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Social Investing and Fiduciary Responsibility

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Social Investing and Fiduciary Responsibility Presentation for the IPERS Investment Board February 2, 2001 Gregg A. Schochenmaier, General Counsel – PowerPoint PPT presentation

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Title: Social Investing and Fiduciary Responsibility


1
Social Investing and Fiduciary Responsibility
  • Presentation for the IPERS Investment Board
  • February 2, 2001

Gregg A. Schochenmaier, General Counsel Manager,
Legal Communications Unit
2
Introduction
  • The purpose of this presentation is to inform
    Investment Board Members about the concept of
    social investing and to discuss what fiduciary
    responsibilities it has regarding this topic.

3
Why discuss this issue?
  • Investment Board requested it
  • Fiduciaries need to understand this issue
  • Purpose of IPERS
  • Local implications
  • National implications

4
What will be discussed
  • Define social investing
  • Review legal standards surrounding social
    investing issues
  • Investment Boards implementation of these
    standards through Investment Managers

5
What is social investing?
  • Definition elusive
  • Economically targeted investments (ETI)
  • Shareholder activism
  • Preferences for certain investment managers
  • Socially screened investments
  • Divestitures

6
What law governs this issue?
  • Iowa Code 97B.7
  • Iowa common law
  • Internal Revenue Code

7
Iowa Code 97B.7
  • Derived from Iowa common law
  • Prudent person standard
  • exercise judgment and care which persons
    exercise ... in the management of their own
    affairs
  • not for the purposes of speculation
  • in regard to the permanent disposition of the
    funds
  • considering probable income and safety of their
    capital
  • Not a prudent expert standard

8
Iowa Code 97B.7
  • Fund can own any kind of property and investment
    that a prudent person would acquire on their own
  • Must give consideration to the facts a prudent
    person should know when making such an
    investment, including how the investment relates
    to total value of fund
  • What is appropriate consideration?
  • Investment designed to further purpose of system
  • taking into consideration risk of loss and
    opportunity for gain
  • Portfolio composition with regard to
    diversification

9
Iowa Code 97B.7
  • Liquidity current return of investments
    relative to needed cash flow requirements
  • Projected return relative to funding objectives
    of the system
  • Consistent with this paragraph (97B.7),
    investments made under this paragraph shall be
    made in a manner that will enhance the economy of
    this state, and in particular, will result in
    increased employment of the residents of this
    state.

10
Iowa Code 97B.7
  • Exclusive benefit rule
  • All moneys paid or deposited into this fund are
    to be used for the exclusive benefit of the
    members and beneficiaries or contingent
    annuitants
  • to pay retirement claims for members
  • to pay refunds
  • to pay costs for administration of the
    retirement system

11
Iowa Common Law
  • Restatement of Trusts (Second)
  • 170 - Duty of Loyalty sole interest and
    exclusive benefit rules
  • 174 - Duty to Exercise Reasonable Care and
    Skill prudence rule
  • 227 - General Standard for Prudent Investment
  • contains these duties care, skill, caution,
    diversification, loyalty, impartiality,
    delegation supervision of agents
  • Common law governs in absence of a statute

12
Internal Revenue Code
  • General qualification requirements for a pension
    plans tax-exempt status, including IPERS
  • 401(a) incorporates the common law standards,
    such as the duty of loyalty
  • 401(a) Preamble contains an exclusive benefit
    rule that is very similar to Iowa Code 97B.7
    and common law
  • pension plan must be for the exclusive
    benefit of the plans covered employees and their
    beneficiaries, and that it must be impossible
    for any part of the corpus or income to be used
    for or diverted to, purposes other than the
    exclusive benefit of the employees or their
    beneficiaries

13
Internal Revenue Code
  • 401(a)(1) - all contributions received by the
    plan must be for the purpose of distributing to
    such employees or their beneficiaries the corpus
    or income of the fund accumulated by the trust
  • 401(a)(2) - under the express terms of the
    trust, it must be impossible for trust assets to
    be diverted to purposes other than the exclusive
    benefit of the employees or their beneficiaries
    prior to the satisfaction of benefits due under
    the plan

14
What do these legal authorities require of
fiduciaries in the context of social investing?
  • An IPERS fiduciary has a responsibility to act
    prudently and to manage IPERS investments for the
    exclusive benefit of IPERS members and
    beneficiaries
  • The Iowa Code requires that all investment
    decisions for the IPERS Trust Fund must be made
    not for the purpose of speculation, but based on
    consideration of the risk of loss and
    opportunity for gain the probable income and
    safety of the investment proper diversification
    based on modern portfolio theory liquidity to
    fund cash flow requirements and, return on
    investments relative to the funding objectives of
    IPERS

15
What do these legal authorities require of
fiduciaries in the context of social investing?
  • An investment that enhances Iowas economy or
    increases job growth in Iowa must pass the same
    tests as any other investment
  • The fact that the investment is an Iowa
    investment can be considered when, and only when,
    the factors that are used to make an investment
    decision are equal between competing investments

16
Your role regarding Investment Managers
  • These rules apply to all fiduciaries of the
    System
  • Investment Managers are fiduciaries of the
    System because they exercise full discretionary
    authority over Trust Fund assets by virtue of
    their delegated authority from the Investment
    Board
  • Improper for fiduciary to delegate full
    discretionary authority, then attempt to exercise
    the same or a portion of that authority by
    directing an Iowa investment
  • Investment Manager can claim a breach of
    contract and/or breach of fiduciary
    responsibility by IPERS

17
Your role regarding Investment Managers
  • Once delegated, fiduciaries must act prudently
    in the supervision of its agents per Restatement
    of Trusts (Second) 171
  • How do we do this?
  • Appropriate selection of managers
  • Investment Staff meet and review each managers
    portfolio
  • Require routine reporting
  • On-site visits
  • Presentations to Investment Board

18
Summary
  • All investment decisions must be made under the
    same standards of review
  • If an Iowa investment meets the standards, an
    investment is made because its a good investment
    consistent with our portfolio, not because its an
    Iowa investment
  • All things equal between an Iowa investment and
    a non-Iowa investment, can give preference to
    Iowa investment
  • Dont interfere with delegated discretionary
    authority, but monitor the investment managers
    exercise of that authority
  • Questions?
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