Background
A few state and local governments have statutorily created IACs, also known as investment advisory councils, to assist public fund fiduciaries in the administration of the investment program. An IAC is a source of investment expertise and guidance. Its members serve as a sounding board and cross
33 Part I is filed electronically with the SEC.A copy of an investment adviser's Form ADV can be accessed on the
Investment Adviser Public Disclosure (“IAPD”) website.
34 Part II is not required to be filed electronically.
check on investment policy and practices. The states, like North Carolina, that use a sole fiduciary model, Connecticut, Michigan, and New York, require the appointment of an IAC. In these states, the role of the IAC ranges from consultative to oversight.36
There are a few non-sole fiduciary public funds that use an IAC. In some cases, use of an IAC is required, and, in others, it is discretionary. The role of the IAC at each of the non-sole fiduciary public funds is consultative. Examples include the Florida State Board of Administration,37 the Virginia Retirement Systems,38 the Minnesota State Board of Investments,39 the Texas Employees
Retirement System, the City of Portland, and certain city retirement systems in Washington State.40 Public members that are appointed to an IAC, virtually without exception, are statutorily required to have financial or investment expertise. The number of total IAC members that are required to have investment or financial expertise varies from public fund to public fund. Although the rationale supporting the requirement is understandable, the expertise of the public members makes it likely that they are investment professionals. Their involvement in investment activities gives rise to the potential for conflicts of interest. Disclosure deters and mitigates the risk of conflicts.
Disclosure of all matters that could reasonably be expected to impair independence and objectivity is consistent with best practice. Examples of information that may require disclosure include
relationships with current service providers or those identified as part of a procurement process, criminal or disciplinary offenses that could pose reputational risk to the public fund, political
contributions or gifts to decision-makers or others that could influence decisions, and matters where the member’s involvement may reasonably be viewed as advancing their own personal interest.
36 In New York State, the IAC has no power over investment decisions, but the Real Estate Advisory Committee
(referenced in the statute as the Mortgage Advisory Committee) is legally empowered to disapprove a proposed “mortgage or real estate investment.” (§423 of the New York State Retirement and Social Security Law). In Michigan, the IAC may, by majority vote, direct the sole fiduciary to dispose of a holding or, by unanimous vote, direct the sole trustee to make a specific investment. (MCL, Chapter 16, Section 16.191). In Connecticut, the IAC has approval authority regarding changes to the investment policy, asset allocation, and selection of the CIO.
37 The Florida statutes created the Investment Advisory Council to review the investments made by the staff of the fund
and to make recommendations to the Trustees regarding investment policy, strategy, and procedures. The Council members must possess special knowledge, experience, and familiarity with financial investments and portfolio management.
38 The IAC supports and advises the Board in matters of investment policy, asset allocation, and manager selection. All
IAC members must be investment experts and are selected by the Board and CIO.
39 All proposed investment policies are reviewed by the Investment Advisory Council before they are presented to the
Board for action.
40 RCW 35.39.080 – city retirement systems that are established to provide retirement benefits for nonpublic safety employees.
Findings and Analysis
Like other sole fiduciaries, the Treasurer is required to appoint an IAC.41 In 2009, the General Assembly expanded the size of and number of experts on the IAC. Of the seven IAC members, four are required to have experience relevant to the administration of a large diversified investment program. By statute, the role of the IAC is advisory, but its functions are not specified.
The statute makes it clear that the IAC members are not “public officers” and are not subject to the State Government Ethics Act. Therefore, the IAC members are not required to file a Statement of Economic Interest, disclosing personal financial information.
The NCDST has indicated that a code of ethics will be established for the IAC, using the New York State Common Retirement Fund’s Code of Conduct as a model. The code of ethics will prescribe standards of conduct, including certain restrictions and prohibitions regarding the activities of the members.
Conclusions
The input and advice provided by the IAC members can influence the thinking and decisions of the Treasurer and the IMD. Disclosure is needed as a check on the reliability and objectivity of the information and guidance suggested by the IAC members. Imposing a conflicts disclosure requirement is consistent with best practices and the common practices of other public funds with IACs. Requiring disclosure by IAC members is also in harmony with the transparency and accountability initiative of the Treasurer.
Recommendation:
1. Develop and implement an IAC code of ethics, including a disclosure process that mitigates the risk of conflicts of interest.