Investment FAQ

As a board trustee I have fiduciary responsibility, what does that mean?

Section 1-101.2 of the Illinois Pension Code states: "A person is a 'fiduciary' with respect to a retirement system or pension fund under the Code to the extent that such person:

1. exercises any discretionary authority or discretionary control respecting management of such retirement system or pension fund, or exercises any authority or control respecting management or disposition of its assets;
2. renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such retirement system or pension fund, or has any authority or responsibility to do so; or
3. has any discretionary authority or discretionary responsibility in the administration of such retirement system."

What responsibilities does the Investment Manager have?

Section 1-101.4 of the Illinois Pension Code states: "A person is an 'Investment Manager' with respect to a retirement system or pension fund established under the Code if such person:

1. is a fiduciary appointed by the board of trustees of a retirement system or pension fund in accordance with Section 1-109.1;
2. has the power to manage, acquire or dispose of any asset of the retirement system or pension fund;
3. is either --
1. registered as an Investment Advisor under the Investment Advisors Act of 1940;
2. a bank, as defined that Act; or
3. an insurance company; and
4. has acknowledged in writing that he is a fiduciary with respect to the retirement system or pension fund."
5. The terms "Investment Manager, "Investment Advisor," and "Investment Advisor" are used interchangeably.

What is an Investment Policy and does the pension have to file one?

An Investment Policy is a written document adopted by the board of trustees, which presents the investment goals established by the board, the strategies to be used in the pursuit of the goals, the persons designated to execute the board's policies, the entities with which the board had decided to conduct business, and the measures put into place by the board with which to evaluate periodically the success of its policies. A copy must be filed with the Illinois Division of Insurance, Pension Division.

Who can have custody of investment instruments that have been purchased?

1. Securities cannot be held by a broker/dealer/manager who has discretion over buying or selling securities for the fund.
2. The Investment Policy should include a clause that requires securities be held by a third party custodian designated by the pension board.
3. All trades, where applicable, should be executed via Delivery vs. Payment (DVP) to ensure that securities are deposited in the fund's custodial account prior to release of funds.

Who is responsible for internal control of the pension fund assets?

The pension board is responsible for establishing and maintaining an internal control structure designed to insure that the assets of the fund are protected from loss, theft, or misuse. The internal control structure shall be designed to provide reasonable assurance that these objectives are met.

Should the pension board adopt an Investment Policy?

The Investment Policy shall be adopted by resolution of the pension board. The Policy shall be reviewed on an annual basis by the board and any modifications made thereto must be approved by the board and a copy forwarded to the Illinois Division of Insurance within 30 days.

Are there any resources available for pension board trustees?

Sample Investment Policy -- Government Finance Officers Association Committee on Cash Management 1997. Accessible from GFOA web site at www.gfoa.org or call IGFOA at (630) 629-1460 for a hard copy.

Model Investment Policy -- Association of Public Treasurers of the United States and Canada. Contact APT US&C at 1029 Vermont Avenue, NW, Suite 710, Washington D.C. 20005, or fax (202) 737-0662. For questions, please call APT US&C at (202) 737-0660.

Investment Procedures and Internal Controls Manual -- Village of Carol Stream. Contact IGFOA at (630) 629-1460 for a hard copy.

Managing Your Investments -- A Handbook for Local Government Officials -- State of Illinois, Office of the Comptroller. Contact the Comptroller's Local Government Affairs Division at (877) 304-3899.

Illinois Pension Code -- 40 ILCS 5/1-101 et al. and 50 Illinois Administrative Code -- Section 4430.30. Contact the Illinois Division of Insurance, Pension Division at (800) 207-6958.

What investments are authorized by the Illinois pension code?

Investments by suburban and downstate police and firefighter pension funds are limited to those authorized by the legal list contained in Illinois Pension Code Section 1-113.1 thru 1.113.4.

A. Treasury Bills

The safest and most liquid investment next to cash. Treasury Bills are short-term direct obligations of the U.S. Government and are issued at a discount with maturities of three months, six months or one year.

B. Treasury Notes

Direct obligations of the U.S. Treasury are issued at par and enjoy an active trading market having maturities of one to seven years, pay interest semi-annually and are guaranteed as to principal and interest by the United States Government.

C. Treasury Bonds

Direct obligations of the U.S. Treasury having maturities from five to thirty years, pay interest semi-annually and are guaranteed as to principal and interest by the United States Government.

D. Certificates of Deposit

A written certification by a bank, savings and loan association or a credit union that a fixed dollar amount has been deposited with it for a fixed period of time at a predetermined rate of interest. Certificates are registered in the name of the depositor. (See 540.)

E. Government Bonds & Tax Anticipation Warrants

Interest bearing bonds and short term obligations to finance current expenditures pending receipt of expected tax payments issued by the United States Government, the State of Illinois, or any county, township, or municipal corporation of the State of Illinois.

F. State of Israel Bonds

Direct obligations of the State of Israel for the payment of money, or obligations for the payment of money, which are guaranteed as to the payment of principal and interest by the State of Israel (Illinois Pension Code, Section 1-113 (5.1)).

G. General Accounts of Life Insurance Companies

An investment instrument issued by a regulated insurance company and guaranteed from the general assets of the insurance company. General accounts (GIC's) usually pay a fixed rate of return determined in advance, but generally are not marketable. GIC contracts must be with an insurance company authorized to do business in Illinois and are not limited to percentage limitations as are separate accounts.

H. Separate Accounts of Life Insurance Companies

A separate account is an insurance company product that allows investments in real estate, stocks, bonds, and money market instruments. The assets of the investment funds are owned by the company and are held separately from other assets of the company and are not chargeable with liabilities arising out of any of the company's other business.

I. Government Agencies

Federal definition of "Agency" defined in federal law as an "executive department, an independent federal establishment, or a corporation or other entity established by the Congress, which is owned in whole or in part by the United States." (Federal Financing Bank Act of 1973)

1. Federal List of Agencies and Government Sponsored Agencies:

   1. Federal Housing Administration (FHA)
   2. Government National Mortgage Association (GNMA)
   3. Public Housing Boards (HUD)
   4. Farmers Home Administration
   5. General Services Administration (GSA)
   6. Maritime Administration
   7. Small Business Administration (SBA)
   8. SBA Loan Pools
   9. Tennessee Valley Authority (TVA)
   10. Washington Metropolitan Area Transit Authority
    

2. Additional agencies authorized by the pension code. Illinois law authorizes investments in the following agencies and government-sponsored agencies:

   1. Federal Land Banks
   2. Federal Intermediate Credit Banks
   3. Bank for Cooperatives
   4. Federal Farm Credit Banks
   5. Federal Home Loan Banks
   6. Federal Home Loan Mortgage Corporation
   7. Federal National Mortgage Association (FNMA)
   8. Student Loan Marketing Association (Sallie Mae)

J. Money Market Mutual Funds

Open-ended mutual funds that invest in highly liquid and safe securities and pays money market rates of interest. Funds are not federally insured, but invest only in government-backed securities as stated in Section 1-113.2.

K. Strips -- Separate Trading of Registered Interest and Principal of Securities

A pre-stripped, zero-coupon bond that's a direct obligation of the U.S. Treasury (only Treasury strips are approved investments which do not include brokerage house created strips, such as CATS and TIGRS).

L. CUBES -- Coupon Under Book Entry Safekeeping

Programs introduced by the U.S. Treasury that are direct obligations of the U.S. Government.

M. Illinois Public Treasurers Investment Pool (IPTIP)

Any public agency may also invest any public funds in a Public Treasurers Investment Pool under Section 17 of the State Treasurer Act.

N. Bank Managed Fund

Any public agency may also invest any public funds in a fund managed, operated, and administered by a bank, subsidiary of a bank, or subsidiary of a bank holding company or use the services of such an entity to hold and invest or advise regarding the investment of any public funds.

What kinds of investments are not authorized?

A. General interpretation of applicable laws

Any investment that is not specifically authorized by law is an unauthorized investment.

B. Partial list of most common violations

C. Loans

The law authorizes investments in "interest bearing bonds or tax anticipation warrants of the United States, of the State of Illinois, or of any county, township, or municipal corporation of the State of Illinois." These may be viewed as loans to the respective governments, backed by the faith and credit of the governments.

A small number of pension funds have misconstrued these laws as permitting them to make loans to their municipalities. Such loans are unauthorized, regardless of whether or not the municipality (or any other entity) pays interest.

What happens if a trustee violates their fiduciary responsibility?

Any person who is a fiduciary with respect to a retirement system or pension fund established under this code who breaches any duty imposed upon fiduciaries by this code shall be personally liable to make good to such retirement system or pension fund any losses to it resulting from each such breach.

No person shall be liable with respect to a breach of fiduciary duty under this code if such breach occurred before such person became a fiduciary or after such person ceased to be a fiduciary.

What would be considered conflicts of interest?

Illinois Pension Code, Section 1-110 (b) states:

"(b) A fiduciary with respect to a retirement system or pension fund established under this code shall not:

(1) Deal with the assets of the retirement system or pension fund in his own interest or for his own account;
(2) In his individual or any other capacity, act in any transaction involving the retirement system or pension fund on behalf of a party whose interests are adverse to the interests of the retirement system or pension fund or the interests of its participants or beneficiaries;
(3) Receive any consideration for his own personal account from any party dealing with the retirement system or pension fund in connection with a transaction involving the assets of the retirement system or pension fund."

The Office of the Attorney General has indicated that Section 1-110(b)(1) "appears to be an expression of a well-settled common law rule that a trustee is prohibited from self-dealing. This rule forbids a trustee from either buying or selling securities or other property in a transaction between the trustee individually and the trust estate. Such a transaction is considered fraudulent per se without regard to the fairness of the price of the intentions of the trustee, because the purpose of the rule is to shield the trustee from all temptation. It appears, therefore, that if a pension fund manager purchased securities for the fund which were issued by the manager or an entity owned by it, Subsection 1-110(b) would be violated. The same reasoning would appear to apply to the investment of funds in accounts of a bank which acts as a fund manager."

Further, Section 1-110(c) states:

(c) Nothing in this Section shall be construed to prohibit any trustee from:

(1) Receiving any benefit to which he may be entitled as a participant or beneficiary in the retirement system or pension fund.
(2) Receiving any reimbursement of expenses properly and actually incurred in the performance of his duties with the retirement system or pension fund.
(3) Serving as a trustee in addition to being an officer, employee, agent, or other representative of a party in interest.

When does the pension fund need to rebalance?

Pension funds invested in separate accounts, mutual funds and/or individual stocks should calculate the market value of those funds, at least annually to determine the percentage held vs. the allowable percentage under law. If the percentage exceeds the allowable amount, the fund must reduce to the allowable percentage and document the reduction. The reduction as to which investments are sold is at the discretion of the pension board and applies only to the aggregate percentage. Documentation of the percentage calculations should be maintained at the pension fund.

If market value does not exceed the allowable percentage then no rebalancing is required. Investment Policies of each fund should stipulate the percentage allowable in the various types of authorized investments.

Pension boards should review percentages quarterly for compliance with the Investment Policy. Funds with assets under $2.5 million are allowed 10% in separate accounts and/or mutual funds, which may grow in excess of 10% provided that the contract has not been changed.

Can the pension fund invest in international stocks?

Yes, international stocks are allowable in mutual funds and separate accounts, but are not authorized for individual equities which stipulate U.S. corporations only.

Does the family of funds or each fund within the family have to be in existence 5 years and have $250 million in assets?

Each fund within the family of funds must meet the requirements.

Is broker custody allowed?

Yes, provided that the requirements as stipulated in the pension code are met and the broker-dealer serving as custodian is not also serving as an Investment Advisor for the same public pension fund.

Does the pension fund need to have a written Investment Policy?

Yes, the pension code requires all pension funds to file a written Investment Policy with the Illinois Division of Insurance.

Does the pension fund invest 35% or 45% in separate accounts, mutual funds and individual equities?

Attorney General opinion dated July 15, 1998, states that funds in excess of $2.5 million can invest 35% in addition to 10% allowable in separate accounts/mutual funds. If 45% is invested, at least 10% of that amount must be in separate accounts/mutual funds.

Does the pension fund have to file a copy of Investment Advisor/Manager agreements with the Illinois Division of Insurance?

Yes, within 30 days after appointing any Investment Advisor.

Do the investment professionals have to disclose fees both direct and indirect prior to the purchase of any investment?

Yes, see Administrative Rule 4430 regarding fee disclosure.

If the pension fund assets are less than $2.5 million, can I invest in equities?

Only up to 10% in separate accounts of life insurance companies and or mutual funds.

Does the pension fund have to disclose fees paid to investment professionals?

Yes, full written disclosure of direct and indirect fees, commission penalties, and any other compensation that may be received by the Investment Advisor or any other person providing investment services