PENSION RESERVES INVESTMENT MANAGEMENT (PRIM) BOARD. Report on PRIM s Procurement Process for Investment Management and Other Professional Services

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1 PENSION RESERVES INVESTMENT MANAGEMENT (PRIM) BOARD Report on PRIM s Procurement Process for Investment Management and Other Professional Services Period from July 1, 2010 to June 30, 2011

2 PENSION RESERVES INVESTMENT MANAGEMENT BOARD (PRIM) Table of Contents Page I. Overview A. Description 1 B. PRIM/PRIT Fund Overview 1 C. Summary of PRIM s Procurement Practices 3 II. Independent Accountants Report on Applying Agreed-Upon Procedures 8 III. PRIM Control Objectives, Controls and KPMG Agreed-Upon Procedures Introduction and Results of Procedures Performed 9 A. Public Markets, Hedge Fund, Real Estate and Timber Investment Managers 10 B. Consultants, Custodians, Auditors and Other Professionals 16 C. Private Equity Investments 22 D. Economically Targeted Investments 24 IV. Listing of Services Procured Through RFP 30

3 SECTION I Overview A. Description This Section describes the controls of PRIM as they relate to the selection of third parties to provide investment management, consulting, custody and recordkeeping, auditing and other professional services related to the management of PRIM and the PRIT Fund. Section II contains the report of KPMG LLP (KPMG). Section III details control objectives and related controls prepared by PRIM, a description of the tests of selected controls performed by KPMG and the results of those tests. Section IV provides a listing of the services covered by this report that were procured by PRIM during the period from July 1, 2010 to June 30, B. PRIM/PRIT Fund Overview Organization The PRIT Fund is a pooled investment fund established to invest the assets of the Massachusetts State Teachers and Employees Retirement Systems and the assets of county, authority, district and municipal retirement systems that choose to invest in the PRIT Fund. The PRIT Fund was created by the Legislature in December 1983 (Chapter 661 of the Acts of 1983) with a mandate to accumulate assets through investment earnings and other revenue sources in order to reduce the Commonwealth s significant unfunded pension liability and to assist local participating retirement systems in meeting their future pension obligations. The PRIT Fund merged with the Massachusetts State Teachers and Employees Retirement Systems (MASTERS) Trust on January 1, 1997 in accordance with Chapter 315 of the Acts of As of June 30, 2011, the net assets of the PRIT Fund totaled approximately $50 billion. The Trustees of PRIM are charged with the general supervision of the PRIT Fund. Pursuant to M.G.L. Chapter 32, Section 23(2A)(e), the Trustees, as fiduciaries for each retirement system investing in the PRIT Fund, have authority to employ an Executive Director, external investment managers, custodians, consultants and other professionals they deem necessary to formulate policies and procedures and to take other actions as deemed necessary and appropriate to manage the assets of the PRIT Fund. The Trustees at June 30, 2011 are as follows: Steven Grossman, Chair, Ex Officio Member, State Treasurer and Receiver General; C. LaRoy Brantley, Appointee of the Governor; Greg Mennis, Ex-Officio Member, Designee of the Governor; Theresa McGoldrick, Esq., State Board of Retirement Member; Robert Brousseau, Elected Member, State Teachers Retirement System Representative; Alexander E. Aikens, III, Appointee of the State Treasurer private citizen, investment/business field member; Jay Dow, State Teachers Retirement Board Member; Dana Pullman, Appointee of the Governor public safety representative; and Paul Shanley, Elected Member, State Employees Retirement System Representative. As trustees of the PRIT Fund, the Trustees are fiduciaries. Accordingly, under M.G.L. Chapter 32, Section 23, the Trustees are required to: 1. Act solely in the interest of the participating retirement systems participants and beneficiaries for the exclusive purpose of providing benefits and defraying the reasonable costs of managing the systems pension assets. 2. Act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. 1 (Continued)

4 SECTION I Overview 3. Diversify the investments of the PRIT Fund in order to minimize the risks of large losses unless under the circumstances it is clearly prudent not to do so. 4. Act in accordance with the PRIT Fund s authorizing statute and governing documents. Pursuant to M.G.L. Chapter 32, Section 1, fiduciary standards of conduct also apply to PRIM s staff, investment managers, custodians, investment consultants and others who exercise discretionary authority or discretionary control over the management or disposition of the PRIT Fund s assets. The Trustees are responsible for establishing the policies and guidelines by which the PRIT Fund is managed and PRIM is operated. To assist them in carrying out their duties, the Trustees have established standing committees as described below. Pursuant to the By Laws of PRIM, Article II, Section 8, the role of each committee is to make recommendations to the Trustees within its stated area of responsibility. Members of the committees shall be appointed by the Chair after consultation with other Trustees and shall be ratified by a vote of the Trustees. Such committees may include, at the option of the Trustees, members who are not Trustees. 1. Administration and Audit Committee The Administration and Audit Committee discusses all issues related to the administration and operation of PRIM. The Committee s responsibilities include, but are not limited to: recommending amendments to the Operating Trust Agreement and the By Laws of PRIM; authorizing and eliminating staff positions; establishing a staff salary structure; conducting Executive Director evaluations; and overseeing the custodian of the PRIT Fund s assets, the PRIM operating budget and financial statements, staff and trustee travel, and office management. In addition, the Committee oversees the annual audits of PRIM and the PRIT Fund, including evaluating auditors results and findings. The Committee also oversees the selection and hiring of PRIM s custodian and independent accountants. 2. Investment Committee The Investment Committee discusses all investment related policy, performance and management matters. The Investment Committee reviews and recommends to the Trustees the broad asset allocation among various asset classes. For all asset classes other than real estate and timber, the Committee also reviews and recommends investment structure, recommends hiring and terminating investment managers and consultants, and monitors investment performance. 3. Real Estate Committee The Real Estate Committee discusses all policy, performance and management matters related to investments in real estate and timber. The Committee reviews and recommends to the Trustees the structure of the real estate and timber asset classes, hiring and terminating real estate and timber investment managers and consultants, and acquiring or disposing of properties where this authority is not delegated to another fiduciary. The Committee also monitors real estate and timber investment results and real estate and timber manager performance and organizational issues. The Executive Director, with the assistance of PRIM staff, has the responsibility and authority to assist the Trustees and their committees in establishing investment and administrative policy; to implement the policies and programs established by the Trustees; and to report to the Trustees on the status of the PRIT Fund and the operations of PRIM. The Trustees employ professional investment managers and give them discretion, consistent with specified objectives and guidelines, to manage the PRIT Fund s assets. The Trustees and PRIM staff do not directly manage any PRIT Fund investments. Each investment manager operates under a formal contract that 2 (Continued)

5 SECTION I Overview delineates responsibilities and performance expectations, including formal investment guidelines and administrative requirements. The Trustees review the investment performance of all managers against their stated objectives quarterly, at a minimum. The Trustees may utilize the services of one or more investment management consultants to assist them and PRIM staff in performance review, asset allocation studies, investment structure analyses, manager screening and selection, investment research and other matters of investment policy, procedures and implementation. The analysis and recommendations of the third-party consultants may be considered by the Trustees in conjunction with other available information for the purpose of making informed and prudent decisions. The Trustees may retain one or more custodian banks or trust institutions to hold the assets of the PRIT Fund. The custodian accounts for and assists in the settlement of all transactions executed by PRIM s investment managers and makes available to the Trustees and PRIM staff information with respect to investment holdings, transactions and performance of the PRIT Fund. The Trustees may utilize the services of independent auditors, appraisers and other third parties, as needed. PRIM s mission is to maximize the return on investment within acceptable levels of risk by broadly diversifying the PRIT Fund s investment portfolio, capitalizing on economies of scale to achieve cost effective operations and providing access to high quality, innovative investment management firms, all under the management of a professional staff and the Trustees. C. Summary of PRIM s Procurement Practices PRIM s procurement procedures apply to the selection of all investment managers, consultants, custodians, auditors and other significant providers of services to PRIM. Fees paid to such providers represent approximately 90% of PRIM s fiscal year 2011 operating budget. General Procurement Policies and Practices PRIM s procurement practices are detailed in its Investment Policy Statement that was adopted by the Trustees on September 22, PRIM s Investment Policy Statement includes the following: 1. PRIM s investment services selection process is open, competitive, objective and designed to ensure that the Trustees have access to a broad array of the highest quality service providers who have the experience and capabilities to provide investment services to PRIM. 2. To procure investment and advisory services, PRIM staff, in conjunction with a third-party consultant, when appropriate, drafts and issues a Request for Proposals (RFP). The RFP provides background information on PRIM, outlines and defines the proposal specifications, the selection process, and requests detailed information from respondents on topics relevant to the specific services sought. The RFP is advertised in industry and/or local publications. 3. A Search Committee (typically comprised of PRIM staff, third-party consultants, when appropriate, and representatives of the Trustees and their pertinent Committee) reviews the proposals received and makes objective judgments based solely on the selection criteria outlined in the RFP. The Search Committee may interview finalists, undertake site visits and conduct such other due diligence as is prudent under the circumstances. The Search Committee s recommendation is presented to the pertinent Committee of the Trustees for review. If approved, the Committee brings that 3 (Continued)

6 SECTION I Overview recommendation to the Trustees, who vote to accept or reject the recommendation. If accepted, the Trustees delegate to the Executive Director the authority to carry out the recommendation. PRIM staff then takes the steps necessary to hire the service provider, including negotiation of contract terms. 4. The Trustees typically issue RFPs for consulting and auditing services every three years and custody services every five years. The Trustees issue RFPs for investment management services as needed (e.g., following termination of an existing manager). 5. The Trustees may consider hiring emerging managers, i.e., investment managers with shorter performance track records or fewer assets under management than PRIM s typical investment criteria. Recognizing that there are additional risks to hiring such managers, in all cases, PRIM must identify clear offsetting investment benefits to the PRIT Fund. The investment services offered must be compelling in focus and strategy, economically rewarding and not easily obtained from other managers with longer track records or more substantial organizations. (For example, because established, successful venture capital firms typically may not need to accept money from new investors, PRIM may consider investing with first time funds whose general partners may have shorter track records.) During the search process, all participants are provided with identical information and judged by the same criteria. The Trustees principal tool to ensure the fairness of the process is an open RFP process. The Trustees do not employ by invitation only RFPs. The RFP guides participants through the process of offering to manage assets for, or provide other services to, PRIM. It lays out the rules of the RFP process, establishes the selection criteria and provides applicable legal documents which may influence how participants would manage a portfolio for, or provide other services to, PRIM. As the process proceeds, PRIM staff creates what is referred to as a Process Book documenting how the RFP process has unfolded. Once the search is concluded, the Process Book and all relevant information to the selection process are available to the public. The most fundamental procurement risk PRIM faces is that of selecting an investment manager or other professional service provider who does not perform up to expectations. When this occurs, PRIM incurs opportunity costs and potential disruption of its investment program. While it is never possible to predict any future performance, the RFP process is intended to give the Trustees the opportunity to engage organizations whose investment skill and/or other capabilities (e.g., client service) will persist. The RFP is a detailed document and seeks to approach each of the principal issues in the selection process from a variety of perspectives. The Search Committee reads each proposal and prepares a Search Committee Memorandum highlighting the most important issues raised in the proposals. The Search Committee Memorandum puts all participants on an equal footing and allows staff to compare firms and assess whether one has a competitive advantage that might allow it to outperform its peers. Firms assessed through the RFP process generally are judged on the following criteria: 1) the firm s stability and general experience; 2) the experience of firm personnel; 3) client relations and referrals; 4) philosophy/process; 5) performance; and 6) fees. If the Search Committee is seeking to engage an investment manager, it makes a quantitative and qualitative assessment of how the manager will fit into the existing portfolio in the particular asset class or subasset class. Such an assessment is based on many of the same factors used in asset allocation, namely, 4 (Continued)

7 SECTION I Overview risk, return and correlation among managers, as well as a thorough understanding of the types of risk factors the managers use to earn excess return. It is intended to avoid the risk that by hiring a particular manager, PRIM may overweight a particular investment style or factor and thereby create an unintended bias. If the Search Committee is seeking to engage a consultant, custodian, auditor or other professional service provider, it makes an assessment of how the firm will meet the needs of PRIM and the PRIT Fund. It will assess which firm can best provide the required services outlined in the RFP, with consideration given to the cost of providing those services. The Trustees vote to approve the engagement of investment managers and other professional service providers is made during public board meetings and is subject to the satisfactory outcome of contract and fee negotiations. Private Equity Procurement Policies and Practices PRIM has modified the process described above for Private Equity Investments (venture capital and buy out limited partnership funds) because these opportunities cannot generally be secured through competitive bidding. The Trustees have developed a process to source, evaluate and select investment opportunities as they arise. PRIM s Investment Policy Statement relating to Private Equity Investments includes the following: The Trustees will select Private Equity Investments based on the due diligence and the resulting recommendation of the PRIM staff and third-party consultant. The following criteria will be considered when selecting such investments for recommendation: a. The partnership s strategy must fit PRIM s goals and risk and return objectives. b. The partnership s strategy must make sense in the current market environment, i.e., sufficient investment opportunities must be available for the general partner to fulfill the partnership s objectives. c. Individual general partners should have experience working together as a team. d. Past investment results of the general partner must be superior, and the general partner s prior investment experience should be representative of the strategy proposed for the current investment opportunity. e. The general partner should have experience with the complete investment process (from initial investment through realization) in a number of transactions in varying economic cycles. f. In order to maintain its venture capital allocation while maintaining rigorous investment criteria, PRIM will be prepared to: i. Accept smaller commitments: Because venture capital funds are typically much smaller than private equity funds, they may require smaller commitments to meet their allocation targets. To help establish long term relationships with quality venture capital firms, PRIM will have no minimum commitment for venture capital funds. 5 (Continued)

8 SECTION I Overview ii. iii. Streamline its investment process: Venture capital partnerships are able to raise capital quickly, and thus the time from fund raising to closing can be significantly shorter than that for private equity partnerships. In order to participate in such partnerships, the Investment Committee and the Trustees must be willing, on occasion, to review and approve investment opportunities between regularly scheduled Trustee meetings. Consider nontraditional track records: To participate in quality first time funds, PRIM must be prepared to evaluate general partners investment track records outside limited partnership vehicles. The Trustees select Private Equity Investments in accordance with the following process: a. PRIM staff and the third-party consultant review each Private Equity Investment opportunity so that the selection criteria listed above are applied consistently to each opportunity. They must reach a consensus on each Private Equity Investment before it can receive further consideration. b. Extensive due diligence will be conducted on opportunities that appear to meet the selection criteria and that the third-party consultant and PRIM staff agree may be appropriate for investment. c. If favorable, the third-party consultant s analysis and due diligence will be set forth in a written recommendation to invest. This recommendation, together with the recommendation of the PRIM staff, which must be consistent with that of the third-party consultant, will be presented to the Trustees Investment Committee. If the Investment Committee does not recommend the investment opportunity, it will not proceed. d. If the Investment Committee concurs, a recommendation is made to the Trustees, who make the ultimate decision whether to invest during public board meetings. However, it is often difficult to obtain due diligence materials in a timely manner due to the timing of Investment Committee meetings and public meetings. Therefore, PRIM staff, with a third-party consultant s consensus, can approve investments in existing relationships. PRIM staff only utilizes this process when an investment s closing is in conflict with PRIM s Investment Committee and PRIM Board schedules. PRIM staff makes the necessary investment information available to the Investment Committee and Trustees for their comments prior to any commitment. Following any discussions, PRIM s Executive Director is authorized to formally approve the investment. 6 (Continued)

9 SECTION I Overview Economically Targeted Investments Procurement Policies and Practices The ETI procurement process adopted by the PRIM Board effective January 1, 2006 calls for an RFP to be issued on an annual basis seeking opportunities for investments under the PRIM Board s ETI program. The procurement practices for the ETI program are similar to PRIM s General Procurement Policies and Practices, with two exceptions. First, PRIM does not utilize an outside consultant in assessing and recommending ETI opportunities to the Investment/Real Estate Committee. Second, ETI respondents are not only evaluated against general selection criteria, but also against specific selection criteria derived from PRIM s ETI program. These selection criteria include: 1. Investment must target risk-adjusted, market-rate returns and provide net returns equivalent to or higher than other available investments, at commensurate levels of risk. Economic or social benefits will not justify a lower return on any PRIM investment. 2. Investments must not exceed a reasonable weighting in the portfolio, including tracking the degree of exposure to the Massachusetts economy and ensuring appropriate geographic diversification. Investments should maintain the overall portfolio s compliance with its asset allocation strategy. 3. Investments must be placed with an experienced, capable, and qualified discretionary investment manager. 4. Investments must target a capital gap where there are likely to be underserved markets. 5. Investment managers must be capable of tracking investment performance and the collateral benefits of their investments. 6. Investment managers must demonstrate that their firm will invest over 50% of their portfolio in the Commonwealth of Massachusetts. 7

10 KPMG LLP Two Financial Center 60 South Street Boston, MA SECTION II Independent Accountants Report on Applying Agreed-Upon Procedures The Pension Reserves Investment Management Board: For each of the services procured through RFP (see Section IV), we have performed the procedures enumerated in Section III, which were agreed to by the audit and administration committee and management of the Pension Reserves Investment Management (PRIM) Board, solely to assist you in evaluating the procurement process for the selection of third parties to provide investment management, consulting, custody and recordkeeping, auditing and other professional services (Procurement Process) related to the management of PRIM and the Pension Reserves Investment Trust Fund (PRIT Fund) for the year ended June 30, This agreed-upon procedures engagement was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of the PRIM Board. Consequently, we make no representation regarding the sufficiency of the procedures described in Section III either for the purpose for which this report has been requested or for any other purpose. The results of applying the procedures enumerated in Section III indicated that no exceptions were noted. We were not engaged to, and did not, conduct an examination, the objective of which would be the expression of an opinion on the Procurement Process related to the management of PRIM and the PRIT Fund for the year ended June 30, Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. This report is intended solely for the information and use of the audit and administration committee and management of the PRIM Board, and is not intended to be and should not be used by anyone other than these specified parties. July 12, KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity.

11 SECTION III PRIM Control Objectives, Controls and KPMG Agreed-Upon Procedures Introduction KPMG s agreed-upon procedures over the controls of PRIM was restricted to the control objectives and related procedures specified by PRIM management. It is each interested party s responsibility to evaluate this information in relation to the controls in place at user organizations. KPMG s agreed-upon procedures covered all RFPs listed in Section IV for which services were procured during the period from July 1, 2010 to June 30, Those agreed-upon procedures consisted of inquiries of management and inspection of documents and included sampling of information where appropriate. The results of those agreed-upon procedures are described for each PRIM control listed by management. The controls listed are management s responsibility. Results of Procedures Performed No exceptions were noted. 9

12 A. Public Markets, Hedge Fund, Real Estate and Timber Investment Managers 1. Controls provide reasonable assurance that the Trustees approve the issuance of Requests for Proposals. PRIM staff requests the Investment/Real Estate Committee to make a recommendation to the Trustees to issue a Request for Proposals (RFP). If granted, the Committee makes a formal recommendation to the Trustees, which is included in the Board Meeting Agenda package. Under special circumstances, the Board has the authority to issue an RFP without prior recommendation from the committee. The Trustees decide by a majority vote during a public meeting whether to accept or reject the recommendation of the Investment/Real Estate Committee to issue an RFP. period, inspected the Board Meeting Agenda package and noted documentation of the recommendation by PRIM staff and the Investment/Real Estate Committee to request the Trustees to issue the RFP. period, inspected original Trustees meeting minutes and noted Trustees vote to issue the RFP. 2. Controls provide reasonable assurance that pertinent information regarding the RFP process is provided to potential respondents. Each RFP authorized and issued by the Trustees states the purpose of the RFP. Each RFP authorized and issued by the Trustees defines the scope of services to be provided. Each RFP authorized and issued by the Trustees includes a copy of PRIM s standard investment management agreement. period, inspected copies of the RFPs and noted that the purpose is stated. Agreed the purpose of the RFP to the purpose listed in the Trustees vote authorizing the RFP. period, inspected copies of the RFPs and noted Section containing scope of services. period, inspected copies of the RFPs and noted inclusion of a standard investment management agreement. Each RFP authorized and issued by the Trustees describes the selection process. period, inspected copies of the RFPs and noted that the selection process was described. 10 (Continued)

13 Each RFP authorized and issued by the Trustees provides a tentative timetable for the selection process. period, inspected copies of the RFPs and noted inclusion of a tentative timetable. Each RFP authorized and issued by the Trustees defines minimum qualifications (if appropriate) that respondents must meet in order to be granted further consideration. Each RFP authorized and issued by the Trustees contains selection criteria that will be used to evaluate respondents proposals. Such criteria generally include: a) Stability and experience of firm and personnel b) Client relations and references c) Performance d) Philosophy/process e) Fees. period, inspected copies of the RFPs and noted that the minimum qualifications were defined. period, inspected copies of the RFPs and noted requests for specific selection criteria, including stability and experience of firm and personnel, client relations and references, performance philosophy/process and fees. 11 (Continued)

14 3. Controls provide reasonable assurance that potential respondents are informed about the legal structure of PRIM as well as the overall investment mix of the PRIT Fund. Each RFP authorized and issued by the Trustees includes summary information on PRIM s legal structure, the PRIT Fund s investment allocation, and copies of PRIM and the PRIT Fund s enabling legislation or a link referring potential respondents to PRIM s website which contains such information. period, inspected copies of the RFPs and noted inclusion of summary of PRIM s legal structure, the PRIT Fund s investment allocation, and copies of PRIM and the PRIT Fund s enabling legislation. 4. Controls provide reasonable assurance that communication with potential respondents during the search process is organized and controlled. Each RFP authorized and issued by the Trustees includes the name of the Procurement Officer and clearly states that all communications regarding the RFP and selection process should be directed to the Procurement Officer. period, inspected copies of the RFPs and noted inclusion of the name of Procurement Officer and the Section directing all questions to the Procurement Officer. Each RFP authorized and issued by the Trustees provides an opportunity and means for potential respondents to submit questions and obtain responses from the Procurement Officer prior to the Proposal Deadline. period, noted an explanation of the question and answer process and deadline for submission of questions. Inquiries from potential respondents are answered when received in writing on or before the stated Question Deadline Date. Questions received subsequent to the deadline are not answered. period, inspected PRIM s Responses to Questions, which comprised a listing of questions and responses. Selected a sample of questions from the list and agreed them to the originating firm s transmittal. Noted that the date and time stamp (or in its absence, the date of the transmittal) was dated before or on the Question Deadline Date. 12 (Continued)

15 period, reviewed all respondent transmittals received, noting no transmittals in which the date and time stamp (or in its absence, the date of transmittal) was dated after the Question Deadline Date. period, selected a sample of questions from the population of respondent transmittals in which the date and time stamp (or in its absence, the date of the transmittal) was dated before or on the Question Deadline Date. Agreed those questions to PRIM s Responses to Questions. period, selected a sample of questions from the population of respondent transmittals in which the date and time stamp (or in its absence, the date of the transmittal) was dated before or on the Question Deadline Date. Agreed the contacts designated in the firm letters to the fax coversheet that accompanied PRIM s Responses to Questions, that was faxed. 5. Controls provide reasonable assurance that information regarding the issuance of an RFP is widely disseminated. Each RFP issuance is advertised in industry publications, local publications or both. Each RFP is available on PRIM s website ( until the Proposal Deadline. period, inspected copies of and/or original advertisements. period, noted documentation of respondents being able to download the RFP from the PRIM website. Logged onto the PRIM website and noted the Section where RFPs are posted. 13 (Continued)

16 6. Controls provide reasonable assurance that proposals received after the stated deadline are not evaluated. Each RFP authorized and issued by the Trustees contains a Proposal Deadline. All responses to RFPs are denoted with date and time receipt. The Search Committee does not consider proposals received after the Proposal Deadline. 7. Controls provide reasonable assurance that responses to an RFP are reviewed and evaluated objectively. For each RFP, a Search Committee is established, comprised of PRIM staff, Investment/Real Estate Committee members and/or Trustees. The Search Committee initially reviews responses to ensure that respondents meet the minimum qualifications as stipulated in the RFP and have completed the Disclosure Statement that requires respondents to disclose existing relationships with PRIM, the Commonwealth of Massachusetts and its Office of the Treasurer. The Search Committee may invite selected respondents (finalists) to a face to face interview. The Search Committee evaluates the respondents and makes objective judgments and recommendations based on the selection criteria outlined in the RFP. period, inspected the RFPs and noted that all proposals considered were received prior to or on the Proposal Deadline. period, inspected documentation noting the Search Committee was established comprised of PRIM staff, Investment/Real Estate Committee Members, Trustees and a third party consultant. period, inspected documentation to verify all respondents completed a Disclosure Statement and met the minimum qualifications as stipulated in the RFP. For all RFPs, if applicable, for which services were procured during the period, inspected the letters sent to each finalist from the Procurement Officer, noting the time, place and duration of a face to face interview. period, inspected the Search Committee report and noted that the objective selection criteria outlined in the RFP was used to determine their selections. 14 (Continued)

17 8. Controls provide reasonable assurance that a third party consultant provides insight into the selection process. For each RFP, a third party consultant assists the Search Committee in the evaluation of responses and provides the Investment/Real Estate Committee and Trustees with an independent recommendation. period, inspected copies of Search Committee reports addressed to the Investment/Real Estate Committee and noted inclusion of separate reports of the third party consultant. 9. Controls provide reasonable assurance that the Investment/Real Estate Committee is educated about the search and selection process in order to make an informed recommendation to the Trustees. The selection process is summarized by the Search Committee in a written report that is included in the Investment/Real Estate Committee Meeting Agenda package and discussed during the Committee meeting. The Investment/Real Estate Committee decides by a majority vote whether to accept, reject or modify the recommendation of the Search Committee. The Committee then makes a formal recommendation to the Trustees, which is included in the Board Meeting Agenda package. period, inspected copies of Investment/Real Estate Committee materials, noted reports from Search Committee and presentations of search finalists. period, inspected the Board Meeting Agenda package, noting the formal recommendation made by the Investment/Real Estate Committee to the Trustees. 10. Controls provide reasonable assurance that the Trustees are informed about the search and selection process prior to accepting, rejecting or modifying the recommendation of the Investment/Real Estate Committee. The selection process is summarized by the Search Committee in a written report that is included in the Board Meeting Agenda package and discussed during the Board meeting. period, inspected Trustees meeting agendas and minutes and noted presentation by the Investment/Real Estate Committee to the Trustees, including results of the search, names of the finalists and the Investment/Real Estate Committee s recommendation. 15 (Continued)

18 The Trustees decide by a majority vote whether to accept, reject or modify the recommendation of the Investment/Real Estate Committee during a public meeting. period, inspected the Trustees meeting minutes and noted that the decision whether to accept, reject or modify the recommendation of the applicable Committee was made by a majority vote. B. Consultants, Custodians, Auditors and Other Professionals 1. Controls provide reasonable assurance that the Trustees approve the issuance of Requests for Proposals. PRIM staff requests the Investment/Real Estate/Administrative and Audit Committee to make a recommendation to the Trustees to issue a Request for Proposals (RFP). If granted, the Committee makes a formal recommendation to the Trustees, which is included in the Board Meeting Agenda package. Under special circumstances, the Board has the authority to issue an RFP without prior recommendation from the committee. period, inspected the Investment/Real Estate/Administrative and Audit Committee memorandum to the PRIM Board recommending that an RFP be issued. The Trustees decide by a majority vote during a public meeting whether to accept or reject the recommendation of the Investment/Real Estate/Administrative and Audit Committee to issue an RFP. period, inspected the original Trustees meeting minutes and noted the Trustees vote to issue an RFP. 2. Controls provide reasonable assurance that pertinent information regarding the RFP process is provided to potential respondents. Each RFP authorized and issued by the Trustees states the purpose of the RFP. period, inspected copies of the RFPs and noted that the purpose is stated. Agreed the purpose of the RFP to the purpose listed in Trustees vote authorizing the RFP. Each RFP authorized and issued by the Trustees defines the scope of services to be provided. period, inspected copies of the RFPs and noted the Section containing scope of services. 16 (Continued)

19 Each RFP authorized and issued by the Trustees describes the selection process. Each RFP authorized and issued by the Trustees provides a tentative timetable for the selection process. Each RFP authorized and issued by the Trustees defines minimum qualifications (if appropriate) that respondents must meet in order to be granted further consideration. Each RFP authorized and issued by the Trustees contains selection criteria that will be used to evaluate respondents proposals. period, inspected copies of the RFPs and noted that the selection process was defined. period, inspected copies of the RFPs and noted inclusion of a tentative timetable. period, inspected copies of the RFPs and noted that the minimum criteria were defined. period, inspected copies of the RFPs and noted requests for specific selection criteria. 3. Controls provide reasonable assurance that potential respondents are informed about the legal structure of PRIM as well as the overall investment mix of PRIT (if appropriate). Each RFP authorized and issued by the Trustees includes summary information on PRIM s legal structure and the PRIT Fund s investment allocation (if appropriate). In addition, each RFP includes copies of PRIM and the PRIT Fund s enabling legislation or a link referring potential respondents to PRIM s website which contains such information. period, inspected copies of the RFPs and noted inclusion of a summary of PRIM s legal structure, the PRIT Fund s investment allocation, and copies of PRIM and the PRIT Fund s enabling legislation. 4. Controls provide reasonable assurance that communication with potential respondents during the search process is organized and controlled. Each RFP authorized and issued by the Trustees includes the name of the Procurement Officer and clearly states that all communications regarding the RFP and selection process should be directed to the Procurement Officer. period, inspected copies of the RFPs and noted inclusion of the name of the Procurement Officer and a Section directing all questions to the Procurement Officer. 17 (Continued)

20 Each RFP authorized and issued by the Trustees provides an opportunity and means for potential respondents to submit questions and obtain responses from the Procurement Officer prior to the Proposal Deadline. Inquiries from potential respondents are answered when received in writing on or before the stated Question Deadline Date. Questions received subsequent to the deadline are not answered. period, noted an explanation of the question and answer process and deadline for submission of questions. period, inspected PRIM s Responses to Questions, which comprised a listing of questions and responses. Selected a sample of questions from the list and agreed them to the originating firm s transmittal. Noted that the date and time stamp (or in its absence, the date of the transmittal) was dated before or on the Question Deadline Date. period, selected a sample of questions from the population of respondent transmittals in which the date and time stamp (or in its absence, the date of the transmittal) was dated before or on the Question Deadline Date. Agreed those questions to PRIM s Responses to Questions. period, reviewed all respondent transmittals received, noting no transmittals in which the date and time stamp (or in its absence, the date of the transmittal) was dated after the Question Deadline Date. period, selected a sample of questions from the population of respondent transmittals in which the date and time stamp (or in its absence, the date of the transmittal) was dated before or on the Question Deadline Date. Agreed the contacts designated in the firm letters to the fax coversheet that accompanied PRIM s Responses to Questions, that was faxed. 18 (Continued)

21 5. Controls provide reasonable assurance that information regarding the issuance of an RFP is widely disseminated. Each RFP issuance is advertised in industry publications, local publications or both. Each RFP is available on PRIM s website ( until the Proposal Deadline. 6. Controls provide reasonable assurance that proposals received after the stated deadline are not evaluated. period, inspected copies of and/or original advertisements. period, noted documentation of respondents being able to download the RFP from the PRIM website. Logged onto the PRIM website and noted the Section where RFPs are posted. Each RFP authorized and issued by the Trustees contains a Proposal Deadline. All responses to an RFP are entered into a log denoting date and time of receipt. The Search Committee does not consider any proposal received after the Proposal Deadline. period, inspected the corresponding log sheet and noted that all proposals considered were received prior to or on the Proposal Deadline. 7. Controls provide reasonable assurance that responses to an RFP are reviewed and evaluated objectively. For each RFP, a Search Committee is established, comprised of PRIM staff, Investment/Real Estate/Administrative and Audit Committee members and/or Trustees. When appropriate, a third party consultant is also a member of the Search Committee. period, inspected documentation noting that the Search Committee was established comprised of PRIM staff, Investment/Real Estate/Administrative and Audit Committee members, Trustees and, when appropriate, a third party consultant. 19 (Continued)

22 The Search Committee initially reviews responses to ensure that all respondents meet the minimum qualifications as stipulated in the RFP and have completed the Disclosure Statement that requires respondents to disclose relationships with PRIM, the Commonwealth of Massachusetts and its Office of the Treasurer. The Search Committee may invite selected respondents (finalists) to a face to face interview. The Search Committee evaluates the respondents and makes objective judgments and recommendations based on the selection criteria outlined in the RFP. period, inspected documentation to verify that all respondents completed a Disclosure Statement and meet the minimum qualifications as stipulated in the RFP. For all RFPs, if applicable, for which services were procured during the period, inspected the letters sent to each finalist from the Procurement Officer, noting the time, place and duration of a face to face interview. period, inspected the Search Committee report and noted that the objective selection criteria outlined in the RFP were used to determine their selections. 8. Controls provide reasonable assurance that the Investment/Real Estate/Administrative and Audit Committee is educated about the search and selection process in order to make an informed recommendation to the Trustees. The selection process is summarized by the Search Committee in a written report that is included in the Investment/Real Estate/Administrative and Audit Committee Meeting Agenda package and discussed during the Committee meeting. The Investment/Real Estate/Administrative and Audit Committee decides by a majority vote whether to accept, reject or modify the recommendation of the Search Committee. The Committee then makes a formal recommendation to the Trustees, which is included in the Board Meeting Agenda package. period, inspected copies of applicable Committee materials. Noted reports from Search Committee and presentations of search finalists. period, inspected the Board Meeting Agenda package, noting the formal recommendation made by the Investment/Real Estate/Administrative and Audit Committee to the Trustees. 20 (Continued)

23 9. Controls provide reasonable assurance that the Trustees are informed about the search and selection process prior to accepting, rejecting or modifying the recommendation of the Investment/Real Estate/Administrative and Audit Committee. The selection process is summarized by the Search Committee in a written report that is included in the Board Meeting Agenda package and discussed during the Board meeting. The Trustees decide by a majority vote whether to accept, reject or modify the recommendation of the Investment/Real Estate/Administrative and Audit Committee during a public meeting. period, inspected Trustees meeting agendas and minutes and noted presentations by the applicable Committee to the Trustees, including results of the search, names of the finalists and the applicable Committee s recommendation. Noted the vote by Trustees. period, inspected the Trustees meeting minutes and noted that the decision whether to accept, reject or modify the recommendation of the applicable Committee was made by a majority vote. 21 (Continued)

24 C. Private Equity Investments (Venture Capital or Buy Out Limited Partnership Funds) 1. Controls provide reasonable assurance that a third party consultant provides insight into Private Equity Investment opportunities. The third-party consultant provides a detailed Investment Analysis Report for each proposed Private Equity Investment opportunity that concludes with a recommendation which addresses the following: The background and history of the partnership. The history of and an assessment of the quality of the partnership s management team. The partnership s investment strategy. The management team s prior investment track record. Any areas of concern as identified by PRIM s third-party consultant. Other institutions committed to the partnership. The biographies of general partners and other key management. Summary terms of the Partnership, i.e., size, general partners commitment, limited partner obligations, expected closing date and key terms (including fees and earnings allocations). PRIM staff and the third party consultant must agree to recommend investing in an opportunity prior to presenting to the Investment Committee. For all Private Equity Investments approved by the Trustees during the period, inspected copies of the third-party consultant s report and noted the inclusion of information specified. For all Private Equity Investments approved by the Trustees during the period, reviewed Investment Committee Meeting Agendas and third party consultation reports to verify that both PRIM staff and the third party consultant recommend the Private Equity Investments. 22 (Continued)

25 2. Controls provide reasonable assurance that potential conflicts of interest are identified. For each Private Equity Investment, the general partner/manager must complete a standard Disclosure Statement. The Disclosure Statement requires the respondent to disclose relationships with PRIM, the Commonwealth of Massachusetts and its Office of the Treasurer. For all Private Equity Investments approved by the Trustees during the period, inspected copies of the Disclosure Statements and noted that they were complete, signed and dated. 3. Controls provide reasonable assurance that the Investment Committee is educated about Private Equity Investment opportunities in order to make an informed recommendation to the Trustees. Each Private Equity Investment opportunity is summarized by PRIM staff and is included in the Investment Committee Meeting Agenda package. The third-party consultant s Investment Analysis Report for each Private Equity Investment opportunity is provided as an appendix to the Investment Committee Meeting Agenda package. The Investment Committee decides by a majority vote whether to accept or reject the recommendation of PRIM staff and the third-party consultant. If accepted, the Committee then makes a formal recommendation to the Trustees, which is included in the Board Meeting Agenda package. For all Private Equity Investments approved by the Trustees during the period, inspected copies of Investment Committee materials and reviewed PRIM staff and the third-party consultant recommendations. For all Private Equity Investments approved by the Trustees during the period, inspected the Investment Committee Meeting Agenda package to verify that the third-party consultant s Investment Analysis Report for each Private Equity Investment opportunity is provided as an appendix. For all Private Equity Investments approved by the Trustees during the period, inspected the Board Meeting Agenda package to verify the Committee s formal recommendation to the Trustees. 23 (Continued)