MEMORANDUM #20, 2007

Commonwealth of Massachusetts | Public Employee Retirement Administration Commission
Five Middlesex Avenue, Third Floor, Somerville, MA 02145
Ph 617 666 4446 | Fax 617 628 4002 | TTY 617 591 8917 | www.mass.gov/perac
Domenic J. F. Russo, Chairman | A. Joseph DeNucci, Vice Chairman
Paul V. Doane | Kenneth J. Donnelly | James M. Machado | Donald R. Marquis
Joseph E. Connarton, Executive Director


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.

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