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Retirement Manual - Fiduciary and Investment Responsibilities

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Purpose – (See R. S. 11:261)

The legislature recognizes that the fiscal integrity of various governments of and within this state and the financial security of employees and citizens of these various governments require that the public retirement or pension systems, funds, and plans maintained primarily for officers and employees of the governments be maintained on a sound actuarial basis. It is further recognized that the fiduciary responsibilities and the investment practices of these systems, funds, and plans are an integral part of such maintenance. It is also recognized that the legislative branch of state government bears a responsibility with respect to this maintenance. Accordingly, the purpose of this Subpart is to provide for the governing of fiduciary responsibilities and investments by public retirement or pension systems, funds, and plans.

Fiduciary and Investment Responsibilities – (See R. S. 11:263 and R. S. 11:264)

The system is required to apply the prudent-man rule with regard to the investment of system funds. This rule requires each fiduciary of the system and the board of trustees acting collectively on behalf of the system to act with the care, skill, prudence, and diligence under the prevailing circumstances that a prudent institutional investor acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.

The standard requires the exercise of reasonable care, skill, and caution, and is to be applied, with regard to investments, not in isolation, but in the context of the trust portfolio, and as part of an overall investment strategy, which shall include an asset allocation study and plan for its implementation, incorporating risk and return objectives reasonably suitable to the trust (i.e. the retirement system).  The asset allocation study and implementation plan must include the examination of market value risk, credit risk, interest rate risk, inflation risk, counterparty risk, and concentration risk.  The investment policy of the system must preserve and enhance principal over the long term and provide adequate liquidity and cash flow for the payment of benefits.  In addition, investments must be diversified to minimize the risk of significant losses unless it is clearly prudent not to do so.

Notwithstanding the prudent-man rule, the board may invest more than fifty-five percent of the system's total portfolio in equities, so long as not more than sixty-five percent of the total portfolio is invested in equities and at least ten percent of the total equity portfolio is invested in one or more index funds which seek to replicate the performance of the chosen index or indices.

When contemplating any investment, action, or asset allocation the Board must consider factors such as the availability of public pricing to value each investment, the ability to liquidate the investment at a fair market price within a reasonable time frame for the size of the investment being considered, the degree of transparency accompanying the investment, the risk of fluctuations in currency that may accompany the investment, the experience of the managers of the investment, the financial soundness of the entity employing the investment managers, the degree of diversification offered by an investment, whether leverage is involved in the investment, the potential for unrelated business taxable income, the jurisdiction of the laws that govern the investment, and the net expected return related to the risk of the investment.

The prudent man rule does not prohibit investment in small and emerging businesses, small business investment companies, and venture capital firms.  The board of trustees may but is not required to divest itself of any holding in a company having facilities or employees or both located in Iran, Libya, North Korea, Sudan, or Syria.

The system must provide reports on investments including an array of rates of return, investment fees, administrative expenses, asset allocation targets, and the actual allocation of assets.

Fiduciaries are those persons who (1) exercise any discretionary authority or discretionary control with respect to the management of system funds or assets or (2) render investment advice or services for compensation, direct or indirect, with respect to system funds or assets.  However, legislators, state officials, system attorneys, accountants, and actuaries shall not be considered to be fiduciaries unless they exercise discretionary control over the management or administration of the system or some authority or control over system assets.

Any person who has been convicted of a felony offense shall be restricted from serving as a system fiduciary for a period of five years after the conviction or after the end of imprisonment, whichever is later.

Fiduciaries must discharge their duties solely in the interest of system members and beneficiaries for the exclusive purpose of providing benefits to participants and beneficiaries, and paying the expenses of administering the plan.

A fiduciary who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries will be personally liable to make good to the system any losses to the system resulting from each breach, and to restore to the system any profits of the fiduciary which have been made through the use of system assets by the fiduciary.  Fiduciaries of the system are subject to such other equitable or remedial relief, as a court may deem appropriate, including removal of the fiduciary.

No fiduciary is liable with respect to a breach of a fiduciary duty if the breach was committed before he/she became a fiduciary or after he/she ceased to be a fiduciary.

Any fiduciary who participates in a breach committed by a co-fiduciary, or who tries to conceal a co-fiduciary's breach, shall be held liable jointly for breach of fiduciary duty.  Co-fiduciary liability also results from a fiduciary's failure to use reasonable care to prevent a co-fiduciary from committing a breach.  Any fiduciary who has knowledge of a co-fiduciary's breach has a duty to remedy the breach.

Any member, beneficiary, or survivor who can demonstrate a personal interest in the system may bring a civil action to enforce these fiduciary provisions.  In any enforcement proceeding, the plaintiff may seek and the court may grant any or all of the following forms of relief:

        1.    A writ of mandamus;
        2.    Injunctive relief;
        3.    Declaratory judgment;
        4.    Judgment rendering certain actions of the board as void;
        5.    Judgment awarding civil damages.
        6.    Judgment requiring payment of the amounts in R.S. 11:269.

Exclusive original jurisdiction for enforcement proceedings shall be in the Nineteenth Judicial District Court of Louisiana.  In any enforcement proceeding, the court has jurisdiction and authority to issue all necessary orders to require compliance with, or to prevent noncompliance with, or to declare the rights of parties provided by these fiduciary provisions.  Any noncompliance with the orders of the court may be punished as contempt of court.

If a person who brings enforcement proceedings prevails, he shall be awarded reasonable attorney fees and other costs of litigation.  If such person prevails in part, the court may award him reasonable attorney fees or an appropriate portion thereof.  If the court finds that the proceeding was of a frivolous nature and was brought with no substantial justification, it may award reasonable attorney fees to the prevailing party.

The system may not submit a proposed regulation or approve any internal policy to relieve a fiduciary from responsibility for a breach of fiduciary duty.  However, the system may purchase insurance to cover liability or losses due to acts or omissions of fiduciaries.  Any such insurance shall maintain the insurance company's right of subrogation.  A fiduciary may purchase insurance to cover his own liability, without condition.

Investments in Prohibited Nations; Purpose – (See R. S. 11:311)

The purpose of this Subpart is to assure the members and retirees of the state and statewide retirement systems, the state and her political subdivisions as employers, and the taxpayers of Louisiana that the monies held in trust for the benefit of public employees are not used directly or indirectly to support terrorist activities.

Investments in Prohibited Nations; Application and Definitions –(See R. S. 11:312)

As used in this Subpart, the following terms shall have the following meanings, unless a different meaning is clearly required by context:

  1. "Company" means any foreign domiciled or based entity, real or juridical, which is not a subsidiary of nor owned in whole or in part by any domestic company, and which is engaged in an enterprise for financial gain.
  2. "Prohibited nation" means Iran, North Korea, Sudan, or Syria.

The fund shall provide semiannual written reports to the House of Representatives and Senate committees on retirement regarding any investments in any company having facilities or employees or both located in a prohibited nation.  The report must include the name of each such company, the asset allocation class and sector to which it belongs pursuant to the board's asset allocation policy, and the amount invested in such company.
 
Reports are due by the fifteenth day of February, containing information for the six-month period ending December thirty-first, and by the fifteenth of August, containing information for the six-month period ending June thirtieth in each calendar year.

Each system's money managers shall be responsible for supplying to the system all information necessary to complete the reports in a timely manner as required by this Subsection.

Each system shall adopt rules necessary to implement the provisions of this Subpart.

Investments in Prohibited Nations; Prudent-Man Rule – (See R. S. 11:313)

Notwithstanding the prudent-man rule, the board of trustees may but is not required to divest itself of any holding in a company having facilities or employees, or both, located in a prohibited nation as that term is defined in R. S. 11:312(B)(2).

Investments in Prohibited Nations; Constructive Engagement;Direct Ownership of Securities – (See R. S. 11:314)

The fund must adopt and implement a corporate governance strategy of constructive engagement of each company, in which the system has a direct ownership of securities, having facilities or employees or both located in a prohibited nation. Such corporate governance strategy of constructive engagement shall contain a plan of system action to cause any such company to remove facilities, employees, or both from any prohibited nation.  

The fund was required to implement a plan of action by not later than one hundred twenty days after August 15, 2007.  In addition, the fund must continue to implement such plan of action with respect to a particular company for the period of time that the system continues to possess an ownership interest in the company.  As part of each system's corporate governance strategy of constructive engagement, the system is required to make its best efforts to identify all such companies.  Such efforts must include all of the following:

  1. Reviewing and analyzing publicly available information regarding companies having facilities or employees or both located in a prohibited nation, including information provided by but not limited to nonprofit organizations, research firms, international organizations, and government entities.
  2. Contacting and obtaining information from asset managers who invest on behalf of the system in companies having facilities or employees or both located in a prohibited nation.
  3. Contacting and obtaining information from other institutional investors, including other public pension systems, that have divested themselves of investments in companies having facilities or employees or both located in a prohibited nation.

Such corporate governance strategy requires the fund to form strategic shareholder alliances, whether formal or informal, with other public pension systems that have a common ownership interest with the system in any company having facilities or employees or both in a prohibited nation for the purpose of effecting change in the company's policy so as to cause the company to remove its facilities, employees, or both from any prohibited nation.  In pursuing such shareholder alliances, the following provisions apply:

  1. The fund must share with other systems covered a semiannual list of companies in which the system invests that have facilities or employees or both located in a prohibited nation.  Each system with common ownership interests in such companies must then form a strategic shareholder alliance, whether formal or informal, for the purpose of influencing such companies to cease having facilities or employees or both located in a prohibited nation.
  2. Each covered system must, separately or jointly with another system that is a member of a strategic shareholder alliance under this Section, submit semiannually, to each such company having facilities or employees or both located in a prohibited nation, a notice that provides for all of the following:
    1. Informs such company of the requirements of this Subpart and of the company's status as having facilities or employees or both located in a prohibited nation.
    2. Requests that such company refrain from continuing to have facilities or employees or both located in a prohibited nation.
    3. Details the nature of any strategic shareholder alliance of which the system is a member pursuant to this Section, which notice is to include a list of systems, whether this Subpart applies to those systems or not, making up such alliance
    4. Details the percentage of shares that each member of the strategic shareholder alliance possesses.
    5. Informs such company that it may become subject to divestment by the systems in the shareholder alliance if such company continues having facilities or employees or both located in a prohibited nation.

The fund is required to adopt rules necessary to implement the provisions of this Section and must report compliance with this Section to the House of Representatives and Senate committees on retirement as part of the report submitted pursuant to R. S. 11:312(C).

Investments in Prohibited Nations; Constructive Engagement; Securities Held in a Collective Fund – (See R. S. 11:315)

The fund must adopt and implement a corporate governance strategy of constructive engagement of any collective fund investment manager or advisor, requesting such manager or advisor to constructively engage each company having facilities or employees or both located in a prohibited nation in which the system possesses an indirect ownership interest through investment in any such collective fund, excluding private equities and hedge funds.  Such corporate governance strategy of constructive engagement is to contain a plan of system action to cause any such collective fund to in turn cause any such company to remove facilities, employees, or both from any prohibited nation.  The fund had until one hundred twenty days after August 15, 2007 to create such plan of action and must continue to implement such plan of system action with respect to a particular collective fund for the period of time that the system continues to possess an indirect ownership interest in the company through the collective fund investment.  As part of each system's corporate governance strategy of constructive engagement, the system must make its best efforts to identify all such companies.  Such efforts shall include:

  1. Reviewing and analyzing publicly available information regarding companies having facilities or employees or both located in a prohibited nation, including information provided by but not limited to nonprofit organizations, research firms, international organizations, and government entities.
  2. Contacting and obtaining information from asset managers who invest on behalf of the system in companies having facilities or employees or both located in a prohibited nation.
  3. Contacting and obtaining information from other institutional investors, including other public pension systems, that have divested themselves of investments in companies having facilities or employees or both located in a prohibited nation.

The corporate governance strategy of the fund requires the fund to form strategic alliances, whether formal or informal, with other public pension systems that have a common ownership interest with the system in any company having facilities or employees or both in a prohibited nation through participation in the same collective fund, excluding private equities or hedge funds, for the purpose of effecting change in the company's policy so as to cause the company to remove its facilities, employees, or both from any prohibited nation.  In pursuing such alliances, the following provisions apply:

  1. The fund must share with other systems covered a semiannual list of companies in which the system invests that have facilities or employees or both located in a prohibited nation.  Each system with common ownership interests in such companies must then form a strategic shareholder alliance, whether formal or informal, for the purpose of influencing such companies to cease having facilities or employees or both located in a prohibited nation.
  2. Each covered system must, separately or jointly with another system that is a member of a strategic alliance under this Section, submit semiannually to the investment manager or advisor of any collective fund, requesting any such collective fund manager or advisor to submit to each such company having facilities or employees or both located in a prohibited nation, a notice that provides for all of the following:
    1. Informs such company of the requirements of this Subpart and of the company's status as having facilities or employees or both located in a prohibited nation
    2. Requests that such company refrain from continuing to have facilities or employees or both located in a prohibited nation.
    3. Details the nature of any strategic alliance of which the system is a member pursuant to this Section, which notice shall include a list of systems, whether this Subpart applies to those systems or not, making up such alliance.
    4. Details the percentage of shares that each member of the strategic alliance possesses.
    5. Informs such company that it may become subject to divestment by the systems in the strategic alliance if such company continues having facilities or employees or both located in a prohibited nation.

The fund is required to adopt rules necessary to implement the provisions of this Section and must report compliance with this Section to the House of Representatives and Senate committees on retirement as part of the report submitted pursuant to R. S. 11:312(C).

Investments in Prohibited Nations; Terror-Free Index Fund – (See R. S. 11:316)

As used in this Section, the following terms have the following meaning unless a different meaning is clearly required by the context:

  1. "Screened equities" means stocks or other ownership interest in a company identified as having facilities or employees or both located in a prohibited nation, which equities are excluded from the terror-free index fund.
  2. "Terror-free equities" means equities in companies not identified as having facilities or employees or both located in a prohibited nation.
  3. "Terror-free index fund" means an international index fund which identifies equities in companies having facilities or employees or both located in a prohibited nation and excludes them from the fund.

The fund was required within sixty days after August 15, 2007 to communicate with investment managers with international investment experience for the establishment of an international terror-free index fund which identifies and excludes from the fund companies having facilities or employees or both in a prohibited nation.  The communication shall stipulate that, as part of managing such fund, the manager will replace the screened equities with comparable equities or will adjust the weighting of remaining equities held in a system's portfolio.  The fund, if it includes an allocation to international markets, is required to allocate a portion of its international investments to such terror-free index.

If the fund has an investment strategy which includes allocation to international markets but does not possess sufficient assets to meet the minimum investment required by the manager to create a terror-free index fund on its behalf alone, the fund must join an existing terror-free index fund established pursuant to this Section, or join with another system to meet such minimum investment requirements for the purpose of establishing a terror-free index fund common to those systems.

The fund must adopt rules necessary to implement the provisions of this Section, and must report compliance with this Section to the House of Representatives and Senate committees on retirement as part of the report submitted pursuant to R. S. 11:312(C).

Nothing in this Section requires a system to invest in international markets or to utilize collective funds or index funds for such purpose unless otherwise part of the investment strategy adopted by the system.  If a system invests in international markets and utilizes collective funds or index funds for such purpose, this Section does apply.

Liabilities; Discretionary Control – (See R. S. 11:264.1)

Legislators, state officials, system attorneys, accountants, and actuaries are not considered fiduciaries unless they exercise discretionary control over the management or administration of the system or some authority or control over system assets.

Fiduciary Restriction; Felony Conviction – (See R. S. 11:264.2)

Any person who has been convicted of a felony offense is restricted from serving as a system fiduciary for a period of five years after the conviction or after the end of imprisonment, whichever is later.

Basic Fiduciary Duty – (See R. S. 11:264.3)

The basic duty of a fiduciary is to discharge his duties with respect to the system in the exclusive interest of the members and beneficiaries.

Exclusive Interest Rule – (See R. S. 11:264.4)

A fiduciary must discharge his duties within the law solely in the interest of system members and beneficiaries for the exclusive purpose of providing benefits to participants and beneficiaries, and paying the expenses of administering the plan.

Breach of Fiduciary Duty – (See R. S. 11:264.5)

Any person who is a fiduciary with respect to this plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this Subpart is personally liable to make good to the plan any losses to the plan resulting from each such breach, and to restore to the plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary.  In addition, the fiduciary is subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary.

No fiduciary is liable with respect to a breach of fiduciary duty under this Subpart if such breach was committed before he became a fiduciary or after he ceased to be a fiduciary.

It is not a breach of fiduciary duty for a board of trustees or any member of such a board to take action to divest the system of any holding in a company having facilities or employees or both located in a prohibited nation as that term is defined in R. S. 11:312(B)(2); however, nothing in this Subsection requires a board to divest itself of any such holding.

Cofiduciary Liability – (See R. S. 11:264.6)

Any fiduciary who participates in a breach committed by a cofiduciary, or who tries to conceal a cofiduciary’s breach, will be held liable jointly for breach of fiduciary duty.  Cofiduciary liability also results from a fiduciary’s failure to use reasonable care to prevent a cofiduciary from committing a breach.

Any fiduciary who has knowledge of a cofiduciary’s breach has a duty to remedy the breach.

Venue for any Legal Action Against the System – (See R. S. 11:264.7)

The venue for any legal action (lawsuit) that may be brought against the system is exclusively in the Nineteenth Judicial District Court of Louisiana.

System Policy Regarding Breach of Fiduciary Duty – (See R. S. 11:264.8)

No retirement system may submit a proposed regulation, or approve any internal policy to relieve a fiduciary from responsibility for breach of fiduciary duty.  However, a system may purchase insurance to cover liability or losses due to acts or omissions of fiduciaries.  Any such insurance must maintain the insurance company’s right of subrogation.  A fiduciary may purchase insurance to cover his own liability, without condition.

Compensation of Investment Advisors – (See R. S. 11:265)

Each board of trustees of the various public retirement systems, plans, or funds is hereby authorized, in requesting proposals for investment advisory services, to require that fees shall be quoted as a fixed fee, a fee based on market value of assets, or a performance fee.

Investment Performance Standards – (See R. S. 11:266)

The provisions of this Section are applicable to all Louisiana public retirement or pension systems, funds, and plans, and do not apply to any investment manager or investment advisor who does not have an office for investment managers or investment advisors domiciled in the United States.

Investment performance reports submitted by any investment manager or investment advisor of any covered entity of this Section must be in compliance with the current Performance Presentation Standards as amended and published by the Association for Investment Management and Research or any successor entity.

Investment performance composite data submitted in response to a request for proposal or any other solicitation or selection process used by this fund for hiring an investment manger or investment advisor must be in compliance with the current Performance Presentation Standards as amended and published by the Association Standards as amended and published by the Association for Investment Management and Research or any successor entity.

The fund must require, at least annually, that investment managers or investment advisors that they employ or retain must submit investment performance composite data, which contains the portfolio that is subject to a Level I verification as defined in the Performance Presentation Standards as amended and published by the Association for Investment Management and Research or any successor entity.

The Investment Performance Standards required in this section are not required for investments in limited partnerships, limited liability partnerships, private placements, and natural resource portfolios.

Disclosure; Consultants; Money Managers – (See R. S. 11:269)

Consultants and money managers must provide full disclosure to the Board related to conflicts of interest, including non-pension sponsor sources of revenue. Consultants also must provide full disclosure of any payments they receive from money managers, in hard or soft dollars, for any services they provide, including but not limited to performance measurement, business consulting, and education.

Each consultant and money manager must submit a written disclosure report semiannually.  The report must be submitted regardless of whether the consultant or money manager has any conflict or payment to report.  Should a reportable agreement be confected during any reporting period, the consultant or money manager must notify the system of the agreement within seven business days.

Any consultant or money manager found to be in violation of this section must pay to the fund an amount of money equal to the value of the revenue or payments he failed to disclose together with any damages caused by the failure to disclose. Additionally, if the failure to disclose is intentional, the consultant or money manager must pay to the system an amount equal to three times the value of the revenue or payment he failed to disclose as a penalty, in addition to any damages actually caused by the failure to disclose.

Actuarial Soundness – (See the Constitution of the State of Louisiana, Article 10, Section 29(E))

Neither the state nor the board of trustees may take any action that will cause the actuarial present value of expected future expenditures of the system to exceed or further exceed the sum of the current actuarial value of assets and the actuarial present value of expected future receipts of the retirement system, except with respect to the following:

  1. Normal business operating expenses of the system.
  2. Capital outlay expenditures of the system.
  3. Management of investments of the system.
  4. Cost-of-living increases to retirees, as provided by law, provided the system is approaching actuarial soundness as provided by law and the granting of such increase does not cause an increase in the actuarially required contribution rate.

All assets, proceeds, or income of the retirement system and all contributions and payments made to the system to provide for retirement and related benefits are held, invested as authorized by law, or disbursed as in trust for the exclusive purpose of providing such benefits, refunds, and administrative expenses under the management of the board of trustees and may not be encumbered for or diverted to any other purpose.  The accrued benefits of members may not be diminished or impaired.  Future benefit provisions for members of the system may only be altered by legislative enactment.

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