Request for Proposals for a Fiduciary Performance Audit of the South Carolina Retirement System Investment Commission: RFP_Fiduciary_RSIC_10072013.pdf
***NOTICE: November 8, 2013 - 5:10 pm: Proposals were received and opened from the following firms:
Benchmark Financial Services, Inc. - Ocean Ridge, FL
Funston Advisory Services, LLC - Bloomfield Hills, MI
***NOTICE: December 5, 2013 - Fiduciary Performance Audit Contract Awarded to Funston Advisory Services, LLC
The following questions were received regarding the Request for Proposal to conduct a fiduciary performance review of the South Carolina Retirement System Investment Commission (RSIC). Responses are provided for review.
Q1a. Is the intent of this RFP to complete a comprehensive compliance audit or a fiduciary review?
Response 1a: This is a fiduciary performance review.
Q1b. Our understanding is that this is the first evaluation in what is expected to be an annual process. A fiduciary review, which would identify policy, practice and compliance gaps and provide a priority roadmap for future evaluations. A comprehensive compliance audit across the entire scope of the RFP could be accomplished, but would require significant resources and perhaps more time than allotted in the RFP.
Response 1b: The South Carolina Office of the State Inspector General (SIG) agrees this engagement is a fiduciary review as defined above, and is being utilized to identify policies and practices currently in place which are operating effectively and efficiently, and to identify gaps in compliance in order to provide a priority roadmap for remediation and future evaluations. The SIG recognizes the comprehensive nature of a fiduciary review and will re-assess the annual requirement with the appropriate state legislators upon conclusion of this fiduciary performance review.
Q1c. Alternatively, are there specific areas where the SIG does require a compliance audit together with other areas covered by the fiduciary review approach?
Response 1c: Section III “Scope of Services” specifically identifies six categories for fiduciary performance review. These areas were identified as specific areas of interest to the RSIC and the SIG, while allowing the Proposer the flexibility to utilize judgment, experience and creativity in conducting this fiduciary performance review in conformance with other public pension plans. However, Category 4 “Key Investment Administration Functions” asks for a review of the due diligence process to select investment managers, etc., to include internal controls identified as less than adequate in prior audits. The SIG is seeking to have a compliance audit conducted of this process, specifically of RSIC’s due diligence process conducted for Alternative Investments. The period of review for the due diligence compliance audit is from January 1, 2013 to the present.
Q2. In the Background section, there is a reference to “other fiduciaries and trustees exercising authority and direction over the Retirement System are: State Budget and Control Board, Public Employee Benefit Authority (PEBA), and the State Treasurer’s Office.” In Category 3 there is a mention of PEBA performing investment accounting for the investment portfolio. Are there other specific areas of responsibility which should be addressed?
Response 2: This fiduciary performance review is specific to the RSIC. The fiduciary structure of the South Carolina Retirement System (Retirement System) is unique among public pension plans in its diversification of fiduciary and trustee oversight. South Carolina Code of Laws, Title 9 encompasses legislation for the entire South Carolina Retirement System, to include RSIC and PEBA. Specifically, SC Code of Laws, Title 9, Chapter 16 defines RSIC’s fiduciary role in the overall Retirement System, while Chapter 4 defines PEBA’s role. RSIC is the sole fiduciary charged with the investment of assets held in trust by the Retirement System. PEBA performs back-office accounting operations for RSIC pursuant to a Memorandum of Understanding (MOU) because PEBA is charged with preparing financial statements for the Trust funds which contain investment information. Additionally, PEBA maintains the legacy system of record for the Retirement System. To the extent the responsibilities afforded to “other fiduciaries and trustees” of the Retirement System positively or negatively impact the fiduciary performance of RSIC these relationships should be reviewed.
Q3a. In the Background section, it is mentioned that the RSIC manages and invests all assets held in trust for the participants and beneficiaries of five governmental defined benefit plans: South Carolina Retirement System, South Carolina Police Officers Retirement System, Retirement System for Judges and Solicitors of the State of South Carolina, Retirement System for Members of the General Assembly of the State of South Carolina, and the National Guard Retirement System. Are they all invested in one pool using the same asset allocation?
Response 3a: Yes. For specific investment performance reports and asset allocation the Proposer is directed to review publicly available information for the RSIC at the following website: www.ic.sc.gov.
Q3b. Do they all have the same liability structures and funding levels?
Response 3b: No. The liability structures and funding levels for the five retirement plans are the responsibility of PEBA. Specific plan information on each retirement plan can be located at www.retirement.sc.gov or www.peba.sc.gov. The Proposer is also directed to the “Notes to the Financial Statements” section of the PEBA Comprehensive Annual Financial Report (CAFR). Specifically, page 34 of the CAFR sets forth the liability structures and funding levels for each of the five retirement plans. http://www.retirement.sc.gov/financial/CAFR2012.pdf
Q4. There is a reference in the RFP to “conformance with best practices of other public pension plans.” Is it intended for the consultant to conduct a benchmarking process as part of this review, or to rely upon existing benchmarks and research?
Response 4: Section III “Scope of Services” sets forth the purpose of the fiduciary performance review is to critically evaluate the fiduciary roles and responsibilities of the RSIC, with the goal of identifying strengths, weaknesses, areas for improvement, and best practices among widely available and accepted industry standards for public pension plans.
Q5. In Category 1, the scope specifically includes “Investment Commission communication policy.” Should this also include execution, i.e., is the policy being followed by the commissioners?
Response 5: Yes, from a reasonableness perspective.
Q6. In Category 2, one of the items listed as in scope is “investment funding process.” Does this refer to the cash in and out to and from external managers and re-balancing of portfolios?
Response 6: Yes.
Q7. In Category 3, in assessing the roles and responsibilities of key staff, the PEBA investment accounting relationship for the investment portfolio is identified for review. What investment-related functions are performed by the financial group in PEBA?
Response 7: PEBA performs the “back-office” accounting for the RSIC through an MOU. This MOU affords PEBA the ability to “roll-up” the financial data for annual reporting for the Retirement System, annual auditing of the financial statements, and inclusion in the state’s overall CAFR.
Q8. In Category 3, a review of the standard operating procedures manual is included in the scope. Is it possible to obtain a copy of the manual to understand its breadth and level of detail?
Response 8: The RSIC’s standard operating procedures manual is contained within the Annual Investment Plan and Statement of Investment Objectives and Policies, a public document. Also available to the public are the governance policies and investment advisor reports. These can be reviewed and downloaded at: www.ic.sc.gov/Policies/AIP/default.htm.
Q9a. In Category 4 of the RFP, you indicate that the reasonableness of management fees, custodial fees and securities lending fee splits are part of the scope of this review. Have you participated in benchmarking with CEM Benchmarking Inc. or another benchmarking service?
Response 9a: The RSIC has participated in CEM benchmarking in the past.
Q9b. If not, would you be willing to do so as part of this review?
Response 9b: The SIG will entertain the possibility of benchmarking for this review. The SIG is aware that much of the available data is self-reported by public pensions, and is publicly available. Before final determination is made to engage in a benchmarking study, the Proposer should identify the process of sourcing comparative data, and the methodology of the benchmarking study in order to draw an equitable comparison to RSIC’s asset allocation and fee structure. The Proposer should specify the level of fees to be analyzed and the associated methodology of review for each type of fee (management fees, performance fees/carried interest, and/or pass through expenses). If proposers or sub-contractors rely on financial statement data or self-reported data by plans, proposers should indicate how different levels of reporting among plans will be normalized to provide a true apples to apples comparison of fees paid.
Q10a. In Category 4, there are a number of issues identified as "process". Does this imply the consultant should review the policy and articulated procedures (if they exist) and, in general, whether or not the policies and procedures are being followed?
Response 10a: Yes, from a reasonableness perspective.
Q10b. Is a detailed compliance audit of those policies and procedures required?
Response 10b: Judgment and creativity is left to the discretion of the consultant to conduct whatever procedure(s) and/or compliance audit is deemed necessary to fulfill the purpose and goal of the fiduciary performance review as set forth in the “Scope of Services.”
Q11. In Category 4, internal controls are identified for review. What internal controls have been identified as less than adequate in prior audits?
Response 11: While not a comprehensive list of internal control deficiencies, the 2013 SIG report of the RSIC gives an insight into key internal control deficiencies. The Proposer is directed to review the SIG report at: http://oig.sc.gov/Pages/default.aspx. As set forth in response to Question #1, the SIG is seeking to have a compliance audit conducted of RSIC’s due diligence process conducted for Alternative Investments. The period of review is from January 1, 2013 to the present.
Q12a. In Category 5, in evaluating the reasonableness and adequacy of legal compliance, should the consultant assess the policy and process and reach compliance conclusions based upon a sampling approach or conduct a comprehensive compliance audit of all activities in scope?
Response 12a: A review of the reasonableness and adequacy of RSIC’s legal compliance should assess policy and process through a sampling approach. This review should incorporate RSIC’s internal legal component, as well as any external legal review and/or support afforded to RSIC’s investment of Retirement System assets.
Q12b: What is the compliance standard to be met?
Response 12b: The standard to be met should be that the processes and policies utilized by RSIC are legally sufficient and conform to accepted industry standards.
Q13. In Category 6, is the intent to focus on the IT governance process (organizational structure, strategy, goal setting, ability to meet current and future needs of investment program), or do you also want to include a technical evaluation (systems design, reliability, applications management, adequacy of firewalls, access controls, etc.)?
Response 13: The intent is to determine if the IT systems provide adequate tools and processes for meeting the RSIC’s effective and efficient investment of the Retirement Systems stated mission and goals.
Q14. In category 6, are there any custom (in-house) applications that are to be included in the review? If so, are you looking at the adequacy of the application fulfilling the business need or are you looking for a code-level review to assess technical adequacy?
Response 14: All IT applications and systems are to be reviewed for adequacy of the RSIC effectively and efficiently fulfilling its fiduciary role and responsibility to the Retirement System.
Q15. We are aware of the reported conflicts among some of the RSIC commissioners, including past litigation and other issues. How does the SIG want the consultant to address these issues, if at all, with respect to its implications for governance, risk and stakeholder relations?
Response 15: This is a fiduciary performance review of the RSIC, which is comprised of RSIC commissioners and staff. As a co-fiduciary of the Retirement System, the RSIC has relationships with other co-fiduciaries and trustees, each with a specific role in the Retirement System’s overall governance. This review should address RSIC’s fiduciary performance, to include internal communications and relationships between commissioners and staff, as well as co-fiduciary relationships, which positively or negatively impact upon RSIC’s fiduciary performance in achieving RSIC’s mission, and investment strategy and goals for the Retirement System. This review should address those performance issues which are operating effectively, meeting or exceeding accepted industry standards, as well as those adversely impacting RSIC’s fiduciary performance, wherever it may be found.
Q16. What will be the protocols and procedures for obtaining access to RSIC commissioners and staff and PEBA staff and obtaining documents?
Response 16: The South Carolina Office of the Inspector General is the client in this engagement. To that end, the SIG will facilitate, with the assistance of RSIC, PEBA and other entities, the acquisition of documents and access to RSIC commissioners, staff and PEBA staff. Any and all questions, concerns or issues which may arise will be addressed between the consultant and the SIG.
Q17. Is there currently a standard operating procedures manual in place (see page 8, category 3, fifth bullet point)? Would you be able to provide a copy of it prior to the deadline for submitting proposals? Alternatively, would you be able to provide the table of contents?
Response 17: The RSIC’s standard operating procedures manual is contained within the Annual Investment Plan and Statement of Investment Objectives and Policies, a public document. Also available to the public are the governance policies and investment advisor reports. These documents can be reviewed and downloaded at: www.ic.sc.gov/Policies/AIP/default.htm.
Q18. With respect to what areas of the operations of the Commission does the State provide services? For example, information technology, human resources, short-term investment funds, cash management. To what extent are these to be included in or excluded from the fiduciary audit?
Response 18: The RSIC for the most part is a self-contained entity. Given the fact the RSIC is one of several co-fiduciaries to the Retirement System, it must interact with other co-fiduciaries which have specific roles in the administration of the overall Retirement System. For example the State Treasurer’s Office (STO), a co-fiduciary, is the state’s Custodian by statute and controls the contract with the external custodian, BNY Mellon. As well, the STO currently requires cash movements to be approved by RSIC and the STO. For those investments which utilize out-of-bank custodial arrangements the RSIC must work through the STO for the transfer of these funds. A second example relates to the “back-office” investment accounting support from PEBA, a co-fiduciary of the Retirement System. This is memorialized through an MOU to support the RSIC. Consequently, the fiduciary performance review of RSIC should incorporate interactions with co-fiduciaries to the extent these interactions positively or negatively impact RSIC’s fiduciary performance.
Q19. What South Carolina statute(s) addresses fiduciary liability, fiduciary (Board) D&O insurance, and indemnification for the commissioners?
Response 19: In the capacity as commissioners, South Carolina Code of Laws, as amended, Title 9, Chapter 16 addresses fiduciary liability and indemnification for the commissioners. Additionally, the Retirement System maintains a fiduciary liability policy for the commissioners.
Q20. Can you please further define the word "key" with respect to the roles and responsibilities of the staff of the Commission (i.e. page 7, Category 3, first bullet point)? For example, do you mean staff above a certain level in the organization?
Response 20: The following positions have been identified as key personnel within the RSIC staff structure: Chief Operating Officer, Chief Investment Officer, Deputy Chief Investment Officer, Manager Research Managing Director, Strategic Partnerships Director, Operational Due Diligence Director, Internal Asset Management Managing Director, Director of IT, Chief Legal Officer, Director of Investment Reporting and Performance, Director of Internal Audit & Compliance, Administrative Manager, Public Information Officer, two senior risk management officers.
Q21. A question was raised if the presentation conference schedule set forth in the RFP time table (week of 11/11/2013) was a “typo” in that it would be held the week following the closing of the RFP advertisement period on 11/08/2013.
Response 21: The presentation conference schedule will commence on Wednesday, 11/13/2013 and conclude on Thursday, 11/14/2013. Dependent upon the number of proposals received will determine the beginning time on Wednesday. Recognizing the quick turnaround, the scheduling of time slots for vendor presentations will be filled on Thursday initially, and then on Wednesday. Notification of date/time assignments for vendor presentation will occur Friday evening (11/08/2013) after closure of the RFP advertising period, and after a scrub of each proposal for “mandatory minimum qualifications” has been made for each proposal. Vendor presentations will not exceed 30 minutes in length. Additionally, vendors have the option of making a telephonic presentation if travel to Columbia, SC is a problem. Notification will be made both telephonically and by email to the authorizing individual named in the proposal on Friday evening, 11/08/2013, no later than 8 pm, Eastern time.