INS-30-08-00004-P Standards for the Management of Various New York State Retirement Systems

7/23/08 N.Y. St. Reg. INS-30-08-00004-P

NEW YORK STATE REGISTER

VOLUME XXX, ISSUE 31

July 23, 2008

RULE MAKING ACTIVITIES

INSURANCE DEPARTMENT

PROPOSED RULE MAKING

HEARING(S) SCHEDULED

 

I.D No. INS-30-08-00004-P

Standards for the Management of Various New York State Retirement Systems

PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following proposed rule:

Proposed Action:

Amendment of Part 136 (Regulation 85) of Title 11 NYCRR.

Statutory authority:

Insurance Law, sections 201, 301, 314, 7401(a) and 7402(n)

Subject:

Standards for the management of various New York State retirement systems.

Purpose:

To establish high ethical standards, strengthen internal controls and governance, and enhance the operational transparency.

Public hearing(s) will be held at:

9:00 a.m.-12:00 p.m., Sept. 10, 2008 at Insurance Department, Neil Levin Hearing Rm., 25 Beaver St., Fifth Fl., New York, NY.

Interpreter Service:

Interpreter services will be made available to hearing impaired persons, at no charge, upon written request submitted within reasonable time prior to the scheduled public hearing. The written request must be addressed to the agency representative designated in the paragraph below.

Accessibility:

All public hearings have been scheduled at places reasonably accessible to persons with a mobility impairment.

Substance of proposed rule (Full text is posted at the following State website: www.ins.state.ny.us):

The following is a summary of the substance of the rule:

Part 136 is retitled: “Public Retirement Systems”

The present Part 136 is renumbered to be Subpart 136-1 and titled: “Standards For Certain Actuarially Funded Public Retirement Systems”. The use or the reference of “Part” has been changed to “Subpart” throughout Subpart 136-1. The New York State Employees' Retirement System and the New York State Policemen's and Firemen's Retirement System have been removed from Subpart 136-1 and included in the new Subpart 136-2.

A new Subpart 136-2, entitled “Standards for the New York State and Local Employees' Retirement System, the New York State and Local Police and Fire Retirement System and the New York State Common Retirement Fund” has been added.

Section 136-2.1 sets forth the main purposes of Subpart 136-2, including establishing standards to assure the conduct of the business of the state employees' retirement systems, the New York State Common Retirement Fund (“the Fund”, which holds the assets of the retirement system), and of the State Comptroller (as administrative head of the retirement system and as sole trustee of the Fund) are consistent with the principles.stipulated therein.

Section 136-2.2 contains the definitions for the Subpart.

Section 136-2.3 sets forth the fiduciary responsibilities for the Comptroller.

Section 136-2.4 provides guidance on governance responsibilities and ethics provisions for persons or entities having a fiduciary responsibility to the Fund.

Section 136-2.5 provides guidance on the disclosure, recordkeeping and reporting requirements.

Section 136-2.6 requires the Comptroller to establish an actuarial committee.

Section 136-2.7 indicates what is considered a breach of fiduciary responsibility, and the actions to be taken in the event of such a breach.

Text of proposed rule and any required statements and analyses may be obtained from:

Andrew Mais, Insurance Department, 25 Beaver St., New York, NY 10004, [phone], e-mail: [e-mail]

Data, views or arguments may be submitted to:

Micheal Maffei, 25 Beaver St., New York, NY 10004, [phone], e-mail: [e-mail]

Public comment will be received until:

Five days after the last scheduled public hearing.

This action was not under consideration at the time this agency's regulatory agenda was submitted.

Regulatory Impact Statement

1. Statutory authority: The Superintendent's authority for promulgation of this rule derives from sections 201, 301, 314, 7401(a), and 7402(n) of the Insurance Law.

Sections 201 and 301 of the Insurance Law authorize the Superintendent to effectuate any power accorded to him by the Insurance Law, and to prescribe regulations interpreting the Insurance Law.

Section 314 requires every public retirement and pension system to file an annual report pursuant to section 307 of the Insurance Law. It also vests the Superintendent the authority to promulgate certain standards with respect to the public retirement and pension systems of the State of New York or of a municipality thereof, and to make an examination into the affairs of every system at least once every five years in accordance with sections 310, 311 and 312. The implementation of the standards is necessarily through the promulgation of regulations.

As confirmed by the Court of Appeals in Matter of Dinallo v. DiNapoli, 9 N.Y. 3rd 94, 846 N.Y.S. 2d 593 (2007), the Superintendent operates in two distinct capacities. The first is his role as the general regulator. The second is his role as a statutory receiver of distressed entities. Article 74 sets forth the Superintendent's role and responsibilities in this latter capacity.

Section 7401(a) lists the entities, including the public retirement systems, to which Article 74 (Rehabilitation, Liquidation, Conservation and Dissolution of Insurers) applies.

Section 7402(n) provides that it is a ground for rehabilitation if an entity subject to Article 74 has failed or refused to take such steps as may be necessary to remove from office any officer or director whom the Superintendent has found, after appropriate notice and hearing, to be a dishonest or untrustworthy person.

2. Legislative objectives: Section 314 of the Insurance Law authorizes the Superintendent to promulgate and amend, after consultation with the respective administrative heads of public retirement and pension systems and after a public hearing, certain standards with respect to the public retirement and pension systems of the State of New York or a municipality thereof. This proposed amendment is in accordance and consistent with the public policy objectives the Legislature sought to advance when enacting Section 314 by providing the Superintendent the powers to promulgate standards with respect to actuarial assumptions, accounting practices, administrative efficiency, discharge of fiduciary responsibilities, investment policies and financial soundness. Sections 7401(a) and 7402(n) of the Insurance Law apply the provisions of Article 74 to the public retirement systems and provide for the commencement of a rehabilitation proceeding, respectively. This proposed amendment is consistent with and in accordance with the Legislature's public policy objectives underlying the enactment of sections 7401(a) and 7402(n) in that it provides a means whereby, in the event of an unlikely and extreme case of misfeasance, the court may order the Superintendent to take control of a public retirement system.

3. Needs and benefits: Certain new standards governing actuarial assumptions, administrative efficiency, investment policies and financial soundness will be established by this amendment. The new Subpart specifically establishes standards for the management of the New York State and Local Employees' Retirement System and the New York State and Local Police and Fire Retirement System (“the Retirement System”), and the New York State Common Retirement Fund (“the Fund”), which was established pursuant to Section 422 of the Retirement and Social Security Law and which holds the assets of the Retirement System. These standards are intended to assure that the conduct of the business of the Retirement System and the Fund, and of the State Comptroller (as administrative head of the Retirement System and as sole trustee of the Fund), are consistent with the principles set forth in the rule.

In view of recent events surrounding how investment managers, consultants or advisors, and especially placement agents have conducted business with clients, including exploiting weaknesses in internal controls that may result in conflicts of interest and mishandling of funds, the Superintendent has decided that there is an important and immediate need to strengthen the Fund's control environment to protect the integrity of the state employees' retirement systems. The rule requires the establishment and disclosure of new standards of behavior with respect to investment of the Fund's assets, conflicts of interest, and procurement. In addition, it creates new audit and actuarial committees, and strengthens the investment advisory committee. The rule sets high ethical standards, strengthens internal controls and governance, and enhances the operational transparency of the Fund. This rule will also strengthen supervision by the Insurance Department and will greatly improve the protection afforded to the Fund's members and beneficiaries.

4. Costs: The rule imposes additional requirements and standards on the State Comptroller. It is thus anticipated that additional costs will result from its implementation. According to the Comptroller's office, the costs should run about $500,000 per year. The monies will provide for new audit and actuarial committees, and for the strengthening of the investment advisory committee. These costs will not be drawn from revenue appropriations but will be borne by the Common Retirement Fund. The Superintendent and the State Comptroller firmly believe that the benefits, as described in paragraph 3 above, far outweigh any additional costs.

5. Local government mandates: The regulation imposes no new programs, services, duties or responsibilities on any county, city, town, village, school district, fire district or other special district.

6. Paperwork: It is also anticipated that paperwork will result from additional reporting requirements imposed by the rule. For example, the Comptroller will be required to establish new committees. The operation of these committees will entail the creation and maintenance of minutes and reports. In addition, the Comptroller will be required to compile and post on its website a number of compliance-related reports, statements, policies and procedures. However, the benefits, as described in the paragraph 3 above, more than adequately justify the additional paperwork required.

7. Duplication: This amendment will not duplicate any existing state or federal rule.

8. Alternatives: Alternate methods were considered to achieve the goal of improving the protections for the Fund's members and beneficiaries. The Superintendent and State Comptroller considered, among other things, mandating the creation of an independent governance committee; requiring that an independent fiduciary review be conducted on an annual basis (ultimately, it was determined that a tri-annual review is appropriate); and changing the accounting standard to be applied in investment of the funds assets (i.e., requiring the use of FASB standards instead of GASB standards). In developing the rule, the Superintendent and State Comptroller also briefed representatives of: (1) New York State and New York City Public Employee Unions; (2) New York City Retirement and Pension Funds; (3) Borough Presidents of the five counties of New York City; and (4) officials of the New York City Mayor's Office, Comptroller's Office and Finance Department. The standards set forth in the proposed rule will be subject to comment and discussion at the public hearing required by section 314 of the Insurance Law.

9. Federal standards: There are no minimum standards of the federal government for the same or similar subject areas.

10. Compliance schedule: This rulemaking will be effective upon publication in the State Register after final adoption. However, the State Comptroller's office has already made significant progress in adopting the mandates required by this regulation. Currently, the State Comptroller's public website discloses information concerning investment manager contracts, placement agent fees, and investment portfolio information. The State Comptroller's public website also provides information concerning its desire to be more transparent by outlining new procurement guidelines and procedures with respect to procurement of all investment managers, and consultants and advisors.

Investment managers, consultants or advisors contracting with the Comptroller will become subject to the relevant provisions of this rulemaking upon entering into a contract with the Comptroller. All affected parties will have prior notice and opportunity to comment on the proposed rule at a public hearing, which necessarily will be held before final adoption.

Regulatory Flexibility Analysis

1. Small businesses: The Insurance Department finds that this rule will not impose any adverse economic impact on small businesses and will not impose significant reporting, recordkeeping or other compliance requirements on small businesses.

This amendment sets standards for the management of the New York State and Local Employees' Retirement System and New York State and Local Police and Fire Retirement System (collectively, “the Retirement System”), and the New York State Common Retirement Fund (“the Fund”). These standards are intended to assure that the conduct of the business of the Retirement System and the Fund, and of the State Comptroller (as administrative head of the Retirement System and as sole trustee of the Fund), are consistent with the principles specified in the rule. Among all the affected parties, the State Comptroller, as a fiduciary whose responsibilities are clarified and broadened, is impacted most by the amendment. The State Comptroller is not a “small business” as defined in section 102(8) of the State Administrative Procedure Act,

This rule is also directed to individuals and entities having a fiduciary responsibility to the New York State and Local Employees' Retirement System and the New York State and Local Police and Fire Retirement System (collectively, “the Retirement System”), and the New York State Common Retirement Fund (“the Fund”). Investment managers, consultants or advisors that do business with the Fund may fall within the definition of “small business” set forth in section 102(8) of the State Administrative Procedure Act, because they are independently owned and operated, and employ 100 or less individuals. The amendment requires such entities to disclose to the Fund in writing any conflict of interest they may have which could reasonably be expected to impair their ability to render unbiased and objective advice. The rule also requires investment managers and consultants or advisors to file annually with the Fund a statement acknowledging that they are aware of, and that they are in compliance with, the above standard.

Additionally, whenever the Fund engages, hires, invests with, or commits to an outside investment manager who is using the services of a placement agent or intermediary to assist the investment manager in obtaining investments by the Fund, or who is otherwise doing business with the Fund, investment managers are required to disclose payments made to any such placement agent or intermediary.

While the amendment imposes new disclosure and filing requirements with respect to investment managers and consultants or advisors who may be small businesses, there is no indication that the amendment will have any significant adverse impact, economic or otherwise, on small businesses.

2. Local governments: The Insurance Department finds that this rule will not impose any adverse compliance requirements or adverse impacts on local governments. The basis for this finding is that this rule is directed at the State Comptroller; committees required by statue, regulation or executive order; employees of the Office of State Comptroller; and investment managers, consultant or advisors — none of which are local governments.

Rural Area Flexibility Analysis

The Insurance Department finds that this rule does not impose any additional burden on persons located in rural areas, and the Insurance Department finds that it will not have an adverse impact on rural areas.

Among the entities covered by this regulation, the Comptroller of the State of New York, investment managers, consultants or advisors, committees required by statue, regulation or executive order, and employees of Office of the State Comptroller — only investment managers, consultants or advisors may do business in various counties in the state, including rural areas as defined under State Administrative Procedure Act Section 102(13). While the amendment imposes new disclosure and filing requirements with respect to investment managers and consultants or advisors who may do business in rural areas, there is no indication that the amendment will have any significant adverse impact, economic or otherwise, on such parties.

The Insurance Department anticipates that costs of complying with the new disclosure and filing requirements by investment managers and consultants or advisors doing business in rural areas will be relatively insignificant. Affected parties should be able to comply with the requirements without the need to hire new personnel or engage outside consultants.

Job Impact Statement

The Insurance Department finds that this rule will have little or no impact on jobs and employment opportunities. This amendment sets standards for the management of the New York State and Local Employees' Retirement System and New York State and Local Police and Fire Retirement System (collectively, “the Retirement System”), and the New York State Common Retirement Fund (“the Fund”). These standards are intended to assure that the conduct of the business of the Retirement System and the Fund, and of the State Comptroller (as administrative head of the Retirement System and as sole trustee of the Fund), are consistent with the principles specified in the rule. Among all the affected parties, the State Comptroller, as a fiduciary whose responsibilities are clarified and broadened, is affected most by the amendment. The regulation is unlikely to impact jobs and employment opportunities. To the extent that the State Comptroller may be required to engage outside entities, such as investment managers, consultants or advisors, to assist in fulfilling its audit function, the only possible impact on jobs and employment opportunities will be positive.

Nor should the rule have a measurable impact on self-employment opportunities.