on Aug. pension system from making any campaign 3, 2009, also would prohibit an invest- contribution valued in excess of $1,000 ment advisor from providing or agreeing individually or $5,000 in the aggregate in to provide, directly or indirectly, payment any 12-month period. AFSCME recom- to any third party for a solicitation of advi- mends that for smaller systems (less than sory business from any governmental entity $5 billion in assets), these thresholds on behalf of such advisor. According to be scaled down to $500 individually or the SEC, this ban on the use of third-party $2,500 in the aggregate. The prohibition placement agents has been proposed to would apply to campaign contributions eliminate possible circumvention of the ban made to, or on behalf of, or at the request on campaign contributions through the use of the system’s officers and employees, any of third parties. According to the SEC, its existing board member, the appointing concern was triggered by responses to its authority of any board member and those 1999 rule-making proposal, which stated public officers who by virtue of statutory that imposing a two-year “time out” based designation sit ex officio on the board, and on a contribution by a third-party solicitor candidates for those offices. The policy also was unfair and created significant compli- requires recusal of board members receiv- ance challenges because these solicitors ing such contributions from any participa- were not controlled by the advisors. The tion in a decision regarding an investment prohibition does not extend to officers, relationship with the maker of such a employees or related persons of the advisor. contribution. The SEC’s rule follows on the heels of the New York state attorney general’s proposed Why is this language included? “Public Pension Fund Reform Code of Con- As noted above, the language is included duct,” which includes a similar ban. in the event the SEC either fails to adopt its proposed regulations and/or substantially We applaud the efforts of the New York modifies those regulations in a way that fails attorney general, the SEC and others to to address effectively the pay-to-play issue. ensure investment firms that do business with public pension funds are held to the What is the source of the language? highest standards of transparency, eth- The source of the language is the policy and ics and accountability. However, we think regulatory language developed by CalSTRS. laws, regulations and policies designed to achieve this end should not interfere with Enhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems 13
  16. 16. the proper exercise by system trustees, ‘However, an outright ban on the use of staff and advisors of their fiduciary duties. placement agents, a long-established and In our view, the proposed ban on the use legitimate component of a plan sponsor’s of placement agents does that, improperly exercise of its fiduciary obligation, consti- assuming that in order to ensure a ban on tutes an extreme suggestion that would pay-to-play (which AFSCME fully sup- serve to harm the financial interests of ports) is not circumvented, any use by investors like ourselves. ‘Legitimate’ place- investment managers of placement agents ment agents, as distinguished from the indi- or other third-party marketers must be abolished. Eliminating the use of place- viduals involved in the New York scandal, ment agents in transactions involving pub- have long served to help the PRIM Board lic pension funds will hamper the efforts source high-quality investment opportuni- of investment managers, particularly new ties, especially in certain asset classes like managers with smaller capitalization who private equity. It is difficult to fathom how a cannot afford to hire in-house marketing political corruption case has led to the con- staff, to raise public pension fund invest- clusion that placement agents as a group ments. This ultimately is detrimental to the are a source of the problem.’ pension funds themselves. AFSCME shares the concern that a blan- The SEC’s proposed ban on the use of third- ket ban on third-party placement agents party placement agents has raised similar inappropriately would tie the hands of concerns for public pension systems. The the fiduciaries that manage public pen- Missouri State Employees’ Retirement System sion funds by narrowing the scope of the (MOSERS) has commented that: investable universe for such funds, par- ticularly in the private equity area. Simply “It is MOSERS’ view that legitimate place- put, public pension funds do not have the ment agents serve a valuable role to investors staff or resources to evaluate every poten- in alternative asset classes. It is our view that tial investment opportunity that comes to some of the best investment opportuni- market in private equity and similar asset ties are with smaller firms that have spun classes. Placement agents provide a neces- out from larger organizations or are raising sary service to investment managers who institutional capital for the first time. Typi- may have an excellent product to offer but cally, small firms do not have the internal who need the assistance of a well-regarded resources to effectively market their funds on investment expert to get the attention of a a global basis. If placement agents are pro- public pension fund. The practical effect hibited from being paid by investment man- of such a ban would be to make it much agers for facilitating the investment process more difficult for smaller and/or minority on behalf of public pension funds, MOSERS and women-owned investment managers will have a more arduous and costly pro- to get the opportunity to make their case cess accessing the best global investment to public pension funds for investment opportunities.” capital. And as a practical matter, such a ban does not seem likely to have any more Similarly, the Pension Reserves Investment impact on reducing potential corruption Management Board of Massachusetts (PRIM) than increasing transparency would have. has stated that: 14 American Federation of State, County and Municipal Employees, AFL-CIO
  17. 17. AFSCME does support robust disclosure 3. A copy of all agreements between the provisions that provide full transparency to investment manager and the placement both public pension funds and the public agent. generally as to all aspects of any placement 4. The names of any current or former sys- agent relationships that exist in the context tem board members, employees or con- of the investment of public pension assets. sultants who suggested the retention of Many systems already have adopted such the placement agent. provisions. Moreover, AFSCME thinks there is a significant potential for abuse when 5. A statement that the agent is registered a current or former board or staff mem- with the SEC or the Financial Industry ber seeks to serve as a placement agent on Regulatory Association (FINRA). behalf of an investment manager that is seeking an investment relationship with 6. A statement whether the placement agent his or her current or former system. We do is registered as a lobbyist with any state or not think this potential for abuse is cured national government. with the passage of time. As such, we sup- port a permanent ban on current or former The policy applies to all agreements with board or staff members serving as placement investment managers that are entered into agents in connection with an investment after the policy is adopted, and to any pre- relationship involving their current or for- existing agreements if there is an amend- mer system. ment to a substantial term of that agreement. Compliance responsibilities for system staff What does the proposed policy do? also are identified. The policy requires staff to The proposed policy would require an decline an investment if the external manager investment manager to disclose to the public has used a placement agent that is not regis- pension system the following information: tered with the Securities and Exchange Com- mission or the Financial Industry Regulatory Whether the investment manager has com- Authority. pensated or agreed to compensate any place- ment agent in connection with an investment Additionally, the proposed policy provides by the system. for a lifetime ban on current or former board members and staff from working as a place- The name and professional and educational ment agent in connection with an investment background of the placement agent and relationship involving their current or former whether the placement agent is a current or system. former board member, employee or consul- Why is this language included? tant of the pension system. This language is proffered as an alternative 1. A description of the compensation pro- to the SEC’s proposed blanket ban on the vided or agreed to be provided to the use of third-party placement agents. It goes placement agent. farther than many existing retirement sys- tem disclosure policies by requiring detailed 2. A description of the placement agent’s ser- information about the engagement of the vices and whether those services are ren- placement agent and by providing extensive dered in connection with all prospective compliance provisions. Further, it curbs the clients or a subset thereof. potential abuses involved when current or Enhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems 15
  18. 18. former board members or staff seek to profit by serving as placement agents in connection with investment relationships involving their current or former system. What is the source of this language? This disclosure provisions were adopted by CalPERS in May 2009 and represent the most comprehensive approach to placement agent disclosure we have found.13 The per- manent ban language was developed specifi- cally for this report in response to recent developments in this area. 13. Adapted from California Public Employees’ Retire- ment System Statement of Policy for Disclosure of Placement Agent Fees, adopted May 11, 2009. Copy- right CalPERS 2009. Recently, the California Legislature enacted Assembly Bill 1584, which requires California public pension systems to adopt policies on disclosure of placement agent relationships and requires place- ment agents to disclose campaign contributions made to elected members of the board. 16 American Federation of State, County and Municipal Employees, AFL-CIO
  19. 19. Section II Recommended Policy Language 1. BOARD MEMBER RESPONSIBILITIES and fellow trustees as circumstances require. AND CORE COMPETENCIES There is no such thing as a “dumb question.” Attendance Integrity All board members (or their delegates, where applicable) are expected to attend all board Board members shall conduct themselves and applicable committee meetings. While with integrity and dignity, maintaining the attendance is not always possible, board highest ethical conduct at all times. They members should, once the calendar for a should understand system objectives and year is set, immediately flag any scheduling exercise care, prudence and diligence in han- conflicts and thereafter manage their sched- dling confidential information. ules to avoid creating additional conflicts. Knowledge Absences for medical or other substantial reasons shall be deemed excused absences in Board members should develop and maintain the discretion of the board chairman. their knowledge and understanding of the issues involved in the management of the Committee Service system. The specific areas in which board Each board member should serve on at least members should develop and maintain a one standing committee. high level of knowledge should include: Preparation • Public pension plan governance. Board members should come to board meet- • Asset allocation and investment ings having read the materials prepared and management. circulated by staff and/or consultants, and • Actuarial principles and funding policies. having asked any questions of staff necessary to their understanding of the materials. • Financial reporting, controls and audits. • Benefits administration. Inquisitiveness Board members should be inquisitive, and • Disability (where applicable). should appropriately question staff, advisors • Vendor selection process. • Open meeting and public records laws. Enhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems 17
  20. 20. 2. BOARD MEMBER EDUCATION • Fiduciary responsibility. Purpose • Ethics, conflicts of interest and disclosures. To permit board members to develop core Education competencies, discharge their fiduciary Board members should identify areas in duties to act with care, skill, prudence and which they might benefit from additional diligence and to ensure all board members education and work with staff to find educa- have a full understanding of the issues facing tional opportunities. Board members should the system, the board has adopted orienta- fulfill the training expectations outlined in tion and mentoring programs; mandatory the Board Member Education policy and fiduciary education and ethics training ses- are encouraged to attend additional relevant sions; encourages education; and makes educational opportunities as outlined in Sec- available appropriate periodicals to foster tion 5 of that policy. board member awareness of relevant devel- opments. Participation on certain commit- Collegiality tees, including but not limited to Investment Members shall make every effort to engage and Audits, will require additional educa- in collegial deliberations, and to maintain tional development. The annual work plan an atmosphere in which board or commit- for each committee will set forth educational tee members can speak freely, explore ideas requirements for the year. before becoming committed to positions and Principles seek information from staff and other mem- bers. Board members should come to meet- The Board Member Education policy rests on ings without having fixed or committed their the following important principles: positions in advance. • There is a unique body of knowledge that can be imparted to board members to Independence facilitate the carrying out of their distinct Board members and their delegates shall, roles and responsibilities. upon taking office, sign a pledge confirm- ing their independence and their under- • Board members are responsible for mak- standing of their fiduciary duties. The ing policy decisions affecting all major pledge shall be reviewed annually and shall aspects of pension plan administration. read as follows: They therefore must acquire an appropri- ate level of knowledge of all significant ‘I understand that as a board member, I facets of the plan, rather than only spe- cializing in particular areas. must discharge my duties as a fiduciary with respect to the system solely in the interest • No single method of educating trustees is of its members, retirees and beneficiaries. optimal. Instead, a variety of methods is I pledge not to allow political meddling or necessary and appropriate. other forms of intimidation to affect my inde- • This policy is not intended to dictate that pendence of judgment in the exercise of my board members attend only specific con- fiduciary responsibilities.’ ferences, programs, etc. Instead, trustees should work with the CEO to determine 18 American Federation of State, County and Municipal Employees, AFL-CIO
  21. 21. their own educational needs and which • Where applicable, health benefits program educational opportunities best address structure, delivery and board authority. those needs. • An explanation of fiduciary responsibility, Orientation of New Board Members conflicts of interest and ethics. Attendance. Each new board member (and • A review of board member immunity, designated representative, where applicable) indemnity and fiduciary insurance. shall attend an orientation session. • An explanation of the strategic plan (where applicable) and the planning Timing for Orientation. The new board mem- process. ber (or designated representative, where applicable) is urged to attend the orientation • A high-level review of existing board session before sitting at the first board meet- policies. ing as a voting member. • A briefing on current and emerging issues before the board. Development and Content. The orientation ses- • Biographical information on board sions will be developed by the CEO and will, members. at a minimum, include the following topics: • A review of best practices for pension • Role and expectations of board members. governance. • A brief history and overview of the sys- • An introduction to the executive manage- tem, including the mission and purpose of ment team. the system. • A tour of system offices, if practicable. • A review of board committees and their purposes. Materials. At or before the orientation ses- sion, the following documents will be made • An overview of the organizational struc- available to new members: ture and the roles of staff and key service providers, including the actuary, invest- • A listing of names, addresses and contact ment consultant, investment managers, information for the board members. custodian, attorneys and auditors. • A listing of names, addresses and contact • A summary of the actuarial basis of the information for executive management. system, its assets and liabilities and actu- • The board member handbook, which con- arial assumptions and methodologies. tains policies and committee charters. • A summary of the asset allocation and • The strategic plan. investment and funding policies of the • A sample board packet. system. • A copy of the Open Meeting Act. • A summary of the laws and rules govern- ing the system and the board, includ- • Copies of board and committee meeting ing applicable open meeting and public minutes for the last six months. records laws. • A list of upcoming recommended educa- • A summary of the benefit structure and tional conferences. administration. • Any other relevant information or docu- ments deemed appropriate by the CEO. Enhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems 19
  22. 22. Mentoring First Year. In the board members’ first year of Any new board member may request a men- service, in addition to attending the orienta- tor to assist him or her in becoming familiar tion session, the board members are encour- with his or her responsibilities on the board. aged to attend one educational session or If a request is made, the board chair will conference designed to give them a general designate one experienced board member understanding of the responsibilities of a to be a mentor to the new board member public retirement system fiduciary. for a period of one year. The mentor will contact the new board member at least once Second Year. During the board members’ each calendar quarter, outside of regularly second year of service, board members are scheduled board meetings, for consultation encouraged to attend one educational session or discussion related to new board member or conference designed to help them become orientation. proficient in performing their duties on board committees. Ongoing Board Member Education Educational Conferences. The CEO will Ongoing. Board members are responsible for maintain a list of educational conferences self-evaluating their additional educational appropriate for board members and board needs and obtaining knowledge in specific members may attend any of these confer- needs areas in a controlled manner. Board ences subject to the board’s travel expense members shall complete annually a Board policy. The CEO will scrutinize conference Member Knowledge Self-Assessment (Attach- agendas and materials to ensure they are ment I) and then discuss their results and geared appropriately toward education as training needs with the CEO. opposed to marketing and consider whether associated recreational/entertainment activi- Evaluation Form. Board members must com- ties present potential appearance concerns plete an education evaluation form upon for board members. The CEO will update completion of any educational conference, this list regularly when new educational and such form must be turned in with any opportunities arise. The list also will be request for reimbursement of expenses asso- modified to reflect the evaluations from ciated with the conference. A reimbursement board members who have attended specific will not be made without a completed evalu- conferences to ensure the conferences remain ation form. worthy of the board’s time and the system’s Fiduciary Education Session expense. In considering out-of-state educa- tional opportunities, board members should Each year the general counsel will arrange for a weigh the costs and benefits of travel vs. fiduciary education session that will update the locally based education. board members on issues affecting their service on the board. Board members and their desig- In-House Education Sessions. Based on the nated representatives are expected to attend. personal education needs of the board mem- Ethics Training bers, the CEO will arrange for staff or outside service providers to conduct educational ses- Board members and their designated repre- sions throughout the year at regularly sched- sentatives shall complete any ethics training uled board meetings, or off-site. courses required by state or local law. 20 American Federation of State, County and Municipal Employees, AFL-CIO
  23. 23. Retirement Industry Periodicals determination of the relevant facts, con- Board members are encouraged to subscribe sidering alternative courses of action and to periodicals selected from a list of pension obtaining expert advice as needed. and investment-related periodicals main- • Acting in accordance with the documents tained by the CEO. The expense for the peri- and instruments governing the system. odicals will be paid by the system. The CEO will annually review and update this list with Exclusive Purpose of Systems Assets input from the board members. The assets of the plan shall never inure to the benefit of an employer and shall be held for Compliance the exclusive purposes of providing benefits The willful failure of a board member to to members and beneficiaries and defraying comply substantially with this education reasonable expenses of administering the policy will be reviewed by the board. system. Prohibited Transactions 3. ETHICAL AND FIDUCIARY CONDUCT Except as otherwise provided by law, the A. Fiduciary Duties board and the officers and employees of the system shall not cause the system to engage Duty of Loyalty in a transaction if they know or should Board members and staff of the system shall know the transaction constitutes a direct or discharge their duties with respect to the sys- indirect: tem and the plan solely in the interest of the members, retirees and beneficiaries for the • Sale or exchange, or leasing, of any prop- exclusive purpose of: erty from the system to a member or beneficiary for less than adequate consid- • Providing benefits to members and eration, or from a member or beneficiary beneficiaries. to the system for more than adequate consideration. • Defraying reasonable expenses of adminis- tering the plan. • Lending of money or other extension of credit from the system to a member Duty to Act Prudently or beneficiary without the receipt of Board members and staff must discharge adequate security and a reasonable rate of their duties with the care, skill, prudence interest, or from a member or beneficiary and diligence under the circumstances then with the provision of excessive security or prevailing that a prudent person acting in a an unreasonably high rate of interest. like capacity and familiar with those matters would use in the conduct of an enterprise • Furnishing of goods, services or facilities of a like character and with like aims. This from the system to a member or benefi- requires: ciary for less than adequate consideration, or from a member, retiree or beneficiary • Diversifying the investments of the system to the system for more than adequate so as to minimize the risk of large losses, consideration. unless under the circumstances it clearly is prudent not to do so. • Transfer to, or use by or for the ben- efit of, a member or beneficiary of any • Undertaking an appropriate analysis of assets of the plan for less than adequate a proposed course of action, including consideration. Enhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems 21
  24. 24. • Acquisition, on behalf of the system, of gain or the advantage of another, any employer security, real property or including, but not limited to, so loan. called “insider trading” as described in Subsection C, infra. Prohibitions Against Self-Dealing 4. Providing confidential information to per- Board members and officers and employ- sons to whom issuance of this information ees of the system shall not do any of the has not been authorized. following: 5. Receiving or accepting money or any • Deal with the assets of the system in their other consideration from anyone other own interest or for their own account. than the system for the performance of • In their individual, or any other capac- an act which the board member or staff ity, act in any transaction involving the would be required or expected to render system on behalf of a party, or represent in the regular course or hours of his/her a party, whose interests are adverse to the duties. interests of the plan or the interests of the 6. Performance of an act in other than members and beneficiaries. his/her capacity as a board member or • Receive any consideration for their per- because of the public office that gives rise sonal account from any party conducting to the member’s ex officio status, knowing business with the system in connection that such act later may be subject, directly with a transaction involving the assets of or indirectly, to the control, inspection, the plan. review, audit or enforcement by such per- son or by the system.14 B. Statement of Ethical Conduct 7. Receiving or accepting, directly or indi- The board has established the following rectly, any gift (including money), any Statement of Ethical Conduct and has deter- service, gratuity, favor, entertainment, mined that engaging in any of the following hospitality, loan or any other thing of activities or conduct is inconsistent, incom- value, from anyone who is doing or is patible, in conflict with or inimical to the seeking to do business of any kind with duties of a board member and/or staff. the system or whose activities are regu- lated or controlled in any way by the No employment, activity or enterprise shall system, under circumstances from which be engaged in by any board member or staff it reasonably could be inferred that the which might result in, or create the appear- gift was intended to influence him/her ance of resulting in, any of the following: in his/her official duties or was intended 1. Using the prestige or influence of the as a reward for any official action on his/ board or staff position for private gain or her part. the advantage of another. 14. For example, if the state controller sits on a pen- 2. Using system time, facilities, employees, sion board, the retirement system still can contract equipment or supplies for private gain or with the Controller’s Office to issue retirement checks, advantage, or the private gain or advan- even if those payments are subject to audit by the retirement system. Conversely, a board member who tage of another. operates a private payroll service could not contract with the retirement system to issue checks, because 3. Using confidential information acquired those checks would be subject to audit and he or she is by virtue of system activities for private not issuing them as a public officer. 22 American Federation of State, County and Municipal Employees, AFL-CIO
  25. 25. 8. As a board member, having an ex parte “Insider trading” has been defined as buying communication on the merits of an or selling securities on the basis of mate- administrative appeal with any party or rial, nonpublic information relating to those their attorney until after the board’s deci- securities. Any person who possesses mate- sion is final. rial, nonpublic information is considered an “insider” as to that information. The pro- 9. Publishing any writing or making any hibition against insider trading may reach statement to the media, to state adminis- anyone, not just a corporate insider, who has trators, legislative personnel or members access to the material, nonpublic informa- of the public that purports to represent tion. The scope of insider trading liability the system’s position or policy on any has been extended to “controlling persons,” matter or subject, before the board has which includes any entity or person with formally adopted a policy or position on power of influence or control over the man- the matter or subject. This section shall agement, policies or activities of another not be interpreted to preclude board person. It also has been extended to “tippees” members or staff, as private citizens, from who receive material, nonpublic informa- expressing their personal views. tion from an insider when the “tipper” (the “insider”) breaches a fiduciary duty for his or Nothing in this statement shall exempt any her personal benefit and the “tippee” knows board member or staff from applicable pro- or has reason to know of the breach. The visions of any other laws. The standards of law provides civil and criminal penalties for conduct set forth in this statement are in insider trading violations. addition to those prescribed elsewhere in this policy and in applicable laws and rules. Information is deemed material if it would be C. Policy Prohibiting Insider Trading considered important by a reasonable investor in deciding whether to buy, sell or refrain from Background any activity regarding that company’s securi- The board is committed to the highest ethical ties. Material information may be either posi- standards and strictest adherence to federal, tive or negative and can relate to any aspect state and foreign securities laws and regula- of a company’s business. Common examples tions regarding “insider trading.” To ensure of material information include, but are not the system operates in a manner commen- limited to: unpublished financial results and surate with its goal of promoting integrity in projections, news of a merger or acquisi- the investment, administration and manage- tion, stock splits, public or private securities/ ment of securities, the board has adopted this debt offerings, changes in dividend policies policy prohibiting insider trading. The policy or amounts, gain or loss of a major customer applies to board members and staff, which or supplier, major product announcements, includes investment consultants and contrac- significant changes in senior management, a tors affiliated with the system. The prohibition change in accounting policies, major problems on insider trading continues to apply even after or successes of the business and information resignation from the board or termination of relating to a company against whom the sys- employment until such time, if ever, the infor- tem is considering securities litigation. Mate- mation becomes generally available to the pub- rial nonpublic information may not be used lic other than through disclosure by or through by board members or staff for personal gain or the board member or staff. to benefit third parties. Enhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems 23
  26. 26. Information is considered “nonpublic” if it which the material nonpublic information is not available to the general public. Once relates, even without disclosing the basis for it is released to the general public, it loses the recommendation, is prohibited. its status as “inside” information. How- ever, for nonpublic information to become Board members and staff in possession of public, it must have been made generally material, nonpublic information relating to available to the securities marketplace, and a tender offer, acquired directly or indirectly sufficient time must pass for the information from the bidder or target company, may not to become available in the market. To show trade in target company securities. Board that material information is public, it gener- members and staff also may not disclose ally is necessary to show some fact verifying such material, nonpublic information to the information has become generally avail- another person. able, such as disclosure in company filings with the SEC or company press releases to Board members and staff in possession of a national business and financial wire ser- material, nonpublic information may not vice, a national news service or a national purchase, directly or indirectly, any security newspaper. in the initial public offering of such secu- rity. Board members and staff also may not Policy on Insider Trading encourage, facilitate or arrange such a pur- Board members and staff may be provided chase by or on behalf of any other person. or have access to confidential information, including material, nonpublic information. This policy is to be delivered to all new board Any information not publicly available must members and staff, including consultants, be treated as confidential even if it is not des- upon commencement of a relationship or ignated as confidential. It is the duty of board employment with the system. Each board members and staff to maintain the confi- member and all staff must read and complete dentiality of information and to not misuse the certification in Attachment II within 30 confidential information, including material, days of receipt of the policy and annually by nonpublic information, belonging to or relat- April 1 of each year thereafter. The certifica- ing to the system. Board members and staff tions shall be delivered to the general counsel. who come into possession of material, non- public information must not communicate The chief investment officer shall obtain writ- it intentionally or inadvertently to any third ten confirmation from each external manager party, including but not limited to relatives that handles securities for the system that and friends, unless the person has a need to there is a policy against insider trading and know for legitimate reasons in keeping with that the policy is enforced. The written con- their responsibilities to the system. Special firmation must be received by the system care should be taken so that confidential within 30 days of commencement of the information is not disclosed inadvertently. manager’s relationship with the system. Board members and staff in possession of Disclosures of personal financial interests material, nonpublic information may not filed by board members or staff pursuant purchase or sell securities of the concerned to state or local law may be reviewed by company or other publicly traded securities the system to ensure compliance with this to which the information pertains. Recom- policy. Board members and staff should mending purchases or sales of securities to report any suspected violation of this policy 24 American Federation of State, County and Municipal Employees, AFL-CIO

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