PERAC Memo #31 - 2018: Disclosure of Compensation
Disclosure of Compensation
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This memo reminds all § 23B investment service providers that "compensation, in whatever form" must be disclosed annually and in RFP responses, including non-cash arrangements such as directed brokerage, conference sponsorships, charitable or political contributions made at investor request, and economic interests in general partnerships. PERAC flags recent filings showing law firm economic interests contingent on fund-raising success as examples of arrangements that must be fully disclosed.
Full Text
M E M O R A N D U M
TO: All Retirement Board Members, Administrators, and Chapter 32, Section 23B Filers
FROM: Thomas J. O'Donnell, Compliance Officer
RE: Disclosure of Compensation
DATE: October 18, 2018
Each year and as part of the RFP process, all "investment service providers" or prospective investment service providers must file annual disclosures with the retirement board and PERAC. These disclosures include arrangements for compensation paid, or to be paid, to the contractor or a related person, by others in connection with the services the contractor provides to the retirement board or any other client; disclosure of compensation in whatever form paid, or expected to be paid, by the contractor or a related person to others in relation to the services provided to the retirement board or any other client; and disclosure of any conflict of interest that the contractor may have, that may interfere with the ability of the contractor to provide unbiased and objective services to the retirement board.
Under Section 23B of Chapter 32 of the Massachusetts General Laws, the contractor must "…annually disclose to the commission and the retirement board compensation, in whatever form, paid or expected to be paid, directly or indirectly, by the contractor or a related person to others in relation to the contractor's services to the retirement board or any other client."
The Commission would like to use this memo to remind filers that "compensation" may come in many forms including an economic interest in an investment.
The statute requires that "…compensation, in whatever form…" be disclosed. In many instances, such as in the context of cash payments, this term is clear. However, there exist many forms of compensation that may take place in relation to investment activities. For example, directing brokerage to a particular broker, purchase of services from a vendor that provides consulting services to a retirement board as well as payment for attending conferences sponsored by such a vendor, all must be disclosed. Recently, some managers have initiated compensation in the form of political and/or charitable contributions made in response to requests by potential or existing investors or their representatives. Any such contributions must be disclosed.
PERAC has also received filings where parties receive "an economic interest in the partnership which will serve as general partner to the Partnership," including interests provided to principals of law firms advising on marketing strategies, and arrangements where attorney compensation is partially tied to the fund's success in raising money from tax-exempt sources. All of these arrangements must be disclosed in detail to the retirement board and PERAC each year and as part of a response to an RFP.