Audit of the Pension Reserves Investment Management Board Objectives, Scope, and Methodology

An overview of the purpose and process of auditing the Pension Reserves Investment Management Board.

Overview

In accordance with Section 12 of Chapter 11 of the Massachusetts General Laws, the Office of the State Auditor has conducted a performance audit of certain activities of Pension Reserves Investment Management Board (PRIM) Board for the period July 1, 2019 through January 15, 2022.

We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Below is a list of our audit objectives, indicating each question we intended our audit to answer and the conclusion we reached regarding each objective.

Objectives	Conclusion
Did the PRIM Board meet its objective of investing between 5%–10% of all investments with emerging managers, as required by Section 21 of the PRIM Board’s Investment Policy Statement?	Yes
Did the PRIM Board develop a plan to ensure that not less than 20% of its investment managers are owned by minorities, women, or people with disabilities, in accordance with Section 23(8)(a–c) of Chapter 32 of the General Laws?	Yes

 

To achieve our audit objectives, we gained an understanding of the internal control environment in the areas related to the objectives by reviewing applicable PRIM Board policies and procedures, as well as the PRIM Board’s internal control plan; conducting interviews with management and other employees; and performing walkthroughs of the processes related to the PRIM Board’s investments with emerging managers.

To obtain sufficient, appropriate evidence to address our audit objectives, we performed the following procedures.

To determine whether the PRIM Board met its objective of investing between 5%–10% of all investments with emerging managers, as required by Section 21 of the PRIM Board’s Investment Policy Statement, from July 1, 2019 through January 13, 2021,⁷ we performed the following tests:

• We obtained and reviewed a list of emerging managers used by the PRIM Board during the audit period with information on assets under management (AUM) under $2 billion and woman/minority-owned status. This list was put together by the PRIM Board in a Microsoft Excel spreadsheet, upon our request. We also obtained and reviewed a list of the PRIM Board’s total investments, including investments with diverse managers, from the PRIM Board custodian bank’s information system, NEXEN,⁸ which included the source account names and AUM amounts of the PRIM Board’s investment managers. We obtained and reviewed a list of investment managers’ names from Dynamo.⁹
• We merged the lists from both systems to match the investment managers’ source account names from NEXEN with the investment managers’ names in Dynamo to generate a comprehensive list of the PRIM Board’s investment managers with their AUM amounts and woman/minority-owned status.
• Using the data from the Microsoft Excel spreadsheet and comprehensive list of the PRIM Board’s investment managers, we calculated what percentage of all the PRIM Board’s investments were with emerging managers.

To determine whether the PRIM Board developed a plan to ensure that not less than 20% of its investment managers are owned by minorities, women, or people with disabilities (or diverse managers), in accordance with Section 23(8)(a–c) of Chapter 32 of the General Laws, from January 14, 2021 through January 15, 2022, we performed the following tests:

• We reviewed the meeting minutes of the three PRIM Board meetings that took place during the above period to ensure that the four parts of the PRIM Board’s FUTURE Initiative were discussed. We also reviewed the following:
• the meeting meetings for evidence of the PRIM Board’s approval to allocate capital to the FUTURE Initiative’s Emerging-Diverse Manager Program
• a contract signed by the PRIM Board to hire Lenox Park Solutions¹⁰ to conduct analytics related to diversity, equity, and inclusion for the PRIM Board
• PRIM Board presentation materials, which covered the proposal of the FUTURE Initiative and changes to the PRIM Board’s website.

Data Reliability Assessment

NEXEN

To gain an understanding and assess the reliability of the list of PRIM Board’s total investments, including investments with diverse managers, from NEXEN, we interviewed PRIM Board officials. We also reviewed the System and Organization Control reports¹¹ that covered the periods April 1, 2019 through March 31, 2020; April 1, 2020 through March 31, 2021; and October 1, 2020 through September 1, 2021. These reports described testing of the information system general controls; no internal control deficiencies were identified. We also obtained and reviewed bridge letters¹² for the periods March 31, 2020 through June 30, 2020; March 31, 2021 through June 30, 2021; and September 30, 2021 through December 31, 2021. We observed PRIM Board officials perform queries and extract reports of total investments, including investments with diverse managers, as of each of the following dates: December 31, 2020; January 31, 2021; and September 30, 2021.

Dynamo

To assess the reliability of the list of all investment managers from Dynamo, we interviewed PRIM Board officials to gain an understanding of this system and its data and observed PRIM Board officials extract the list of all investment managers as of March 4, 2022. We reviewed the System and Organization Control reports that covered the periods April 1, 2019 through September 30, 2019; January 1, 2020 through September 30, 2020; and January 1, 2021 through September 30, 2021. We also obtained and reviewed bridge letters for the periods September 30, 2019 through October 8, 2020; September 30, 2020 through September 8, 2021; and September 30, 2021 through February 24, 2022. These reports described testing of the information system general controls; no internal control deficiencies were identified.

In addition, we selected a sample of 11 of the 36 diverse managers on the list of all the PRIM Board’s investment managers. We verified that they were owned by women, minorities, or people with disabilities by reviewing the results of the survey conducted by the PRIM Board’s vendor Lenox Park Solutions and Third-Party Due Diligence reports¹³ on the investment managers.

We also selected a sample of 10 out of 187 investment managers that were not identified as diverse managers from the list of the PRIM Board’s investment managers. We verified that they were not owned by women, minorities, or people with disabilities by reviewing Third-Party Due Diligence reports, hiring documentation, and the PRIM Board’s emails to investment managers to confirm ownership diversity information.

List of Emerging Managers

To assess the accuracy of the list of emerging managers compiled by the PRIM Board in a Microsoft Excel spreadsheet, we selected a sample of 10 of the 36 investment managers from the list. We verified that each investment manager had AUM under $2 billion or was woman/minority-owned by reviewing Third-Party Due Diligence reports or PRIM Board meeting minutes.

We tested for duplicates and missing data for the lists obtained from NEXEN and Dynamo. We also reconciled the lists to each other to ensure that terminated managers or data outside our audit period were not included.

Based on the procedures above, we determined that the data were sufficiently reliable for the purpose of this audit.

Conclusion

Our audit revealed no significant instances of noncompliance that must be reported under generally accepted government auditing standards.

7.    When Section 23(8)(a–c) of Chapter 32 of the General Laws came into effect on January 14, 2021, the PRIM Board stopped measuring its investments with emerging managers and created a plan to measure its investments with diverse managers to comply with this law. Therefore, we only considered the period July 1, 2019 through January 13, 2021 for this objective.

8.    The PRIM Board’s custodian bank, BNY Mellon, uses NEXEN to contain a list of PRIM Board investment managers’ source account names and AUM amounts.

9.    PRIM uses Dynamo as a customer relationship management software. It stores information such as email communications, investment strategy, quarterly reviews, and company information for each investment manager used by PRIM. It also allows PRIM to monitor investment manager performance. Dynamo contains investment managers’ names and diversity information (i.e., whether they are owned by minorities, women, or people with disabilities).

10.    Lenox Park Solutions is a data analytics company that works with financial service companies, or similar agencies, to gather information and statistics on diversity, equity, and inclusion for the company or the vendors it uses.

 

11.   A System and Organization Control report about a service organization’s systems is issued by an independent contractor to provide assurance about a service organization’s security, processing integrity, confidentiality, and/or privacy controls.

12.    A bridge letter, also known as a gap letter, is made available by a service organization to cover the period between the reporting period end date of a System and Organization Control report and the release of a new report.

13.    A Third-Party Due Diligence report is completed in preparation for a business transaction (such as a corporate merger or purchase of securities). It provides details on a company’s assets, liabilities, contracts, benefits, and potential issues.

Date published:	December 1, 2022