FROM: Barbara Hannah, Chief Counsel
SUBJECT: Investment Manager Contracting Process
RECOMMENDATION:
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Review of Investment Manager Contracting Process.
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BACKGROUND:
The SBCERA Board of Retirement serves as the sole trustee of the retirement trust and is subject to the fiduciary duties established under Article XVI, section 17 of the California Constitution and Government Code section 31595. Although the Board may delegate investment authority to external managers, such delegation does not diminish the fiduciary nature of the delegated responsibilities. To fulfill these obligations, SBCERA utilizes its Master Custody Account Agreement (MCA) to establish contractual responsibilities of investment managers and safeguard retirement trust assets.
The MCA includes provisions addressing fiduciary standards of care, liability for negligence, indemnification, confidentiality and public disclosure requirements, regulatory compliance, insurance requirements, and most importantly, the business terms governing the relationship with the external manager. These provisions are intended to protect SBCERA and ensure that managers exercise delegated investment authority consistent with applicable fiduciary obligations.
Investment Manager Contracting Process
Based on prior experience negotiating investment management agreements, staff recognized that the contracting process can be lengthy, particularly when material contractual terms are not addressed until after the manager has been approved. Staff also recognized the importance of ensuring the prospective managers understand SBCERA’s fiduciary responsibilities and the key contractual provisions governing the parties’ relationship before their selection is considered.
To address these challenges, improve efficiency, and minimize delays in executing investment management agreements, staff has implemented a process whereby prospective investment managers are provided with the MCA, applicable SBCERA policies, and investment manager questionnaire. The intent is to ensure that prospective managers understand and agree to SBCERA’s contractual requirements and that any material exceptions are identified and substantially resolved before the prospective manager is presented to the Investment Committee or Board for consideration.
This process allows staff to address potential contractual issues earlier in the selection process, reduce post approval negotiations, and promote greater consistency and transparency. Following approval of an investment manager, staff’s goal is to complete execution of the MCA within 45 days, subject to resolution of any outstanding requirements.
The implementation of this process is intended to streamline contract negotiations and facilitate the timely implementation of approved investment decisions while maintaining SBCERA’s fiduciary responsibilities and the contractual protections necessary to safeguard retirement trust assets. Staff has already observed positive results from the implementation of this process, having successfully completed negotiations and executed an agreement with one investment manager within 30 days and another in less than 45 days. These results demonstrate the effectiveness of addressing contractual requirements early in the selection process and support the goal of completing future investment management agreements within 45 days of approval.
BUDGET IMPACT:
None.
STRATEGIC PLANNING GOAL/OBJECTIVE:
Operational Excellence & Efficiency
STAFF CONTACT:
Barbara Hannah
Thomas Kim
Debby Cherney
ATTACHMENTS:
None.