Commonwealth of Massachusetts | Public Employee Retirement Administration Commission
Five Middlesex Avenue, Suite 304, 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
Mary Ann Bradley | 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: April 7 , 2008
Each year PERAC provides Board members with a reminder of the elements necessary to insure that compliance with law and regulation is taking place. This memo will focus on disclosure and compliance issues. A separate memo of a more general nature concerning investments has been provided separately.
Disclosures
A basic principle of good governance is that the decision maker be aware of all the individuals, entities or parties that may have an interest in the decision. More specifically, the full details of the interest that any individual, party or entity may have in the procurement of goods and services by a Board should be known to all Board members prior to a decision or selection being made. To that end, PERAC has developed Disclosure Statements in an effort to make sure that Board members make informed decisions armed with the knowledge of any fees or other compensation that relates to the selection of a particular firm.
In order for Best Practices to be followed, Disclosure Statements are:
PERAC’s Disclosures are by no means exhaustive and Boards may wish to amplify on them. Disclosures must address the following:
Third Party Relationships
Perhaps the area in which legitimate procurements are most often corrupted is through relationships that a vendor may have with third parties who also have a relationship with the Board or one of its members or employees. Criminal investigations in Ohio and Illinois have uncovered practices that seriously compromised one or more searches for products or services.
840 CMR 1.03
As noted above, PERAC Regulations contain a Prohibition Against Certain Persons Holding Certain Positions (840 CMR 1.03). Each Board should conduct a review to ensure that no person that is prohibited under the regulation from serving “(1) as a member, administrator, fiduciary, officer, trustee, custodian, counsel, agent, employee, or representative in any capacity of the board; (2) as a consultant, manager, or provider of goods or services to a board; (3) in any capacity that involves decision making authority or custody or control of the monies, funds, assets or property of any system” is holding such a position.
In 2007, PERAC issued a directive prohibiting Clarke Blizzard from serving in any capacity with a retirement board as well as prohibiting the retirement board from doing business with “any firm, partnership, company, entity, consulting arrangement or other individual association with which Blizzard is involved.” Blizzard, who has been active in the Massachusetts marketplace in the past, was convicted of conspiracy to commit extortion under 18 U.S.C. Section 1951. His activities related to the investments of the Ohio Workers Compensation Bureau.
Chapter 268A
The State Ethics Commission has ruled that retirement board members and staff are subject to the provisions of Chapter 268A, the Conflict of Interest Law (see EC-COI-00-2). Board members and employees should familiarize themselves with that law and comply with it at all times. We have also enclosed a copy of the Ethics Commission publication “Introduction to the Conflict of Interest Law”.
Investment Contracts
Boards should review all contracts under 840 CMR 16.02(5). These contracts must be in writing and, at a minimum, should include provisions regarding investment objectives, brokerage practices, proxy voting, tender offer exercise procedures, terms of employment, fees and termination provisions. All contracts must provide that the investment manager is a fiduciary with respect to the funds invested by the board. No contract may include terms which require that the board indemnify the manager or consultant.
Under 840 CMR 16.02(6) boards must annually review a current Form ADV Part II submitted by each manager.
Brokers
840 CMR 16.05 prohibits the direction of brokerage commissions by board members and employees. Each Board must also evaluate the brokerage generated by managers to ensure that it is receiving best execution.
Procurement of Services
840 CMR 16.08 requires that a competitive process must be followed in the selection of investment managers, consultants, custodians and other investment related service providers. Such a process must also be followed in order for members to meet their fiduciary duty when selecting other service providers.
The investment activity of Retirement Boards is under increasing scrutiny in the wake of passage of Chapter 68 of the Acts of 2007. In this environment it is vital that Boards comply with Best Practices in selecting, contracting with and monitoring all vendors.
As always, PERAC is committed to work with the Retirement Boards to assist Board members in meeting their fiduciary responsibilities and fulfilling the mandates of Chapter 32.
If you have any questions or comments please contact me.