TRUSTEE ORIENTATION

1. TRUSTEE ORIENTATION Legal & Ethical Matters Presented By: Omar Davis, General Counsel

2. WHAT IT MEANS TO BE A TRUSTEE • MPERS’ Board of Trustees oversees the general administration of the System. While a Trustee always exercises discretion independently, the governance of the System is vested in the Board as a body, not in any individual Trustee. The Board has established its own governance policies and rules for administration of the System. • Legal liability for the breach of a duty or a violation of law can fall on the System, the Board of Trustees, or individual Trustees.

3. WHAT IT MEANS TO BE A TRUSTEE • A Trustee mitigates personal legal risk by devoting sufficient time to carry out his or her duties and responsibilities effectively. This includes time to obtain education regarding MPERS, Trustee duties, and all matters pertinent to the administration of MPERS. • Legal risks are defined by duties. MPERSTrustees are entrusted with caring for the property of others, and as such, operate under some of the highest legal duties.

4. What are those Duties and how are they created? • Section 104.150of Missouri statutes, expressly provides: “All property, money, funds, investments and rights …” in the system “… shall be vested in trust for the members and for the purposes” set out in the laws establishing MPERS. • Because MPERS’ funds are held in trust for the members, the statutes and common law for trusts applies to MPERS’ Trustees. • One of the bedrock principles of trust law is the concept of the fiduciary. • MPERS Trustees also exercise discretion within the framework of specific statutes, rules, and policies applicable to the System.

5. What is the fiduciary duty? • A Trustee for MPERS is considered a fiduciary. A fiduciary is defined as: A person holding the character of a trustee…in respect to the trust and confidence involved in it and the scrupulous good faith and candor which it requires. A person having a duty, created by his undertaking, to act primarily for another’s benefit in matters connected with such undertaking. • As a fiduciary, a Trustee must adhere to two distinct, but related fiduciary duties: • The Duty of Care; and • The Duty of Loyalty.

6. The Duty of Care The duty of care is generally thought of as the “Prudent Man Rule”. This standard states that a Trustee, properly exercising the duty of care will display conduct consistent with: • A prudent person; • Acting in a similar capacity; • Who has knowledge of the matters that are the subject of the trust relationship.

7. The Duty of Loyalty A Trustee also has a duty of loyalty. Loyalty requires that a Trustee: • Act solely for the best interests of the plan beneficiaries; • Refrain from self-dealing; • Avoid conflicts of interest; • Act with candor, honesty and integrity; and • Maintain independence.

8. The Duty of Loyalty Additional aspects of the duty of loyalty include: • Aduty to segregate and account for trust assets; • Aprohibition from doing business with the trust or appropriating trust assets; • Aduty to act impartially toward all beneficiaries; and • Aduty to make trust assets productive.

9. How do you exercise your fiduciary duty? MPERS’ Trustees execute their duties by: • Selecting and retaining competent management; • Establishing objectives and policies for the system; • Monitoring compliance with laws and policies; and • Overseeing the performance of management.

10. How do you exercise your fiduciary duty? • Effective policies should cover all significant activities of the Board and the System. • The policies should include monitoring and reporting mechanisms to assure the Board is informed. • Policies should also require independent third - party review in certain matters, including an obligation to report to the Board or a designated Committee of the Board.

11. How do you exercise your fiduciary duty? A Trustee is not expected to personally engage in the operational aspects of MPERS. Per state law, a Trustee may delegate investment and management functions. The Trustee shall exercise reasonable care, skill, and caution in: • Selecting an agent suitable to the exercise of the delegated function, taking into account the nature and the value of the assets subject to such delegation and the expertise of the agent; • Establishing the scope and terms of the delegation, consistent with the purposes and terms of the trust; and

12. How do you exercise your fiduciary duty? The Trustee shall exercise reasonable care, skill, and caution in: • Periodically reviewing the agent's actions in order to monitor the agent's performance and compliance with the terms of the delegation. A Trustee who complies with these requirements is not liable to the beneficiaries or to the trust for the decisions or actions of the agent to whom the function was delegated.

13. Specific Laws Governing Trustees There are multiple state statutes that directly address the conduct expected of MPERS Trustees. Chapter 104 is the section of state law that establishes MPERS. Section 104.210 states: • No trustee or employee of the system shall receive any gain or profit from any funds or transaction of the system, except benefits from interest in investments common to all members if entitled thereto. • A Trustee who accepts any gratuity or compensation for the purpose of influencing the investment of funds of the system shall forfeit office and be subject to the penalties prescribed for bribery.

14. Specific Laws Governing Trustees Chapter 105, is the general law applicable to elected and appointed state officials. • Section 105.450 commences several sections of state law prohibiting public officials from engaging in conflicts of interest and self-dealing. • Section 105.478specifies criminal penalties for violation of the conflict of interest and self dealing laws. Violations constitute a class B misdemeanor for the first offense, and a class D felony for any later offenses. • Later sections of Section 105 require certain public officials, including Trustees, to file annual financial disclosure statements with the State Ethics Commission. MPERS staff assists Trustees in meeting the annual financial disclosure filing requirements under this law.

15. Other Controlling Regulations In addition to the statutes mentioned previously, MPERS’ Board of Trustees has issued Board Rules and adopted Board Governance Policies, which prescribe and limit the managerial and discretionary powers of the Board, individual Trustees, and staff.

16. Trustee Protections In addition to the protections afforded for adhering to their fiduciary duties, Trustees are also provided certain common law and statutory defenses for engaging in acts within their roles as Trustees. Several are listed below: • Sovereign Immunity • Official (Qualified) Immunity • State Legal Expense Fund • Legal Representation

17. Trustee Protections Sovereign Immunity • The doctrine of sovereign immunity prohibits lawsuits against the state (and its constituent parts) absent its consent. • Section 537.600 sets forth Missouri’s limited waiver of sovereign immunity (related to operation of state owned motor vehicles and the dangerous condition of state owned property).

18. Trustee Protections Official (Qualified) Immunity • The doctrine of official or qualified immunity protects public officials and employees from liability for alleged acts of negligence based on discretionary acts committed during the performance of their official duties. • However, official immunity does not typically protect public officials and employees from liability for alleged acts of negligence committed during the performance of ministerial acts ancillary to their official duties.

19. Trustee Protections State Legal Expense Fund & Other Insurance • The State of Missouri self-insures all state agencies, their officials, and employees under the “State Legal Expense Fund.” • The Attorney General issued MOSERS an opinion indicating that Legal Expense Fund coverage is available to MOSERS, but is secondary to any insurance policies it holds. The rationale relied upon in this opinion should also be applicable to MPERS.* • MPERS has obtained Directors & Officers Liability Insurance, as well as insurance on MPERS staff, to provide financial protection to MPERS officials in case liability is incurred for certain covered actions. *The State Legal Expense Fund is managed and defended by the Attorney General. As such, representation in actions for which liability will be covered by the Legal Expense Fund is undertaken by the Attorney General.

20. Trustee Protections Legal Representation • MPERS has authority and has hired a General Counsel to advise the plan and its officials. * • MPERS also has authority to hire outside counsel to provide advice and representation if necessary.** *Although the General Counsel is hired by the Executive Director and advises the Board of Trustees and staff, the General Counsel’s “client” is actually MPERS, the agency. **There may be limited instances when outside counsel is retained, at MPERS’ expense, to personally represent a Trustee in an action arising out of the performance of the Trustee’s official duties.

21. Pending Concerns