SCOPE:
EnnisKnupp recently completed a fiduciary review for a Large Public Fund. We evaluated several of their programs for compliance with the governing boards’ adopted investment policy statement, statutory requirements applicable to them and best practices for the retirement fund industry.
APPROACH:
We based our approach on a methodology customized for the large public fund. It included a review of internal databases, external research, analysis and a comparison to best practices.
Legal Review. Our evaluation began with a review of the laws (Constitutional provisions, state statutes, local ordinances, county board resolutions and administrative rules) guiding “plan document,” paying particular attention to the legal constraints hindering optimal investment performance. We examined their structure, benefits and investment authority, along with the structure and authority of the two boards governing the Large Public Fund.
Internal Review. Our next step was to review internal board governance policies and procedures, including their bylaws and code of ethical conduct. We also examined the compliance mechanisms for their investment policies (the Investment Policy Statement, the Investment Risk Management Policy Statement, and Corporate Governance Policies) and its organizational policies (the Media Policy, the Privacy and Confidentiality Policy, and the Audit Committee Orientation Manual). Our internal review also included an evaluation of the Large Public Fund’s organizational structure and resources, assessing the level and types of resources dedicated to different activities, including compliance, and the segregation of duties within the organization.
Investment Review. We reviewed the policies, monitoring processes, and compliance mechanisms for their domestic equity, international equity, fixed income, private equity, real estate, cash and alternative asset classes. We evaluated the investment management structure and costs, along with their rebalancing policies. Additionally, we examined their relationship with its master custodian (BNY Mellon) as well as its investment performance measurement and due diligence processes. Our review of the due diligence process included a look at how the Large Public Fund monitors investment manager compliance with investment guidelines and contracts.
Risk Review. Within the risk management discipline, we focused on investment risk and enterprise risk. Our analysis of investment risk included reviewing the portfolio risks associated with setting asset allocation parameters, selecting asset classes and investment strategies, developing investment manager guidelines, and monitoring performance. We compared their actual practices to those stated in its policies. Within the enterprise risk framework, we reviewed their operational processes and procedures, internal controls, and disaster recovery/business continuation plans. We also reviewed the Large Public Fund’s accounting, valuation and financial reporting processes and the compliance programs associated with these functions.
RECOMMENDATIONS:
Overall, we generated 125 recommendations for the Large Public Fund, ranging from minor “housekeeping” updates to more significant changes, such as performance reporting and internal audit functions. We set priorities for our recommendations, which helped them develop an implementation plan.
OUTCOMES:
Our work generated positive feedback from this Large Public Fund and its governing boards. The Large Public Fund immediately went to work implementing our recommended changes to its policies, processes, and compliance functions.