Best Practice Policies for Trustees and Pension Systems - AFSCME

Enhancing Public Retiree Pension Plan Security:Best Practice Policies forTrustees and Pension Systems

AFSCME’s 1.6 million members provide the vital services thatmake America happen and advocate for prosperity andopportunity for all working families.We are nurses, corrections officers, child care providers, EMTsand 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 timeswe are behind the scenes. Wherever we are, we’re proud to takeon the responsibility of helping to keep this country strong.AFSCME is a union made up of a diverse group of people whoshare a common commitment to public service. We see the bigpicture and gladly accept the responsibility of guarding andnurturing it — not because we expect to be recognized for oursacrifice, but because we know the job needs to be done. That’swhy we’re in the public service — to keep our families safe andmake our communities strong.While we work for justice in the workplace, we advocate forprosperity and opportunity for all of America’s working families.We not only stand for fairness at the bargaining table — we fightfor fairness at the ballot box and in the halls of government.

ContentsExecutive Summary ................................................................. 3Section I: Overview and Discussion of Best Practice Policies ............................... 51. Board Member Responsibilities and Core Competencies .................................52. Board Member Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63. Ethical And Fiduciary Conduct ......................................................7A. Fiduciary Duties ...............................................................7B. Statement of Ethical Conduct. ....................................................8C. Prohibition on Insider Trading ....................................................8D. State and/or Local Conflict of Interest Laws .........................................8E. Avoidance of Appearance of Nepotism .............................................9F. Limitation on Receipt of Gifts .....................................................9G. No-Contact Policy. ............................................................10H. Disclosure of Communications ..................................................10I. Prohibition on Campaign Contributions (pay-to-play)..................................11J. Disclosure of Third-Party Relationships and Payments; Permanent Ban on Current orFormer Board Members or Employees from Providing Placement Agent Services inConnection with the System .................................................... 13Section II: Recommended Policy Language . ............................................ 171. Board Member Responsibilities and Core Competencies ................................ 172. Board Member Education . ........................................................ 183. Ethical And Fiduciary Conduct ..................................................... 21A. Fiduciary Duties .............................................................. 21B. Statement of Ethical Conduct. ...................................................22C. Policy Prohibiting Insider Trading ................................................23D. State and/or Local Conflict of Interest Laws .......................................25E. Avoidance of Appearance of Nepotism ............................................25F. Limitation on Receipt of Gifts . ...................................................26G. No-Contact Policy. ............................................................26H. Disclosure of Communications ..................................................27I. Prohibition on Campaign Contributions ............................................29J. Disclosure of Third-Party Relationships and Payments; Permanent Ban on Current orFormer Board Members or Employees from Providing Placement Agent Services inConnection with the System .................................................... 31Attachment I: Board Member Knowledge Self-Assessment ...................................35Attachment II: Insider Trading Policy Certification. ..........................................39Enhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems1

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Executive SummaryAFSCME represents 1.6-millionstate and local employees and retirees thatshare a common commitment to publicservice and who have invested in a financiallysound public retirement system fortheir financial security. AFSCME membersparticipate in more than 150 public pensionsystems with assets totaling more than$1 trillion. Some of our members have theadded responsibility of serving in a fiduciarycapacity as a trustee of one of thosepublic retirement systems. As an organization,AFSCME works to ensure our members’financial security and to give thosemembers who serve as trustees on publicretirement systems the tools to be effectivein that position.To fulfill their mission, trustees and staff ofpublic pension systems in the United Statesmust invest billions of dollars prudently,ensure sufficient funds will be available topay retirement benefits many years into thefuture, and make certain systems are in placeto pay retirement benefits in a timely andaccurate manner. Under the best of circumstancesthis is a heavy burden, and in recentyears public pension systems have had tocope with additional economic and politicalchallenges that have made the jobs of thosewho oversee and administer these systemseven more difficult.For many years, AFSCME has been a leaderin the efforts to reform corporate governance,working to improve the responsivenessof boards of directors and executivesto shareholders. The time has come for asimilar focus on the governance of publicpension systems. The retirement securitynot only of our own members, but of publicemployees and retirees generally, would beenhanced by identifying and implementing“best practices” governance policies thatlead to well-educated trustees and staff witha clear understanding of their responsibilitiesoperating in a transparent environmentwith safeguards to prevent even the appearanceof a conflict of interest.AFSCME has reviewed the policies of leadingpublic pension funds, as well as public pensionfund governance best practices research.The latter includes the Clapman Report,released in 2007 by the Committee on FundGovernance of the Stanford InstitutionalInvestors’ Forum. The Clapman Report setsforth best practice principles in several areas,including trustee core competencies andEnhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems3

addressing conflicts of interest. This report 1provides a useful analytical frameworkagainst which to measure specific policiesappropriate to the needs of individual pensionsystems.AFSCME has used this information todevelop recommended best practices policylanguage for public pension funds in threekey areas:1. Board Member Responsibilities and CoreCompetencies2. Board Member Education3. Ethical and Fiduciary Conduct, including:A. Fiduciary DutiesB. Statement of Ethical ConductC. Prohibition on Insider TradingD. State and/or Local Conflict of Interest LawsE. Avoidance of Appearance of NepotismF. Limitation on Receipt of GiftsG. No-Contact PolicyH. Disclosure of CommunicationsI. Prohibition on Campaign Contributions(Pay-to-Play)J. Disclosure of Third-Party Relationships and Payments;Permanent Ban on Current or FormerBoard Members or Employees from ProvidingPlacement Agent Services inConnection with the SystemWe have two goals that led us to developthese recommended policies. Firstly, andmost importantly, we want to ensure decisionsby public pension fund fiduciariesare made solely in the best interests of planmembers, retirees and beneficiaries. Secondly,we wish to provide examples of bestpractice policies that meet that objectivebut do not inappropriately tie the hands ofthose fiduciaries. We recognize few publicretirement systems have the time or resourcesto conduct an extensive development and/or overhaul of their governance and ethicspolicies. These recommendations can helpsystems review their existing policies, identifyany gaps and revise them or develop newpolicies as appropriate.While our report cites the policies of a numberof public pension systems from aroundthe country, we want to acknowledge thatmany other systems have likewise developedstrong policies in the ethics and governanceareas. We hope systems do not simply “cutand paste” this work into their own policies,but instead use this report as a catalyst fordevelopment of policies specifically tailoredto their own needs.Throughout these recommended policies,we refer to “board members” and “trustees”interchangeably. Also, we use the terms“chief executive officer,” “chief investmentofficer” and “general counsel” to refer tothose persons with final staff-level authorityover administrative, investment and legalmatters, respectively, in a public pensionsystem. We recognize smaller systems inparticular may utilize outside service providersin lieu of in-house staff to fulfill thelatter two functions. In those instances, thesystem should determine whether a staffrole that is identified in a recommendedpolicy is best suited for the outside serviceprovider or available in-house staff.1. The report may be found online at http://www.law.stanford.edu/program/executive/programs/Clapman_Report-070316v6-Color.pdf4American Federation of State, County and Municipal Employees, AFL-CIO

Section IOverview and Discussion ofBest Practice Policies1. BOARD MEMBER RESPONSIBILITIESAND CORE COMPETENCIESIn most public pension systems in theUnited States, the membership of theboard of trustees is set forth in law, andtypically involves some combination ofelected, appointed and ex officio members.Elected members are chosen by groups ofactive and/or retired employees covered bythe system; appointed members may comefrom that group, plan sponsor managementor the public at large; and ex officio membersmost often are elected or appointedpublic officials. By design, therefore, trusteescome into their positions with diverseskill sets, perspective and understanding oftheir roles.Trustees face demands immediately upontaking the oath of office. There is no timefor a trustee to “get up to speed” before crucialdecisions must be made and key votesmust be cast. Consequently, leading pensionsystems have adopted policies that describeexactly what is expected of a trustee (responsibilities)and what a trustee needs to know(core competencies). Pension boards comprisedof trustees with this level of knowledgeand understanding are able to evaluateeffectively the complex issues presented tothem. 2 Further, such boards should be muchmore immune to efforts by those who wouldhave them make decisions that are not in thebest ultimate interest of the members, retireesand beneficiaries of their system.This is not to say that public pension systemsshould require expertise in such areas asinvestments, actuarial matters or auditing asa precondition to serve as a board member.The principal function of a public pensionfund trustee is to work with his/her peers onthe board to establish the strategic directionof the system, to hire the necessary staff andconsultants with the expertise to carry outthat direction and administer the system ona day-to-day basis, and then to oversee thework being done to ensure the direction iscarried out. For the most part, board competencyinvolves a completely different skillset than those of professional investmentmanager, actuary or auditor. And, as a practicalmatter, experience has shown that gettingsuch experts to serve on a board that is regularlyin the public eye, requires public disclosureof personal financial interests (includingclient relationships) and pays little or nothingis extremely impractical.2. Clapman Report at 12.Enhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems5

What does the proposed policy do?The proposed policy sets forth a recommendedlist of responsibilities and corecompetencies that are common to all boardmembers of a public retirement system.What is the source of the policy language?The proposed policy builds upon existingpolicies in place at the California StateTeachers Retirement System (CalSTRS) andthe San Diego City Employees’ RetirementSystem (SDCERS). 3 Additional referencepoints include the California Public Employees’Retirement System (CalPERS) Board ofAdministration Code of Ethics, as well as theClapman Report.2. BOARD MEMBER EDUCATIONThe Clapman Report recommends that:“Trustees, on a regular basis, should obtaineducation that provides and improves corecompetencies, and that assists them inremaining current with regard to their evolvingobligations as fiduciaries.” 4 The challengesto fulfillment of this recommendationare twofold. Firstly, education programsmust be identified or developed that addressone or more of the above competencies.Secondly, there must be an evaluation of thetrustee’s own needs, given his or her knowledge,experience, the nature of issues facingthe board and board responsibilities (i.e.,committee membership, committee chair,board chair or vice chair).There is no lack of educational opportunitiesavailable to public pension fund trustees,and trustees as a rule are diligent aboutattending them. However, while trustees“devote considerable time and effort to3. In the aftermath of the many problems facingSDCERS in the early part of this decade, the systemhas implemented a number of significant governancereforms and is gaining recognition as an exemplar ofbest practices in many areas.4. Clapman Report at 10.education, primarily by attending a varietyof conferences that are geared to publicfunds and that focus on investments,” suchprograms as a rule “neither encourage trusteesto develop the broad vision they need toset policy, nor do they provide the practicalgrounding a board needs to oversee a fund’soperations.” 5 Also, in our view, many programsdo not maximize “in the seat” education.They may rely heavily on for-profitcommercial sponsorships. Programs alsomay tilt the balance toward recreation andentertainment.What does the proposed policy do?The proposed education policy sets fortha comprehensive approach to educatingpension fund trustees so they candischarge their duties with the requisiteknowledge, skills and abilities. It identifiesa new board member orientation processdesigned to get trustees quickly “upto speed,” as well as a mentoring processfor those new board members who desirea mentor. It sets forth a general curriculumfor trustees in their first and secondyears of service as well as ongoing educationthereafter, including fiduciary andconflicts of interest training. Finally, itincludes a self-assessment tool to enabletrustees to identify their own areas of educationalneed so they can work effectivelywith system staff to obtain such training.What is the source of the policy language?The education policies of several publicretirement systems were reviewed and usedin developing the recommended policy language,including those of CalSTRS, SDCERS,the Colorado Public Employees’ RetirementAssociation (CoPERA), the Los AngelesFire and Police Pension Plan (LAFPP) and5. Good Pension Governance: An Advocate’s Guide forImprovement, John Por and Tom Ianucci, The NAPPAReport (Volume 13, Number 5, February 2001).6American Federation of State, County and Municipal Employees, AFL-CIO

the Marin County Employees’ RetirementAssociation (MCERA).3. ETHICAL AND FIDUCIARY CONDUCTStating that: “a clear and robust conflicts policyis a fundamental defense against the misuseof fund assets,” the Clapman Report setsforth the following best practice principlesfor pension fund conflict of interest policies:• A fund should establish and publicly discloseits policy for dealing effectively andopenly with situations that raise either anactual conflict of interest or the potentialfor the appearance of a conflict of interest.• In order for a conflict of interest policyto be effective, appropriate authoritieswith the ability to act independently ofany potential conflict must have accessto information that adequately describestrustee and staff interests and relationshipsthat could, at a minimum, give rise to anappearance of impropriety. A fund shouldtherefore establish a regular, automaticprocess that requires all covered personsto report and disclose actual or potentialconflicts of interest.• Trustees and staff should periodicallyaffirm and verify compliance with conflictrules, regulatory reporting requirementsand other policies intended to protect thefund against the actuality or appearance ofself-interested transactions and conflicts.• Trustees and staff should under no circumstancespressure anyone, whetheror not a covered person, to engage in atransaction that creates an actual conflictor an appearance of impropriety. Trusteesand staff should be required to discloseany such attempts to a proper complianceauthority as determined by the board.• A fund should publicly disclose necessaryinformation as specified below toensure trustees and staff are fulfilling theirfiduciary duties to beneficiaries. 6Many pension systems, particularly in recentyears, have developed effective ethics and conflictof interest policies. Few, however, havedeveloped comprehensive policies addressingall facets of the ethics/conflicts landscapeand set them forth in a board policy manualthat is available online. One system that hasaccomplished this, after more than a year ofwork by its board, is CalSTRS. Section 600of the CalSTRS Board Policy Manual, completedjust prior to the release of the Clapmanreport, 7 provides the foundation for the bestpractice policies proposed herein. The policiescover: A) Fiduciary Duties; B) Statementof Ethical Conduct; C) Prohibition on InsiderTrading; D) State and/or Local Conflict ofInterest Laws; E) Avoidance of Appearance ofNepotism; F) Disclosure of Charitable Contributions,Ban on Specified Gifts, and Recusal;G) No-Contact Policy; H) Disclosure of Communications(including avoidance of undueinfluence); I) Prohibition on Campaign Contributions(pay-to-play); and J) Disclosure ofThird-Party Relationships and Payments. Eachof these policies will be discussed in turn.A. Fiduciary DutiesWhat does the proposed policy do?The proposed policy identifies the fiduciaryduties commonly applicable to public pensionfund trustees and staff. The sources ofsuch duties differ from system to system, andalternatively may be found in constitutionalor statutory provisions, rules or regulationsand/or through the application of commonlaw trust principles.What is the source of the policy language?Policy language from CalSTRS and MCERAwas used in creating the policy.6. Clapman Report at 13, 15.7. The CalSTRS Board Policy Manual is available onlineat http://www.calstrs.com/About%20CalSTRS/Teachers%20Retirement%20Board/BoardPolicyManual.pdfEnhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems7

Why is this language included?In dealing with potential conflicts issues orfiduciary law issues, the potential exists for agiven situation to be permissible under onebody of laws/rules and impermissible underthe other. AFSCME thinks a “one-stop-shopping”approach that combines all potentiallyapplicable laws and rules in one place facilitatesa comprehensive analysis of an issueor concern and minimizes the potential forinadvertent wrongful conduct.B. Statement of Ethical ConductWhat does the proposed policy do?The policy addresses a broad range of theethics and conflicts issues facing pensionboard trustees and staff, including but notlimited to using the prestige or influence ofa board or staff position for personal gainand maintaining the confidentiality of privateinformation.What is the source of the policy language?While most systems have some form of thispolicy, this language in particular is groundedin the language of California GovernmentCode 19990, which sets forth a “Statement ofIncompatible Activities” for a state employeeor officer. Both CalSTRS and CalPERS havetaken this language and developed their ownstatements of ethical conduct that are moretailored to the needs of a public pension system,and the recommended policy languageis adapted from these statements.Why is this language included?This language is intended as a “catchall” provisionto cover those areas of potential concernnot specifically addressed elsewhere inthe ethics/conflicts policies.C. Prohibition on Insider TradingWhat does the proposed policy do?The proposed policy provides a backgroundon the insider trading issue, defines insidertrading, prohibits the use of material, nonpublicinformation in the purchase or saleof publicly traded securities and requires anannual certification by board members andstaff that they have read and understoodthe policy.Why is this language included?This language is provided to remind boardmembers and staff of their obligations underfederal and state/local law not to trade oninside information.What is the source of the policy language?This language originally was developed byCalSTRS after a survey of insider tradingpolicies at pension funds around the country.The recommended policy also includes somelanguage from CalPERS’ policy.D. State and/or Local Conflict ofInterest LawsWhat does the proposed policy do?The proposed language essentially servesas a reminder that, in addition to the ethicspolicies of the system, board members andstaff are subject to state and/or local laws thataddress conflicts involving such personalfinancial interests as investments, sources ofincome and gifts.Why is this language included?To remind board members and staff of theirobligations under applicable state or localconflict of interest laws.What is the source of the policy language?The proposed language was adopted from theCalSTRS language and made more generic innature. Systems adapting such policy languageshould ensure they capture all of the applicablestate and local laws regarding disclosure andreporting of financial interests as well as otherconflict provisions. For example, most systemsin California refer not only to the PoliticalReform Act and the duty to not participate in8American Federation of State, County and Municipal Employees, AFL-CIO

a governmental decision involving a financialinterest, but additionally set forth: 1) therequirement in certain circumstances that aboard member publicly announce the reasonfor his/her recusal from an issue; and 2) theprohibition in Government Code 1090 againstparticipating in the making of a governmentalcontract in which the board member has a personalfinancial interest.E. Avoidance of Appearance of NepotismWhat does the proposed policy do?The proposed policy seeks to avoid an appearanceof a conflict of interest that could ariseif a matter pending before the board couldaffect the personal financial interest of a “closerelation” of a board member. Typically, stateor local conflict of interest laws define a boardmember’s financial interest to extend to immediatefamily but no farther, leaving open thepossibility that a board member could lawfullyparticipate in a decision affecting the personalfinancial interests of, for example, an in-law.This policy adds a recusal requirement in thatsituation that does not typically otherwiseexist under state or local law.Why is this language included?To safeguard both the system and individualboard members and staff fromallegations that the outcome of a decisionwas influenced by a familial or other closerelationship. 8What is the source of the policy language?This language is taken from Section 500 ofthe CalSTRS Board Policy Manual.F. Limitation on Receipt of GiftsWhat does this policy do?The proposed policy reminds board and staffmembers that the receipt of gifts can create,8. If a board member were to participate in such a decision,he or she could face a claim that this action wouldviolate his or her exclusive duty of loyalty, thereby raisingfiduciary law concerns.at a minimum, the appearance of a conflict,and under some circumstances can violatestate or local law. It admonishes board andstaff members that they must comply withlimitations on gifts and honoraria set forthin applicable law. The policy goes on to prohibitthe acceptance of any gift if it could bereasonably expected that it would influencethe judgment of the board or staff member orbe considered as a reward for action or inaction.The policy creates a hard annual limitof $150 of aggregate gifts from any singlesource in a calendar year. It also sets forthcriteria for the exercise of judgment by aboard or staff member as to the propriety ofaccepting a gift in “close cases.”Why is this language included?Gifts to board members and staff at pensionsystems from persons doing or seekingto do business with the system often areviewed by many as a form of pay-to-playand raise at a minimum an appearance ofconflict. Several systems around the countryhave come under intense media scrutinywhen such gifts have been receivedby board members and staff. While manystate and local laws establish limits on thereceipt of gifts by public officers, theselimits can be fairly high. The $150 limitis viewed as a more appropriate thresholdgiven the sensitive nature and fiduciaryaspects of the positions held by boardmembers and staff of a pension system.What is the source of the language?Numerous policies from pension systemsaround the country were reviewed priorto drafting this policy. The language of theproposed policy is based on elements of giftpolicies from the Washington State InvestmentBoard, MCERA and the Santa BarbaraEmployees’ Retirement System.Enhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems9

What alternative language was considered?Several systems ban the receipt of all giftsregardless of dollar value.G. No-Contact PolicyWhat does the proposed policy do?The proposed policy prohibits any contactbetween a prospective bidder on a systemrequest for proposal (RFP) or other procurementfor goods or services and board membersand staff, once the RFP has been issued.Incidental social contact and/or communicationsclearly not related to the procurementprocess are permissible.Why is this language included?This language is included to prevent a prospectivebidder from attempting to exertundue influence on a procurement processby having an ex parte communication withdecision makers in the process. Many systemsare subject to state or local laws on thissubject and for such systems this provisionwill serve as a reminder.What is the source of the language?The source of the language is the CalSTRSBoard Policy Manual, which in turn wasadapted from statutory language applicableto CalSTRS (California Government CodeSection 22364) and CalPERS (CaliforniaGovernment Code Section 21053).H. Disclosure of CommunicationsWhat does the proposed policy do?The proposed policy requires disclosureof certain communications between boardmembers and persons seeking to do businesswith the system. The proposed policyalso requires disclosure of certain communicationsbetween board members andstaff and addresses attempts to exert undueinfluence over board members and/or staff.Specifically, the policy:1. Requires written disclosure of any communicationbetween a person financiallyinterested in an investment transactionthat requires board approval and a boardmember concerning the transaction.Disclosure is required by both the boardmember and the financially interestedparty.2. Requires written disclosure of any communicationbetween a person financiallyinterested in an investment transactionthat does not require board approval anda board member concerning the transaction.Disclosure is required only by thefinancially interested party.3. Requires written disclosure by system staffor consultants of any conversation with aboard member in which the board memberis advocating for a specific outcomeon a proposed investment transaction.4. States that it is improper for a boardmember or third party to attempt to useundue influence to coerce staff or anotherboard member to a certain result or decision;defines “undue influence” and “thirdparty” and establishes a procedure tofollow if a staff member or board memberthinks he or she has been subject toundue influence.Why is this language included?Subsections 1 through 3 reflect the principlethat board members serve as co-fiduciariesand act solely and exclusively for the benefitof system participants. The board is empoweredcollectively to direct system management,staff and consultants on policy mattersof system operations. Individual communicationsby board members with staff, consultantsand those influencing system actionsor doing business with the system create thepotential for misunderstanding, misinformationand conflicting constructions. They alsocould be perceived as inappropriately affectingthe board or staff, potentially placing10American Federation of State, County and Municipal Employees, AFL-CIO

oard members on unequal footing with eachother because one or more members couldbe in possession of information that is materialto a decision the others do not have.Conversely, communications between boardmembers and staff or consultants that areinitiated in the regular course of businessto help the board member gain a betterunderstanding of an issue or transaction donot raise such concerns. As a result, SectionH, Subsection 3 of the proposed policy isdrafted to limit the disclosure obligation onlyto those communications in which a boardmember is advocating with staff or a consultantfor a specific outcome in an investmenttransaction.Section 4 was developed as a guard againstundue influence being placed on a boardmember, staff or consultant in order to obtaina specific result from a system decision.What is the source of the language?The first disclosure of communicationsrules we are aware of were enacted by theCalifornia Legislature in 1997 to require disclosureof third-party communications withboard members of CalSTRS 9 and CalPERS. 10These laws did not require disclosure ofsuch communications involving investmenttransactions that were within staff-delegatedauthority and did not require an investmentcommittee/board vote.Thereafter, the Teachers’ Retirement Systemof Texas (TRS) adopted a comprehensivedisclosure policy addressing all elements ofboard/staff/consultant/third-party communicationswith the exception of the undueinfluence issue. In its own 2006 comprehensiveethics policy review, CalSTRS evaluatedthat policy and elected not to adopt itin its entirety, but instead to: 1) expand the9. California Education Code Section 22364.10. California Government Code Section 20153.communications disclosure requirement todelegated investment transactions; 2) add arequirement that communications involvinga board member with staff and/or a consultantin which the board member is advocatingfor a specific outcome on an investmentdecision be disclosed; and 3) developed theundue influence provision. CalPERS adoptedsimilar policies in September 2008.I. Prohibition on Campaign Contributions(pay-to-play)The issue of alleged pay-to-play practices atpublic pension funds first received nationalattention in 1999, when the Securities andExchange Commission (SEC) issued a proposedrule that would ban registered investmentadvisors from providing advisoryservices for compensation for two years afterthe advisor, or any of its partners, executiveofficers or solicitors, make a contributionto elected officials or candidates foroffice that could influence the selection ofthe advisor. 11 The SEC proposed this ruleafter receiving “reports that the selectionof investment advisors, which we regulateunder the Advisors Act, may be influencedby political contributions, and as a result,the quality of management services providedto funds may be affected.” The SECobserved that: “The record suggests stronglythat political contributions can play a significantrole in the selection of investmentadvisors. Allegations of pay-to-play havebeen reported in at least 17 states.”At that time, some pension systems alreadyhad sought to address pay-to-play concerns,either by banning campaign contributionsoutright or by requiring that investmentmanagers disclose any contributionsmade to board members or candidatesfor elected office that sat ex officio on theboard. In some instances, such disclosure11. 17 CFR Part 275; Release No. IA-1819; File No.S7-19-19-99.Enhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems11

was accompanied by an informal process inwhich the board member would recuse his/herself from voting on a matter affecting aninvestment manager from whom he/she hadreceived a campaign contribution. But theboard member often would participate indiscussions leading up to the vote, and thepossibility for influencing the outcome ofthe vote remained.It ultimately became apparent the SECwould not move forward with the rulemakingproposal. Pay-to-play issues continuedto surface periodically. In 2004finding that with so much money at stake,the system “…appeals to human weakness.It offers temptation to elected officials andcontractors to place their respective personalinterests ahead of the interest of thestate…,” then-New Jersey Governor JimMcGreevey issued Executive Order 134,banning state vendors from contributingto gubernatorial, state or county committees.Pay-to-play allegations also surfaced inthe “Coingate” scandal in Ohio, where thestate signed a contract with an investmentmanager to buy and sell rare coins for theOhio Bureau of Workers’ Compensationand a few months later the manager made a$2,000 campaign contribution to the state’sgovernor. In 2006, the U.S. Department ofJustice accused a former board member ofthe Illinois Teachers’ Retirement System ofusing his ties to the system to extort feesand kickbacks from investment firms seekingcapital commitments from the system.It is against this background that recentallegations of pay-to-play and abusive placementagent relationships in the state of NewYork and elsewhere have come to light. Ledby New York Attorney General AndrewCuomo, this investigation has led to indictments,guilty pleas and an SEC investigation.The attorney general has developeda “Public Pension Fund Reform Code ofConduct” that, among other things, bansthe use of placement agents and the makingof campaign contributions by investmentfirms seeking to do business with publicpension funds.In the aftermath of the criminal indictmentsin New York, on Aug. 3, 2009, theSEC issued new proposed rules that wouldprohibit investment advisors from providingadvisory services for compensation to a governmentclient for two years after the advisoror certain of its executives or employeesmake a campaign contribution to certainelected officials or candidates for office.The rule also would prevent an advisorfrom soliciting from others, or coordinatingcontributions to certain elected officials orcandidates or payments to political partieswhere the advisor is providing or seekinggovernment business. A de minimis exceptionis provided that would permit coveredpersons to make aggregate contributions of$250 or less per election to an elected officialor candidate if the person making thecontribution is entitled to vote for that officialor candidate.AFSCME fully supports a ban on so calledpay-to-play. However, AFSCME believesthat the de minimis threshold of $250 istoo low. 12 Also, in our view the exceptionshould not be limited to contributions to12. In part, this is based on a concern that the SupremeCourt and appellate cases that have affirmed $250limits are 33 and 14 years old, respectively (Buckley v.Valeo (1976) 421 U.S. 1; Blount v. SEC (1995) 61 F. 3d938). Failing to account for intervening inflation maymake contribution limits more vulnerable to a legalchallenge. Further, campaign contributions are a factof life in the modern political process and AFSCMEthinks any limits must draw a careful balance thatseeks to avoid the risk of the exercise of undue influenceon a pension fiduciary while at the same time notforeclosing the exercise of First Amendment rights tocommunicate support for a political candidate and hisor her ideas through the making of a campaign contribution.We think the limits we have proposed strike anappropriate balance.12American Federation of State, County and Municipal Employees, AFL-CIO

an elected official or candidate for whomthe donor is entitled to vote. Because ofthese concerns, as well as the possibilitythat the SEC’s proposed rules either may notbe enacted or may be substantially revised,AFSCME is recommending policy languagein this area that may be adopted by a publicpension system.What does the proposed policy do?The proposed policy would ban a personwho is engaging or seeking to engage inan investment relationship with a publicpension system from making any campaigncontribution valued in excess of $1,000individually or $5,000 in the aggregate inany 12-month period. AFSCME recommendsthat for smaller systems (less than$5 billion in assets), these thresholdsbe scaled down to $500 individually or$2,500 in the aggregate. The prohibitionwould apply to campaign contributionsmade to, or on behalf of, or at the requestof the system’s officers and employees, anyexisting board member, the appointingauthority of any board member and thosepublic officers who by virtue of statutorydesignation sit ex officio on the board, andcandidates for those offices. The policy alsorequires recusal of board members receivingsuch contributions from any participationin a decision regarding an investmentrelationship with the maker of such acontribution.Why is this language included?As noted above, the language is includedin the event the SEC either fails to adopt itsproposed regulations and/or substantiallymodifies those regulations in a way that failsto address effectively the pay-to-play issue.What is the source of the language?The source of the language is the policy andregulatory language developed by CalSTRS.Additional commentsSystems considering adopting such a policyshould consider whether state or local lawsset different or conflicting dollar limits and/or require compliance with formal rulemakingprocedures.J. Disclosure of Third-Party Relationshipsand Payments; Permanent Ban on Current orFormer Board Members or Employees fromProviding Placement Agent Services inConnection with the SystemProposed rules issued by the SEC on Aug.3, 2009, also would prohibit an investmentadvisor from providing or agreeingto provide, directly or indirectly, paymentto any third party for a solicitation of advisorybusiness from any governmental entityon behalf of such advisor. According tothe SEC, this ban on the use of third-partyplacement agents has been proposed toeliminate possible circumvention of the banon campaign contributions through the useof third parties. According to the SEC, itsconcern was triggered by responses to its1999 rule-making proposal, which statedthat imposing a two-year “time out” basedon a contribution by a third-party solicitorwas unfair and created significant compliancechallenges because these solicitorswere not controlled by the advisors. Theprohibition does not extend to officers,employees or related persons of the advisor.The SEC’s rule follows on the heels of theNew York state attorney general’s proposed“Public Pension Fund Reform Code of Conduct,”which includes a similar ban.We applaud the efforts of the New Yorkattorney general, the SEC and others toensure investment firms that do businesswith public pension funds are held to thehighest standards of transparency, ethicsand accountability. However, we thinklaws, regulations and policies designed toachieve this end should not interfere withEnhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems13

the proper exercise by system trustees,staff and advisors of their fiduciary duties.In our view, the proposed ban on the useof placement agents does that, improperlyassuming that in order to ensure a ban onpay-to-play (which AFSCME fully supports)is not circumvented, any use byinvestment managers of placement agentsor other third-party marketers must beabolished. Eliminating the use of placementagents in transactions involving publicpension funds will hamper the effortsof investment managers, particularly newmanagers with smaller capitalization whocannot afford to hire in-house marketingstaff, to raise public pension fund investments.This ultimately is detrimental to thepension funds themselves.The SEC’s proposed ban on the use of thirdpartyplacement agents has raised similarconcerns for public pension systems. TheMissouri State Employees’ Retirement System(MOSERS) has commented that:“It is MOSERS’ view that legitimate placementagents serve a valuable role to investorsin alternative asset classes. It is our view thatsome of the best investment opportunitiesare with smaller firms that have spunout from larger organizations or are raisinginstitutional capital for the first time. Typically,small firms do not have the internalresources to effectively market their funds ona global basis. If placement agents are prohibitedfrom being paid by investment managersfor facilitating the investment processon behalf of public pension funds, MOSERSwill have a more arduous and costly processaccessing the best global investmentopportunities.”Similarly, the Pension Reserves InvestmentManagement Board of Massachusetts (PRIM)has stated that:‘However, an outright ban on the use ofplacement agents, a long-established andlegitimate component of a plan sponsor’sexercise of its fiduciary obligation, constitutesan extreme suggestion that wouldserve to harm the financial interests ofinvestors like ourselves. ‘Legitimate’ placementagents, as distinguished from the individualsinvolved in the New York scandal,have long served to help the PRIM Boardsource high-quality investment opportunities,especially in certain asset classes likeprivate equity. It is difficult to fathom how apolitical corruption case has led to the conclusionthat placement agents as a groupare a source of the problem.’AFSCME shares the concern that a blanketban on third-party placement agentsinappropriately would tie the hands ofthe fiduciaries that manage public pensionfunds by narrowing the scope of theinvestable universe for such funds, particularlyin the private equity area. Simplyput, public pension funds do not have thestaff or resources to evaluate every potentialinvestment opportunity that comes tomarket in private equity and similar assetclasses. Placement agents provide a necessaryservice to investment managers whomay have an excellent product to offer butwho need the assistance of a well-regardedinvestment expert to get the attention of apublic pension fund. The practical effectof such a ban would be to make it muchmore difficult for smaller and/or minorityand women-owned investment managersto get the opportunity to make their caseto public pension funds for investmentcapital. And as a practical matter, such aban does not seem likely to have any moreimpact on reducing potential corruptionthan increasing transparency would have.14American Federation of State, County and Municipal Employees, AFL-CIO

AFSCME does support robust disclosureprovisions that provide full transparency toboth public pension funds and the publicgenerally as to all aspects of any placementagent relationships that exist in the contextof the investment of public pension assets.Many systems already have adopted suchprovisions. Moreover, AFSCME thinks thereis a significant potential for abuse whena current or former board or staff memberseeks to serve as a placement agent onbehalf of an investment manager that isseeking an investment relationship withhis or her current or former system. We donot think this potential for abuse is curedwith the passage of time. As such, we supporta permanent ban on current or formerboard or staff members serving as placementagents in connection with an investmentrelationship involving their current or formersystem.What does the proposed policy do?The proposed policy would require aninvestment manager to disclose to the publicpension system the following information:Whether the investment manager has compensatedor agreed to compensate any placementagent in connection with an investmentby the system.The name and professional and educationalbackground of the placement agent andwhether the placement agent is a current orformer board member, employee or consultantof the pension system.1. A description of the compensation providedor agreed to be provided to theplacement agent.2. A description of the placement agent’s servicesand whether those services are renderedin connection with all prospectiveclients or a subset thereof.3. A copy of all agreements between theinvestment manager and the placementagent.4. The names of any current or former systemboard members, employees or consultantswho suggested the retention ofthe placement agent.5. A statement that the agent is registeredwith the SEC or the Financial IndustryRegulatory Association (FINRA).6. A statement whether the placement agentis registered as a lobbyist with any state ornational government.The policy applies to all agreements withinvestment managers that are entered intoafter the policy is adopted, and to any preexistingagreements if there is an amendmentto a substantial term of that agreement.Compliance responsibilities for system staffalso are identified. The policy requires staff todecline an investment if the external managerhas used a placement agent that is not registeredwith the Securities and Exchange Commissionor the Financial Industry RegulatoryAuthority.Additionally, the proposed policy providesfor a lifetime ban on current or former boardmembers and staff from working as a placementagent in connection with an investmentrelationship involving their current or formersystem.Why is this language included?This language is proffered as an alternativeto the SEC’s proposed blanket ban on theuse of third-party placement agents. It goesfarther than many existing retirement systemdisclosure policies by requiring detailedinformation about the engagement of theplacement agent and by providing extensivecompliance provisions. Further, it curbs thepotential abuses involved when current orEnhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems15

former board members or staff seek to profitby serving as placement agents in connectionwith investment relationships involving theircurrent or former system.What is the source of this language?This disclosure provisions were adoptedby CalPERS in May 2009 and represent themost comprehensive approach to placementagent disclosure we have found. 13 The permanentban language was developed specificallyfor this report in response to recentdevelopments in this area.13. Adapted from California Public Employees’ RetirementSystem Statement of Policy for Disclosure ofPlacement Agent Fees, adopted May 11, 2009. CopyrightCalPERS 2009. Recently, the California Legislatureenacted Assembly Bill 1584, which requires Californiapublic pension systems to adopt policies on disclosureof placement agent relationships and requires placementagents to disclose campaign contributions madeto elected members of the board.16American Federation of State, County and Municipal Employees, AFL-CIO

Section IIRecommended Policy Language1. BOARD MEMBER RESPONSIBILITIESAND CORE COMPETENCIESAttendanceAll board members (or their delegates, whereapplicable) are expected to attend all boardand applicable committee meetings. Whileattendance is not always possible, boardmembers should, once the calendar for ayear is set, immediately flag any schedulingconflicts and thereafter manage their schedulesto avoid creating additional conflicts.Absences for medical or other substantialreasons shall be deemed excused absences inthe discretion of the board chairman.Committee ServiceEach board member should serve on at leastone standing committee.PreparationBoard members should come to board meetingshaving read the materials prepared andcirculated by staff and/or consultants, andhaving asked any questions of staff necessaryto their understanding of the materials.InquisitivenessBoard members should be inquisitive, andshould appropriately question staff, advisorsand fellow trustees as circumstances require.There is no such thing as a “dumb question.”IntegrityBoard members shall conduct themselveswith integrity and dignity, maintaining thehighest ethical conduct at all times. Theyshould understand system objectives andexercise care, prudence and diligence in handlingconfidential information.KnowledgeBoard members should develop and maintaintheir knowledge and understanding of theissues involved in the management of thesystem. The specific areas in which boardmembers should develop and maintain ahigh level of knowledge should include:• Public pension plan governance.• Asset allocation and investmentmanagement.• Actuarial principles and funding policies.• Financial reporting, controls and audits.• Benefits administration.• Disability (where applicable).• Vendor selection process.• Open meeting and public records laws.Enhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems17

• Fiduciary responsibility.• Ethics, conflicts of interest and disclosures.EducationBoard members should identify areas inwhich they might benefit from additionaleducation and work with staff to find educationalopportunities. Board members shouldfulfill the training expectations outlined inthe Board Member Education policy andare encouraged to attend additional relevanteducational opportunities as outlined in Section5 of that policy.CollegialityMembers shall make every effort to engagein collegial deliberations, and to maintainan atmosphere in which board or committeemembers can speak freely, explore ideasbefore becoming committed to positions andseek information from staff and other members.Board members should come to meetingswithout having fixed or committed theirpositions in advance.IndependenceBoard members and their delegates shall,upon taking office, sign a pledge confirmingtheir independence and their understandingof their fiduciary duties. Thepledge shall be reviewed annually and shallread as follows:‘I understand that as a board member, Imust discharge my duties as a fiduciary withrespect to the system solely in the interestof its members, retirees and beneficiaries.I pledge not to allow political meddling orother forms of intimidation to affect my independenceof judgment in the exercise of myfiduciary responsibilities.’2. BOARD MEMBER EDUCATIONPurposeTo permit board members to develop corecompetencies, discharge their fiduciaryduties to act with care, skill, prudence anddiligence and to ensure all board membershave a full understanding of the issues facingthe system, the board has adopted orientationand mentoring programs; mandatoryfiduciary education and ethics training sessions;encourages education; and makesavailable appropriate periodicals to fosterboard member awareness of relevant developments.Participation on certain committees,including but not limited to Investmentand Audits, will require additional educationaldevelopment. The annual work planfor each committee will set forth educationalrequirements for the year.PrinciplesThe Board Member Education policy rests onthe following important principles:• There is a unique body of knowledge thatcan be imparted to board members tofacilitate the carrying out of their distinctroles and responsibilities.• Board members are responsible for makingpolicy decisions affecting all majoraspects of pension plan administration.They therefore must acquire an appropriatelevel of knowledge of all significantfacets of the plan, rather than only specializingin particular areas.• No single method of educating trustees isoptimal. Instead, a variety of methods isnecessary and appropriate.• This policy is not intended to dictate thatboard members attend only specific conferences,programs, etc. Instead, trusteesshould work with the CEO to determine18American Federation of State, County and Municipal Employees, AFL-CIO

their own educational needs and whicheducational opportunities best addressthose needs.Orientation of New Board MembersAttendance. Each new board member (anddesignated representative, where applicable)shall attend an orientation session.Timing for Orientation. The new board member(or designated representative, whereapplicable) is urged to attend the orientationsession before sitting at the first board meetingas a voting member.Development and Content. The orientation sessionswill be developed by the CEO and will,at a minimum, include the following topics:• Role and expectations of board members.• A brief history and overview of the system,including the mission and purpose ofthe system.• A review of board committees and theirpurposes.• An overview of the organizational structureand the roles of staff and key serviceproviders, including the actuary, investmentconsultant, investment managers,custodian, attorneys and auditors.• A summary of the actuarial basis of thesystem, its assets and liabilities and actuarialassumptions and methodologies.• A summary of the asset allocation andinvestment and funding policies of thesystem.• A summary of the laws and rules governingthe system and the board, includingapplicable open meeting and publicrecords laws.• A summary of the benefit structure andadministration.• Where applicable, health benefits programstructure, delivery and board authority.• An explanation of fiduciary responsibility,conflicts of interest and ethics.• A review of board member immunity,indemnity and fiduciary insurance.• An explanation of the strategic plan(where applicable) and the planningprocess.• A high-level review of existing boardpolicies.• A briefing on current and emerging issuesbefore the board.• Biographical information on boardmembers.• A review of best practices for pensiongovernance.• An introduction to the executive managementteam.• A tour of system offices, if practicable.Materials. At or before the orientation session,the following documents will be madeavailable to new members:• A listing of names, addresses and contactinformation for the board members.• A listing of names, addresses and contactinformation for executive management.• The board member handbook, which containspolicies and committee charters.• The strategic plan.• A sample board packet.• A copy of the Open Meeting Act.• Copies of board and committee meetingminutes for the last six months.• A list of upcoming recommended educationalconferences.• Any other relevant information or documentsdeemed appropriate by the CEO.Enhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems19

MentoringAny new board member may request a mentorto assist him or her in becoming familiarwith his or her responsibilities on the board.If a request is made, the board chair willdesignate one experienced board memberto be a mentor to the new board memberfor a period of one year. The mentor willcontact the new board member at least onceeach calendar quarter, outside of regularlyscheduled board meetings, for consultationor discussion related to new board memberorientation.Ongoing Board Member EducationEducational Conferences. The CEO willmaintain a list of educational conferencesappropriate for board members and boardmembers may attend any of these conferencessubject to the board’s travel expensepolicy. The CEO will scrutinize conferenceagendas and materials to ensure they aregeared appropriately toward education asopposed to marketing and consider whetherassociated recreational/entertainment activitiespresent potential appearance concernsfor board members. The CEO will updatethis list regularly when new educationalopportunities arise. The list also will bemodified to reflect the evaluations fromboard members who have attended specificconferences to ensure the conferences remainworthy of the board’s time and the system’sexpense. In considering out-of-state educationalopportunities, board members shouldweigh the costs and benefits of travel vs.locally based education.In-House Education Sessions. Based on thepersonal education needs of the board members,the CEO will arrange for staff or outsideservice providers to conduct educational sessionsthroughout the year at regularly scheduledboard meetings, or off-site.First Year. In the board members’ first year ofservice, in addition to attending the orientationsession, the board members are encouragedto attend one educational session orconference designed to give them a generalunderstanding of the responsibilities of apublic retirement system fiduciary.Second Year. During the board members’second year of service, board members areencouraged to attend one educational sessionor conference designed to help them becomeproficient in performing their duties onboard committees.Ongoing. Board members are responsible forself-evaluating their additional educationalneeds and obtaining knowledge in specificneeds areas in a controlled manner. Boardmembers shall complete annually a BoardMember Knowledge Self-Assessment (AttachmentI) and then discuss their results andtraining needs with the CEO.Evaluation Form. Board members must completean education evaluation form uponcompletion of any educational conference,and such form must be turned in with anyrequest for reimbursement of expenses associatedwith the conference. A reimbursementwill not be made without a completed evaluationform.Fiduciary Education SessionEach year the general counsel will arrange for afiduciary education session that will update theboard members on issues affecting their serviceon the board. Board members and their designatedrepresentatives are expected to attend.Ethics TrainingBoard members and their designated representativesshall complete any ethics trainingcourses required by state or local law.20American Federation of State, County and Municipal Employees, AFL-CIO

Retirement Industry PeriodicalsBoard members are encouraged to subscribeto periodicals selected from a list of pensionand investment-related periodicals maintainedby the CEO. The expense for the periodicalswill be paid by the system. The CEOwill annually review and update this list withinput from the board members.ComplianceThe willful failure of a board member tocomply substantially with this educationpolicy will be reviewed by the board.3. ETHICAL AND FIDUCIARY CONDUCTA. Fiduciary DutiesDuty of LoyaltyBoard members and staff of the system shalldischarge their duties with respect to the systemand the plan solely in the interest of themembers, retirees and beneficiaries for theexclusive purpose of:• Providing benefits to members andbeneficiaries.• Defraying reasonable expenses of administeringthe plan.Duty to Act PrudentlyBoard members and staff must dischargetheir duties with the care, skill, prudenceand diligence under the circumstances thenprevailing that a prudent person acting in alike capacity and familiar with those matterswould use in the conduct of an enterpriseof a like character and with like aims. Thisrequires:• Diversifying the investments of the systemso as to minimize the risk of large losses,unless under the circumstances it clearlyis prudent not to do so.• Undertaking an appropriate analysis ofa proposed course of action, includingdetermination of the relevant facts, consideringalternative courses of action andobtaining expert advice as needed.• Acting in accordance with the documentsand instruments governing the system.Exclusive Purpose of Systems AssetsThe assets of the plan shall never inure to thebenefit of an employer and shall be held forthe exclusive purposes of providing benefitsto members and beneficiaries and defrayingreasonable expenses of administering thesystem.Prohibited TransactionsExcept as otherwise provided by law, theboard and the officers and employees of thesystem shall not cause the system to engagein a transaction if they know or shouldknow the transaction constitutes a direct orindirect:• Sale or exchange, or leasing, of any propertyfrom the system to a member orbeneficiary for less than adequate consideration,or from a member or beneficiaryto the system for more than adequateconsideration.• Lending of money or other extensionof credit from the system to a memberor beneficiary without the receipt ofadequate security and a reasonable rate ofinterest, or from a member or beneficiarywith the provision of excessive security oran unreasonably high rate of interest.• Furnishing of goods, services or facilitiesfrom the system to a member or beneficiaryfor less than adequate consideration,or from a member, retiree or beneficiaryto the system for more than adequateconsideration.• Transfer to, or use by or for the benefitof, a member or beneficiary of anyassets of the plan for less than adequateconsideration.Enhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems21

• Acquisition, on behalf of the system, ofany employer security, real property orloan.Prohibitions Against Self-DealingBoard members and officers and employeesof the system shall not do any of thefollowing:• Deal with the assets of the system in theirown interest or for their own account.• In their individual, or any other capacity,act in any transaction involving thesystem on behalf of a party, or representa party, whose interests are adverse to theinterests of the plan or the interests of themembers and beneficiaries.• Receive any consideration for their personalaccount from any party conductingbusiness with the system in connectionwith a transaction involving the assets ofthe plan.B. Statement of Ethical ConductThe board has established the followingStatement of Ethical Conduct and has determinedthat engaging in any of the followingactivities or conduct is inconsistent, incompatible,in conflict with or inimical to theduties of a board member and/or staff.No employment, activity or enterprise shallbe engaged in by any board member or staffwhich might result in, or create the appearanceof resulting in, any of the following:1. Using the prestige or influence of theboard or staff position for private gain orthe advantage of another.2. Using system time, facilities, employees,equipment or supplies for private gain oradvantage, or the private gain or advantageof another.3. Using confidential information acquiredby virtue of system activities for privategain or the advantage of another,including, but not limited to, socalled “insider trading” as describedin Subsection C, infra.4. Providing confidential information to personsto whom issuance of this informationhas not been authorized.5. Receiving or accepting money or anyother consideration from anyone otherthan the system for the performance ofan act which the board member or staffwould be required or expected to renderin the regular course or hours of his/herduties.6. Performance of an act in other thanhis/her capacity as a board member orbecause of the public office that gives riseto the member’s ex officio status, knowingthat such act later may be subject, directlyor indirectly, to the control, inspection,review, audit or enforcement by such personor by the system. 147. Receiving or accepting, directly or indirectly,any gift (including money), anyservice, gratuity, favor, entertainment,hospitality, loan or any other thing ofvalue, from anyone who is doing or isseeking to do business of any kind withthe system or whose activities are regulatedor controlled in any way by thesystem, under circumstances from whichit reasonably could be inferred that thegift was intended to influence him/herin his/her official duties or was intendedas a reward for any official action on his/her part.14. For example, if the state controller sits on a pensionboard, the retirement system still can contractwith the Controller’s Office to issue retirement checks,even if those payments are subject to audit by theretirement system. Conversely, a board member whooperates a private payroll service could not contractwith the retirement system to issue checks, becausethose checks would be subject to audit and he or she isnot issuing them as a public officer.22American Federation of State, County and Municipal Employees, AFL-CIO

8. As a board member, having an ex partecommunication on the merits of anadministrative appeal with any party ortheir attorney until after the board’s decisionis final.9. Publishing any writing or making anystatement to the media, to state administrators,legislative personnel or membersof the public that purports to representthe system’s position or policy on anymatter or subject, before the board hasformally adopted a policy or position onthe matter or subject. This section shallnot be interpreted to preclude boardmembers or staff, as private citizens, fromexpressing their personal views.Nothing in this statement shall exempt anyboard member or staff from applicable provisionsof any other laws. The standards ofconduct set forth in this statement are inaddition to those prescribed elsewhere in thispolicy and in applicable laws and rules.C. Policy Prohibiting Insider TradingBackgroundThe board is committed to the highest ethicalstandards and strictest adherence to federal,state and foreign securities laws and regulationsregarding “insider trading.” To ensurethe system operates in a manner commensuratewith its goal of promoting integrity inthe investment, administration and managementof securities, the board has adopted thispolicy prohibiting insider trading. The policyapplies to board members and staff, whichincludes investment consultants and contractorsaffiliated with the system. The prohibitionon insider trading continues to apply even afterresignation from the board or termination ofemployment until such time, if ever, the informationbecomes generally available to the publicother than through disclosure by or throughthe board member or staff.“Insider trading” has been defined as buyingor selling securities on the basis of material,nonpublic information relating to thosesecurities. Any person who possesses material,nonpublic information is consideredan “insider” as to that information. The prohibitionagainst insider trading may reachanyone, not just a corporate insider, who hasaccess to the material, nonpublic information.The scope of insider trading liabilityhas been extended to “controlling persons,”which includes any entity or person withpower of influence or control over the management,policies or activities of anotherperson. It also has been extended to “tippees”who receive material, nonpublic informationfrom an insider when the “tipper” (the“insider”) breaches a fiduciary duty for his orher personal benefit and the “tippee” knowsor has reason to know of the breach. Thelaw provides civil and criminal penalties forinsider trading violations.Information is deemed material if it would beconsidered important by a reasonable investorin deciding whether to buy, sell or refrain fromany activity regarding that company’s securities.Material information may be either positiveor negative and can relate to any aspectof a company’s business. Common examplesof material information include, but are notlimited to: unpublished financial results andprojections, news of a merger or acquisition,stock splits, public or private securities/debt offerings, changes in dividend policiesor amounts, gain or loss of a major customeror supplier, major product announcements,significant changes in senior management, achange in accounting policies, major problemsor successes of the business and informationrelating to a company against whom the systemis considering securities litigation. Materialnonpublic information may not be usedby board members or staff for personal gain orto benefit third parties.Enhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems23

Information is considered “nonpublic” if itis not available to the general public. Onceit is released to the general public, it losesits status as “inside” information. However,for nonpublic information to becomepublic, it must have been made generallyavailable to the securities marketplace, andsufficient time must pass for the informationto become available in the market. To showthat material information is public, it generallyis necessary to show some fact verifyingthe information has become generally available,such as disclosure in company filingswith the SEC or company press releases toa national business and financial wire service,a national news service or a nationalnewspaper.Policy on Insider TradingBoard members and staff may be providedor have access to confidential information,including material, nonpublic information.Any information not publicly available mustbe treated as confidential even if it is not designatedas confidential. It is the duty of boardmembers and staff to maintain the confidentialityof information and to not misuseconfidential information, including material,nonpublic information, belonging to or relatingto the system. Board members and staffwho come into possession of material, nonpublicinformation must not communicateit intentionally or inadvertently to any thirdparty, including but not limited to relativesand friends, unless the person has a need toknow for legitimate reasons in keeping withtheir responsibilities to the system. Specialcare should be taken so that confidentialinformation is not disclosed inadvertently.Board members and staff in possession ofmaterial, nonpublic information may notpurchase or sell securities of the concernedcompany or other publicly traded securitiesto which the information pertains. Recommendingpurchases or sales of securities towhich the material nonpublic informationrelates, even without disclosing the basis forthe recommendation, is prohibited.Board members and staff in possession ofmaterial, nonpublic information relating toa tender offer, acquired directly or indirectlyfrom the bidder or target company, may nottrade in target company securities. Boardmembers and staff also may not disclosesuch material, nonpublic information toanother person.Board members and staff in possession ofmaterial, nonpublic information may notpurchase, directly or indirectly, any securityin the initial public offering of such security.Board members and staff also may notencourage, facilitate or arrange such a purchaseby or on behalf of any other person.This policy is to be delivered to all new boardmembers and staff, including consultants,upon commencement of a relationship oremployment with the system. Each boardmember and all staff must read and completethe certification in Attachment II within 30days of receipt of the policy and annually byApril 1 of each year thereafter. The certificationsshall be delivered to the general counsel.The chief investment officer shall obtain writtenconfirmation from each external managerthat handles securities for the system thatthere is a policy against insider trading andthat the policy is enforced. The written confirmationmust be received by the systemwithin 30 days of commencement of themanager’s relationship with the system.Disclosures of personal financial interestsfiled by board members or staff pursuantto state or local law may be reviewed bythe system to ensure compliance with thispolicy. Board members and staff shouldreport any suspected violation of this policy24American Federation of State, County and Municipal Employees, AFL-CIO

to the general counsel. The general counselis responsible for causing an investigation ofany reported violation. After such investigation,if the general counsel concludes thepolicy may have been violated, he or sheshall take appropriate action.Violation of this policy may result in disciplinaryaction, including dismissal or othersanction. Any disciplinary action for violationof the policy may be in addition to any civilor criminal liability under federal and statesecurities laws and regulations and is notsubject to appeal on the grounds that the violationdid not ultimately result in any actualcivil or criminal investigation or other legalproceeding.D. State and/or Local Conflict ofInterest Laws1. All board members and staff are subject tothe disclosure and reporting requirementsof the system’s Conflict of Interest Code(COI) as well as applicable laws and regulationsin this area. Absent full compliancewith these rules, receipt by a board memberor staff from a third party of any gift,honoraria or payment of actual transportationand related lodging and subsistenceor any payment or reimbursement of thesame may subject them to disqualificationfrom participation in making decisionsrelated to the third party. It is the recipient’sresponsibility to ensure he or shedoes not engage in any action that placeshim or her in a conflict of interest and toproperly disclose and report the receiptof any gift, honoraria or travel expensesunder the system’s COI and applicablepolitical reform laws and regulations.Board members and staff are encouragedto confer with the general counsel if theyhave questions concerning possible conflictsof interest.2. Any board member or staff who receivesan offer from any third party, other thanthe system, of travel expenses (paid orreimbursed) or actual transportation andrelated lodging and subsistence from anythird party other than the system, has theresponsibility to obtain prior approval toensure compliance with applicable lawsand rules. For board members, priorapproval must be given by the full board.For the CEO, prior approval must be givenby the board chairman or designee. Forother staff, approval must be given by theCEO. If board members and staff acceptmeals provided by third parties, subjectto the obligations noted above, per diemreimbursement for such meals cannot beclaimed from the system.E. Avoidance of Appearance of NepotismEven if otherwise permissible under applicableconflict of interest laws and/or board policy,board members should avoid participating insystem matters in which a close relation of theboard member has a personal, managerial orsubstantial financial interest. A “close relation”is defined as a spouse, mutual financial dependent,significant other or person in an intimaterelationship; a child, parent, sibling (includingin-laws and step-relations), grandparent orgrandchild, niece or nephew, aunt, uncle orcousin. A “substantial financial interest” existsif the personal financial effect of the systemmatter on the close relation would be $250 ormore in a 12-month period and that effect isparticular to the close relation, as opposed toaffecting a much larger group. For example,under this policy, a board member would notbe precluded from participating in a decisionto recommend legislation that would increasethe percentage amount of a cost-of-livingadjustment paid to all retirees even if theboard member’s mother would receive thisincrease along with all other retirees. However,if the board member’s mother files anappeal that contends her specific cost-of-livingEnhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems25

adjustment had been calculated incorrectly bythe system, under this policy the board memberwould be precluded from participating inthe decision regarding this appeal.F. Limitation on Receipt of GiftsPublic pension plan governance is characterizedby a host of competing interests,both public and private, that may challengeboard members and staff in the exerciseof their fiduciary roles with respect tothe exclusive interest of system members.Board members and staff require independenceand objectivity when interactingwith existing or potential service providersto the system. The receipt of gifts and/orthe solicitation of charitable contributionscan create at a minimum the appearance ofa conflict of interest and may violate stateor local law.1. Applicable State/Local LawEach board member and designated staffshall comply with the gift limitation provisionsand the prohibition on the acceptanceof honoraria as set forth in (insert applicablestatutory authority).2. Additional Limitationsa. No board member or staff member mayreceive, accept, seek or solicit, directly orindirectly, anything of economic value asa gift, gratuity or favor from a person if itreasonably could be expected that the gift,gratuity or favor would:i. Influence the vote, action or judgment ofthe board or staff member; orii. Be considered as part of a reward foraction or inaction.b. No board or staff member may accept giftswith an aggregate value of $150 in a calendaryear from a single source that doesbusiness or seeks to do business with theretirement system.c. If the board or staff member is allowedto accept a gift under applicable law andthis policy, he or she still is obligated toevaluate the propriety of accepting thegift. Board members and staff should besensitive to the source and value of thegift, the frequency of gifts from one source,the possible motives of the giver and theperception of others regarding the gift.Close cases always should be decided byrejecting gifts, gratuities or favors that mayraise questions regarding the board orstaff member’s integrity, independence andimpartiality. If a board or staff member isuncertain as to whether to accept the gift,he or she should consult the system’s generalcounsel.3. Application of PolicyNothing in this policy supersedes any applicableprovision of state or local law. Thoseentities engaged in business with the systemalso may have reporting requirements understate or local law.G. No-Contact PolicyUpon the release of any Request for Proposal(RFP), Invitation for Bid (IFB) or comparableprocurement vehicle for any system serviceor product, there may be no communicationor contact between the applicant or bidderand board members or staff concerning thesubject of the procurement process until theprocess is completed. Requests for technicalclarification regarding the procurementprocess itself are permissible and must bedirected to the person in charge of administeringthe contract process.Incidental contact between a prospective bidderor its representative and board membersand staff that is exclusively social, or thatclearly pertains to a matter not related to thesubject procurement process, is permissible.26American Federation of State, County and Municipal Employees, AFL-CIO

Any applicant or bidder who willfully violatesthis policy will be disqualified from anyfurther consideration to provide the applicableservice or product.Board members and staff should report anysuspected violation of this policy to the chiefexecutive officer, who will determine theappropriate course of action.H. Disclosure of Communications1. Disclosure of Communications Regarding InvestmentTransactions that Require Investment Committeeor Board Approvala. During the evaluation of any prospectiveinvestment transaction, no party who isfinancially interested in the transaction,nor any officer or employee of that party,may knowingly communicate with anyboard member concerning any matterrelating to the transaction or its evaluation,unless the financially interested partydiscloses the content of the communicationin writing to the general counsel andthe board prior to the board’s action onthe prospective transaction. This does notapply to communications that: (1) arepart of a noticed board meeting; (2) areincidental, exclusively social, and do notinvolve the system or its business, or theboard or staff member’s role as a systemofficial; or (3) do not involve the system orits business and that are within the scopeof the board or staff member’s private businessor public office wholly unrelated tothe system.i. The written disclosure must include thedate and location of the communicationand the substance of the mattersdiscussed. It shall be submitted nolater than five working days prior tothe noticed board meeting at which theinvestment transaction is being considered,unless the communication occursless than five working days before thenoticed board meeting, in which casethe disclosure must be submitted immediatelyafter the communication occurs.ii. Consistent with its fiduciary duties,the board will determine the appropriateremedy for any knowing failure ofa financially interested party to complywith this policy, including, but notlimited to, outright rejection of theprospective investment transaction,reduction in fee income or any othersanction.b.Any board member who participates ina communication subject to this policyalso has the obligation to disclose thecommunication to the general counseland the board, prior to the board’saction on the prospective transaction.The disclosure must be in writing anddisclose the date and location of thecommunication and the substance of thematters discussed. It must be submittedno later than five working days prior tothe noticed board meeting at which theinvestment transaction is being considered,unless the communication occursless than five working days before thenoticed board meeting, in which case thewriting must be submitted immediatelyafter the communication occurs. Thecommunications disclosed under thissection will be made public, either atthe open meeting of the board in whichthe transaction is considered, or if inclosed session, upon public disclosure ofany closed session votes concerning theinvestment transaction.i. This disclosure obligation does notapply to communications that aregeneral in nature and content, suchas: (1) those with regard either to thenature of the party’s business or interestsor with regard to public informationregarding the system; (2) a simpleexpression of the party’s interestEnhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems27

generally in doing business with thesystem or having the system invest inor with the party communicating withthe board member; or (3) a simpleexpression by the board member inrelation to the performance of aninvestment or service provided tothe system.ii. An alleged failure of a board memberto disclose communications asrequired herein will be referred to thechairperson for appropriate actionunless the chairperson is a party to thecommunication in question, in whichcase the matter will be referred to thevice chair.iii. The general counsel will provide theboard with an annual summary of thecommunications disclosed pursuant tothis section.2. Disclosure of Communications RegardingInvestment Transactions that Do Not RequireInvestment Committee ApprovalThe disclosure obligation regarding communicationscovered by Subsection H 1for a party or its officer or employee whois financially interested in an investmenttransaction also applies to communicationsinvolving transactions the chief investmentofficer has been delegated the authority toapprove without the need for investmentcommittee action. Upon the initiation ofany consideration by the investment officeor one of its consultants or advisors of thereview of a proposed investment transaction,the firm seeking a system investment will begiven a copy of this policy together with aform to use to report any communicationswith board members for which disclosure isrequired. There is no parallel obligation onthe part of the board member to disclose acommunication involving a transaction thathas been delegated to the chief investmentofficer, although board members are urgedto keep an informal record of communicationsthat would be subject to disclosure ifthe transaction ultimately comes before theInvestment Committee and must be reportedunder Subsection H 1. 15The general counsel will provide the boardwith an annual summary of the communicationsdisclosed pursuant to this paragraph.3. Disclosure of Communications BetweenBoard Members and Staff Regarding InvestmentTransactionsAs a general matter, the board recognizesthat the free flow of communication betweenindividual board members and staff or consultantsis beneficial to the conduct of systembusiness, and that requiring disclosure of allor a large part of such regular communicationwould create a burdensome reportingrequirement that likely would serve no usefulpurpose. However, in those instances whereconduct by an individual board memberreasonably can be interpreted as an attemptto influence the outcome of a board or staffdecision or consultant recommendation in aninvestment transaction, the board recognizesthat such communications could create thepotential for misunderstanding, misinformationor conflicting instructions and reasonablycould be interpreted as inappropriatelyaffecting the board, staff or consultant. Suchcommunications do not always rise to thelevel of “undue influence,” as defined anddiscussed in Section H, Subsection 4, butnevertheless should be subject to disclosure.Any communication regarding a potentialinvestment transaction initiated by a board15. Under these provisions, disclosure by both theboard member and the investment manager must bemade for transactions requiring board approval. Fortransactions delegated to the CIO, only the investmentmanager has to provide disclosure. If a transaction isoriginally slotted for CIO approval but then is elevatedto the board for decision, the board member must thendisclose the communication; hence, the recordkeepingsuggestion.28American Federation of State, County and Municipal Employees, AFL-CIO

member with either a system employee orconsultant in which the board member isadvocating for a specified outcome must bedocumented by the employee or consultantand reported to the general counsel. Suchcommunications will be disclosed to theboard if and when, in the judgment of thegeneral counsel, they may be material to theboard’s deliberation with respect to any systemmatter.4. Avoidance of Undue InfluenceThe board recognizes that if a board memberor a third party attempts to direct staff or aboard member to a specified action, decisionor course of conduct through the useof undue influence, sound decision-makingcould be compromised to the ultimate detrimentof the board as a whole and/or systemmembers, retirees and beneficiaries.Any staff member or board member whothinks he or she has been subject to theattempted exercise of undue influence, asdescribed above, should report the occurrenceimmediately and simultaneously tothe chief executive officer and to the generalcounsel. The general counsel will investigatethe situation immediately and is authorizedto use the services of an outside law firm toconduct the investigation if he or she deemsit appropriate. After such investigation, if thegeneral counsel concludes that an exerciseof undue influence was attempted, he orshe will take whatever action deemed to beappropriate, which will include notificationto the board and thereafter a public disclosureduring an open session meeting of theboard. If the chief executive officer or generalcounsel thinks he or she personally hasbeen subjected to an attempted exercise ofundue influence, he or she must immediatelyadvise the board chairperson, unless the circumstancesdictate that another board membershould instead be notified. The boardchairperson or other board member willinvestigate the situation with the assistanceof the fiduciary counsel and take whateveraction he or she deems to be appropriate.DefinitionsUndue Influence is defined as the employmentof any improper or wrongful pressure,scheme or threat by which one’s will is overcomeand he or she is induced to do or notto do an act which he or she would not do,or would do, if left to act freely.Third Party means and includes a person orentity that is seeking action, opportunity or aspecific outcome from the system regarding asystem matter. The third party may be seekingthe action, opportunity or outcome forhis or her or its own behalf or the third partymay be seeking it on behalf of another personor entity in the capacity of a representative,agent or intermediary, or as an advocatefor a cause or group of individuals or entities.This definition includes public officials.I. Prohibition on Campaign Contributions1. Prohibitionsa. No party engaging or seeking to engagein an investment relationship with thesystem may make any campaign contributionsvalued in excess of $1,000individually, or $5000 in the aggregate,from the party engaged in the investmentrelationship and the individuals identifiedin Subsection D collectively, in any12-month period beginning on the datesidentified in Subsection e, to any persondesignated in Subsection c below.b. For purposes of this policy, “investmentrelationship” means a relationship betweena non-governmental party and the systemfor the purpose of providing investmentservices such as money management orfund management services, investmentadvice or consulting (including makingEnhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems29

ecommendations for the placement orallocation of investment funds) and investmentsupport services (including marketresearch, fund accounting, custodial servicesand fiduciary advice) for investmentsplaced in the retirement fund.c. This prohibition applies to campaigncontributions made to, on behalf of or atthe request of, the system’s officers andemployees, any existing board member,the appointing authority of any boardmember and those public officers whoby virtue of statutory designation sit exofficio on the board, and candidates forthe appointing authority of any boardmember and those public officers who byvirtue of statutory designation sit ex officioon the board.d. This prohibition applies to those partiescurrently engaging in or seeking toengage in an investment relationship withthe system that is expected to generate atleast $100,000 annually in income, fees orother revenue to the party, and specificallyincludes:i. Those individuals employed by or associatedwith the parties described in thisSection 1 b. above, who are required tofile a disclosure of financial interest pursuantto state or local law; orii. “Authorized Personnel/Key Personnel” asdefined and identified by the contractingparty in the “Authorized Personnel/Key Personnel” exhibit incorporated in orattached to the contract between the contractingparty entering into the investmentrelationship and the system; oriii. Those individuals who expect to and/ordo experience a material financial effecton their economic interests, includingsalary, bonuses, options or other financialincentives directly deriving from aninvestment relationship with the system.This prohibition also applies to contributionsfrom any other entities or individualsmade at the direction of such partiesidentified above in this Subsection d.e. For parties defined in Subsection dabove, the prohibition set forth in thissection shall apply to the time periodwhich begins:i. On the date the system first announcesa procurement or search process thatcould lead to an investment relationshipthat is likely to generate at least$100,000 annually in income, fees orother revenue to the party; orii. On the date a party identified in Subsectiond above approaches the system witha proposal to enter into an investmentrelationship by discussing the specificfacts and financial terms of a particularinvestment transaction or strategy, whicheveris earlier, and ends when the investmentrelationship is terminated by anyparty for any reason, or when the systemcommunicates its decision not to pursuethe investment relationship.2. Disclosure and Recusal Requirement forCampaign Contributionsa. No officer, employee or current boardmember, including any ex officio boardmembers, may make, participate in makingor in any way attempt to use his orher official position to influence a decisioninvolving an investment relationshipwith the system if the officer, employee ormember has received, solicited or directeda campaign contribution valued in excessof $1,000 individually or $5,000 in theaggregate, in any 12-month period prior tothe dates identified in Section 1 from anyperson designated in Section 1, Subsectiond. For purposes of this section, a memberappointed by an appointing poweralso will be deemed to have received a30American Federation of State, County and Municipal Employees, AFL-CIO

contribution if the appointing powerhas received a contribution within the12-month period prior to the datesidentified in Section 1, Subsection efrom any person designated in Section 1,Subsection D.b. If the disqualification provision of Subsectiona results in the lack of a quorumfor the purposes of taking action on anyitem before the board or any of its committees,a sufficient number of boardmembers to constitute a quorum will bedrawn by lot from the otherwise disqualifiedboard members for the purpose ofestablishing a quorum and taking actionon items before the board or any of itscommittees. Board members who havebeen drawn by lot to constitute a quorumwill have their participation deemed asnecessary and shall be exempt from therestrictions of Subsection a for the purposeof establishing a quorum and participatingin the deliberations and votingon an item for which a quorum could notbe established absent this waiver of therestrictions of Subsection a.3. Remedies, Enforcement and Safe Harborsa. The general counsel will cause an independentinvestigation to be performed for anyreported violation of Sections 1 and 2, andreport any documented violation to theboard for action.b. If any party seeking an investment relationshipwith the system is found to be inviolation of Section 1, that party will bedisqualified from engaging in an investmentrelationship with the system for aperiod of two years.c. Any party who has an existing investmentrelationship with the system and who isfound to be in violation of the provisionsof Section 1 will be subject to disqualificationfrom doing future or additionalbusiness with the system for a period oftwo years.d. If a party voluntarily reports a violation ofSection 1 to the general counsel within 90days of the contribution being made andit is established pursuant to an independentinvestigation that the violation wasinadvertent, the disqualification provisionof Subsection c will not be applied. Thissafe harbor provision does not apply to aknowing or intentional violation of Section1 of the restrictions of Subsection a.e. System staff will maintain a current list ofparties engaged in an investment relationshipsubject to Section 1, Subsection d.The disclosure and recusal requirements ofSection 2, Subsection a do not apply to anyofficer, employee or board member, includingex officio board members, if the investmentrelationship has not been publishedon the list maintained by system staff.J. Disclosure of Third-Party Relationshipsand Payments; Permanent Ban on Current orFormer Board Members or Employees fromProviding Placement Agent Services inConnection with the System1. PurposeThis policy sets forth the circumstancesunder which the system will require the disclosureof payments to placement agents inconnection with systems’ investments in orthrough external investment managers. Thispolicy additionally prohibits permanentlycurrent or former board members or employeesof the system from providing placementagent services in connection with systeminvestments. This policy is intended to applybroadly to all of the types of investmentpartners with whom the system does business,including the general partners, managers,investment managers and sponsors ofhedge funds, private equity funds, real estatefunds and infrastructure funds, as well asEnhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems31

investment managers retained pursuant toa contract. The system adopts this policy torequire broad, timely and updated disclosureof all placement agent relationships, compensationand fees. The goals of this policy are tohelp ensure system investment decisions aremade solely on the merits of the investmentopportunity by individuals who owe a fiduciaryduty to the system; to prevent improprietyand the appearance of impropriety;and to provide transparency and confidencein system investment decision-making.2. ApplicationThis policy applies to all agreements withexternal investment managers and thoseentered into after the date this policy isadopted. This policy also applies to existingagreements with external investment managersif, after the date this policy is adopted,the agreement is amended to extend theterm of the agreement, increase the commitmentof funds by the system or change thesubstantive terms of the agreement (includingthe fees or compensation payable to theinvestment manager). In the case of such anamendment, the disclosure provisions of Section4, Subsection a of this policy shall applyto the amendment and not to the originalagreement.3. Disclosure Policy — Responsibilities of ExternalInvestment ManagersEach external investment manager is responsiblefor:a. Providing the following information (collectively,the “Placement Agent InformationDisclosure”) to staff and, if applicable, tothe general partner, managing member orinvestment manager at the time investmentdiscussions are initiated by the externalmanager or the system.b. A statement whether the external investmentmanager or any of its principals,employees, agents or affiliates hascompensated or agreed to compensate,directly or indirectly, any person(whether or not employed by the externalinvestment manager) or entity to act as aplacement agent in connection with theinvestment by the system.c. A résumé for each officer, partner or principalof the placement agent (and anyemployee providing similar services) detailingthe person’s education, professionaldesignations, regulatory licenses and investmentand work experience. If any suchperson is a current or former system boardmember, employee or consultant or a memberof the immediate family of any suchperson, this fact shall be specifically noted.d. A description of any and all compensationof any kind provided or agreed to beprovided to a placement agent, includingthe nature, timing and value thereof.Compensation to placement agents shallinclude compensation to third parties aswell as employees of the external investmentmanager who are retained in orderto solicit, or who are paid based in wholeor in part upon, an investment from thesystem.e. A description of the services to be performedby the placement agent and a statementas to whether the placement agent isutilized by the external investment managerwith all prospective clients or onlywith a subset of the external investmentmanager’s prospective clients.f. A copy of any and all agreements betweenthe external investment manager and theplacement agent.g. The names of any current or former systemboard members, employees or consultantswho suggested the retention of theplacement agent.h. A statement that the placement agent(or any of its affiliates, as applicable)32American Federation of State, County and Municipal Employees, AFL-CIO

is registered with the Securities andExchange Commission or the FinancialIndustry Regulatory Authority and thedetails of such registration.i. A statement whether the placementagent, or any of its affiliates, is registeredas a lobbyist with any state or nationalgovernment.j. Providing an update of any changes to anyof the information included in the PlacementAgent Information Disclosure within14 calendar days of the date that the externalinvestment manager knew or shouldhave known of the change in information.k. Representing and warranting the accuracyof the information included in the PlacementAgent Information Disclosure in anyfinal written agreement with a continuingobligation to update any such informationwithin 14 calendar days of the date thatthe external investment manager knew orshould have known of any change in theinformation.4. Disclosure Policy — Responsibilities of SystemInvestment StaffSystem investment staff are responsible for allof the following:a. Providing external investment managerswith a copy of this policy at the time thatdiscussions are initiated with respect to aprospective investment or engagement.b. Confirming that the Placement AgentInformation Disclosure has been receivedprior to the completion of due diligenceand any recommendation to proceed withthe engagement of the external investmentmanager or the decision to make anyinvestment.c. For new contracts and amendments tocontracts existing as of the date of thispolicy, declining the opportunity to retainor invest with the external investmentmanager if the Placement Agent InformationDisclosure reveals that the externalinvestment manager has used a placementagent that is not registered with the Securitiesand Exchange Commission or theFinancial Industry Regulatory Authority.d. For new contracts and amendments tocontracts existing as of the date of thispolicy, securing the agreement of theexternal investment manager in the finalwritten agreement between the system andthe external investment manager to providethe system the following remedies inthe event the external investment managerknew or should have known of any materialomission or inaccuracy in the PlacementAgent Information Disclosure or anyother violation of this policy:i. Whichever is greater, the reimbursementof any management or advisory fees fortwo years or an amount equal to theamounts paid or promised to be paid tothe placement agent; andii. The authority to terminate immediatelythe investment management contractor other agreement with the externalinvestment manager without penalty,to withdraw without penalty from thelimited partnership, limited liabilitycompany or other investment vehicle,or to cease making further capital contributions(and paying any fees on theserecalled commitments) to the limitedpartnership, limited liability company orother investment vehicle.e. For new contracts and amendments tocontracts existing as of the date of thispolicy, confirming that the final writtenagreement between the system and theexternal investment manager providesthat the external investment manager shallbe solely responsible for, and the systemshall not pay (directly or indirectly), anyfees, compensation or expenses for anyEnhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems33

placement agent used by the externalinvestment manager. A provision thatallows the external investment managerto pay placement agent fees or compensationfrom capital contributed by thesystem with a corresponding reduction inthe management fee payable with respectto the system’s investment shall not beregarded as a payment of the placementagent fee or compensation by the systemfor purposes of this policy.f. Prohibiting any external investment manageror placement agent from solicitingnew investments from the system for 24months after they have committed a materialviolation of this policy.g. Providing copies of the Placement AgentInformation Disclosure to the chief investmentofficer, the chief executive officer andthe general counsel.h. Providing the Investment Committee witha copy of the Placement Agent InformationDisclosure whenever the committeeconsiders the decision to invest with theexternal manager.i. Compiling a monthly report containingthe names and amount of compensationagreed to be provided to each placementagent by each external manager asreported in the Placement Agent InformationDisclosures, providing the report tothe board and disclosing the report to thepublic by posting to the system’s website.j. Reporting to the board at least quarterlyany material violations of this policy.5. Permanent BanNo current of former board member oremployee may serve as a placement agent inconnection with any system investment.6. External ManagersExternal managers shall comply with thispolicy and cooperate with staff in meetingstaff’s obligations under this policy.7. Literal Expression of the PolicyAll parties responsible for implementing,monitoring and complying with this policyshould consider the spirit as well as theliteral expression of this policy. In cases inwhich there is uncertainty whether a disclosureshould be made pursuant to thispolicy, this policy shall be interpreted torequire disclosure.Definitions:Consultant refers to individuals or firms, andincludes key personnel of consultant firmswho are contractually retained or have beenappointed to a pool by the system to provideinvestment advice to the system but who donot exercise investment discretion.External Investment Manager is an asset managementfirm that is seeking to be, or hasbeen, retained by the system to manage aportfolio of assets (including securities) fora fee. The external manager usually has fulldiscretion to manage system assets, consistentwith investment management guidelinesprovided by the system and fiduciaryresponsibility.Placement Agent is any person or entity hired,engaged or retained by or acting on behalfof an external investment manager or onbehalf of another placement agent as a finder,solicitor, marketer, consultant, broker orother intermediary to raise money or investmentsfrom or to obtain access to the system,directly or indirectly.34American Federation of State, County and Municipal Employees, AFL-CIO

ATTACHMENT IBOARD MEMBER KNOWLEDGESELF-ASSESSMENTIntroductionBoard policy provides that board members shoulddevelop and maintain their knowledge and understandingof the issues involved in the managementof the system across the broad spectrum ofpension-related areas. The specific areas in whichboard members should develop and maintain usefullevels of knowledge shall include:••••••••••GovernanceAsset allocation and investmentsActuarial processBenefits administrationDisabilityFiduciary responsibilityEthics, conflicts and disclosuresOpen meeting and public recordsFinancial controls and auditsVendor selection processThe policy states that board members should identifyareas where they might benefit from additionaleducation and work with staff to find educationalopportunities. The purpose of this self-assessmentis to help board members fulfill their responsibilityto identify such areas so they can engage in meaningfuldiscussion with the general counsel regardingeducational needs and opportunities and makeinformed choices about the educational opportunitiesthat they pursue.InstructionsKeeping in mind that this is not a “test,” and thatno one besides you will see the specific results, youshould answer the questions using your best judgmentas to your knowledge level in the given area.As indicated, use a simple numeric scale to identifyyour knowledge and understanding of the subjectmatters, with a “1” indicating no knowledge orunderstanding and a “5” indicating comprehensiveand detailed knowledge and understanding. Whenyou complete the self-assessment, identify thosesubject areas, by either general category or specificquestion as applicable, where you scored the lowest.Make a note of these areas for future discussionwith the general counsel about your educationalneeds and upcoming educational opportunities toaddress those needs.GovernanceI am confident I understand the governance of the system.This includes:1 2 3 4 5Understanding board function, processes, committee structure, exercise of discretion,delegation of responsibilities and oversight role.Understanding the organizational structure and roles of staff and key service providers,including the actuary, investment consultant, attorneys and auditors.Understanding the laws and rules governing the system.Understanding the system’s independence under applicable laws.Understanding best practices for public pension board governance.Enhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems35

Asset Allocation and InvestmentsI am confident I understand the asset allocation and investment and funding policies of thesystem. This includes:1 2 3 4 5Understanding the major asset classes and their characteristics.Understanding specialized asset classes and techniques, such as private equity, marketneutral and securities lending.Understanding the concept of risk versus reward and the “efficient frontier” principle ofasset allocation.Understanding the reports provided by staff and the investment consultant on theperformance of the investment portfolio.Understanding the role of active management in the investment portfolio.Actuarial ProcessI am confident I understand the information provided to me by our outside actuary concerningthe actuarial soundness of the system. This includes:1 2 3 4 5Understanding how assets and liabilities of the system are calculated on an actuarial basis.Understanding the difference and relationship between the actuarial value of assetsand the market value of assets and the asset smoothing process.Understanding how changes in actuarial assumptions have an impact on system assetsand liabilities.Understanding the nature of the plan sponsors’ funding obligations and the responsibilityof the board to determine the annual required contribution.Feeling comfortable with asking our actuary questions when I need further information,explanation or clarification on a subject.Benefits AdministrationI am confident I understand the benefit structure and benefits administration process at thesystem. This includes:1 2 3 4 5Understanding the different plans available to employees of all plan sponsors.Understanding how the system communicates with its members.Understanding the difference between the responsibility for plan design (plan sponsor)and the responsibility for plan administration (the system).Understanding how so-called “contingent” benefits are calculated and administered.Understanding how the DROP is administered.36American Federation of State, County and Municipal Employees, AFL-CIO

DisabilityI am confident I understand the disability benefit structure, program administration andhearing/appeals process at the system. This includes:1 2 3 4 5Understanding the qualifications for a disability retirement and the benefits thatare provided.Understanding the process that is followed in disability applications, from intake throughdetermination of eligibility.Understanding the medical and legal issues that are discussed during consideration ofdisability matters.Understanding the re-examination process.Understanding the hearing and appeal process that is followed when a memberis dissatisfied.Fiduciary ResponsibilityI am confident I understand the responsibilities I have as a system fiduciary.This includes:1 2 3 4 5Understanding the duty to be prudent.Understanding the duty of loyalty and to whom that duty is owed.Understanding what constitutes a prohibited transaction.Understanding the duty to administer the plan in accordance with governingplan documents.Understanding how to delegate authority while retaining appropriate oversight.Ethics, Conflicts and DisclosureI am confident I understand the laws, rules and policies that address ethics, conflicts anddisclosure at the system. This includes:1 2 3 4 5Understanding applicable state and/or local conflict of interest laws and the duty to avoidparticipating in a decision that affects my economic interests.Understanding system policies concerning conflicts of interest.Understanding system policies regarding disclosure by board members and/or investmentmanagers of third-party communications.Enhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems37

Open Meeting and Public RecordsI am confident I understand the applicable laws and procedures concerning open meetingsand public records. This includes:1 2 3 4 5Understanding the notice requirements for meetings, including teleconference meetings.Understanding the limitations on discussing matters that have not been noticedon the agenda.Understanding the circumstances under which communications outside of noticedmeetings can be deemed under the law to be a “meeting.”Understanding what may and may not be discussed during a closed session.Understanding what constitutes a “public record” under the law and the circumstancesunder which system records must either be disclosed or withheld.Financial Controls and AuditsI am confident I understand the system of financial reporting, controls and audits.This includes:Understanding the respective roles of the chief financial officer, chief compliance officer,the internal auditor and the outside auditor.Understanding the Comprehensive Annual Financial Report (CAFR).Understanding the concepts of “risk assessment” and developing internal controls toaddress those risks.Understanding the responsibility for maintaining the security of confidential informationkept by the system.Understanding the present relationship between the system and the plan sponsor(s) withrespect to the system’s financial controls and reporting.1 2 3 4 5Vendor Selection ProcessI am confident I understand the vendor selection process. This includes:Understanding when a Request for Proposals (RFP) must be conducted and whether theboard must first approve the RFP.Understanding the “no-contact” provisions of board policy as they relate to RFPs.1 2 3 4 538American Federation of State, County and Municipal Employees, AFL-CIO

ATTACHMENT IIInsider Trading Policy CertificationI, ___________________________, hereby certify that I have read and understand thepolicy prohibiting insider trading and agree to adhere strictly to the policy. I furthercertify that I understand the failure to act in conformance with the policy prohibitinginsider trading will result in serious consequences, including termination from myemployment or contract with the system.______________________________Date______________________________SignatureEnhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems39

40American Federation of State, County and Municipal Employees, AFL-CIO

About the AuthorChris Waddell joined Olson Hagel & Fishburn, LLP as a senior attorney inDecember 2008. He heads the firm’s newly created public retirement lawpractice. Most recently, he served as general counsel for two Californiapublic retirement systems; first at the California State Teachers’ RetirementSystem (CalSTRS), the second-largest public pension fund in the country,and later at the San Diego City Employees’ Retirement System (SDCERS).He has extensive experience in advising public pension trustees and staffon fiduciary obligations and pension plan governance.Under Mr. Waddell’s guidance, SDCERS has adopted a number of cuttingedgeboard governance policies in the areas of ethics, conflicts of interest,independence and board member core competencies.At CalSTRS, Mr. Waddell developed for board adoption significant enhancementsto governance and policy, including “pay-to-play” policies andregulations that received national attention. He created a framework for astrong, independent audit committee based upon private-sector best practices.He also authored and administered an innovative securities litigationpolicy that recouped approximately $200 million in CalSTRS investmentlosses. Prior to joining CalSTRS, Mr. Waddell served on the CalSTRS boardas the representative of the California Department of Finance.Mr. Waddell is a Fellow at the Rock Center for Corporate Governance atStanford Law School, where he is co-director of the Fiduciary College,which provides education to pension trustees and staff. He is a memberof the National Association of Public Pension Plan Attorneys (NAPPA) andhas served as the chairman of the Investment Section and co-chairman ofthe Fiduciary Section. He has spoken frequently on pension governance,conflicts of interest and securities litigation issues before the NationalCouncil on Teacher Retirement, NAPPA, the California Association of PublicRetirement Systems and the Stanford Fiduciary College. He also has testifiedbefore Congress, the California Legislature, the San Diego City Counciland the San Diego Charter Revision Commission.Mr. Waddell earned his bachelor’s degree in political science/public servicefrom the University of California at Davis and his law degree from theMcGeorge School of Law, where he was a writer and editor for the PacificLaw Journal.

American Federation of State, Countyand Municipal Employees, AFL-CIO1625 L Street, N.W.Washington, DC 20036-5687Tel: 202-429-1000www.afscme.org688-09