Soft Dollar and Commission Recapture Policy by cmk16156

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									            Ohio Public Employees Retirement System

Soft Dollar and Other Commission Arrangements Policy
                                      February 2007
                                                   TABLE OF CONTENTS


I.     SCOPE .................................................................................................................................1

II.    PURPOSE............................................................................................................................1

III. LEGAL AUTHORITY.......................................................................................................1

IV. BEST EXECUTION PHILOSOPHY ...............................................................................1

V.     OBJECTIVES .....................................................................................................................2
       A.   INTERNALLY MANAGED INVESTMENTS ...........................................................................2
       1.   SOFT DOLLAR ARRANGEMENTS .......................................................................................2
       2.   OTHER COMMISSION ARRANGEMENTS ............................................................................2
       B.   EXTERNALLY MANAGED INVESTMENTS ..........................................................................3
       1.   SOFT DOLLAR AND OTHER COMMISSION ARRANGEMENTS..............................................3
       2.   COMMISSION RECAPTURE ................................................................................................3
VI. ROLES AND RESPONSIBILITIES.................................................................................3
       A.   BOARD OF TRUSTEES .......................................................................................................3
       B.   INVESTMENT COMMITTEE ................................................................................................3
       C.   BROKER REVIEW COMMITTEE .........................................................................................3
       D.   INVESTMENT STAFF .........................................................................................................4
       E.   PUBLIC MARKET EXTERNAL INVESTMENT MANAGERS ...................................................4
VII. MONITORING AND REPORTING ................................................................................4


                                                        Revision History

Policy Established                                                                                 June 17, 2003
Policy Revised                                                                                     September 14, 2005
Policy Revised                                                                                     February 21, 2007
I.     SCOPE

       This policy applies to purchase and sale transactions involving internally and externally
       managed public market securities of the Ohio Public Employees Retirement System
       (“OPERS”) Defined Benefit, Defined Contribution and Health Care Funds that are paid
       for through commissions.

II.    PURPOSE

       This policy establishes a framework for use of Soft Dollar and Other Commission
       Arrangements, which are defined in Section IV below, to minimize total transaction costs
       while maximizing the value of brokerage and investment research services received. It
       also provides for proper monitoring and oversight of Soft Dollar and Other Commission
       Arrangements.

III.   LEGAL AUTHORITY

       In accordance with Ohio Revised Code Section 145.11, which establishes the fiduciary
       responsibilities of the Board, OPERS investment staff will use every effort to obtain Best
       Execution, as defined in Section IV below, with respect to all transactions.

IV.    BEST EXECUTION PHILOSOPHY

       Best Execution means the execution of a purchase or sale transaction at a price and
       commission or fee that provides the most favorable total cost or total proceeds reasonably
       obtainable under the circumstances then prevailing. OPERS’ primary goal in all
       transactions is to obtain Best Execution.

       Best Execution does not necessarily mean paying the lowest possible commission. A
       brokerage commission is the fee paid to a broker-dealer for services rendered and is
       calculated as a lump sum or as a percentage of the amount of a transaction. Brokerage
       commissions compensate broker-dealers for executing transactions. Some commissions
       also compensate broker-dealers for providing investment research services, which are
       defined as advice, analysis, reports or other expressions of relevant reasoning or
       knowledge.

       Amounts by which such brokerage commissions exceed the price of executing
       transactions are referred to as “Soft Dollars.” Soft Dollars used to purchase proprietary
       investment research services generated by a broker-dealer who executes a transaction are
       included in the cost of such transactions and are referred to as “Bundled Commission
       Arrangements”. Soft Dollars used by an executing broker to purchase investment
       research services from a third party for OPERS are referred to as “Other Commission
       Arrangements”.

       In managing its internal portfolio, OPERS may pay brokerage commissions that include
       either the price of proprietary or third party investment research services. When it does,


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     OPERS shall make a good faith determination that such price is reasonable in relation to
     the value of the brokerage and research services it receives. In doing so, OPERS will
     make a prudent and diligent effort to follow guidance provided to investment managers
     by regulators such as the Securities and Exchange Commission, which has done so
     pursuant to Section 28(e) of the Securities Exchange Act of 1934 (the “Act”).

V.   OBJECTIVES

     A. Internally Managed Investments

        When selecting broker-dealers for transactions involving its internally managed
        funds, OPERS investment staff will follow its policies and procedures to choose the
        firm most capable of providing the brokerage services necessary to obtain Best
        Execution.

        Investment staff will also comply with Ohio Revised Code Section 145.11(B), which
        requires the Board to give equal consideration to minority owned and controlled firms
        and firms owned and controlled by women that otherwise meet the policies and
        criteria established by the Board.

        Investment staff will also comply with Ohio Revised Code Section 145.114 to
        increase the use of Ohio-qualified agents for the execution of transactions when an
        Ohio-qualified agent offers quality, services, and safety comparable to other agents
        otherwise available to OPERS.

            1. Soft Dollar Arrangements

             Internal Equity Management staff will determine which broker-dealers to use in
             executing Bundled Commission transactions. In doing so, staff will consider its
             need for research and the cost and quality of services to be obtained through
             such transactions. Staff will report results of its allocation of Bundled
             Commission to the Investment Division’s Broker Review Committee on a
             regular basis.

            2. Other Commission Arrangements

             The Broker Review Committee will, at least annually, forecast the estimated
             amount of credit that will be available to OPERS through transactions involving
             Other Commission Arrangements. All requests by investment staff to spend
             these credits must be made to the Committee, which will consider the costs and
             benefits of such requests and maintain detailed records of its decisions
             concerning them.




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      B. Externally Managed Investments

             1. Soft Dollar and Other Commission Arrangements

              OPERS permits its public market external investment managers to utilize Soft
              Dollar and Other Commission Arrangements as long as they seek to obtain Best
              Execution of their transactions and to comply with Section 28(e) of the Act
              and/or other comparable laws and regulations, such as those of the Financial
              Services Authority of the United Kingdom.

             2. Commission Recapture

              If an OPERS commission recapture agent, in a transaction it reviews, determines
              commissions generated by an external equity manager exceed the cost of
              execution services rendered, and if commission dollars are available for rebate,
              it will seek to recapture the excess commissions. Any commissions recovered
              will be returned to the portfolio from which they were generated.

VI.   ROLES AND RESPONSIBILITIES

      The delineation of roles and responsibilities is important for the efficient and effective
      management of OPERS and its investment assets. The duties and responsibilities of the
      Board, Investment Committee, Investment Staff, Broker Review Committee, internal
      Investment Staff and External Public Market Investment Managers, in relation to Soft
      Dollar and Other Commission Arrangements, including Commission Recapture, are as
      stated below.

      A. Board of Trustees

         The Board of Trustees is responsible for approving the Soft Dollar and Other
         Commission Arrangements Policy. The Board shall review this policy periodically to
         determine if modifications are necessary.

      B. Investment Committee

         The Investment Committee shall monitor compliance with the Soft Dollar and Other
         Commission Arrangements Policy as set forth in this document. It shall evaluate
         proposals for modifications of the policy, as needed, and make recommendations
         concerning it for consideration by the Board. The Investment Committee shall
         review this policy and its results at least annually.

      C. Broker Review Committee

         The Broker Review Committee is responsible for recommending to the Director-
         Investments the annual commission targets to be generated through Other
         Commission Arrangements and for determining which investment research services


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          to purchase with such commissions. It will also monitor the use of Bundled
          Commissions by the Internal Equity Management staff. It will report on Bundled
          Commissions and Other Commission Arrangements to the Director-Investments and
          to the Investment Committee, as appropriate or at least annually.

          The Committee is also responsible for recommending changes to the Soft Dollar and
          Other Commission Arrangements Policy and for maintaining appropriate
          documentation of its activities.

       D. Investment Staff

          All Commission Recapture programs must be approved in writing by the Director-
          Investments. Investment staff is responsible for abiding by all approved policies.

       E. Public Market External Investment Managers

          OPERS will require its public market external investment managers to report, as
          appropriate, concerning their efforts to achieve Best Execution of securities
          transactions and their compliance with Section 28(e) of the Act and/or other
          applicable laws and regulations.

VII.   MONITORING AND REPORTING

       Investment staff will provide the following documentation to the Investment Committee:

       A. Internally Managed Investments

          The Broker Review Committee will report on OPERS’ Soft Dollar and Other
          Commission Arrangements expenses and the investment research services purchased
          with them whenever requested by the Committee but no less frequently than annually.

       B. Externally Managed Investments

          With respect to Soft Dollar and Other Commission Arrangements, investment staff
          will require each of OPERS’ public market external managers to provide:

          A copy of its monitoring procedures.
          A semi-annual report documenting the nature, benefit and source of services obtained
          through Soft Dollar and Other Commission Arrangements.
          A statement demonstrating compliance with Section 28(e) of the Act and/or other
          comparable laws and regulations.
          Where possible, a semi-annual trade evaluation report, provided by a third party
          vendor, analyzing transactions with broker-dealers.

          With respect to Commission Recapture programs, External Management staff will
          monitor the quality of trade execution results relative to the remuneration received in


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the form of rebated commissions. Staff will periodically present reports concerning
them to the Director-Investments and to the Investment Committee.




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