Compliance Manual and Summary Operating Procedures

West Midlands Pension Fund

Compliance Manualand Summary OperatingProcedures

October 2015

2 COMPLIANCE MANUAL AND SUMMARY OPERATING PROCEDURES 2015

Acknowledgement of Receipt and Undertaking

TO: THE COMPLIANCE OFFICERCITY OF WOLVERHAMPTON COUNCIL

FROM:

Name (BLOCK CAPITALS please)

SUBJECT: WEST MIDLANDS PENSION FUND COMPLIANCE MANUAL AND SUMMARY OPERATING PROCEDURES 2015 (THE ‘MANUAL’)

Sign one copy of this memorandum and return it to the Compliance Officer. Please keep a copy for your reference.

I hereby acknowledge receipt of the West Midlands Pension Fund manual. The manual sets forth, in summary, various policies which the Council has adopted to protect both the individual and the Council, and to reflect the Council’s intention tooperate in compliance with the Financial Services and Markets Act 2000 and the relevant rules of the various Financial Conduct Authority (FCA) sourcebooks as a matter of best practice and other relevant legislation, such as the Criminal JusticeAct 1993 and the Local Government Pension Scheme Regulations 1998, as amended in 2008.

I understand that it is my responsibility to be familiar with the contents of this manual and the regulatory provisions relating tothe conduct of an individual as an approved person and/or as a person working for an authorised person in the United Kingdom. I undertake to be in strict compliance with the provisions of The Criminal Justice Act 1993, specifically the insiderdealing and money laundering regulations, and the City of Wolverhampton Council’s personal account dealing requirements.

Signature of staff member

Date

Acknowledgement of Receipt and Undertaking 2

1 Introduction 41.1 Business Overview 41.2 Financial Service and Market Act 2000 81.3 FCA Statement of Principles 91.4 Statements of Principles and Code of Practice 10

for Approved Persons1.5 Meetings and Correspondence with Regulators 111.6 Compliance 121.7 Code of Market Conduct 131.8 Money Laundering 161.9 High Level Standards for Firms and Individuals 161.10 Impact of Markets in Financial Instruments 17

Directive (‘MiFID’) on the Council1.11 Impact of the Capital Requirements 17

Directive (‘CRD’)

2 Investments and Finance 192.1 Preface 192.2 Client Communications General Advertising 19

Requirements2.3 Charges 202.4 Suitability 202.5 Churning and Switching 212.6 Use of Dealing Commissions 222.7 Best Execution 232.8 Timely Execution 232.9 Trade Recording 242.10 Aggregation and Allocation 252.11 Periodic Information 252.12 Safekeeping Of Assets 262.13 Outsourcing Arrangement 282.14 External Fund Managers 282.15 Disclosure and Transparency Rules 292.16 Staff Fitness and Propriety 312.17 Training and Competence 312.18 Compliance Monitoring 322.19 Transaction Reporting 32

3 General 333.1 Conflicts of Interest 333.2 Personal Dealing Rules 343.3 Inducements 353.4 Bribery Act 2010 36

Principle 1 – Proportionate Procedures 36Principle 2 – Top-level Commitment 36Principle 3 – Risk Assessment 37Principle 4 – Due Diligence 37Principle 5 – Communication and Training 37Principle 6 – Monitoring & Review 37

3.5 Money Laundering – Procedures 373.6 Record Keeping 403.7 Rule and Procedure Breaches 403.8 Data Protection 413.9 Business Continuity 413.10 Compliants 42

Appendix A Dealing Limits 44

Appendix B Specific Approval 45

Appendix C Lending Limits 46

Appendix D LGPS (Management & Investment 47of Funds) Regulations 2009 – 1 April 2013

1) Citation, commencement and application 482) General definitions 483) Definition of ‘investment’ 484) Management of pension fund 495) Power to borrow 506) Separate bank account 507) Definition of ‘investment manager’ 518) Choice of investment managers 519) Terms of appointment of investment managers 5110) Review of investment manager’s performance 5211) Investment policy and investment of 52

pension fund money12) Statement of investment principles 5213) Investments under section 11(1) of the 53

Trustee Investments Act 196114) Restrictions on investments 5315) Requirements for increased limits 5316) Use of fund money by an 53

administering authority17) Revocations 54

Appendix E LGPS (Management & Investment of 58Funds) Regulations 2009 – 1 January 2010

1) Citation and commencement 592) General definitions 593) Definition of ‘investment’ 604) Management of pension fund 615) Definition of ‘investment manager’ 716) Choice of investment managers 717) Terms of appointment of investment managers 718) Review of investment manager's performance 729) Use and Investment of pension fund money 729a) Statement of investment principles 7210) Investments under s.11 of the Trustee 73

Investments Act 1961.11) Restrictions on investments 7311a) Requirements for increased limits 7312) Use of fund money by an 74

administering authority13) Consequential amendments and revocations 75

Appendix F Staff Declaration 80

COMPLIANCE MANUAL AND SUMMARY OPERATING PROCEDURES 2015 3

Contents


1 Introduction

1.1 Business Overview

The City of Wolverhampton Council (the ‘authority’) is an administering authority of the Local Government PensionScheme (LGPS) and is responsible for administering the West Midlands Pension Fund (‘WMPF’) and the West MidlandsIntegrated Transport Authority Pension Fund (‘WMITA PensionFund’), known collectively as the ‘Fund’. Therefore, not only does it manage its own investments, it also carries out investment and other services for and on behalf of WMITA Pension Fund.

The investment services carried out by the authority for WMITAPension Fund fall within the remit of the Financial Services Act2012, the Act created the regulatory organisation, the Financial Conduct Authority (FCA). Although the authority is not regulatedby the FCA, it has decided to follow the rules of the FCA as amatter of best practice.

This manual needs to be read in conjunction with the Fund’s Employee Code of Conduct. It is acknowledged that there is a degree of overlap between the code and this manual but, takentogether, they create a structure within which employees canfeel secure that they are performing their jobs appropriately andthat the Fund is properly exercising its responsibilities.

1.1.1 Purpose of this ManualThis manual sets out the procedures that the City of Wolverhampton Council has decided to voluntarily observe asmanagers of an occupational pension scheme (OPS), called theWest Midlands Pension Fund. The following procedures arebased upon those of the FCA.

In addition to voluntarily complying with FCA rules as a matter of best practice, we are required to comply with the Local Government Pension Scheme Regulations 1995 as amendedand altered by subsequent regulation, which set out the mechanics of how the scheme should be run by us as an administering authority. These regulations are not considered indetail in this manual; however, the section governing powers ofinvestment is included in section two, in order to make this acomplete guide to the regulatory requirements of the InvestmentDivision of the WMPF. Also Appendix D includes the LGPS(Management & Investment of Funds) Regulations 2009 whichcame into force on 1 January 2010.

This manual provides an overview of compliance matters relevant to the authority as a whole, rather than to the regulationof all particular areas of investment business. Employees shouldbe familiar not only with these general principles, proceduresand rules but also with those applicable to their particular area of business. It is intended to outline the general principles of regulation and to highlight some of the more critical aspects ofthese requirements, from the employee's perspective.

It is not possible in a manual of this kind to cover all matters or to anticipate all the requirements which may arise in new or developing areas of Fund administration, so it will be necessaryto supplement and amend the manual from time to time. This willbe achieved through the issue of amendments and practicenotes.

1.1.2 ScopeThis manual is applicable in its entirety to all members of the investment or related divisions of the administering authority.Other members or employees of the administering authoritymust read the following sections of the manual:

Section 1 Introduction in its entirety; andSection 3 General rules, subsections:• Conflicts of interest• Personal dealing rules• Inducements• Bribery Act 2010• Money laundering – procedures• Record keeping• Rule and procedure breaches• Data protection• Business continuity, and• Complaints.

If you are in doubt whether you are a member of the investmentor related divisions, or whether any part of this manual is applicable to your role or activities, please contact the Compliance and Risk Team.

1.1.3 Your ResponsibilityAs an employee or member of the administering authority, it isyour responsibility to read these procedures, observing themboth in spirit as well as the letter, and to act with high standardsof honesty and fairness. Failure to do so constitutes a seriousbreach of duty and could result in dismissal.

If you do not understand how these procedures apply to you, orwhat action you should take in any circumstances, you should consult the Compliance and Risk Team. Ignorance or misunderstanding of these procedures will not be accepted as an excuse for failing to comply with them.

1.1.4 Notification of Breaches If, in any circumstances, you think you cannot fully comply withthese procedures or if you have for any reason failed to observeany of these procedures, you should immediately notify theCompliance and Risk Team who will advise on what steps totake.

1.1.5 Written Compliance Procedures To ensure that employees act in accordance with their own andthe Fund’s relevant responsibilities under the principles, the Fund is required to draw up written compliance procedures. This manual forms part of the Fund’s written compliance procedures. Further guidance on the obligations of staff is givenin the code of conduct issued to each member of staff.

1.1.6 Co-operation With Enquiries, Inspections, etc. Employees must fully co-operate with any inspection. Upon request they will make themselves available to any inspectionteam, produce any inspection team documents, files, computerdata and other material in their possession, power or control;give access to any inspection team to all premises at all times (including access to computer facilities, files or systems) and permit any inspection team to copy documents or other materialor remove copies; to answer truthfully, fully and promptly allquestions put to them by any member of an inspection team.Employees must take all steps within their power to ensure thatno record or file shall be amended or destroyed if it may be relevant to any matter which is currently the subject of a disciplinary enquiry, formal inspection or other process, reference or appeal.

1.1.7 Co-operation With a Customer Under the principles, the Fund’s employees must allow WMITAto inspect, either personally or through an agent, any record ofmatters relating exclusively to WMITA within seven days of receiving a request. If there is any doubt whether to allowWMITA to inspect a record, for example where that record doesnot relate exclusively to WMITA, the Compliance and Risk Teamshould be asked for further guidance.

It is the additional duty of the Chief Financial Reporting Officer,Strategic Director of Pensions, senior managers and managersto ensure that there is full compliance in every activity undertaken, whether or not it is part of the administering authority's business, which is in voluntary compliance with FCA rules.

1.1.8 Key PersonnelThe following is a list of key personnel with responsibilities for avariety of functions:

OfficersAssistant Director Finance: Mark TaylorChief Legal Officer: Kevin O’KeefeStrategic Director of Pensions: Geik DreverHead of Governance: Rachel HoweAssistant Director (Investments): Mark ChalonerAssistant Director (Actuarial & Pensions): Rachel Brothwood

Designated OfficersCompliance Officer: Mark TaylorMoney Laundering Reporting Officer: Mark TaylorTraining and Competence Officer: Geik Drever

1.1.9 Governance ArrangementsThe Fund’s governance arrangements have four elements:

1) Pensions Committeea) To discharge the functions of the administering authority

for the application of the Local Government Pension Scheme regulations in the West Midlands.

b) To put in place and monitor the arrangements for the administration of contributions and payments of benefits as required by the regulations, and the proper management and investment of monies held for the purpose of paying benefits.

c) To determine and review the provision of resources made available for the discharge of the function of administering authority.

2) Pensions BoardThe local Pensions Board assists the Pensions Committeewith the good governance of the scheme ensuring the Fund’s adherence to legislation, statutory codes of practice and guidance.

Consisting of five employer and five member representativestogether with two City of Wolverhampton councillors, theboard ensures the good performance of the Fund through theScheme Advisory Board’s benchmarking criteria.



3) Advisors and OfficersThe Fund’s principal advisors are as follows:

a) High level advice on general management from the Managing Director of the City of Wolverhampton Council.

b) Legal and general administrative advice and management from the Chief Legal Officer of the City of Wolverhampton Council who is also the monitoring officer for the City of Wolverhampton Council.

c) Financial and technical advice from the Strategic Director of Pensions who is the lead senior support officer and has direct responsibility for the in-house management.

d) The Strategic Director of Pensions is the senior full-time officer who provides technical advice to members and officers, as well as implementing the investment strategy through a team of professionally qualified staff and external managers.

e) Senior pension administration staff are responsible for pension’s administration and communications.

f) Assistant Director Finance of the City of Wolverhampton Council is the Section 151 officer of the City of Wolverhampton Council and that responsibility applies to the Fund.

4) Investment Advisory Sub-CommitteeThe Investment Advisory Sub-Committee has oversight of the implementation of the management arrangements andcomprises representatives from the seven district councilsand two local trade unions. The Committee meet at least fourtimes a year.

1.1.11 Organisation ChartThe WMPF structure is shown on the next page.

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1.2 Financial Service and Markets Act 2000

The Financial Services and Markets Act 2000 (‘FSMA’ asamended by the Financial Services Act 2012) is the underlyingprimary legislation which provided for the formation of the FCAand the establishment of its powers.

FSMA provides particular scope for the FCA’s enforcementpowers in respect of the Code of Market Conduct (see section1.6 below), contained within the Market Conduct Sourcebookelement of the FCA Handbook. The FCA is able to levy penaltiesagainst individuals or firms who breach the code through insiderdealing or attempted market manipulation. FSMA also enablesthe FCA to apply to the High Court for disgorgement or restitutionorders.

Part 1a of the Financial Services Act 2012 sets out three overallstatutory objectives which the FCA needs to achieve. These influence the FCA’s approach to regulation from policy to the detailed rule setting level.

The three objectives are:

a) the consumer protection objective: securing the appropriatedegree of protection for consumers;

b) the integrity objective: protecting and enhancing the integrityof the UK financial system; and

c) the competition objective: promoting effective competition inthe interest of consumers.

1.2.1 FCA RegulationAs the administering authority of the Fund, the Council’s mainbusiness area is discretionary investment management.

This activity is normally regulated by the FCA. The administeringauthority manages a local authority pension fund which is regulated by the Local Government Pension Fund Regulations1995, and as such does not require authorisation by the FCA. If the administering authority was regulated by FCA, it wouldhave to comply with:

a) The FCA Handbook of rules and guidance;

b) any limitations or requirements imposed on it by the FCA; and

c) the overall provisions of FSMA.

1.2.2 AuthorisationThe FSMA is the primary legislation in relation to investmentbusiness in the UK and provides that any person who carries ondesignated investment business without either authorisation orexemption will be guilty of an offence and will be liable to criminal and civil proceedings.

Investment activities carried out by the administering authority in relation to regulated investments, which are subject to the Financial Services and Markets Act; include arranging deals inand managing regulated investments.

The Financial Services and Markets Act requires companiessuch as the administering authority to be authorised so as to ensure that only people who are fit and proper carry on investment business within the UK.

However, the administering authority manages a local authoritypension fund which is regulated under the Local GovernmentPension Fund Regulations 1995, and as such does not requireauthorisation by the FCA.

The administering authority manages the Fund internally in conjunction with the use of external managers.


1.3 FCA Statements of Principles

The FCA has issued eleven principles that every authorised firmmust comply with. The principles are a general statement of thefundamental obligations of firms and their employees under thenew regulatory system. The principles are the foundation onwhich firms should organise themselves, conduct their investment business and relate to their regulators.

These should be borne in mind at all times by all staff, as they are a statement of the minimum standards expected from practitioners in the financial services industry. They apply directlyto the conduct of investment business by all authorised persons.

The principles are not exhaustive. Conformity with them does notexcuse a failure to observe other regulatory requirements andthe observance of other requirements does not necessarilyamount to conformity with the principles.

The breach of a principle does not in itself give rise to an actionfor damages, but will be taken into account for purposes of discipline and intervention.

The principles are as follows:

Please note that ‘regulators’ refers to the FCA and other regulators with recognised jurisdiction in relation to regulated activities of an authorised firm, whether in the UK or abroad.

Although we are not directly regulated by the FCA, these principles provide a cornerstone of good investment business practice and, therefore, failure to comply withthese principles could lead to serious disciplinary sanctionsbeing taken against us and/or our employees.

While the FCA's rules and guidance deal with the bearing of theprinciples in particular circumstances, the principles are also designed as a general statement of regulatory requirements applicable in new or unforeseen situations. Therefore, the FCA'srules and guidance should not be viewed as exhausting the implications of the principles themselves.

You should familiarise yourself with these principles.

1) Integrity - the firm must conduct its business with integrity.

2) Skill, care and diligence - the firm must conduct its business with due skill, care and diligence.

3) Management and control - the firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.

4) Financial prudence - the firm must maintain adequate financial resources.

5) Market conduct - the firm must observe proper standards of market conduct.

6) Customers' interests - the firm must pay due regard tothe interests of its customers and treat them fairly.

7) Communications with clients - the firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear,fair and not misleading.

8) Conflicts of interest - the firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.

9) Customers: relationships of trust - the firm must takereasonable care to ensure the suitability of its advice anddiscretionary decisions for any customer who is entitled to rely upon its judgement.

10)Clients' assets - the firm must arrange adequate protection for clients' assets when it is responsible for them.

11)Relations with regulators - the firm must deal with itsregulators in an open and cooperative way, and must disclose to the FCA appropriately anything relating to thisfirm of which the FCA would reasonably expect notice.

1.4 Statements of Principles and Code of Practice for Approved Persons

In relation to individuals, underpinning all of the FCA’s regulationsfor approved persons are the seven principles set out in theStatements of Principles and Code of Practice for Approved Persons included in the FCA Handbook. The first four principlesapply to all approved persons while the remaining three apply tothose individuals performing significant influence functions (controlled functions 1 to 12B, 28 and 29 as set out within chapter 10 of the FCA’s supervision manual).

They are as follows:

• An approved person must act with integrity in carrying outtheir controlled function.

• An approved person must act with due skill, care and diligence in carrying out their controlled function.

• An approved person must observe proper standards ofmarket conduct in carrying out their controlled function.

• An approved person must deal with the FCA and other regulators in an open and co-operative way and must disclose appropriately any information of which the FCAwould reasonably expect notice.

• An approved person performing a significant influence function must take reasonable steps to ensure that the regulated business of the firm for which they are responsible in their controlled function is organised so that it can be controlled effectively.

• An approved person performing a significant influence function must exercise due skill, care and diligence in managing the business of that firm for which they are responsible in their controlled function.

• An approved person performing a significant influence function must take reasonable steps to ensure that the business of that firm for which they are responsible in their controlled function complies with the regulatory requirements imposed on that business.

The FCA has issued a Code of Conduct for Approved Personswhich sets out descriptions of conduct which, in the opinion ofthe FCA, do not comply with the statements of principle and, incertain cases, factors which, in the opinion of the FCA, are to betaken into account in determining whether or not an approvedperson’s conduct complies with one of the statements of principle.

1.4.1 Senior Managers’ Regime The FCA published Consultation Paper CP 14/13 - Strengtheningaccountability in banking: a new regulatory framework for individuals respectively in July 2014. This outlined the view thatbehaviour and culture within banks played a major role in the2008-09 financial crisis and in conduct scandals such as paymentprotection insurance (PPI) misselling and the attempted manipulation of LIBOR.

The FCA believes that holding individuals to account is a keycomponent of effective regulation. In this consultation, the regulator is proposing changes to the way individuals working for UK banks, building societies, credit unions and PRA-designated investment firms (collectively referred tothroughout the consultation paper (CP) as ‘relevant firms’) are assessed and held accountable for the roles they perform.The proposals reflect the recommendations of the ParliamentaryCommission on Banking Standards (‘PCBS’) and implementchanges required by amendments which the Financial Services(Banking Reform) Act 2013 (the ‘Act’) made to the FinancialServices and Markets Act 2000 (FSMA).

These changes are significant and include:

• a new ‘Senior Managers Regime’ (SMR) for individuals who are subject to regulatory approval, which will requirefirms to allocate a range of responsibilities to these individuals and to regularly vet their fitness and propriety.This will focus accountability on a narrower number of senior individuals in a firm than the current ‘Approved Persons Regime’ (‘APR’);

• a ‘Certification Regime’ which will require relevant firms toassess the fitness and propriety of certain employees whocould pose a risk of significant harm to the firm or any of its customers; and

• a new set of ‘conduct rules’.

A final policy statement and final rules will be published by theregulators, following which this manual, the code and relevantpolicies and procedures will be updated. Please contact theCompliance and Risk Team if you have any questions on the new ‘Senior Managers Regime’.



1.5 Meetings and Correspondence with Regulators

FCA Principle 11 - Relations with regulators - states that the "firmmust deal with its regulators in an open and co-operative way,and must disclose to the FCA appropriately anything relating tothe firm of which the FCA would reasonably expect notice".

The FCA specifically requires that the firm must take reasonablesteps to ensure that all information it gives to the FCA is factually accurate, complete and, in the case of estimates andjudgements, fairly and properly based after appropriate enquiries have been made by the firm.

As the firm must also have adequate systems and internal controls in place to conduct its business in an orderly manner, it is imperative that any dealings or communication with any ofthe firm's regulators must also be carried out in an orderly andconsistent manner.

Although we are not regulated by the FCA, other 'regulators'may make enquiries of us such as the National Audit Office,Local Government Office, The Pensions Regulator and the Pensions Ombudsman.

As such, all employees are subject to the following procedures:

• All communications in respect of any queries or investigation by a regulatory body must be referred immediately to the Compliance Officer.

• Any employee contacted by a regulatory body should take down brief details of the nature of the communicationand state that they will refer the matter to the ComplianceOfficer.

• Any requests for information or co-operation from a regulatory body must be referred to the Compliance Officer before any communication is forwarded. It will be responsibility of the Compliance and Risk Team for co-ordinating any request for information.

• Any request for information or cooperation from the police, the Department of Trade and Industry or any otherprosecuting authority must be immediately referred to the Compliance and Risk Team. The Compliance and Risk Team will co-ordinate any response with other departments. Occasionally, a regulatory body or the police may state that on no account may an employeespeak to anyone else in respect of an enquiry. Regardless of any attempt to impose such a prohibition, employeesmust immediately inform the relevant Compliance Officerbefore agreeing to provide any information or document.

• No employee should attend a meeting or interview with a regulatory body without informing and receiving permission from the Compliance and Risk Team. The Compliance and Risk Team will co-ordinate such meetings and retains the right to attend any such meeting or interview at its discretion.

It is vital that the firm has a co-ordinated and consistent approachto dealing with any regulators.

Always contact your Compliance Officer immediately upon receiving any communication from a regulator.


1.6 Compliance

1.6.1 Compliance OfficerThe administering authority must ensure that it takes reasonablesteps to establish and maintain compliance procedures, includingthe appointment of a Compliance Officer of appropriate statusand experience.

The Compliance Officer has responsibility for overseeing the administering authority's compliance procedures including responsibility for ensuring that any necessary records are kept.Responsibility for compliance also rests with line managementand employees themselves. All matters contravening the administering authority's internal compliance controls should be referred to him or her.

You should also speak to him or her in the first instance, if youhave any queries about how these procedures apply to you. In the absence of the Compliance Officer, you should consult amember of the Fund’s Compliance and Risk Team.

The Compliance Officer and the Compliance and Risk Team areavailable to assist employees to conduct business in accordancewith the relevant rules and regulations. Employees should not attempt to resolve difficult or unfamiliar questions alone.

When in doubt on a matter of interpretation or on the propriety ofa particular course of action or if uncertainty arises as to whetherwe are authorised to conduct a certain type of business, theyshould consult the designated Compliance Officer or a memberof the Compliance and Risk Team. A list of these individuals is detailed below:

The administering authority's Compliance Officer is Mark Taylor.

The Compliance Officer reports to the Pensions Committee.

1.6.2 Compliance and Risk TeamAll members of the Compliance and Risk Team assist the Compliance Officer.

The Compliance and Risk Team will assist, co-operate with, andmonitor the activities of all investment activities, and will submitregular reports on areas covered, including but not limited tobreaches of any kind, and identifying any needs for additionaltraining in any aspect of the administering authority's business.

The Compliance and Risk Team will be provided with adequateresources with regards to staff and finance to fulfil their role.

1.6.3 Responsibility for ComplianceThe Pensions Committee of the administering authority is ultimately responsible for the administering authority’s compliance. This is recognised by a regular review of compliance activities at Pensions Committee meetings:

The regular review of compliance activities includes but is notlimited to:

• reviewing the annual report and statement of accounts to ensure its compliance with legal and regulatory requirements;

• reviewing controls procedures relating to all significant operational risks;

• ensuring the independence of the compliance function;

• receiving a written report from the Compliance and RiskTeam, covering the general state of compliance within theadministering authority; and

• receiving a quarterly, written report on the programme of inspections and any findings or other matters likely to involve the reputation of the administering authority and/orrisk of significant compliance breach.


1.7 Code of Market Conduct

1.7.1 Market Conduct RulesThe Code of Market Conduct is part of the Market ConductSourcebook (‘MAR’) within the FCA Handbook. MAR was updated in July 2005 as part of the UK’s implementation of theMarket Abuse Directive, introduced through legislation acrossEurope to further advance the process of financial integrationand harmonisation.

The code itself establishes a regime for determining ‘marketabuse’, based upon the behaviour which a ‘regular user’ (‘a reasonable person who deals on that market in investmentsof the kind in question’) would regard as behaviour falling belowreasonably expected standards for that market.

The remit of the market abuse regime extends to qualifying investments (equities, debt and derivatives, including commodityderivatives) traded on prescribed markets (recognised investment exchanges in the UK).

The code outlines seven potential offences which are deemed toconstitute ‘market abuse’. These are:

1) Insider DealingThe abuse of insider dealing outlined by FCA rules should beconsidered in conjunction with the criminal penalty laid out by theCriminal Justice Act 93 (detailed in section 1.6.1). The followingfour types of behaviour are listed as being considered by theFCA to fall within the insider dealing definition of market abuse:

• Dealing on the basis of inside information which is not trading information;

• Front running/pre-positioning - that is, a transaction for aperson’s own benefit, on the basis of and ahead of an order which he is to carry out with or for another (in respect of which information concerning the order is inside information), which takes advantage of the anticipated impact of the order on the market price;

• In the context of a takeover, an offer or potential offeror entering into a transaction in a qualifying investment, on the basis of inside information concerning the proposed bid, that provides merely an economic exposure to movements in the price of the target company’s shares (for example, a spread bet on the target company’s shareprice); and

• In the context of a takeover, a person who acts for the offeror or potential offeror dealing for his own benefit in a qualifying investment or related investment on the basis of information concerning the proposed bid which is insideinformation.

2) Improper DisclosureThe FCA defines improper disclosure as being either of the following behaviour:

• Disclosure of inside information by the director of an issuer to another in a social context; and

• Selective briefing of analysts by directors of issuers or others who are persons discharging managerial responsibilities.

3) Misuse of InformationMAR describes the following as being behaviour that amounts toa misuse of information:

• Dealing or arranging deals in qualifying investments basedon relevant information, which is not generally available and relates to matters which a regular user would reasonably expect to be disclosed to users of the particularprescribed market, but which does not amount to marketabuse (insider dealing) (whether because the dealing relates to a qualifying investment to which section 118(2)does not apply or because the relevant information is not inside information); and

• A director giving relevant information, which is not generally available and relates to matters which a regularuser would reasonably expect to be disclosed to users of the particular prescribed market, to another otherwise thanin the proper course of the exercise of his employment orduties, in a way which does not amount to market abuse(improper disclosure) (whether because the relevant information is not inside information or for some other reason).

4) Manipulating TransactionsThe manipulation of transactions is defined as being the effectingof transactions which “give, or are likely to give, a false or misleading impression as to the supply of, or demand for, or asto the price of one or more qualifying investments; or secure theprice of one or more such investments at an abnormal or artificial level”. Behaviour that would fall within this definition issplit into that which could be viewed as giving a ‘false and misleading impression’, and that which could be deemed to beprice positioning. Examples of each are provided within the FCAHandbook, and the Compliance Officer should be consulted ifyou have any uncertainties, or require further clarification.


5) Manipulating DevicesThe FCA has included the following as examples of marketabuse through the manipulation of devices:

• Taking advantage of occasional or regular access to the traditional or electronic media by voicing an opinion about a qualifying investment (or indirectly about its issuer) while having previously taken positions on that qualifying investment and profiting subsequently from the impact ofthe opinions voiced on the price of that instrument, withouthaving simultaneously disclosed that conflict of interest tothe public in a proper and effective way;

• A transaction or series of transactions that are designed toconceal the ownership of a qualifying investment, so thatdisclosure requirements are circumvented by the holding of the qualifying investment in the name of a colluding party, such that disclosures are misleading in respect of the true underlying holding. These transactions are oftenstructured so that market risk remains with the seller. This does not include nominee holdings;

• Pump and dump - that is, taking a long position in a qualifying investment and then disseminating misleadingpositive information about the qualifying investment with aview to increasing its price; and

• Trash and cash - that is, taking a short position in a qualifyinginvestment and then disseminating misleading negative in-formation about the qualifying investment, with a view todriving down its price.

6) DisseminationThe abuse of dissemination is defined by the FCA as being behaviour which includes:

• knowingly or recklessly spreading false or misleading information about a qualifying investment through themedia, including in particular through a regulatory information service or similar information channel; and

• undertaking a course of conduct in order to give a false ormisleading impression about a qualifying investment.

7) Misleading Behaviour and DistortionThis type of market abuse is defined as being “likely to give aregular user of the market a false or misleading impression as to the supply of, demand for or price or value of, qualifying investments or would be, or would be likely to be, regarded by a regular user of the market as behaviour that would distort, orwould be likely to distort, the market in such an investment”.

At the same time, it is also “likely to be regarded by a regularuser of the market as a failure on the part of the person concerned to observe the standard of behaviour reasonably expected of a person in his position in relation to the market”.

Examples given by the FCA include:

• the movement of physical commodity stocks, which might create a misleading impression as to the supply of, or demand for, or price or value of, a commodity or the deliverable into a commodity futures contract; and

• the movement of an empty cargo ship, which might create a false or misleading impression as to the supply of, or thedemand for, or the price or value of a commodity or the deliverable into a commodity futures contract.

As can be clearly seen, the offences are wide ranging and theunderlying legislation has taken away the potential safe harboursof, for example, adherence to general market practice or recognised investment exchange (‘RIE’) rules.

Compliance with RIE rules will, however, be given ‘appropriateweight’ as part of the evaluation of potentially abusive transactions. In contrast, compliance with the Takeover Code andthe FCA price stabilising rules give an automatic safe harbour.

The administering authority and its employees should be particularly aware of potential offences as it should be noted that there is no need to prove intent as part of the evidence forabusive behaviour; ie, unintentional, accidental, abusive behaviour is still an offence. There is also a specific penalty in respect of requiring or encouraging a person to engage in behaviour which would amount to market abuse. If in doubt, you should consult the Compliance Officer.

If you are in any way unsure as to what might constitute marketabuse, you should contact the Compliance and Risk Team immediately.

1.7.2 Insider Dealing – The Criminal Justice Act 1993No employee of the administering authority or any closely connected person, who is in possession of 'inside information',may:

• deal in any 'price-affected' securities,

• encourage another person to deal in any 'price-affected' securities, or

• disclose the 'inside information' to another person (except in the proper performance of the function of his employment).

If the Fund or an individual is made an insider, neither the Fundnor the individual may trade in the security. Additionally, the individual should notify the Strategic Director of Pensions, theHead of Investments and the Compliance and Risk Manager.

Please note that 'securities' is very widely defined to include allequity, fixed income, derivative (including OTC) and commodityproducts.


A brief guide as to what constitutes ‘unpublished price-sensitiveinformation’ is contained in the following section of this chapter.When in doubt, employees must seek guidance from the Compliance and Risk Team.

Unpublished Price - Sensitive InformationPart V of the Criminal Justice Act 1993 states that unpublishedprice-sensitive 'inside information', is information which:

a) relates to particular securities or to a particular issuer or issuers of securities and not to securities or to issuers of securities generally,

b) is specific or precise,

c) has not been made 'public', and

d) if it were made 'public' would be likely to have a significant effect on the price or value of any securities.

Please note that although the inside information may be held inrespect of one security, other securities – eg, in the same sector– may be 'price-affected'.

'Price-affected securities' are those where the 'inside information', if made public, would be likely to have a significant effect on the price or value of the securities.

A person has information as an insider if:

a) it is, and they know that it is, inside information; and

b) they have it, and know that they have it, from an insidesource.

A person has information from an inside source if:

a) they have it through being a director, employee or shareholder of an issuer of securities; or

b) they have it through having access to the information byvirtue of their employment office or profession; or

c) the direct or indirect source of their information is a personwho falls within (a) above.

Information is made 'public' if:

a) it is published in accordance with the rules of a regulated market for the purpose of informing investors and their professional advisers;

b) it is contained in records which by virtue of any enactment areopen to inspection by the public;

c) it can be readily acquired by those likely to deal in any securities:

i) to which the information relates, or

ii) of an issuer to which the information relates; or

d) it is derived from information which has been made public. Information may be treated as made 'public' if or eventhough:

i) it can be acquired only by persons exercising diligence or expertise; or

ii) it is communicated to a section of the public and not to the public at large; or

iii) it can be acquired only by observation; or

iv)it is communicated only on payment of a fee; or

v) it is published only outside the UK.

In plain terms, therefore, the information must be:

• Unpublished: not available to the general public. It is sufficient that the information can be legitimately and readily obtained by any member of the public who wants it, eg, through a TOPIC screen.

• Price-sensitive: as well as being unavailable to the generalpublic the information must be of a nature which could, ifpublished, make a material difference to the market value of the securities.

If in any doubt as to whether information is unpublished andprice sensitive, seek guidance from the Compliance and RiskTeam.


1.8 Money Laundering

A summary of the key provisions of the Money Laundering Regulations 2007, the Joint Money Laundering Steering GroupGuidance (December 2007), the FCA Senior ManagementArrangements, Systems and Controls (SYSC) Sourcebook andthe administering authority’s own money laundering proceduresare included in Section 3.3 of this manual.

1.9 High Level Standards for Firms and Individuals

The following sections are drawn from the section of the FCA Handbook in High Level Standards on Senior ManagementArrangements, Systems and Controls (‘SYSC’).

1.9.1 Apportionment of ResponsibilitiesA firm must take reasonable care to maintain a clear and appropriate apportionment of significant responsibilities amongits directors and senior managers in such a way that:

a) it is clear who has which of those responsibilities; and

b) the business and affairs of the firm can be adequately monitored and controlled by the directors, relevant seniormanagers and the governing body of the firm.

(SYSC 2.1.1R)

1.9.2 RequirementA firm must appropriately allocate to one or more individuals, inaccordance with SYSC 2.1.4R, the functions of:

a) dealing with the apportionment of responsibilities under SYSC 2.1.1R; and

b) overseeing the establishment and maintenance of systemsand controls under SYSC 3.1.1R. (SYSC 2.1.3R)

1.9.3 SYSC 2.1.4R Table: Allocation of Functions (see SYSC 2.1.3R)

1.9.4 Recording the ApportionmentA firm must make a record of the arrangements it has made to satisfy SYSC 2.1.1R (apportionment) and SYSC 2.1.3R (allocation) and take reasonable care to keep this up to date.

This record must be retained for six years from the date onwhich it was superseded by a more up-to-date record. (SYSC 2.2.1R)

1.9.5 Systems and ControlsA firm must take reasonable care to establish and maintain suchsystems and controls as are appropriate to its business (SYSC3.1.1R).

The FCA provides no definitive guidance on what are appropriate systems and controls. FCA has indicated that some of the factors which will be of relevance are:

a) the nature, scale and complexity of the business;

b) the diversity of operations;

c) the volume and size of operations; and

d) the degree of risk involved.

The firm will have to demonstrate that it has made a proper assessment of these factors. There is, however, from the focusadopted in the Senior Management Arrangements, Systems and Controls Rules, a clear indication of the main areas that FCAexpects to be both covered by systems and controls (SYSC 3.2)and adequately documented.

3) Allocation to one or more individuals selected from this column is compulsory if there is no allocation to an individual in column 2, but is otherwise optional and additional:

The firm’s and its group’s directors and seniormanagers

1) Firm type 2) Allocation of both functions must be to the following individual, if any (see note):

Any other firm 1) the firm’s managing director (and all of themjointly, if more than one); or

2) a director or senior manager responsible for the overall management of:a) the group; orb) a group division within which some or all of

the firm’s regulated activities fall.


1.9.6 Senior Management Arrangements, Systems andControls Rules Coverage Relevant systems and controls are:

a) adequacy of management information;

b) business continuity;

c) clarity of reporting lines and delegation in the organisation;

d) documentation of business strategy;

e) maintenance of records;

f) adequacy of compliance reporting and monitoring;

g) systems and controls in relation to financial crime and money laundering;

h) suitability of remuneration policy;

i) recruitment and oversight of employees and agents;

j) Cabinet (Resources) panel and internal audit;

k) performance of risk assessment;

l) documentation and control of outsourcing relationships; and

m)management and disclosure of conflicts of interest.

1.10 Impact of the Markets in Financial Instruments Directive (‘MiFID’) on the Council

The MiFID is a Europe-wide directive, intended to further promote a single European market for wholesale and retailtransactions in financial instruments. The MiFID provides theframework for the establishment of a more level playing field inrespect of investment firms in Europe. It paves the way, potentially, for less local protectionism, more effective and wideruse of passporting of services, and the initiation of cross-borderpassporting of clearing and settlement services to create a moreunified capital market structure in Europe.

The MiFID was implemented in the UK on 1 November 2007with a number of significant changes to the FCA Handbook rulesand guidance. Some of the key provisions have been set outbelow.

1.10.1 Suitability and AppropriatenessThere is an increased onus on firms to demonstrate that theyhave satisfactorily assessed the ability of professional and retailcustomers to undertake transactions from the financial and trading track record of firms and individuals, including sources of available income, and their professional or educational background. The assessment of suitability depends on the client’sinvestment objectives and time horizon for investments, as wellas his knowledge and understanding of the particular productswhich the investment firm is intending to sell to him. While thereare relaxations for execution only business, this can only be

undertaken for the client if the investments concerned are non-complex (eg, non-financial derivative financial instruments),the service is initiated by the client (which appears to precludeanything other than very generalised marketing to potential customers), and the client is informed that certain protections donot apply.

1.10.2 Pre- and Post-Trade TransparencyRegulated markets have to make public all bid and offer pricesthat are advertised through their systems. Regulated marketshave to publish the price volume and time of transactions thathave taken place under their systems. They must make the details of these transactions public as close to real-time as possible. All types of trading in shares, whether on regulatedmarkets, multilateral trade facilities (‘MTFs’) or over-the-counterare subject to post-trade transparency obligations.

All investment firms trading outside a regulated market areobliged to make public the number of shares and the price of alltransactions, as well as where they took place. For retail clients,and for trades under “customary retail size”, firms are specificallyforbidden from trading at anything other than their firm quotewith clients, so price improvement is effectively forbidden. Thereis no restriction on the frequency with which the quote can beupdated. Currently nearly all trades (on-exchange and upstairstrades) are reported via recognised exchanges like the LondonStock Exchange. The MiFID allows firms conducting OTC tradesmore freedom in publication (eg, via the firm’s website).

1.10.3 Best ExecutionUnder the MiFID, investment firms need to adhere to a numberof new requirements, including ensuring that they obtain the bestpossible result for clients, as well as having an ‘order executionpolicy’ in place to allow this to be achieved. The ‘best possible result’ now includes, for non-private clients, a number of otherfactors beyond the execution price including costs, speed, likelihood of execution and settlement, size, nature or any otherconsideration relevant to the execution of an order.

1.11 Impact of the Capital Requirements Directive (‘CRD’)

The new Basel Accord was implemented within the EuropeanUnion via the Capital Requirements Directive (‘CRD’). The original Basel Accord, introduced with the intention ofstrengthening the soundness and stability of the internationalbanking system through the higher capital ratios that it required,was agreed in 1988 by the Basel Committee on Banking Supervision.

The CRD, which came into force on 1 January 2007, is a revision of the previous framework which introduced a modern, risk-sensitive prudential framework for credit institutions and investment firms across the EU, and was developed in line withthe revised Basel framework.


The CRD framework consists of four main components:

a) It contains an explicit measure for operational risk and includes more risk sensitive weightings against credit risk.

b) It reflects improvements in firms’ risk management practices,for example, by the introduction of an internal ratings basedapproach that allows firms to rely to a certain extent on theirown estimates of credit risk.

c) It provides incentives for firms to improve their risk management practices, with more risk sensitive risk areas as firms adopt more sophisticated approaches to risk management.

d) The new framework leaves the overall level of capital held byfirms collectively broadly unchanged.

The revised adequacy framework further ensures that the financial resources held by a firm are in line with the risk associated with the business profile and control environmentwithin the firm. Capital resources therefore consist of three ‘pillars’. Pillar 1 sets out the minimum capital requirements firms will have to meet for credit, market and operational risk.

Under pillar 2, firms and supervisors have to take a view onwhether a firm should hold additional capital against risks notcovered in pillar 1. The aim of pillar 3 is to improve market discipline by requiring firms to publish details of their risks, capital and risk management.


2 West Midlands Pension Fund Business

2.1 Preface

Chapter 2 of this manual details procedures and relevant regulations in relation to financial promotions, client classificationand the deal flows.

2.2 Client Communications General Advertising Requirements

2.2.1 IntroductionStrictly speaking, since the Fund is our only customer, these ruleswould not apply. However, it is felt that best practice would be toapply the rules in spirit to recipients of communications issued bythe administering authority.

All communications to current/potential Fund beneficiaries andtheir employers should be clear, fair and not misleading, andshould make it clear that the communication is a financial promotion and state the full name, address and telephone number of the administering authority and that the administeringauthority is the manager of the Fund.

It is vitally important that all communication with our customers,including potential customers, is carried out in a professional and honest manner and is, at all times, clear, fair and never misleading. This is especially the case when issuing any advertisement or marketing material. As such, we have a strictset of procedures for the approval and issue of any such material, in line with FCA requirements. All employees must familiarise themselves with these procedures.

General advertising and marketing is covered by the FCA's ruleson ‘Financial Promotion’ in the Conduct of Business Sourcebook(COB) chapter 4. The FCA's financial promotion rules reinforceboth principle 6 which requires firms to pay due regard to the interests of its customers and to treat them fairly, and principle 7which requires firms to pay due regard to the information needsof its clients and communicate information to them in a waywhich is clear, fair and not misleading.

A financial promotion is an invitation or inducement to engage ininvestment activity. Only authorised persons may communicatefinancial promotions, except that if the financial promotion hasbeen approved by an authorised person, a non-authorised person may then communicate it.

2.2.2 Types of CommunicationThe FCA's rules on financial promotion cover – for example – printed advertising, radio broadcasts and tip-sheets as well astelemarketing, research notes, presentations and information onwebsites.

All financial promotions must be approved by the CommunicationsTeam prior to issue. Equally, any existing approved promotion thathas been materially changed must be resubmitted for approval.

All financial promotions must ensure that information:

a) includes the name of the administering authority, its addressand a contact point such as email address, fax or telephonenumber;

b) clearly indicate that the authority has approved the communication;

c) is accurate and in particular does not emphasise any potentialbenefits of relevant business or a relevant investment withoutalso giving a fair and prominent indication of any relevantrisks;

d) is sufficient for, and presented in a way that is likely to be understood by, the average member of the group to whom itis directed, or by whom it is likely to be received; and

e) does not disguise, diminish or obscure important items, statements or warnings.

Please note that for specific promotions that refer to past performance, suitable text must be drafted relating to the specificinvestment involved and draw attention to the fact that past performance will not necessarily be repeated in the future. Information about past performance must also not be presentedin such a manner as to suggest that it constitutes a projection illustrating the possible future value of an investment contract or fund. There should also be no unfair comparison with the performance of another type of investment or the selection of an unreasonably short time period for comparison. FCA rules(COBS - Conduct of Business Sourcebook - 4.6.2 R) require thatany use of past performance data in a communication with aclient complies with the following rules:

a) That indication is not the most prominent feature of the communication;

b) The information includes appropriate performance information which covers at least the immediately precedingfive years, or the whole period for which the investment hasbeen offered, the financial index has been established, or theservice has been provided if less than five years, or suchlonger period as the firm may decide, and in every case thatperformance information must be based on and show complete 12-month periods;

c) The reference period and the source of information areclearly stated;

d) The information contains a prominent warning that the figuresrefer to the past and that past performance is not a reliable indicator of future results;

e) If the indication relies on figures denominated in a currencyother than that of the EEA State in which the retail client is resident, the currency is clearly stated, together with a warning that the return may increase or decrease as a resultof currency fluctuations;


f) If the indication is based on gross performance, the effect ofcommissions, fees or other charges are disclosed.

2.3 Charges

Before providing fund management services, we should disclosethe basis or amount of our charges and the nature or amount ofany other remuneration receivable by us and attributable to ourservices. Best practice would seem to be to apply this rule to potential beneficiaries and employers, even though they are notcustomers, since it is reasonable that contributors to a Fundshould know how the Fund is charged.

Therefore, when approaching potential employers/Fund beneficiaries, it should be explained to them that:

a) the Fund is charged for management services on a cost basis;

b) the remuneration of the fund managers is in accordance with the local authority's pay structure; and

c) the charges of external managers are a negotiated percentage of total funds managed by them.

Reasonable ChargesOur charges (and those of external managers) to the Fund mustnot be unreasonable in the circumstances. In order to complywith this, the following should be adhered to:

a) In-house charges to the Fund should always be actual costsincurred.

b) External managers either invoice the administering authority,or deduct charges at source, quarterly or half-yearly. Theircharges should be verified.

Most costs (including fund managers' charges) are met directlyfrom the Fund's bank account. The only exceptions are overheads (eg, for the building and salaries) which are initiallypaid out of the administering authority's account, and a proportion recharged to the Fund (except salaries of Fund employees which are recharged 100%) in accordance withagreed service levels.

The Strategic Director of Pensions should ensure that therecharges are reasonable.

2.4 Suitability

In deciding to effect any transaction for the Fund, we must havereasonable grounds for believing that such a transaction is suitable for the Fund's purpose having regard to the powers and provisions of the Local Government Pension Scheme Regulations 1995 and also we ensure that our external fundmanagers abide by this.

The aim of the Fund is to provide for past, present and futureemployees' pensions. As such the Fund is required to provide acombination of income and capital growth. It is vital that no unnecessary risks are taken with the assets of the Fund. Any investments, which are contrary to this policy, would automatically be regarded as unsuitable.

In assessing suitability of a particular transaction the appropriateinvestment manager must have regard to the following:

a) The powers and provisions contained in the Local Government Pension Scheme Regulations 1995 and asamended (see later);

b) The Fund’s Statement of Investment Principles, Funding Strategy Statement, Investment Strategy Statement and quarterly Tactical Asset Allocation Review;

c) The future marketability of the investment;

d) The risk involved in the investment. The level of risk is a relative term as it depends as much upon the amount of funds allocated to a particular type of investment and thespread of such allocations as the risk inherent in the investment itself;

e) His/her own skill and knowledge in that particular type of investment. (To facilitate this, the Strategic Director of Pensions is responsible for notifying each manager of the limits and scope of his/her discretion concerning such investments. If unsure as to the limit of his/her authorityhe/she should see the Strategic Director of Pensions immediately.) Details of the limits can be found in Appendix A.

A list of investment areas requiring specific approval from theStrategic Director of Pensions is found in Appendix B.

As a general principle, decisions as to whether an investment issuitable are based on independent research and reports received, and potentially require approval from the Strategic Director of Pensions. For each portfolio, this includes consideration of the following factors:

Quoted EquitiesThe Portfolio Manager's interpretation and knowledge of themarket gained from reliable sources and awareness of topics ofdiscussion among brokers generally, including the following:

a) Advice and research from one or more of the Fund's approved brokers that a particular transaction is recommended as suitable in the light of the Fund's policies;

b) Experience and reliability of a broker's analyst when assessing the reliability of broker's suggestions;

c) Existing/desired portfolio construction;

d) Data sources such as Bloomberg;

e) Political, economic and stock market conditions.

Fixed interest

a) Yields and prices, as shown by electronic market informationservices;

b) Research received and brokers' advice;


c) Economic data to give a broader and more long-term view,including trade surplus, retail prices index (RPI), public sectorborrowing requirement (PSBR) etc, and consideration of thepolitical situation. These help to develop expectations of the future performance of the various markets;

d) Relative movements between maturity groups can lead to opportunities for policy switches;

e) Deviations from usual patterns in price movement of differentbonds, for example divergence between two which tend normally to move together, which may suggest a switch to beof benefit.

The Fund's fixed interest investments consist of those issued byUK and overseas governments plus corporate bonds. Somebonds in externally managed portfolios may not be rated, particularly in emerging markets.

Private Equity and Other Alternative Investments

a) Internal and external (where available) research on variousfund managers;

b) Quarterly/half yearly reports and accounts from fund managers with whom funds are currently invested, and general monitoring of the Fund's performance.

When a new fund is invested in, a proposal must first be submitted to the Strategic Director of Pensions for approval; The Strategic Director of Pensions may then make arrangements to discuss with the Chairman of the Committee.

Property(Note: unless in a unitised fund, property is not an investmentwithin the scope of the FCA rules.) When an investment is madein a new property, a proposal must first be submitted to theStrategic Director of Pensions for approval; the Strategic Directorof Pensions may then make arrangements to discuss with theChairman of the Committee. External advice is taken on all majortransactions.

Given the large scale of the Fund's operations, establishing suitability will often be a question of degree. A given level of exposure to a particular investment may be considered suitable,but an increased level of exposure to the same investment maybe considered unsuitable. Any case where suitability could bequestioned should be discussed with the Strategic Director ofPensions who may consult the Chairman of the Committee asappropriate.

The Investment Advisory Sub-Committee is always advised ofprivate equity investments and significant property transactions;a note must be retained on the Fund file concerning any such investments detailing the circumstances and the reasons forreaching the conclusion that the investment was suitable for purchase.

A higher standard of supporting documentation is required forany investment which is not obviously suitable. We must showthat any material interest has been properly considered andfound not to influence the decision or that the transaction wouldbe commercially appropriate regardless of the material interest.

Details of the reasons for deciding that a transaction in which wehave a material interest is suitable should therefore be recorded.This would include purchase of shares whose issue we have underwritten.

An investment will be suitable if it satisfies the following criteria:

a) It meets the investment policy of the Committee. This policy:

i) determines the size of the main asset classes;

ii) has regard to any legislative limits; and

iii) determines specific policies in respect of any particular types of investment.

b) It falls into one of the specific portfolios agreed from time totime by the Committee.

c) It meets the criteria referred to in Appendix A.

In addition, prior written approval must always be sought fromthe Strategic Director of Pensions whenever any investment isbeing considered which is:

a) not in an allocated portfolio;

b) in excess of the limits set for such portfolios. (This applies toboth an individual investment and also where a series of investments in a holding within a rolling three-month periodwill in total exceed the limit);

c) a contingent liability transaction.

The Strategic Director of Pensions meets regularly with eachmanager to discuss examples of recent transactions etc.; this meeting acts as a high-level suitability review.

We are not expected to be fortune-tellers as to the future performance of any investment. However, we must take reasonable care to ensure we are appraised of any facts thatmay be relevant to a particular investment. We will not betreated as having breached the suitability rule if at the time ofmaking an investment decision we did not and ought not to have known of any facts which would have caused that investment to be unsuitable.

2.5 Churning and Switching

Churning relates to dealing too frequently on behalf of the Fundand switching relates to moving between or within packagedproducts. It is worth noting that the series of transactions thatmay be suitable when viewed in isolation may be unsuitable ifthe recommendations or the decisions to trade are made with afrequency that is not in the best interest of the client. Even if therecommendations or decisions to trade do not bring any personal benefit, managers should have regard to the Fund’sagreed investment strategy in determining the frequency oftransactions. This would include, for example, the need to switcha client within or between packed products.

The reason that these are frowned on is that these practices areoften used to generate commission for the instigator without regard to the needs of the consumer. However, this should notbe an area of concern since we are remunerated by way ofsalary on a standard scale set by the administering authority,churning or switching would not bring any personal benefits and there is no incentive in our situation for managers to take


any decision that is not in the Fund's interest. At all times, managers should never the less be mindful of any conflicts of interest. Please see section 3.3 of this manual for further guidance on conflicts of interest.

2.6 Use of Dealing Commissions

The FCA rules on the use of dealing commissions (COBS 11.6)builds on the guidance on the acceptance of inducements bymanagers, and it’s dealt with further in section 3.2 of this manual.Managers should ensure that they comply with both this sectionand the rules on inducements at section 3.2.

The rules on the use of dealing commissions apply to a firm that acts as an investment manager when it executes customerorders that relate to:

a) shares; and

b) to the extent that they relate to shares:

i) warrants;

ii) certificates representing certain securities;

iii) options; and

iv)rights to or interests in investments of the nature referred to in (i) and (iii).

Use of Dealing Commission to Purchase Goods or Services A manager must not accept any goods or services in addition tothe execution of its customers’ orders if it:

a) executes its customer orders through a broker or another person;

b) passes on the broker’s or other person’s charges to its customers; and

c) is offered that good or service in return for the chargesreferred to in (b).

The prohibition above does not apply where:

a) the investment manager has reasonable grounds to be satisfied that the good or service received in return for thecharges in (b) above will reasonably assist the investmentmanager in the provision of its services to its customers, onwhose behalf the relevant customer orders are being executed;

b) the investment manager's receipt of that good or service inreturn for the charges in (b) above does not, and is not likelyto, impair compliance with the duty of the investment manager to act in the best interests of its customers; and

c) that good or service either:

i) is directly related to the execution of trades on behalf of the investment manager's customers; or

ii) amounts to the provision of substantive research.

An example of a good or service relating to the execution oftrades that the FCA does not regard as meeting the requirementsof the rule on use of dealing commission is post trade analytics.These would not meet the evidential criteria for a good or serviceto be directly related to the execution of trades.

Examples of goods or services that relate to the provision of research that the FCA does not regard as meeting the requirements of the rule on use of dealing commission includeprice feeds or historical price data that have not been analysed or manipulated in order to present the investment manager withmeaningful conclusions. These would not meet the evidential criteria for a good or service to amount to the provision of substantive research.

A manager intending to pass on to its customer or the Fund anycharges should always have regard to their duties under the customer or Fund’s best interest.

Disclosure and Record KeepingManagers that enter into arrangements involving dealing commissions must make adequate prior disclosure to customersand the Fund concerning the receipt of goods or services that directly relate to the execution of trades or amount to the provision of substantive research. This prior disclosure shouldform part of the summary form disclosure under the rule on inducements.

If a manager enters into arrangements in accordance with therule on use of dealing commission, he must in a timely mannermake adequate periodic disclosure to the relevant customers orthe Fund of the arrangements entered into.

Adequate prior and periodic disclosure must include details of thegoods or services that directly relate to the execution of tradesand, wherever appropriate, separately identify the details of thegoods or services that are an attributable amount to the provisionof substantive research.

In assessing the adequacy of prior and periodic disclosuresmade, the FCA will have regard to the extent to which the investment manager adopts disclosure standards developed by industry associations such as the Investment ManagementAssociation, the National Association of Pension Funds and theAssociation for Financial Markets in Europe.

Disclosure should be made at least once a year and a record ofeach prior and periodic disclosure to customers and the Fundmust be maintained for at least five years from the date on whichit is provided.

Detailed rules on the use of dealing commission can be found atCOBS 11.6 of the FCA Handbook. If a manager is in any doubtwhether or not a good or service can be accepted they shouldcontact the Compliance and Risk Team.

Monitoring the Use of Dealing CommissionManagers are under a duty to act in the best interest of customers and the Fund. The payment for research by means of dealing commission, bundles with execution costs and paid out of client funds can give rise to conflicts of interests. The FCA’sdiscussion paper on the use of dealing commission (DP14/3) encourages investment managers to seek, and brokers to provide, clear payment and pricing mechanisms that enable execution and research services to be purchased and valued,such as by using commission sharing agreements (CSAs).

The authority pays for research through dealing commission tobrokers and separately to independent research companies.


Where the authority has a CSA in place, the Compliance andRisk Team will monitor payments to ensure that the CSA is adhered to. Where CSAs are not in place, managers should ensure that after taking account of the full transaction costs,charges for research are not unreasonable and the broker stillprovides best execution. Where the authority pays for researchfrom a company that does not also provide concurrent dealingservices, managers should decide on a budget or maximumspend on research. All budgets for research services should bereviewed by the Compliance and Risk Team on an annual basis,and any increase to the budget reviewed by the Compliance and Risk Team.

All research should adhere to the evidential provisions set out inCOBS 11.6.5E which states that for a good or service to amountto the provision of substantive research the relevant researchmust:

a) be capable of adding value to the investment or trading decisions by providing new insights that inform the investment manager when making such decisions about itscustomers’ portfolios;

b) whatever form its output takes, represent original thought, inthe critical and careful consideration and assessment of newand existing facts, and must not merely repeat or repackagewhat has been presented before;

c) have intellectual rigour and must not merely state what iscommonplace or self-evident; and

d) present the investment manager with meaningful conclusionsbased on analysis or manipulation of data.

If a manager has any doubt whether payments are being madein line with the relevant CSA, or whether any research meets therequirements of COBS 11.6.5E above, they should contact theCompliance and Risk Team for guidance.

Managers should at all times adhere to the rules in this manual atSection 2.7 Best Execution.

2.7 Best Execution

FCA rule COBS 11.2.1R states that a firm that executes a customer order in a designated investment must take all reasonable steps to obtain the ‘best possible result’ for the client.

In deciding to effect any transaction for the Fund, we must takereasonable steps, having regard to the powers and provisions ofthe Local Government Pension Scheme Regulations 1995, to ensure that the counterparty is reliable; and that the terms andcircumstances of the transaction are the best available on the relevant market at the time for transactions of the same kind andsize with a reliable counterparty.

In deciding whether a particular counterparty is reliable when undertaking the transaction you must check that where they arein the UK they are:

a) regulated by the FCA;

b) used to dealing in investments of the kind contemplated;

c) used to dealing in investments of the size contemplated;

d) where they are overseas, that they are suitably regulated andour previous dealings have been carried out efficiently.

In assessing whether a particular transaction is on the best termsavailable, we must look at a number of other factors beyond theexecution price including costs, speed, likelihood of executionand settlement, size, nature or any other consideration relevantto the execution of an order. However, the effect of obtaining thebest available combination of price and charges is paramount.Any other terms of the transaction will only be taken into accountwhen the net effect of price and charges is equal.

Selection of CounterpartyAll employees have a list of approved brokers that are considered reliable for each area of transactions, describing for each any particular type of transactions for which they areespecially suitable. All agreements with brokers should include a formal duty of best execution and it should be monitored to ensure that it is given.

2.8 Timely Execution

Once a decision has been made to effect a transaction on behalfof the Fund, FCA rule COBS 11.3.2R states that the transactionmust be executed as soon as reasonably practicable in the circumstances. Postponement may, however, be allowableunder COBS 11.3.2R where we believe on reasonable groundsthat this is in the best interests of the Fund (ie, that the preferredprice may become available). Postponement is unlikely to be relevant to in-house investment decisions. We should, however,ensure that external fund managers, to whom this may be rele-vant, are complying with the requirements.

In many instances, the deal will be executed immediately by thebroker once a definite investment decision has been made.However, this is not always the case, particularly for the overseas portfolios. Such transactions are monitored in terms oftime (position checked and recorded every 24 hours) and price(tracked on the screen). Types of investment transactions, andtherefore detailed procedures, vary as discussed below, but thegeneral principle of controlling time and price is always followed.

UK EquitiesOnce a decision has been taken to buy or sell a particular stockor ETF, the manager should, as soon as reasonably practicable,begin the process of selecting a broker and placing the order.Rarely, for example with smaller companies, an order may beplaced with a broker with instructions to buy or sell up to a specified number of shares at a set limit. In this case, the brokermay take some time to execute the order, or may not be able toobtain a satisfactory price and so not deal at all. The investmentmanager should ensure that he/she is kept informed.

Overseas EquitiesOnce a decision to transact in a particular investment has beentaken, and a desired price has been identified, the managershould, as soon as reasonably practicable, place the order withthe relevant broker(s).

In the case of Japan and the Far East, orders need to be placedovernight due to time differences. In practice, this really only


means that the order should be placed when or before the nextoverseas dealing day begins, which will usually mean by the endof the UK working day. Most such orders are open for one day.

The manager should ensure that he is informed by the end of our business day if the transaction has not been executed (for example, if the requested price could not be obtained). He/sheshould then decide whether to place the order again, at the same or different price, or abandon it and record all details in thedealing book.

For the USA and Europe, where the working days overlap, orders should be placed as soon as reasonably practicable oncethe decision has been made.

Timely execution is to be expected from the broker, to the extent possible. Where, however, the order is specifically openfor one day in order to obtain a better price than the minimumrequested, then obviously execution may be delayed whereprices are moving throughout the day. Again, if a transaction hasnot been executed by the following day, the investment managermust ensure he/she is informed, and should enter the details ofthe decision taken in the dealing book.

In some cases, orders may be left open for several days, wherethe order needs to be executed in stages (due to size of order,price asked, stock liquidity etc.). In this case the dealing bookshould be kept up-to date, recording when a part of the deal hasbeen executed and carrying forward the balance.

Fixed InterestThere is no fixed interest in-house management. All bonds aremanaged externally by specialists.

Private EquityFor both primary and secondary market transactions, the equivalent of timely execution is the payment of call noticesunder the limited partnership agreement within the normal 10 to 14-day period, although the concept is not entirely relevantto this area.

GeneralStrictly, not only the time at which the order is placed, but alsothe time at which the decision to undertake the transaction ismade, should be recorded. Comparison of the two can then givean indication of whether the timely execution requirement isbeing met. Due to a lack of any motive for delaying execution inthe case of in-house investment managers, this would not seemto be necessary.

Procedures for best and timely execution by external managerswill be monitored as part of the review process.

2.9 Trade Recording

COBS 11.5.1(E) sets out the following minimum contents requirements which apply in relation to client order and execution records. The information is required to be recorded at the time of effecting a transaction. These records must be kept for a minimum of five years.

Therefore, when a transaction is effected, ie, placed with the broker, the following details should be recorded in the dealingbook:

a) Date

b) Time

c) Broker name

d) Investment (instrument identification)

e) Buy or sell

f) Number of units in the investment

g) Price obtained

h) Exchange rate (when notified by bank) where currency ac-count not held

i) Value of trade

j) Settlement day

k) Reason for transaction

l) Any special conditions or restrictions placed on the order

Any outstanding information must be recorded as it is supplied. If the information is incomplete, that fact must be recorded andthe missing information recorded as it is received.

Information from the dealing book is used to enter the transaction onto a computerised accounting system. This will bedone as the transaction is executed. The computer-generatedreference should be entered in the dealing book and a formshowing the computerised reference will be passed to the Finance section. For fixed interest transactions, the forms will be passed to the Finance section as soon as full information isavailable and this will in most cases be before receipt of contract note as settlement is usually next day.

When a contract note is received from the broker (or, initially, a fax) it should be compared with the dealing book and any discrepancy actioned.

UK and Overseas Equities

a) Date

b) Time (when dealing in open markets)

c) Broker name

d) Stock name

e) Buy or sell

f) Number of shares/units in the investment

g) Price (best price or indicative price at which order placed andactual price obtained)

h) Approximate value of trade

i) Index/active trade

j) Balance of investment units held after transactions (UK only)


k) Instructions for next move in this stock heading (UK only)

l) Currency of trade

m)Country of trade (Europe only)

n) Transaction number

Any outstanding information must be recorded as it is supplied. If the information is incomplete, that fact must be recorded andthe missing information recorded as it is received.

Any corrections to information supplied must be recorded on receipt.

When the transaction confirmation is received via fax, it shouldbe checked and any discrepancies followed up. The informationis then used to input details into the accounting system which willgenerate a transaction number. The transaction number shouldbe entered in the dealing book.

The transaction confirmation is then attached to a form detailingthe transaction number and relevant portfolio. This is thenpassed to the Finance section.

For all corporate actions for which normal dealing does notoccur, an instruction is issued to the Finance section. This is thentransmitted via HSBCnet to HSBC Institutional Fund Services bya pre-determined deadline.

2.10 Aggregation and Allocation

Aggregation and allocation are not processes that the Fund would directly undertake, relying on their brokers and counterparties to apply the rules appropriately when dealing for the fund. The FCA’s rules in this area are set out here for information purposes.

A firm is not permitted to carry out a client order or a transactionfor own account in aggregation with another client order unlessthe following conditions are met:

a) It must be unlikely that the aggregation of orders and transactions will work overall to the disadvantage of any client whose order is to be aggregated;

b) It must be disclosed to each client whose order is to be aggregated that the effect of aggregation may work to its disadvantage in relation to a particular order;

c) An order allocation policy must be established and effectivelyimplemented, providing in sufficiently precise terms for thefair allocation of aggregated orders and transactions, including how the volume and price of orders determines allocations and the treatment of partial executions.

(COBS 11.3.7R)

The administering authority must ensure that COBS 11.3.9 (Fair Allocation) is taken into account when undertaking an allocation of securities. The rule states:

A firm which has aggregated transactions for own account withone or more client orders must not allocate the related trades in away which is detrimental to a client.

2.11 Periodic Information

We must ensure that we send our customer, the Fund, at suitableintervals a report stating the value of the Fund at the beginningand end of the period. This should be provided at least sixmonthly unless another interval is given in an agreement. Thisreport should be sent within 25 business days of the completionof the date to which it is made up. If the authority's portfolioincludes an uncovered open position in a contingent liability investment then the statements should be provided on a monthly basis.

This is achieved by sending such information to the PensionsCommittee and the Investment Advisory Sub-Committee, whoare, essentially, trustees (and therefore to receive information tobe sent to customers) so as to keep them informed of the investment activities. The relevant Portfolio Managers and theAssistant Director (Investments) write individual sections, and the Strategic Director of Pensions submits the report.

As the administering authority sends the customer a periodicstatement, there is no requirement to send individual transactionconfirmations to the customer for each individual transaction undertaken. The periodic statements must contain the relevantinformation as prescribed in column 2 of COBS 16 Annex 1R R.

Periodic statements should contain the following information:

SummaryOverall summary of asset allocation of the Fund in the period setagainst approved policy.

Basis of ValuationA statement of the basis on which the value of each designatedinvestment has been calculated and, if applicable, a statementthat the basis for valuing a particular designated investment haschanged since the previous periodic statement. If any designatedinvestments are shown in a currency other than the usual oneused for valuation of the portfolio, the relevant currency exchange rates must be shown.

For each type of investment (ie, UK equities, fixed interest etc.):

a) summary of purchases and sales and total net investmentduring the period;

b) valuation of each constituent investment;

c) schedule detailing every transaction in the period (trade dateand time, number of units bought/sold, price and value, venueand instrument identifier);

d) outline of the background to the performance of the market;

e) synopsis of the investment management during the period;

f) the aggregate of money and a summary of all investmentstransferred into and out of the portfolio during the year – thisis set out in the published annual report and accounts;

g) the aggregate of any interest payments, dividends and otherbenefits received by the firm for the portfolio during that yearand a comparison with the previous year – this is set out inthe published annual report and accounts;


h) Details of underwriting commission received in the period;

i) The aggregate of realised and unrealised profits or gains andlosses attributable to the assets comprised in the portfolio; and

j) Summary of stock lending activity during the period (seebelow).

Details of Any Asset Loaned or ChargedA summary of any investments that were, at the closing date,lent to a third party; any investments that were at that datecharged to secure borrowings made on behalf of the portfolio;any temporary money loans; and the aggregate of any interestpayments made and income received during the account periodin respect of loans or borrowings made during that period and acomparison with the previous period.

Charges and RemunerationIf not previously advised in writing, a statement for the period ofaccount:

a) of the aggregate charges of the authority; and

b) of any remuneration received by the authority from a thirdparty in respect of the transactions entered into, or any otherservices provided, for the portfolio.

Where an external manager holds a significant proportion offunds (in excess of 5% of the total assets) regular activity reportsshould be submitted to the Committee.

The Strategic Director of Pensions should ensure that a copy ofall reports submitted is kept in the Investment Division.

2.12 Safekeeping of Assets

We must keep safe, or arrange for the safekeeping of, any documents of title relating to Fund investment; and properly register any registerable investments that we buy or hold for the Fund in the Fund's name. The administering authority outsources the holding of Fund assets to a third party custodian andbanks. Where we ourselves hold title documents, we must not part with possession of them except upon sale or for administration purposes. The FCA’s rules on the safekeeping of assets are found in the Client Assets Sourcebook (CASS).

If some title documents are held as security for a loan to theFund, (currently, under the Local Government Pension SchemeRegulations 1995, the Fund is not allowed to borrow) or securityfor, or any form of guarantee or indemnity provided by way ofsecurity for, the discharge of any liability arising from contingentliability transactions, we must:

a) ensure the title documents are identified and held separatelyfrom the other title documents;

b) supply the customer (ie, the Committee, who are in the position of trustees) at least every six months with a statementspecifying the number of units of each investment in our custody and, optionally, all other investments owned;

c) record certain details concerning documents held (see below);

d) reconcile all title documents held as at two dates each year, orat least every six months;

e) meet the requirements for carrying out reconciliations (seebelow); and

f) maintain an up-to-date record of all title documents by reference to the issuers of each investment.

The administering authority has procedures in place to monitorthe quality of service provided by third party custodians.

Where title documents are not held on site, we must:

a) ensure that an eligible custodian holds them;

b) authorise an eligible custodian to release title documents onlyto us (since the customer cannot expressly request release toanother person) or to our order on sale;

c) ensure by written arrangements that the eligible custodiankeeps the required records (see below);

d) ensure that the eligible custodian sends sufficient informationfor us to include documents held by him in our reconciliations.We should also obtain assurance in our agreement letters thatthe eligible custodian obeys FCA's rules and carries out,where applicable, physical reconciliations.

We must not arrange any stock lending unless it is authorised,and subject to, any terms or conditions. All monies, fees or commissions so earned (other than charges received for arranging the loan) are to be paid directly into the Fund or received on account of the Fund and dealt with in accordancewith CASS.

CASS 6.3.1R states:A firm may deposit financial instruments held by it on behalf of itsclients into an account or accounts opened with a third party, butonly if it exercises all due skill, care and diligence in the selection,appointment and periodic review of the third party and of thearrangements for the holding and safekeeping of those financialinstruments.

Our custodian bank (‘the bank’) currently holds all stocks not heldon site (which form the vast majority of the stocks). There shouldbe a written agreement with the bank that should ensure that itand its agents agree to comply with all the relevant regulationsconcerning safekeeping of the Fund's assets.

Any restrictions on use of custodians, or other relevant provisions contained in the Local Government Pension Scheme Regulations 1995 should be covered in the agreement.The agreement should also include that, where assets are notheld by a branch of the bank, the agent should also be an eligiblecustodian/own custodian (unless specific approval is given by theCommittee for use of any other custodian) and that the bank'sagreement with the agent ensures that the requirements of theregulations will be met.


The bank should accept responsibility for ensuring its agents andsub-custodians meet the standards and requirements set by theFCA. The following points should be in the customer agreement:

a) That the title of the account indicates that any financial instrument credited to it does not belong to the firm;

b) That the third party will hold or record a financial instrumentbelonging to the firm's client separately from any financial instrument belonging to the firm or to the third party;

c) The arrangements for registration or recording of the financialinstrument if this will not be registered in the client's name;

d) The restrictions over the third party's right to claim a lien, rightof retention or sale over any financial instrument standing tothe credit of the account;

e) The restrictions over the circumstances in which the thirdparty may withdraw assets from the account;

f) The procedures and authorities for the passing of instructionsto or by the firm;

g) The procedures regarding the claiming and receiving of dividends, interest payments and other entitlements accruingto the client; and

h) The provisions detailing the extent of the third party's liabilityin the event of the loss of a financial instrument caused by thefraud, wilful default or negligence of the third party or anagent appointed by him.

Documents held on site are kept in the safe on the premises.

Settlements section procedures on purchase and sale of stocksare available from the Settlements section head.

Records: the cashiers department maintains the register of certificates that are arranged by company (ie, issuer).No certificates are received or issued without a memo form authorised by the Strategic Director of Pensions/Assistant Director (Investments).

Statements: The quarterly report to the Pensions Committee includes, for each portfolio under in-house management, a list of all securities held, detailing number of units held in each.

2.12.2 Reconciliations

Private EquityThe Compliance and Risk Team performs a six-monthly reconciliation between the register and the records on the computer valuation system. A spreadsheet is produced showingany differences and the reasons for these. Reconciling itemsshould be promptly investigated and cleared. The spreadsheetshould be filed and kept for at least five years.

A full stock count of those certificates held on premises, twiceyearly on the 31 March and the 30 September in each year.

Records of this physical reconciliation, including reconciliation ofany discrepancies, should be made and kept for at least fiveyears.

UK Stocks, Overseas Stocks, UK Fixed Interest Securitiesand International BondsA daily list is received from the custodian bank showing all stocksheld by them/their agents. The same information is down loadeddirectly from the custodian's network. On a monthly basis, holdings on the investment accounting system are reconciled tothe information downloaded from the custodian's network. Allreconciliations should be carried out by a member of the Financesection and observed by the Senior Accountant and reviewed bythe Strategic Director of Pensions (ideally all should be reviewed;should time not allow this, those involving physical counts onlyshould be reviewed). All three should sign the spreadsheet/report.

StocklendingA comprehensive compliant customer agreement has beendrawn up, providing for any income to be paid directly into theFund account, to avoid the holding of client money. Prior permission for any stock lending should also be obtained in writing from the Strategic Director of Pensions, and retained on a separate file maintained by the Finance section.

2.12.3 Client MoneyWe should comply with the FCA rules on client money in CASSas these constitute best practice with regard to the handling andsafeguarding of the Fund's money.

In the normal course of business, we do not anticipate being in aposition where we hold client money, as any cash is immediatelypaid into the Fund account.

However, we should consider the possibility of client moneybeing held by:

a) brokers (in the UK and overseas);

b) our custodians;

c) external fund managers (eg, dividends received);

and we should thus ensure that every written agreement with abroker; external manager or custodian includes a clause ensuring client money protection in line with FCA regulatory requirements.


2.13 External Fund Managers

The administering authority has arrangements in place to monitor services and functions outsourced to third parties. The authority has determined that it has two material outsourcing arrangements in place; custodian services providedby HSBC and portfolio management services provided by carefully selected third party fund managers.

The FCA has a keen focus on the effectiveness of segregation ofassets and the safeguarding of client money and FCA SYSC8.1.8 requires that:

A common platform firm must in particular take the necessarysteps to ensure that the following conditions are satisfied:

a) The service provider must have the ability, capacity, and anyauthorisation required by law to perform the outsourced functions, services or activities reliably and professionally;

b) The service provider must carry out the outsourced serviceseffectively, and to this end the firm must establish methods forassessing the standard of performance of the serviceprovider;

c) The service provider must properly supervise the carrying outof the outsourced functions, and adequately manage the risksassociated with the outsourcing;

d) Appropriate action must be taken if it appears that the serviceprovider may not be carrying out the functions effectively and in compliance with applicable laws and regulatory requirements;

e) The firm must retain the necessary expertise to supervise the outsourced functions effectively and manage the risks associated with the outsourcing;

f) The service provider must disclose to the firm any develop-ment that may have a material impact on its ability to carryout the outsourced functions effectively and in compliancewith applicable laws and regulatory requirements;

g) The firm must be able to terminate the arrangement for theoutsourcing where necessary without detriment to the continuity and quality of its provision of services to clients;

h) The service provider must co-operate with the FCA and anyother relevant competent authority in connection with the outsourced activities;

i) The firm, its auditors, the FCA and any other relevant competent authority must have effective access to data related to the outsourced activities, as well as to the businesspremises of the service provider; and the FCA and any otherrelevant competent authority must be able to exercise thoserights of access;

j) The service provider must protect any confidential information relating to the firm and its clients;

k) The firm and the service provider must establish, implementand maintain a contingency plan for disaster recovery and periodic testing of backup facilities where that is necessaryhaving regard to the function, service or activity that has beenoutsourced.

The administering authority has appropriate governing agreements in place with its custodian and third party managersand will undertake periodic visits to its outsource providers toconfirm that compliance standards remain adequate within thesethird party firms and the custodian. Further details of thearrangements for supervision of third party fund managers areset out below.

2.14 Outsourcing Arrangement

Although we have outsourced to external managers discretion(within agreed parameters) to manage a proportion of our funds,and although they themselves are all authorised under the FCA,we retain responsibility for ensuring that they are complying withthe FCA rules in performance of fund management activities onour behalf. In particular, we need sufficient information and assurance for all our fund management activities, including thosemanaged externally under outsourcing arrangements. FCA guidance in SYSC 3.2.4G states that a firm cannot contract out ofits regulatory obligations. The firm is also required to undertakemonitoring on the performance of its outsourcing relationships.

Compliance Monitoring of Outsourced Fund ManagementA risk-based approach is taken to the monitoring of the externalmanagers' compliance with some counterparties being reviewedon a more regular basis than others, by way of:

Annual visits to discuss compliance control procedures and thecompletion, on an annual basis, of an affirmation statementsigned by the external manager's compliance officer. This coversall main aspects of compliance, including those which are difficult/impossible to test directly, items verifying that the termsof our agreement with them have been met, initial and ongoingad-hoc monitoring focusing on development of an adequate customer agreement and ensuring that it is updated to incorporate any rule changes. Sample testing of transactions will also be undertaken where there are unresolved queries regarding the fund manager’s procedures.

It should be noted that the external managers treat the administering authority as a ‘professional client’. This investorclassification means that certain protections may be lost, assome of the conduct of business rules relate to retail clients onlyand the external managers are not obliged to comply with theserules when carrying out fund management activities on our behalf. This does not have a significant effect in practical terms.

We must ensure that adequate terms of agreement are in placethat sufficiently protect the Fund and authority.


We should also ensure that managers are aware of the Fund objectives to provide for past, present and future employeespensions; income and capital growth, with no unnecessary risks;and of the Local Government Pension Scheme Regulations 1995restrictions on investments. The easiest way to ensure that therelevant percentage limits are not exceeded is to treat each manager's funds separately and require them to observe thelimits as a percentage of the total value of funds managed bythem.

This may be monitored by reviewing the monthly listings andquarterly reports to identify the constitution of the portfolio. If managers are not informed of the investment objectives andlimits they cannot assess suitability of investments for the Fund,and so we will not be able to assure ourselves that funds managed externally are suitably invested and hence that we arecomplying wholly with this rule. They should also be madeaware of the above.

We should also ensure that the agreements do not seek to restrict or exclude any duty or liability owed to us under the Act or the regulatory system.

Where the external manager uses external custodians for safekeeping of our assets we should ensure that whenever possible he uses an eligible custodian (preferably, an authorisedperson) and ensure that any other custodian is not used withoutour prior consent, and where the custodian uses agents, themanager is able to satisfy himself that the custodian will only appoint fit and proper persons who will comply with the relevantrules. The external managers use HSBC as custodian.

The external fund managers should send details every sixmonths of the asset reconciliations they have carried out, show-ing the results and any corrective action that needed to be taken(as relates to our assets). Also, the agreement should set out theprocedures they follow, and whether they physically reconcile allassets themselves or whether the custodian may do this.

The annual affirmation statements should be reviewed by theCompliance and Risk Manager who should ensure that any problems are discussed with the manager and resolved. The statement and any comments from the Compliance and RiskManager should then be passed to the Strategic Director of Pensions for review. Any adverse findings or serious problemsshould question whether the manager continues to be fit andproper to carry out investment business on our behalf.

The statement should be initialled by all that review it, as evidence.

Compliance issues should be included in the quarterly report to the Pensions Committee. A summary of the quarterly compliance reviews, including discussion of any adverse findings, should be sent to the Compliance Officer eachmonth/quarter as appropriate. Copies of the completed review/audit testing carried out at the site visits should be reviewed and kept by the Compliance Officer. Any changes inexternal managers must be reported to the Committee.

Performance MonitoringOther ongoing monitoring by the Portfolio Manager will focus on review of the monthly transaction listings/valuations and quarterly reports.

These should be reviewed as a check over suitability, portfolioconstitution, churning, and will also provide some evidence thatrecords are being properly kept.

The Portfolio Managers are immediately responsible for themonitoring of the performance of external investment managersand any issues arising will be discussed with the Strategic Director of Pensions.

Any significant problems included within the report should be discussed with the Strategic Director of Pensions. If sufficientlyserious (if retention of the manager's services are in question)then this should be reported to the Committee.

2.15 Disclosure and Transparency Rules

The FCA monitors market disclosures by issuers and othersthrough enforcing compliance with the Disclosure Rules andTransparency Rules (DTRs) in its handbook, Chapter 5 of the Disclosure Rules and Transparency Rules (DTRs). The rules ensure transparency around the ownership of companies whoseshares are admitted to trading on a regulated market.

Subject to certain exemptions a person must notify an issuer andthe FCA of the percentage of its voting rights held through his direct or indirect holding of financial instruments.

Making a Disclosure By no later than midnight on the day of the trade, you must determine your holdings. To calculate the proportion of shares,you should use the total number of voting rights according to theissuer’s most recent disclosure.

Subject to the exemption for certain third country issuers (seeDTR 5.11.6 R), a person must notify the issuer of the percentageof its voting rights he holds as shareholder or holds or is deemed to hold through his direct or indirect holding of financialinstruments falling within DTR 5.3.1R (1) of the handbook, subject to the exemption in DTR 5.3.1R(2), and DTR 5.3.1R (2A),(or a combination of such holdings) if the percentage of thosevoting rights:

a) reaches, exceeds or falls below 3%, 4%, 5%, 6%, 7%, 8%,9%, 10% and each 1% threshold thereafter up to 100% (or inthe case of a non-UK issuer on the basis of thresholds at 5%,10%, 15%, 20%, 25%, 30%, 50% and 75%) as a result of anacquisition or disposal of shares or financial instruments fallingwithin DTR 5.3.1 R; or

b) reaches, exceeds or falls below an applicable threshold in (1)as a result of events changing the breakdown of voting rightsand on the basis of information disclosed by the issuer in accordance with DTR 5.6.1 R and DTR 5.6.1A R;

and, in the case of an issuer which is not incorporated in an EEAState, a notification under (b) above must be made on the basisof equivalent events and disclosed information.


Disregarded InterestsCertain interests held by qualifying asset managers and investment managers and shares belonging to open ended investment companies may be disregarded for the purposes of notifications below 10%. However, such interests should bedisclosed at the 5% threshold.

The FCA states in its policy statement (PS06/11) “In the limitedcircumstances where an entity has holdings as principal in combination with holdings that are disregarded then the following should be considered. Holdings that are disregardedand non-exempt holdings should be aggregated. If the aggregatebreaches the 5% or 10% thresholds, then these holdings must bedisclosed. Once the disregarded holding has lost its exempt status at the 5% level, then, to the extent that additional non-exempt holdings are acquired, disclosure is required at eachpercentage point. If additional exempted holdings are acquired,these do not have to be disclosed until the aggregate is equal toor above 10%.”

Managers should bear in mind the following points:

a) If an asset manager has holdings on behalf of a client (‘disregarded’ holdings) and holdings as a principal (‘non-exempt’ holdings), these should be aggregated. If the total is equal to or exceeds 5%, then this total should be disclosed (examples A & B).

b) If the aggregate holding is already equal to, or above 5% andthere is a further acquisition of shares, then the disclosure positions depend on the nature and size of the acquisition. If disregarded holdings are acquired, no further disclosure isrequired until the aggregate equals or exceeds 10% (no further disclosure: example C; exceeding the 10% combinedholding: example D).

c) If non-exempt holdings are acquired, the aggregate totalshould be disclosed if the acquisition increases total votingrights by 1% or more (example C).

Example A:Combined holdings exceeding or equal to the 5% threshold

a) An asset manager purchases a holding of 4% on behalf ofclients as an agent (a holding that can be ‘disregarded’); ithas no holdings as a principal. In this case there is no requirement to disclose as the combined holding is lessthan 5%.

b) The asset manager then acquires a 1% holding as principal,but the level of disregarded holdings remains unchanged.The disclosure is 5%, as the combined holdings are greaterthan, or equal to, 5%.

Example B:Combined holdings exceeding or equal to the 5% threshold

a) An asset manager has a holding of 1% as principal and acquires a holding of 2% on behalf of clients (disregardedholdings). There is no disclosure requirement.

b) The asset manager then increases holdings on behalf ofclients to 5% (a 3% increase) but the level of other holdingsremains unchanged. Here the disclosure is 6%, as the combined holding has breached the 5% threshold as a result of the acquisition.

Example C:Combined holdings above 5% with an acquisition of disregarded holdings and combined holdings above 5% with an acquisition of non-exempt holdings

a) An asset manager has holdings on behalf of clients of 4%and holdings of 2% as principal (the aggregate of theseholdings should have already been disclosed).

It makes a further acquisition on behalf of clients of 1%. In this case there is no disclosure. If the aggregate holdingsare equal to, or above, 5% then if exempt (disregarded)holdings are acquired, no further disclosure is required untilthe aggregate equals, or exceeds, 10%.

b) The asset manager increases holdings as principal to 4% (a 2% increase) but the level of disregarded holdings remains unchanged. Here the obligation is 9%. If the original holdings are equal to, or above, 5%, additional acquisitions as a principal means the full holding must bedisclosed.

Example D:Combined holdings exceeding or equal to the 10% threshold

a) An asset manager has holdings as principal of 2% and acquires 4% of holdings on behalf of clients. Here the disclosure is 6%, as the combined holding has breached the 5% threshold as a result of the acquisition.

b) The asset manager purchases a further 4% holding on behalf of clients (total of 8%), but its holdings as principal remain unchanged. The disclosure is 10%. If holdings onbehalf of clients are acquired, disclosure is required onlywhen the aggregate breaches the 5% or 10% thresholds.

Example E:3% threshold for holdings as a principal

a) The asset manager purchases a 3% holding as principal.The disclosure is 3% as there is an obligation to disclosenon-exempt holdings which are equal to, or exceed theminimum 3% threshold.

To assist you in considering whether or not you should disclose a holding, please refer to the following examples:


2.16 Staff Fitness and Propriety

The Fit and Proper Test for Approved Persons (FIT) Sourcebookdetails what the FCA will consider when assessing the suitabilityof a candidate to fill a controlled function.

The FCA will have regard to a number of factors when assessingthe fitness and propriety of a person to perform a particular controlled function. The most important considerations will be theperson’s:

a) honesty, integrity and reputation;

b) competence and capability; and

c) financial soundness.

(FIT 1.3.1G)

In order to comply with the above requirements, in accordancewith the Council’s procedures, the Investment Division is responsible for the recruitment process and assessment of suitability via the vetting of applicants for employment.

All applicants are required to supply a comprehensive CV andprovide the names of two referees who may be contacted if anoffer of employment, conditional on satisfactory references, is made. Where a conditional offer is made, the HR Division isresponsible for taking up references. The Investment Divisionmust then satisfy themselves as to the applicant’s identity, background, knowledge, qualifications and experience.

The recruitment procedures applied by the Investment Divisioninclude:

a) verification of the knowledge and skills of the individual in relation to the knowledge and skills required for the role; and

b) obtaining sufficient information about the individual’s previousrelevant activities and training. As part of this process, the HRDivision is responsible for taking up references.

2.17 Training and Competence

Under Training and Competence (TC) 2, a firm must make andfulfil a number of high level commitments, that:

a) its employees are competent;

b) its employees remain competent for the work that they do;

c) its employees are appropriately supervised;

d) its employees’ competence is regularly reviewed; and

e) the level of competence is appropriate to the nature of thebusiness.

Firms must therefore ensure that employees have access totraining arrangements, which includes technical training andpractical experience, to ensure that they attain the threshold levelof competence required for their role.

In addition, firms may wish to require individuals to demonstratecompetence by passing an approved examination. Firms shoulddetermine which roles will be subject to this requirement in linewith the activities detailed in TC Appendix 1.1.1 Table.

A firm must not permit an employee to engage in or oversee anactivity unless:

a) the employee has been assessed as competent in that activity; or

b) the employee engages in or oversees the activity while underappropriate supervision.

Employees who would be subject to the requirements of TCwould be required to undertake and pass the appropriate ap-proved examination unless they could be grandfathered into theregime or receive a waiver of the requirement to sit the examfrom the FCA. Until that time they would be deemed to betrainees and would be subject to relevant supervision. The Council’s policy is that individuals who join as Assistant Investment Analysts or above must take appropriate qualifications or a relevant degree. Existing employees are not required to take qualifications as it is assumed that they have sufficient experience to be grandfathered.

With the co-operation of the HR Division, the Council will ensure that assessment of individual training and competencerequirements will be included as part of the recruitment processand any relevant documentation in relation to a new recruit’sthreshold competent status will be obtained from their previousemployer. Pre-employment checks should also be made of anindividual’s fitness and propriety to undertake a particular function.

The FCA requirements make it clear that the onus is firmly onfirms to set up what they believe are ‘adequate’ training and supervision arrangements.

The key elements of the TC requirements are the:

a) identification of activities and members of staff to which therequirements apply (i.e. anyone associated with regulated activities, including back office administrative functions);

b) setting of minimum competence requirements for those activities as a benchmark standard both for existing staff andnew recruits;

c) providing training arrangements (including technical knowledge and the development of practical experience and application skills) by which trainees can reach a threshold standard of competence;

d) implementing appropriate supervision procedures to ensurestandards are maintained and that the documentation of staffcompetence is maintained at a detailed level;

e) creation of a system for assessment of competence and foridentification of training needs; and

f) providing arrangements for updating and refreshing; knowledge, understanding and skills to ensure continuingcompetence.

The investment staff of the administering authority will voluntarily meet the continuing obligations of FCA's Training and Competence Sourcebook. The training and competenceneeds will be identified as part of the personal appraisal process(PRAISE), which is performed on a six monthly basis, and associated continual professional development. The Strategic


Director of Pensions is responsible for identifying and developingthese needs.

The Council will maintain training and competence records in linewith the regulations set out in the Training and CompetenceSourcebook.

A firm must make appropriate records to demonstrate compliance with the rules in this sourcebook and keep them forthe following periods after an employee stops carrying on the activity:

a) At least five years for MiFID business;

b) Three years for non-MiFID business; and

c) Indefinitely for a pension transfer specialist.

(TC 3.1.1R)

In accordance with the above requirements, the HR Division, together with heads of operational divisions, is responsible forensuring new employees fully understand the Council’s operational procedures, ethos and business environment, and addressing any shortfall in the knowledge and skills requiredby new employees to operate at the desired level of entry.

The individual induction training needs of each new recruit will beidentified at the divisional level prior to the employee engaging inor overseeing any regulated activity, and the Strategic Director of Pensions will arrange appropriate on-the-job training such as briefing, shadowing or directed self-study. The training is required to be timely, planned, appropriately structured and evaluated. The Strategic Director of Pensions is also required toensure that the training remains effective and up to date, takesinto account changes in the market and to products, legislationand regulation, and that the training methods used are appropriate to the activity and to the employee’s circumstancesand role.

The HR and Investment Divisions are responsible for the maintenance of sufficient records to evidence that training andassessment is being carried out appropriately to satisfy applicable training and competence requirements, and todemonstrate compliance with FCA record-keeping requirements for each individual employee.

2.18 Compliance Monitoring

The administering authority has a continuing obligation to ensurethat it remains fit and proper to carry on investment business.

Compliance monitoring helps to identify the effectiveness of theadministering authority's compliance arrangements, includingthose of its third parties, and to make appropriate remedial actionin order that fitness and propriety is maintained.

A monitoring programme is in place to cover the main areaswithin the administering authority, which are affected by the Financial Services and Markets Act. The activities to be monitored have been ranked according to significance to ensure that the most risky areas are reviewed most frequently.The programme is divided into cycles of quarterly, half yearlyand annual reviews.

The main areas of review are:

a) accuracy of Fund valuations;

b) investment and borrowing limits;

c) compliance with the appropriate statutory duties registration;

d) complaints/breaches recording;

e) marketing literature; and

f) trading in Fund assets (best execution, churning, etc.).

The Compliance and Risk Team carries out the monitoring programme, providing formal reporting to the Strategic Directorof Pensions and the Pensions Committee. The Compliance Officer retains a copy of the completed programme. The monitoring programme is intended to be flexible, so that it may easily be amended in the light of experience, operational/systems change, or new regulatory requirements.The administering authority must also monitor its external fundmanagers to satisfy itself that they are performing suitable compliance monitoring.

2.19 Transaction Reporting

FCA rules state that whenever a firm enters into a reportabletransaction, it must make a transaction report to the FCA. Transaction reporting is performed by brokers on behalf of theFund.

A firm which executes a transaction:

e) in any financial instrument admitted to trading on a regulatedmarket or a prescribed market (whether or not the transactionwas carried out on such a market); or

e) in any OTC derivative, the value of which is derived from, orwhich is otherwise dependent upon, an equity or debt-relatedfinancial instrument which is admitted to trading on a regulated market or on a prescribed market;

must report the details of the transaction to the FCA.

(SUP 17.1.4)

A firm must report the required details of the transaction to theFCA as quickly as possible and by not later than the close of theworking day following the day upon which that transaction tookplace.

(SUP 17.2.7R)

Transaction reporting is performed by HSBC as custodian. A quarterly reconciliation is performed using the data recordedon ICON and HSBCnet. Monthly transaction listings are sent toHSBC for performance reporting purposes.


3 General

3.1 Conflicts of Interest

The FCA Handbook SYSC 10.1.3R states that a firm must take allreasonable steps to identify conflicts of interest between:

a) the firm, including its managers, employees and appointedrepresentatives (or where applicable, tied agents), or any person directly or indirectly linked to them by control, and aclient of the firm; or

b) one client of the firm and another client; that arise or mayarise in the course of the firm providing any regulated activityor ancillary service.

The nature of the services provided by the authority may giverise to potential or actual conflicts of interests. We have put inplace procedures to identify and manage potential and actualconflicts to ensure these do not adversely affect the interest ofour customers and the Fund and that our actions are not influenced by interest which favour the authority, its employeesor another party.

Conflicts of interests should be avoided, documented, managedand disclosed if they cannot be avoided.

Types of ConflictsFor the purpose of identifying the types of conflicts that arise, ormay arise, in the course of your role, that may entail a risk ofdamage to the interest of a customer or the fund, you must takeinto account, as a minimum, whether you or a person linked tothe authority:

a) is likely to make a financial gain, or avoid a financial loss, atthe expense of the client;

b) has an interest in the outcome of a service provided to theclient or of a transaction carried out on behalf of the client,which is distinct from the client's interest in that outcome;

i) in the case of a management company providing collective portfolio management services for a UCITS scheme, 2) also applies where the service is provided to, or the transaction is carried out on behalf of, a client other than the UCITS scheme;

c) has a financial or other incentive to favour the interest of another client or group of clients over the interests of theclient;

d) carries on the same business as the client; or in the case of amanagement company, carries on the same activities for theUCITS scheme and for another client or clients which are notUCITS schemes; or

e) receives or will receive from a person other than the client an inducement in relation to a service provided to the client, in the form of monies, goods or services, other than the standard commission or fee for that service.

If you are in any doubt about whether a potential or actual conflict has arisen, please contact the Compliance and RiskTeam.

Membership of the scheme does not arise to a conflict.

Management of ConflictsThe authority maintains the following procedures for managingconflicts:

a) Identification - Staff are provided with the Compliance Manual which sets out the types of conflicts that arise or mayarise in their roles in addition to support from Compliancewhere there is any doubt whether there is a potential or actualconflict.

b) Recording - A ‘Conflicts Register’ of all potential and actual conflicts is maintained by Compliance.

c) Personal account dealing (PAD) - to prevent conflicts arisingfrom information obtained by virtue of your employment, allstaff are required to adhere to the rules on PAD. Please seesection 3.3.1 of this manual for further details.

d) Outside business interest - All staff are required to notify Compliance of, and seek approval for any outside business interest.

e) Gifts and entertainment - The authority has implementedprocedures to ensure that staff do not offer or provide gifts orentertainment to employees of any other company or personin an existing or potential business relationship, without thespecific authorisation of the Compliance Officer. Please seesection 3.2.1 of this manual for further details.

f) Best execution - The authority has put in requirements to ensure client orders are handled fairly and to reduce potentialconflicts. Please see section 2.6 of this manual for further details.

g) Training - On an annual basis, Compliance provides face-to-face group training with staff to update them on the types ofpotential and actual conflicts applicable to their roles, updatestaff on how the authority manages conflicts of interest, andanswer any questions on conflicts of interests.


3.2 Charges

3.2.1 IntroductionUnder the FCA rules, explicit employee dealing rules need to bemade available to all employees, and abiding by them in this is acondition of service. The administering authority will regard contravention as gross misconduct. The rules set out below aredesigned to ensure that, as far as is possible within the administering authority's systems and procedures:

a) Personal conflicts of interests are managed;

b) Personal dealings by employees conform with law and regulation and to best practice;

c) Employees are fully aware of what is expected of them;

d) No one unknowingly abuses the trust that is placed on themas responsible employees of the administering authority; and

e) That the highest standards of integrity, on which the administering authority's reputation is based, continue to bemaintained.

It is the responsibility of the Compliance Officer to ensure therules are read by all members of staff and that as far as possiblethe procedures should be complied with; failure to comply couldinvolve the individual committing the criminal offence of insiderdealing. Insider dealing arises where, for example, a persontrades in securities when in possession of information which isnot generally known to the public and which is price-sensitive, ie, which could, if generally known, affect the market price of the security.

Breach of these rules will be regarded as gross misconduct with the ultimate penalty of summary dismissal, irrespective of whether proceedings are instigated under any relevant legislation by the authorities.

Dealing in securities is a fundamental part of the administeringauthority's operations. The FCA rules require that staff dealingmust not conflict with a firm’s duties to its customers (see COBS11.7). No staff dealing activities will be acceptable which may inany way endanger the reputation of the administering authority.Nor may the personal dealings of employees interfere with theperformance of their duties for the administering authority.

However, there is no restriction on the type of investments inwhich employees may deal on their own account, as long as alldealings by staff and connected persons are carried out in accordance with the rules below.

Any breach of these rules will be considered grounds for disciplinary action, which may include dismissal.

3.2.2 ScopeThese rules apply to dealings in stock shares, loan stock, warrants, rights, options, traded options, future contracts or anyother securities of any companies or bodies listed on any recognised stock exchange, on the unlisted securities or ‘over-the-counter’ market anywhere in the world.

These rules apply to all employees of the administering authority(including directors) having duties or responsibilities associatedwith the management of Fund investments whether full time,part time, and temporary or seconded. It also applies to thosewho are ‘connected’ with these employees.

A connected person is someone whom the employee advises ormay advise regarding investments or from whom the employeehas a right of consultation in respect of these investments andwill include:

a) spouse, civil partner or cohabitee;

b) child, step-child, adopted child or financially dependent children;

c) parent or step-parent of employee or of employee's spouseor partner;

d) brother or sister;

e) a company in which one or more employees and/or a connected person has a controlling interest either singly or inaggregate;

f) a trustee of a trust under which the employee or connectedperson benefits; and

g) any other person to whom the employee has given advice or through whom the employee has dealt otherwise than inthe normal course of business acting in the capacity of theemployment for the transaction in question.

In certain circumstances, the employee may be unaware as tothe dealings of some of the persons listed above. If this is thecase, the employee must report to the Compliance Officer orStrategic Director of Pensions the identity of all such persons andthe reason for this lack of knowledge.

3.2.3 RequirementsEmployees and connected persons are required to forward acopy of all contract notes of transactions in which they have beeninvolved to the Compliance and Risk Manager. Employees havethe option of requesting that their broker automatically sends theCompliance and Risk Team contract notes of transactions inwhich they have been involved. Please contact the Complianceand Risk Manager for further details.

In addition, neither the employee nor connected persons maydeal on their own behalf ahead of a transaction in the same stockto be undertaken on behalf of the Fund (in other words, no ‘frontrunning’).

To support this, there should be no share dealing by individualsseven days before or after the Fund trades in the active globalmandate, subject to exceptions (ie, when the Fund trades quicklyin response to a significant piece of news; in which case staffmay legitimately have dealt in the same stocks within the previous seven days). Staff wishing to deal should check with theActive Global Equities Portfolio Manager, whether or not theycan trade prior to doing so and if allowed, notify the Complianceand Risk Team.


The Compliance and Risk Team will check within the fourteenday window, all personal share dealings by staff against those ofthe Fund (taking into account those stocks which the Fund hastraded on an exceptions basis). Additionally, the Fund will reconcile the contract notes of transactions against employeesbrought forward balance (ie, statement of holdings) and their endof period position statement.

Generally, employees and connected persons must not deal in a security where they are in possession of non-public price sensitive information as defined by the Criminal Justice Act 1993.Employees should fully appraise themselves with the provisionsof this Act, a copy of which is held by the Strategic Director ofPensions.

When requested by the Compliance and Risk Team, you will be required to disclose your PAD and that of your connected persons.

If any employees have difficulties in meeting this requirementthey must contact the Compliance Officer immediately. Theymay only breach this requirement if they have the written authorisation of the Compliance Officer.

3.3 Inducements

The FCA Principles 1 and 6 require the firm to conduct its business with integrity, to pay due regard to the interests of itscustomers and treat them fairly. As such, the authority (and itsemployees) must avoid any conflicts of interest with its duty tocustomers. This means the firm should not conduct any businessunder arrangements with any third party that might give rise to aconflict with its duty to customers.

You are also reminded of the opening sentence of paragraph 70of the National Scheme of Conditions of Service, which is as follows:

"The public is entitled to demand of a local government officerconduct of the highest standard and public confidence if his integrity would be shaken were the least suspicion to arise thathe could in any way be influenced by improper motives."

You must use common sense in assessing any situation whereundue influence could be construed. No individual should doanything in the carrying out of his or her duties, which could giverise to accusations of improper conduct. These guidelines are intended to assist in making the right decision in any particularcase when offers of gifts or hospitality are received.

The FCA's Inducement Rule requires that the firm must take reasonable steps to ensure that it, and any employee acting onits behalf, does not offer, give, solicit or accept an inducement, ifit is likely to conflict to a material extent with any duty that thefirm owes to its customers.

This means that the firm must not give or receive any goods orservices to or from another party which may induce the firm toeither use a particular service, be it broking, safe custody or research services or induce the other party to use a particularservice of the firm.

3.3.1 Personal GiftsPersonal gifts or any other benefits must not be offered or provided to employees of any other company or person in anexisting or potential business relationship with the firm withoutthe specific authorisation of the Compliance Officer.

The term ‘gift’ or ‘benefits’ includes credit or any other financialadvantage, any opportunity to make, receive or increase anygain or revenue or to avoid or reduce any loss or expense,money or other property, and any service, facility, system or information.

A gift offered to an officer or his/her family should be tactfully refused when it comes from a person or organisation:

a) with whom the administering authority has or is about to havedealings of any kind whatsoever; and

b) who has applied or may apply to the administering authorityfor any kind of decision.

The only exceptions to this rule are:

a) gifts of little value often given by way of trade advertisementsto a wide range of people and organisations, eg, calendars,diaries, inexpensive pens and other similar articles for use inthe office;

b) gifts of little value given on conclusion of a courtesy visit, eg, to a factory or other premises; and

c) when, it would be discourteous or reflect adversely on the administering authority if the gift of modest nature was not accepted, but acceptance should be on the basis that it will beused to raise funds for charity, community groups, etc.

If in doubt whether a gift may be accepted, the gift should be politely and tactfully refused.

Except for gifts mentioned in the first two bullet points above, all offers of gifts either refused or accepted should be reported to the Strategic Director of Pensions and recorded in the gifts and hospitality register, together with the manner of disposal ofany gifts. The gift register is maintained by the Compliance & Risk Manager.

3.3.2 Gifts in the Form of MoneyUnder no circumstances may cash or cash convertible gifts be offered or accepted. Any such gift which is offered to an employee in the course of, or in connection with, a current orprospective business relationship must be declined, and reportedimmediately to the Compliance and Risk Team.

3.3.3 Hospitality Not Requiring ApprovalCaution is required when a person or commercial body havingbusiness with or seeking a decision from the administrative authority offers hospitality. This is particularly the case when theoffer is made to an individual officer who must refuse where anysuggestion of improper influence is possible.

Hospitality should only be accepted where it is on a scale appropriate to the circumstances, reasonably incidental to the occasion, not extravagant, and where it is apparent that no cause could reasonably arise for adverse criticism about the acceptance of the hospitality.


The following are examples of hospitality, which are acceptable,and those that are not:

Acceptable:

a) An offer of a drink following a site inspection;

b) Invitations to attend functions where the individual representsthe administering authority, eg, dinners at which they are invited to speak, opening ceremonies, non-commercial presentations and shows, charity type sponsorship etc. or tofunctions which they attend by virtue of their professional position;

c) A working lunch or business dinner of a modest standard provided to enable the parties to continue to discuss business;

d) Travel costs and hotel costs where we hold a position on theadvisory board of a private equity fund.

Unacceptable:

a) Cabarets and holidays;

b) Personal offers of theatre tickets or tickets for sporting eventsas opposed to attendance when the officer is representing theadministering authority;

c) Offers of hotel accommodation or company flats for personaluse;

d) A personal invitation to have evenings or days out with representatives of a company or firm who have dealings with the administering authority;

e) Personal invitation to use any company facilities or vehicles,etc.

f) Repeated and lavish entertainment or hospitality.

3.4 Bribery Act 2010

The Bribery Act 2010 came into force on the 1st July 2011 covering two broad offences, ‘active bribery’ being the offering,promising or giving of a bribe and ‘passive bribery’ being the requesting, agreeing to receive or accepting of a bribe. Due tothe nature of the Fund’s activities and the associated proceduresin place, it is considered that the committing of either of theabove offences by Fund officers is highly unlikely. However, anymember of staff who, in the course of Fund business suspectsthat bribery has been offered or committed should immediatelyreport their suspicions to the Strategic Director of Pensions.

The Fund can demonstrate that adequate procedures are inplace to ensure compliance with the six principles of the Act,through implementation of the policies and procedures detailedbelow:

Principle 1 – Proportionate Procedures“A commercial organisation’s procedures to prevent bribery bypersons associated with it are proportionate to the bribery risks itfaces and to the nature, scale and complexity of the commercialorganisation’s activities. They are also clear, practical, accessible,effectively implemented and enforced.”

Fund procedures are designed and implemented to assist officers in identifying and mitigating potential risks, as demonstrated by the following documents and practices:

a) Fund Compliance Manual - incorporating rules on inducements, gifts and hospitality.

b) Officer codes of practice - within the Organisational Mattersguide.

c) Annual training regime for Fund staff conducted by a regulation and compliance specialist.

d) Engagement with specialist legal advisers.

e) Engagement with authorised and regulated counterparties,eg, brokers, the Fund’s custodian.

f) Internal controls and procedures hard coded into the main administration system preventing procedural breaches.

Principle 2 – Top-level Commitment“The top-level management of a commercial organisation (be it a board of directors, the owners or any other equivalent body or person) are committed to preventing bribery by persons associated with it. They foster a culture within the organisation in which bribery is never acceptable.”

Fund officers are committed to preventing bribery and promoting awareness, as demonstrated by the following practices and documents:

a) Robust governance and decision-making regime ensuringFund approval for investments, operations and engagements.

b) Requirement to disclose potential conflicts of interest alongwith the publication of any potential related party transactions.

c) Annual training regime for Fund staff conducted by a regulation and compliance specialist.

d) Fund Compliance Manual - incorporating rules on inducements, gifts and hospitality.

e) Officer Codes of Practice – both internally, within the Organisational Matters guide and externally, such as theCIPFA professional code for members.

f) Engagement with authorised and regulated counterparties.

g) Engagement with specialist legal advisers.

h) Support, policies and procedures from the administering authority on areas such as whistleblowing, procurement andmember codes of conduct.


Principle 3 – Risk Assessment“The commercial organisation assesses the nature and extent ofits exposure to potential external and internal risks of bribery onits behalf by persons associated with it. The assessment is periodic, informed and documented.”

The Fund operates business wide and ongoing risk monitoringprocedures in order to minimise or mitigate both internal and external risks, as demonstrated by the following practices anddocuments:

a) Comprehensive and regularly reviewed risk register.

b) Work in partnership with internal audit and legal specialists.

c) Annual review of compliance with the Bribery Act 2010through incorporation into compliance and regulatory updates.

d) Annual training regime for Fund staff conducted by a regulation and compliance specialist.

Principle 4 – Due Diligence“The commercial organisation applies due diligence procedures,taking a proportionate and risk based approach, in respect ofpersons who perform or will perform services for or on behalf ofthe organisation, in order to mitigate identified bribery risks.”

The Fund operates a detailed and thorough due diligenceprocess in respect of new investments and relationships, whichis underpinned by the approval hierarchy and continued reporting requirements. These are demonstrated by the following practices and documents:

a) Thorough due diligence process in assessing potential new investments or counterparties.

b) Robust governance and decision making regime ensuringFund approval for investments, operations and engagements.

c) Robust monitoring and reporting procedure in regard to existing relationships.

d) Fund Compliance Manual - incorporating rules on inducements, gifts and hospitality.

Principle 5 – Communication & Training“The commercial organisation seeks to ensure that its briberyprevention policies and procedures are embedded and understood throughout the organisation through internal and external communication, including training that is proportionateto the risks it faces.”

The Fund demonstrates compliance with communication andtraining requirements by way of the following practices and documents:

a) Annual training regime for Fund staff conducted by a regulation and compliance specialist.

b) Fund Compliance Manual - incorporating rules on inducements, gifts and hospitality.

c) Officer codes of practice - within the Organisational Mattersguide.

Principle 6 – Monitoring & Review“The commercial organisation monitors and reviews proceduresdesigned to prevent bribery by persons associated with it andmakes improvements where necessary.”

On an annual basis, the Fund will undertake the following to ensure compliance with the monitoring and review requirements:

a) Annual review of compliance with the Bribery Act 2010through monitoring into compliance and regulatory updates.

b) Annual training regime for Fund staff conducted by a regulation and compliance specialist.

c) Periodic review by internal and/or external auditors.

Note:There is no definition of what constitutes reasonable suspicion.There must be genuine reasons or grounds for the suspicion: it ismore than speculation or hunch and common sense will beneeded.

If you are in any way unsure as to what might constitute bribery,you should seek guidance from the Compliance officer.

3.5 Money Laundering Procedures

3.5.1 BackgroundMoney laundering is the process by which criminals attempt tohide and disguise the true origin and ownership of the proceedsof their criminal activities, thereby avoiding prosecution, conviction and confiscation of the criminal funds. If successful, it allows them to maintain control over those proceeds and ultimately to provide a legitimate cover for their source of income.

The sources of laundered money include drug trafficking, terrorism, theft, fraud, robbery, forgery, counterfeiting, blackmail,and extortion. A high proportion originates from drug traffickingbut sources also include tax fraud and evasion.

Money laundering is a global phenomenon and as money laundering becomes easier due to money becoming increasinglyelectronic, the importance of combating it has risen considerably.Cash lends anonymity to many forms of criminal activity and isthe normal medium of exchange in the world of drug traffickingbut it is important to note that it is not just cash, but also securitiesand any other financial instruments, which can be laundered. Inthe more sophisticated crimes the presence of cash is unlikelyand the illicit proceeds may have to be laundered through several 'layers' of transactions to make it 'clean'.

3.5.2 How to Recognise Money Laundering

General MethodsThere is no one method of laundering money and new moneylaundering devices are being thought up all the time, involvingsmall or large amounts of money but the laundering process can be summarised by three stages. These three stages to the laundering process which may occur separately or simultaneously or overlap, include:


a) Placement - the physical disposal of cash proceeds derivedfrom illegal activity;

b) Layering - creating complex layers of financial transactions todisguise the source of the proceeds and confuse the audit trailthereby separating the illicit proceeds from their source; and

c) Integration - returning the proceeds to the economy such thatthey provide apparent legitimacy to criminally derived wealth.

Certain points of vulnerability have been identified in the laundering process:

a) Entry of cash into the financial system;

b) Cross-border flows of cash; and

c) Transfers within and from the financial system

3.5.3 Suspicious TransactionsAs previously stated, there is no one method of launderingmoney – money launderers may use many different types oftransactions especially in the layering stage of money launderingand, therefore, it is difficult to define a suspicious transaction. Deciding what constitutes a suspicious transaction is a somewhatpersonal and subjective one. Clearly a person is not expected toknow the exact nature of a criminal offence or that particularfunds have arisen from a criminal offence. However, certainquestions need be considered in determining whether a transaction is suspicious:

a) Is the size of the transaction consistent with the normal activities of the customer?

b) Is the transaction rational in the context of the customer'sbusiness or personal activities?

c) Has the pattern of transactions conducted by the customerchanged, ie, unusual settlement or delivery instructions?

d) Where the transaction is international in nature, does the customer have any obvious reason for conducting businesswith the other country involved?

The key to recognition is knowing enough about the customer'sbusiness to recognise that a transaction or series of transactionsis unusual.

If you are suspicious, you should make a report to the MoneyLaundering Reporting Officer (MLRO) or, in their absence, theCompliance Officer. You should not attempt to investigate thematter yourself before making a report, or attempt to approachthe client concerned for clarification unless you have been instructed to do so by the MLRO.

There is no prescribed set form when making a report and a report can be made verbally or in writing. The report should bemade on a confidential basis to the MLRO or in his absence tothe Compliance Officer. You should not inform any other member of staff or external parties (including the client concerned) that a report has been made, as this may constitutean offence in itself.

3.5.4 Overview of UK LegislationThere are now eight Acts of Parliament, all still in force, whichdeal with offences related to money laundering. The legislationhas been developed through 'add-ons' and amendments to various Acts of Parliament. Anti-money laundering provisionshave been developed in respect of drugs, terrorism and othercrime.

The Criminal Justice Act (CJA) 1993, together with the regulations, extends the legal obligations under earlier Acts covering drug trafficking and terrorism to the laundering of theproceeds of any serious criminal conduct and contains the additional provisions necessary to implement the EC MoneyLaundering Directive.

The relevant legislation is contained in the following Acts andregulations:

a) The Criminal Justice Act 1993

b) The Drug Trafficking Act 1994

c) The Criminal Law (Consolidation) (Scotland) Act 1995

d) The Terrorism Act 2000

e) The Anti-Terrorism, Crime and Security Act 2001

f) The Proceeds of Crime Act 2002

g) The Money Laundering Regulations 2007

h) The Bribery Act 2010 (implemented July 2011 – see section3.3)

3.5.5 The Money Laundering Regulations 2007The regulations require institutions and firms within the financialservices sector to establish and implement specific policies andmaintain procedures to guard against money laundering. As aresult, it is a criminal offence for a firm not to establish and maintain:

a) internal control policies;

b) client identification procedures;

c) adequate record keeping arrangements;

d) systems for recognising suspicious transactions; and

e) effective reporting procedures and training procedures forstaff.

Penalty: Failure to comply with the regulations may be punishable by a maximum of two years’ imprisonment or a fineor both. (Note: this is irrespective of whether money launderinghas actually taken place.) Where a company commits the offence, individuals responsible for maintaining the foregoing requirements may also face prosecution.

3.5.6 Proceeds of Crime Act 2002The Proceeds of Crime Act received Royal Assent on 24 July2002. The new legislation contains a range of measures that can be used to disrupt criminal activities and new powers to confiscate the proceeds of crime from convicted money launderers.


The most important changes relate to the updating, expansionand unifying of money laundering offences. Historically, therehave existed subtle but important differences in the legislation,covering drug and non-drug related money laundering offences.This Act harmonises these areas.

As a result the Serious Organised Crime Agency (‘SOCA’) wasset up to co-ordinate the recovery of the proceeds of crime.

3.5.7 Offences Under UK LegislationThe combined effect of the UK legislation is to create certain offences with regard to money laundering; all employees shouldbe aware of these offences and the related penalties.

Concealing, Arranging or Acquiring Acquiring or possessing criminal property, or assisting someoneto obtain, conceal, disguise, retain, or use the proceeds of crimeif that person knows or suspects (or should have known or suspected) that the funds are the proceeds of any serious crimeis an offence. Such assistance includes the provision of financialservices. The offences of concealing, arranging or acquiring arepunishable, on conviction, by a maximum of 14 years’ imprisonment or a fine, or both.

It is a defence that the person concerned reported his knowledgeor suspicion to the law enforcement agencies at the first availableopportunity.

Tipping-OffIt is an offence to reveal in any way to anyone that they arebeing investigated, or going to be investigated, or that a reporthas been made or is being considered or that the authorities areacting or may act in connection with an investigation into moneylaundering. Tipping-off is punishable, on conviction, by a maximum of five years’ imprisonment or a fine, or both.

Failure to ReportIn the case of drug trafficking and terrorist activity, it is an offencefor those who acquire knowledge or a suspicion of money laundering in the course of their trade, profession, business oremployment not to report the knowledge or suspicion as soon as is reasonably practical after the information came to their attention. Failure to report such knowledge or suspicion is punishable, on conviction, by a maximum of five years’imprisonment or a fine, or both.

In the case of a person who is employed by an investment business or bank, internal reporting in accordance with the procedures laid down by the employer will satisfy this requirement. The legislation protects those reporting suspicionsof money laundering from claims in respect of any allegedbreach of client confidentiality. Note that you are personally liablefor any of the sanctions described above.

The administering authority's money laundering procedures,which are set out below, form part of the contract of employmentand failure to comply with them may result in termination of employment without notice. The following is a brief explanation.

3.5.8 Statement of the Administering Authority PolicyThe administering authority will comply with its responsibilitiesunder the law and regulations governing the avoidance ofmoney laundering. It does not wish any of its constituent operations or companies to be a channel through which the proceeds of crime are permitted to pass.

For that policy to be effective, it is important that all of the administering authority employees are aware of the applicablelegal requirements and, in appropriate circumstances, satisfythemselves as to the identity and bona fides of the customerswith whom they may deal. They must also maintain appropriaterecords of verification of identity and of transactions, know howto recognise suspicious activity that may indicate the possiblelaundering of criminal funds, and how to report their suspicions.

It is also necessary to provide employees from time to time withtraining in the recognition and handling of transactions carriedout by or on behalf of any person who is, or appears to be, engaged in money laundering. Failure to comply with these responsibilities constitutes a criminal offence in the UK, punishable by up to 14 years' imprisonment or a fine or both.

3.5.9 Responsibilities of the Compliance Officer

a) To provide guidance and assistance to senior management incarrying out their responsibilities. In turn, senior managementmust communicate appropriate policy to employees and ensure that procedures, controls and employee training programmes are implemented, maintained and amended asnecessary.

b) To monitor that the administering authority maintains all of itsbusiness and client records in a form from whence they canbe recovered in hard copy. (Records relating to a client whohas been reported to SOCA may not be destroyed withoutpermission from the relevant authorities.)

3.5.10 Money Laundering Reporting Officer (MRLO)Each firm is required by the regulations to nominate a MLRO towhom employees must report their suspicions. The ReportingOfficer for the administering authority is the Chief Financial Reporting Officer. Once employees have reported their suspicions according to this procedure, they have fully discharged their personal responsibility under the law.

The MLRO will consider the report to obtain any other relevantinformation, in order to decide that there is a satisfactory explanation to the situation, and will record his findings accordingly. Alternatively, he may decide to report the case toSOCA, who will acknowledge and analyse it to decide whetheran investigation by SOCA or customs officers is needed.The Reporting Officer will provide copies of any reports, whichthey submit, to SOCA and to the Compliance Officer.

3.5.11 Record KeepingRecords of transactions and payments made and suspicionsrecorded, must be kept for at least five years after the carryingout of a one-off transaction or the closure of the business relationship.


3.6 Record Keeping

We are required to ensure that sufficient information is recordedand retained about our business and compliance with the regulatory system.

Details of the records to be kept, and for how long they must beretained, can be found in Schedule 1 to each relevant chapter ofthe FCA handbook including in particular the COBS, Supervision(SUP) and CASS sections of the handbook.

The records may be kept in the form of a copy or any other formthat is capable of reproduction in hard printed form. We musttake all steps within our power to ensure that no record or file isdestroyed and that a notice of any amendments to records isrecorded on the relevant document each time an amendment ismade.

The records specified above are managed as follows:

a) The Portfolio Managers are responsible for records of transactions and suitability of packaged products.

b) The Finance and Investments teams which maintain the investment accounting and valuation records are responsiblefor records on investment holdings and income.

c) The Strategic Director of Pensions is responsible for the customer agreement records; ie, they maintain a copy of theLocal Government Pension Scheme Regulations 1995, whichis essentially, the customer agreement.

d) The Strategic Director of Pensions is responsible for ensuringthat personnel files for their division include information ontraining, experience, qualifications and disciplinary action;

e) The Compliance and Risk Manager is responsible for confirmations of personal dealings, the breaches register, the gifts register and updating the compliance and proceduresmanual and circulating to all relevant staff. The Compliance & Risk Manager is also responsible for maintaining records of complaints and for ensuring that the compliance and procedures manual is kept up to date and available to all relevant staff.

f) Advertisements are kept in Pensions Administration (Marketing).

Most records must be kept for five years (see COBS Schedule1.3). The exceptions are compliance procedures and details ofdisciplinary action against employees which must be kept for sixyears and money laundering documentation such as evidence of identity, which must be kept for five years from when the relationship ended, or transactions, which must be kept for fiveyears from when the transaction was completed. The Committeeshould be able to inspect any records at any time. Applying therules in spirit, we should produce such records as they requestwithin seven days.

All records (since the City of Wolverhampton Council became the administering authority) are held on site in either hard copy orelectronic form.

The Compliance and Risk Manager carries out the quarterly monitoring programme and submits regular reports to theStrategic Director of Pensions and the Compliance Officer.

3.6.1 Accounting RecordsWe must maintain adequate accounting records that must:

a) be kept up to date and disclose, with reasonable accuracy, theadministering authority's financial position at any time; and

b) provide the information required by the auditors to form theiropinion.

Proper records must be kept in English to show and explaintransactions effected by the administering authority on behalf ofthe Fund and the administering authority's own transactions.

They must be retained for at least six years, the first two of whichmust be either held on site or be capable of being produced onsite within 24 hours.

In order to facilitate this, the Corporate Finance Division maintains the accounting records for the Fund.

However, all figures relating to investments (value/cost of investments, income, brokers fees etc.) and the Fund bank account (through which these items pass) are produced by theInvestment Division itself, who pass the information on to the accounts department on an annual basis. Dividends are accruedin the Fund's final accounts at the year-end, but in addition an ongoing accruals account is kept in the Investment accounts.

The accounting records show all purchases and sales of Fundassets, all receipts and payments of the Fund's monies, all theFund's assets (ie, investments) and other assets and liabilities ofthe Fund.

Investment accounting records have, to date, all been kept onsite in hard copy. Other financial records are archived to themainframe and downloaded to spreadsheet packages.

The Fund is charged only the actual costs of providing investment management services and other directly attributableoverheads.

3.7 Rule and Procedure Breaches

3.7.1 Reporting of BreachesAll breaches must be reported to the Compliance Officer as soonas they are discovered. Corrective action needs to be taken atonce. Copies of all relevant documents will be kept in the centralregister for at least five years. This will be reviewed regularly bythe Compliance Officer.

3.7.2 High Profile EventsHigh profile events (HPEs), for the purpose of the administeringauthority's procedures, are those which apply to investment-related activities and the management of conflicts of interest, andthey include:

a) matters that could give rise to a criminal prosecution or a substantial action for damages against part of the administering authority or one of its employees;

b) matters which could lead to, or are causing, adverse comment or reputational risk for any part of the administeringauthority;

c) matters involving potential serious disciplinary action for employees;


d) matters involving an actual or perceived breach of in-housecompliance procedures by directors, management or employees;

e) investigations by authorities into, or allegations of, possiblebreaches of insider dealing legislation; and

f) matters involving non-compliance with regulatory reportingor other rules which could lead to a withdrawal of authorisation of, or sanctions against the administering authority.

3.7.3 The Responsibilities of the Compliance Officer The responsibilities of the Compliance Officer are:

a) to identify matters which may constitute, or are, a HPE;

b) to report the HPE to the Pensions Committee, and liaise with it in resolving the HPE; and

c) to record the matter in the breaches register where necessary.

It is the responsibility of the administering authority team to notify the Compliance Officer as soon as they become aware ofsituations, which could constitute HPEs.

3.8 Data Protection

3.8.1 Legal ObligationsThe administering authority has legal obligations under data protection legislation: the Data Protection Act 1984 and the DataProtection Act 1998.

The new act has a much wider definition that includes somemanual files and, in respect of some data, provides a transitionalperiod within which the administering authority has to complywith the new requirements. This means that all computerprocessed personal data, personal data processed by other electronic means and some manual records are now covered bydata protection legislation.

The administering authority must notify the Data Protection Registrar (the ‘Commissioner’ under the new Act) of all personaldata held and maintain records of the sources and disclosures ofthe data. The administering authority must also comply with several principles which are legally enforceable conditions andstandards for the processing of personal data, and must pay particular attention to certain sensitive data and the security andconfidentiality of personal data.

3.8.2 Statement of the Administering Authority PolicyThe administering authority accepts willingly its obligations under data protection legislation and values the right to privacy of the people about whom information is held and recognises the need to manage professionally people's personal data. The administering authority has particular officers whose dutiesinclude the continued development of sound and effective policies and practices in this area. This helps to ensure that a high level of confidentiality and security of personal data is maintained.

The administering authority will therefore:

a) collect and use information fairly and only for clearly statedpurposes;

b) collect only information that is essential for a specific purpose;

c) disclose information only in so far as is consistent with thepurpose for which it was collected; and

d) ensure the information held is adequate, relevant and not excessive, is accurate and where necessary, up to date.

Make all information held about a person available to him or her(although respecting the privacy of another person, or statutoryrequirements may mean that this is not always possible).

All employees are responsible for compliance with data protection legislation and failure to comply may result in personal liability under the law and/or disciplinary measures. Advice, guidance and further information can be obtained fromthe Compliance and Risk Team.

3.8.3 Freedom of Information Act 2005All requests for information under the above Act are referred to the Strategic Director of Pensions. A complete register of requests and responses is maintained by the Compliance andRisk Team.

3.9 Business Continuity

Under FCA SYSC Chapter 4 requirements, a firm is required to:

a) establish, implement and maintain an adequate business continuity policy aimed at ensuring, in the case of an interruption to its systems and procedures, that any losses arelimited, the preservation of essential data and functions, andthe maintenance of its regulated activities, or, where that isnot possible, the timely recovery of such data and functionsand the timely resumption of its regulated activities.

The matters dealt with in a business continuity policy should include:

a) resource requirements such as people, systems and other assets, and arrangements for obtaining these resources;

b) the recovery priorities for the firm's operations;

c) communication arrangements for internal and external concerned parties (including the FCA, clients and the press);

d) escalation and invocation plans that outline the processes forimplementing the business continuity plans, together with relevant contact information;

e) processes to validate the integrity of information affected bythe disruption; and

f) regular testing of the business continuity policy in an appropriate and proportionate manner in accordance withSYSC 4.1.10 R.

The administering authority has a business continuity plan inplace to ensure that it is able to meet its regulatory or client obligations in the event of a significant disruption or disaster. The plan is maintained by the Compliance and Risk Team andwill be subject to regular review to ensure it remains completeand appropriate for the authority’s needs.


3.10 Complaints

What is a Complaint?There are various types of complaints that can be made. Mostwill be common cases involving delays, misunderstandings ordispleasure at general performance that can be resolved andrectified immediately at a departmental level. Any complaints willbe recorded in the register held by the Compliance and RiskTeam.

The definition of a formal complaint is wide. If you are unsurewhat constitutes a formal complaint, contact the Compliance andRisk Team.

Complaint of ‘Significance’‘Significance’ has its natural meaning, but in any event includes acomplaint which cannot be settled quickly and directly, one whichinvolves sums which are material in relation to the financial circumstances of the complainant or one which alleges:

a) any allegation of a breach of FCA principles;

b) a breach of any other regulation or law;

c) negligence;

d) a serious breach of obligation;

e) a conflict of interest;

f) a leak of confidential or price sensitive information;

g) a failure to comply with responsibilities under the regulatorysystem;

h) bad faith, malpractice or impropriety; or

i) repetition or recurrence of any matter about which there hasbeen a recent complaint.

This includes any matter where someone has suffered financialloss. The fact that a particular investment has performed badlywill not, by itself, normally be regarded as a valid complaint.

The FCA rules on complaint handling, set out in the DISP sourcebook, require firms to have in place appropriate controlsto address recurring complaints (DISP 1.3.3R).

Complaints ProcedureDespite efforts within the administering authority to guard against situations where complaints arise, it would be wrong notto plan for dealing with complaints. Complaints from customers(ie, members of the scheme) could come via or from a thirdparty or even direct to us from customers.

It is important that we deal with customer complaints promptly,fairly and within clearly defined procedures. The FCA has strictrules and guidance on how firms handle, record and report allcomplaints from customers or former customers.

Where a formal complaint has been received, all employeesmust adhere to the following procedures. If any formal complaintis received, it should be immediately referred to the Complianceand Risk Team. A member of the Governance Team or theStrategic Director of Pensions of the administering authority willbe responsible for sending a substantive reply which must besent promptly.

The FCA’s rules require all complaints to be dealt with independently by an individual with the authority to resolve the complaint (see DISP 1.4.1R). Once a complaint has beenmade, we will appoint an employee, or employees, of sufficient competence to investigate the complaint and the authority to settle complaints, including the offering of redress. Such persons will not have been directly involved in the complaint.

The FCA has set time limits for responding to complaints. Acknowledgement of a complaint in writing must be providedwithin a reasonable amount of time and in accordance with theFund’s complaints policy. A complaint must be resolved withineight weeks or an explanation must be provided as to why this is not possible (DISP 1.6.2R).

We have decided that written complaints should be acknowledged within five working days after the complaint has been received, unless it is possible to issue a substantivereply at that time.

The person dealing with the complaint should record theprogress of the investigation on the record form, showing dates and actions taken.

When the investigation is complete, a written report must be produced, explaining clearly:

a) the outcome of the investigation; and

b) the nature and the terms of any offer of settlement or the reasons for declining to offer settlement.

Within four weeks of receiving a complaint, we will either send a final response to the complainant or a holding response explaining why the complaint has not been resolved yet, indicating that further contact will be made within another four weeks.

With the first substantive reply to the complaint, unless it offers a settlement reasonably judged to be acceptable to the complainant, we must:

a) advise the complainant that he/she has a right to complain tothe appointed person under the internal dispute resolutionprocedure. There is also recourse to TPAS and The PensionsOmbudsman; and

b) provide details of how to complain.

After eight weeks, the firm must either send a final response oranother holding letter explaining the delay. Where we send afinal response, the complainant will be informed that they mayrefer the complaint to the above bodies if unsatisfied with the response, but must do so within six months.

A final response to the customer must include a note that where the administering authority does not receive a reply within one month from the date of dispatch, the complaint will be considered settled. If the substantive response does not contain this information, and the customer subsequentlyindicates that he or she is still not satisfied, the next written communication from the administering authority must complywith these requirements.


Where a complainant has received a substantive reply and doesnot within one month of its being despatched indicate that he orshe is not satisfied, a follow-up letter will be sent. The complaintmay then be treated as settled on the terms of that reply, provided that the reply included a notification to the complainantthat his or her complaint would be so treated in the circumstances.

If the complainant, having received a substantive reply, indicatesdissatisfaction, the next response must, unless this has alreadybeen done in connection with the complaint in question, advisethe complainant that he has a right to the internal dispute resolution procedure.

Note: We and our employees are required to co-operate fullywith the above bodies in the handling of complaints against us.Co-operation with the above bodies includes, but is not limited to, producing requested documents, adhering to any specifiedtime limits, attending hearings when requested to do so andcomplying promptly with any settlements or awards.

Please note that we must refer to the availability of its internalcomplaints handling procedures in writing when a customer relationship commences. The firm achieves this by including reference of its complaints handling procedures in contractualdocumentation (terms of business letter, for example).

The firm's internal complaints handling procedures refers to thefact that complainants can refer their complaint to the above bodies if they are not satisfied with our attempt to resolve thecomplaint.

Recording of ComplaintsUpon receiving a formal complaint, the complaint must be referred to the Compliance and Risk Team immediately. This isachieved by detailing the following:

• the identity of the customer concerned;

• the nature of the complaint;

• the time and date of its receipt;

• any initial response or reply made; and

• the sum of money involved, where appropriate.

All records of complaints will be retained for a minimum periodof five years, as required by FCA rules (DISP 1.9.1R). Therecords must detail the name of the complainant, the nature ofthe complaint and copies of all correspondence between the parties involved.

A register is maintained of all complaints. When the first substantive reply to the complaint has been given, the correspondence and a copy of the record form (and investigationreport, if any), together with copies of any supporting documentswill be passed to the Compliance Officer, who will sign off therecord form in turn. The documents should then be filed in thecomplaints file or the pensions administration system and theregister updated.

Any further exchanges of correspondence should be attached tothat already filed. All records of complaints will be retained for aminimum period of three years from the date of the last response. In the unlikely event that someone is appointed by aregulator to investigate a complaint against the administering authority, their employees and their third parties must co-operatewith that investigation.

Response to Other ComplaintsA substantive reply should be issued within five working days ofthe complaint being notified. This will include ‘complaints’ relatingto such issues as investment performance.

In cases where a written response is necessary, a full record ofthe action taken to resolve the complaint must be logged at onceon the record form.

Once a complaint has been made, we will appoint an employee,or employees, of sufficient competence to investigate the complaint and the authority to settle complaints, including the offering of redress. Such persons will not have been directly involved in the complaint.


Appendix A: Dealing Limits

West Midlands Pension Fund

a) The dealing referred to in Appendix A is undertaken as part ofthe on-going implementation of the asset allocation policy.This policy is reviewed and approved on a quarterly basis by the Pensions Committee and represents the overall implementation of the Fund’s investment strategy followingthe triennial actuarial valuation.

The Strategic Director of Pensions implements the strategy bymeans of a quarterly brief to the Fund’s Assistant Director (Investments) and in-house Portfolio Managers. Any dealing that would necessitate acting outside of this brief would requirespecific approval by the Strategic Director of Pensions.

b) Allocated Portfolios

1) Quoted EquitiesThese in-house portfolios are the responsibility of Mark Hodgesand David Evans (Portfolio Managers) and Tom Powell (Assistant Portfolio Manager).

Dealing Limits Individual company transaction max £5m subject to max holdinglimit per company of 0.5% of the total fund.

Collective Vehicles and ETFs Maximum dealing limit in any individual collective vehicle of0.5% of the total fund.

Maximum holding in any one collective vehicle limited to 0.5% of the total fund.

Notes

• All dealing is subject to confirmation of availability of cash to be agreed with the Fund Accountant and Strategic Director of Pensions.

• Any transactions not covered by these limits will be subjectto specific approval by the Strategic Director of Pensions. In the absence of the Strategic Director of Pensions the signature of another Portfolio Manager is required.

• Any extra funds invested in or disinvested from externalportfolios are subject to specific approval by the Strategic Director of Pensions.

2) Fixed Interest and Complementary InvestmentsThese portfolios are the responsibility of Jas Sidhu and MikeHardwick (Portfolio Managers).

• No in-house fixed interest

• Any transactions not covered by these limits will be subjectof specific approval by the Strategic Director of Pensions. In the absence of the Strategic Director of Pensions the signature of another Portfolio Manager is required.


• All private equity investments are subject to specific approval by the Strategic Director of Pensions.

• All other alternative investments are subject to specific approval by the Strategic Director of Pensions.

3) CashThis portfolio is the responsibility of the Fund Accountant and theAssistant Accountants.

• Money market (short-term placement of in-house cashholdings) £25m

• Money market £25m

• Any investment currencies (for hedging purposes) or property is subject to specific approval by the Strategic Director of Pensions.

• Any transactions not covered by these limits will be subjectof specific approval by the Strategic Director of Pensions. In the absence of the Strategic Director of Pensions the signature of another Portfolio Manager is required.


• The lending limits for cash management are specified in Appendix C.


Appendix B: Specific Approval

Investment Areas Requiring Specific Approval:

• Arbitrage transactions

• Collective vehicles

• Commodities

• Currencies except pending investment in overseas markets

• Emerging market debt

• Non-investment grade sterling corporate credit

• Overseas non-sovereign fixed interest securities

• Futures

• Hedge funds

• Loans (except investment of cash balances)

• Options

• Portable alpha

• Private equity

• Property

• Swaps

• Transactions which may jeopardise the tax-exempt status of Fund

• Works of art


Appendix C: Lending Limits

Proposed Term Term Viability Support Score Outlook LendingCounterparty Rating Rating Rating Rating Total Fitch Moodys S&P Limit

Credit Rated BanksSvenska Handelsbanken AB 18 30 aa- 1 67 SB SB NO 25Santander UK plc 12 20 a 1 49 SB NO NO 25Barclays Bank plc 13 20 a 1 50 SB NO NO 25HSBC Bank plc 18 30 a+ 1 66 SB NO SB 25

Nationalised BanksLloyds Banking Group plc 10 10 bbb 1 34 SB NO NO 20Royal Bank of Scotland Group plc 9 16 bbb 1 39 SB NO SB 50

Credit Rated MutualsNationwide BS 14 20 a+ 1 52 NO SB NO 10Yorkshire BS 7 14 bbb+ 5 28 SB SB NO 5Coventry BS 7 14 a 5 30 SB SB - 5Skipton BS 4 6 bbb- 5 15 SB NO - 5Leeds BS 6 12 a- 5 26 SB SB - 5Newcastle BS 2 2 bb+ 5 8 SB - - 5West Bromwich BS 2 2 - - 4 - SB - 5Principality BS 4 8 bbb+ 5 19 SB SB - 5Nottingham BS 2 6 - - 8 - SB - 5

Total Lending Budget 220

Total Lending Budget 220

*Limit includes amount in deposit account opened summer 2010. This account will be the last place to redeem moneyfrom due to favourable rate being offered.

Updated as at 1 April 2013

Short-term ratings: a measure of the borrower's ability to repay punctually its senior debt obligations that have a maturity not in excess of 12 months.

Long-term ratings: a measure of a borrower’s ability to repay its senior debt obligations that have a maturity in excess of twelve months. Considered as a benchmark of corporate financial health.

Individual ratings are assigned as a measure of an organisations intrinsic safety and soundness.

Support ratings are an assessment of the likelihood of state or other support in the event of financial failure of a bank.


Made 24 November 2009Laid before Parliament 1 December 2009Working copy coming into force 1 April 2013

Contents

Preliminary1) Citation, commencement and application2) General definitions3) Definition of ‘investment’

Management of Pension Fund4) Management of pension fund5) Power to borrow6) Separate bank account

Investment Managers7) Definition of ‘investment manager’8) Choice of investment managers9) Terms of appointment of investment managers10) Review of investment manager’s performance

Investment and Use of Fund Money11) Investment of pension fund money12) Statement of investment principles13) Investments under section 11(1) of the Trustee Investments Act 196114) Restrictions on investments15) Requirements for increased limits16) Use of fund money by an administering authority

Supplementary17) Revocations

Schedule 1 - Table of limits on investments Schedule 2 - Revocations

Appendix D: LGPS (Management & Investmentof Funds) Regulations 2009 – 1 April 2013


Preliminary

1) Citation, commencement and application

1) These Regulations may be cited as the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009 and shall come into force on 1 January 2010.

2) These Regulations apply in relation to England and Wales.

2) General definitions

1) In these Regulations:

‘the 2000 Act’ means the Financial Services and Markets Act 2000;

‘administering authority’ means a body required to maintain a pension fund under the Administration Regulations;

‘the Administration Regulations’ means the Local Government Pension Scheme (Administration) Regulations 2008;

‘fund money’ means money in the pension fund maintained by an administering authority;

‘proper advice’, in relation to an administering authority, means the advice of a person whom the authority reasonably believes to be qualified by their ability in and practical experience of financial matters (including any such person who is an officer of the administering authority);

‘recognised stock exchange’ has the same meaning as in section 1005(1) of the Income Tax Act 2007; ‘securities’ includes shares, stock and debentures;

‘statement of investment principles’ means the statement referred to in regulation 12(1) or any revision of it, as appropriate;

‘stocklending arrangement’ means an arrangement such as is mentioned in section 263B of the Taxation of Chargeable Gains Act 1992; and

‘sub-underwriting contract’ means a contract with a person who is underwriting a share issue to acquire the shares from that person if that person requires it.

2) Paragraphs (5) to (7) of regulation 3, paragraphs (2) (a) and (2) (b) of regulation 6, regulation 7 and item 4 of the table and the definition of ‘relevant institution’ in Schedule 1, must be read with:

a) section 22 of the 2000 Act (classes of activity and categories of investment);

b) any relevant order under that section; and

c) Schedule 2 to that Act (regulated activities).

3) Definition of ‘investment’

1) In these Regulations ‘investment’ and related expressions have their normal meaning.

2) But the following provisions of this regulation specify things which count as investments for these Regulations, although they might not otherwise do so, and exclude things which might otherwise count.

3) A contract entered into in the course of dealing in financial futures or traded options is an investment.

4) Prior to 1 April 2010, if the administering authority uses fund money for any purpose for which it may borrow money, that use is an investment.

5) A contract of insurance is an investment if it is a contract of a relevant class, and is entered into with a person within paragraph(6) for whom entering into the contract constitutes the carrying on of a regulated activity within the meaning of the 2000 Act.

6) The persons within this paragraph are:

a) a person who has permission under Part 4 of the 2000 Act (permission to carry on regulated activities) to effect or carry outcontracts of insurance of a relevant class;

b) an EEA firm of the kind mentioned in paragraph 5(d) of Schedule 3 to the 2000 Act (EEA passport rights), which has permission under paragraph 15 of that schedule (as a result of qualifying for authorisation under paragraph 12 of that Schedule) to effect or carry out contracts of insurance of a relevant class; and

c) a person who does not fall within sub-paragraph (a) or (b) and who, because that person’s head office is in an EEA state within the meaning of the 2000 Act other than the United Kingdom, is permitted by the law of that state to effect or carry out contracts of insurance of a relevant class.


7) A contract of insurance is of a relevant class for the purposes of paragraphs (5) and (6) if it is:

a) a contract of insurance on human life or a contract to pay an annuity on human life where the benefits are wholly or partly to be determined by reference to the value of, or the income from, property of any description (whether or not specified in the contract) or by reference to fluctuations in, or in an index of, the value of property of any description (whether or not so specified); or

b) a contract to manage the investments of pension funds, whether or not combined with contracts of insurance covering either conservation of capital or payment of a minimum interest.

8) A stocklending arrangement is an investment if, and only if, in respect of it, the conditions in rules 5.4.4R and 5.4.6R, modifiedas specified in paragraph (9) of this regulation, in the Collective Investment Schemes Sourcebook made by the Financial Services Authority are fulfilled in relation to that arrangement.

9) The modifications mentioned in paragraph (8) are that:

a) in rules 5.4.4R and 5.4.6R references to the depositary must be read as if they were references to the administering authority;

b) in paragraph 1 of rule 5.4.4R for the words ‘An ICVC, or the depositary at the request of the ICVC, or the trustee at the request of the manager, may enter into a repo contract, or’ there shall be substituted the words ‘The administering authority may enter into’;

c) in paragraph 1(a) of rule 5.4.4R, the words ‘for the account of the ICVC or by the trustee,’ and the words ‘or to the trustee’ shall be omitted;

d) sub-paragraphs 1(b) (iii) and 1(b) (iv) of rule 5.4.4R shall not apply;

e) paragraph 1A of rule 5.4.6R shall not apply;

f) in paragraph 5 of rule 5.4.6R the words ‘under COLL 6.3 (Valuation and pricing) or this chapter,’ shall be omitted, and the reference to the authorised fund must be read as if it were a reference to the pension fund; and

g) in paragraph 6 of rule 5.4.6R references to scheme property must be read as if they were references to fund money, andthe words in sub-paragraph (a) ‘for the purposes of COLL 6.3 or this chapter’ and in sub-paragraph (b) ‘of this chapter’ shall be omitted.

10) It is an investment to contribute to a limited partnership in an unquoted securities investment partnership.

11) A sub-underwriting contract is an investment.

12) For the purposes of this regulation:

‘limited partnership’ means a partnership where the partners are not liable for the debts or obligations of the partnership beyond the amount which they contributed at the time of becoming a partner;

‘traded option’ means an option quoted on a recognised stock exchange or on the London International Financial Futures Exchange; and

‘unquoted securities investment partnership’ means a partnership for investing in securities which are normally not quoted on a recognised stock exchange when the partnership buys them.

Management of Pension Fund

1) Management of pension fund

1) This regulation is about the sums which an administering authority must pay or credit to and may pay from the pension fund which it administers.

2) An authority must pay or credit to its pension fund, in addition to any other sum the Benefits Regulations, the Transitional Regulations or the Administration Regulations specify must be paid or credited to the fund:

a) the amounts payable by it or paid to it for the credit of the fund by any other authority under regulations 39 to 41 of the Administration Regulations (employers’ contributions and payments);

b) all members’ contributions including those made by virtue of the Transitional Regulations, except contributions payable under regulation 25 of the Administration Regulations (additional voluntary contributions and shared cost additional voluntary contributions);

c) all income arising during the year from investment of the Fund;

d) all capital money deriving from such investment; and


e) all additional payments received by the authority under the Benefits Regulations, the Transitional Regulations or the Administration Regulations.

3) In the case of an administering authority which maintains more than one pension fund, as respects sums which relate to specific members the references in paragraph (2) to an authority’s fund are to the fund which is the appropriate fund for the members in question in accordance with Schedule 4 to the Administration Regulations (appropriate funds).

4) Interest under regulation 44(1) of the Administration Regulations (interest) must be credited and paid to the fund to which the overdue payment is due.

5) Any costs, charges and expenses incurred administering a pension fund may be paid from it except those costs and charges prescribed by regulations made under section 23 (supply of pension information in connection with divorce etc.), 24 (charges by pension arrangements in relation to earmarking orders) or 41 (charges in respect of pension sharing costs) of the Welfare Reform and Pensions Act 1999 which the administering authority is enabled to recover by or under any such regulations.

6) In this regulation:

‘member’ means any active or deferred member or any pensioner but does not include a person who has rights to future benefits under the scheme which are attributable (directly or indirectly) to a credit under section 29(1)(b) of the Welfare Reform and Pension Act 1999 or corresponding Northern Ireland legislation;

‘the Benefits Regulations’ means the Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007; and

‘the Transitional Regulations’ means the Local Government Pension Scheme (Transitional Provisions) Regulations 2008.

5) Power to borrow

1) Except as provided in this regulation, an administering authority must not borrow money where the borrowing is liable to be repaid out of its pension fund.

2) An administering authority may borrow by way of temporary loan or overdraft from a bank or otherwise any sums which it may require for the purpose of:

a) paying benefits due under the scheme, or

b) to meet investment commitments arising from the implementation of a decision by it to change the balance between different types of investment.

3) An administering authority may only borrow money under paragraph (2) if, at the time of borrowing, the authority reasonably believes that the sum borrowed and interest charged in respect of such sum can be repaid out of its pension fund within 90 days of the date of the borrowing.

6) Separate bank account

1) On and after 1 April 2011, an administering authority must hold in a separate account kept by it with a deposit-taker in accordance with this regulation:

a) all monies held by the authority on that date; and

b) all monies received by it on or after that date for the purpose of its pension fund.

2) ‘Deposit-taker’ for the purposes of paragraph (1) means:

a) a person who has permission under Part 4 of the 2000 Act (permission to carry on regulated activities) to accept deposits;

b) an EEA firm of the kind mentioned in paragraph 5(b) of Schedule 3 to the 2000 Act (EEA passport rights) which has permission under paragraph 15 of that Schedule (as a result of qualifying for authorisation under paragraph 12 of that Schedule) to accept deposits;

c) the Bank of England or the central bank of an EEA state other than the United Kingdom; or

d) the National Savings Bank.

3) The deposit-taker shall not; in relation to the account referred to in paragraph (1), exercise any right of set-off it may have in respect of any other account held by the administering authority or any party connected to the administering authority.


Investment Managers

7) Definition of ‘investment manager’

a) a person who has permission under Part 4 of the 2000 Act (permission to carry on regulated activities) to manage investments and may lawfully manage the assets of occupational pension schemes;

b) an EEA firm of the kind mentioned in sub-paragraph (a), (b) or (c) of paragraph 5 of Schedule 3 to that Act (EEA passport rights), which has permission under paragraph 15 of that Schedule (as a result of qualifying for authorisation under paragraph 12 of that Schedule) to manage investments and may lawfully manage the assets of occupational pension schemes; or

c) a person:

i) who does not carry on regulated activities (within the meaning of the 2000 Act) from a permanent place of business maintained by that person in the United Kingdom;

ii) whose head office is situated in an EEA State (within the meaning of the 2000 Act) other than the United Kingdom;

iii) who is recognised by the law of that EEA State as a national of that or another EEA State;

iv) who is authorised under that law to carry on one or more regulated activities (within the meaning of the 2000 Act); and

v) who is not prevented by that law from managing the assets of occupational pension schemes or assets belonging to another person.

8) Choice of investment managers

1) Instead of managing and investing fund money itself, an administering authority may appoint one or more investment managers to manage and invest fund money, or any part of such money, on its behalf.

2) But the authority may only appoint an investment manager if the authority complies with paragraphs (3) to (6).

3) The authority must reasonably believe that the investment manager’s ability in and practical experience of financial matters makes that investment manager suitably qualified to make investment decisions for it.

4) The investment manager must not be its employee.

5) The authority must be satisfied:

a) that the fund, or the relevant part of it, is managed by an adequate number of investment managers; and

b) that where there is more than one investment manager, the value of fund money to be managed by any one of them will not be disproportionate in comparison with the value of fund money managed by other investment managers.

6) The authority must have taken proper advice in relation to the appointment.

9) Terms of appointment of investment managers

1) An investment manager must be appointed on the terms set out in paragraphs (2) to (7).

2) The administering authority must be able to terminate the appointment by not more than one month’s notice.

3) The investment manager must report to the administering authority at least once every three months on the action the investment manager has taken on behalf of the authority.

4) The investment manager must comply with all the administering authority’s instructions.

5) In managing the fund the investment manager must take into account:

a) that fund money must be invested in a wide variety of investments;

b) the suitability for the fund of particular types of investment, or of any particular investment; and

c) the administering authority’s statement of investment principles.

6) But paragraph (5) (a) does not apply where the investment manager only manages part of the fund and the terms of the investment manager’s appointment provide that it does not apply.

7) The investment manager must not make investments which would contravene the administering authority’s statement of investment principles or regulation 14 (restrictions on investments).

8) In determining the investment manager’s terms of appointment, the administering authority must take proper advice.


10) Review of investment manager’s performance

1) Where an administering authority has appointed an investment manager it must keep the investment manager’s performanceunder review.

2) At least once every three months, the authority must review the investments the investment manager has made for the fund and any other action that has been taken by the manager in relation to it.

3) Periodically the authority must consider whether or not to retain the investment manager.

4) In reviewing an investment manager’s decisions and appointment, the authority must take proper advice:

a) if regulation 9(5)(a) applies, about the variety of investments the investment manager has made; and

b) about the suitability of those investments for the fund generally and as investments of their type.

Investment and the Use of Fund Money

11) Investment policy and investment of pension fund money

1) An administering authority must formulate a policy for the investment of its fund money.

2) The authority’s investment policy must be formulated with a view:

a) to the advisability of investing fund money in a wide variety of investments; and

b) to the suitability of particular investments and types of investments.

3) The authority must invest, in accordance with its investment policy, any fund money that is not needed immediately to make payments from the fund.

4) The authority may vary its investments

5) The authority must obtain proper advice at reasonable intervals about its investments.

6) The authority must consider such advice in taking any steps in relation to its investments.

12) Statement of investment principles

1) An administering authority must, after consultation with such persons as it considers appropriate, prepare, maintain (in accordance with paragraph (5)) and publish a written statement of the principles governing its decisions about the investment of fund money.

2) The statement must cover its policy on:

a) the types of investment to be held;

b) the balance between different types of investments;

c) risk, including the ways in which risks are to be measured and managed;

d) the expected return on investments;

e) the realisation of investments;

f) the extent (if at all) to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments;

g) the exercise of the rights (including voting rights) attaching to investments, if the authority has any such policy; and

h) stocklending.

3) The statement must also state the extent to which the administering authority complies with guidance given by the Secretary of State, and, to the extent the authority does not so comply, the reasons for not complying.

4) The first such statement must be published no later than 1 July 2010.

5) The statement must be reviewed, and if necessary, revised, by the administering authority from time to time and, in the case of any material change in the authority’s policy on the matters referred to in paragraphs (2) and (3), before the end of a period of six months beginning with the date of that change.

6) A statement revised under paragraph (5) must be published.


13) Investments under section 11(1) of the Trustee Investments Act 1961

An administering authority may invest, without any restriction as to quantity, in any investment made in accordance with a scheme under section 11(1) of the Trustee Investments Act 1961 (which enables the Treasury to approve schemes for local authorities to invest in collectively).

14) Restrictions on investments

1) The table in Schedule 1 and the exceptions specified below that table (“the exceptions”) shall have effect for the purpose of limiting the making of investments of the types described in the table.

2) Subject to paragraph (3), and, where relevant, the exceptions, a percentage listed in Column 1 of the table in relation to a type of investment so described is the limit on the proportion of fund money which may be invested in that type of investment.

3) An administering authority may, in accordance with regulation 15, decide to increase the limit in relation to a particular type of investment so described, but only where a percentage is shown in relation to that type of investment in Column 2 of the table, and may not exceed that percentage.

4) The percentages mentioned in paragraphs (2) and (3) are percentages of the total value of all existing investments of fund money immediately before the making of the investment concerned.

5) Paragraph (2) and, if applicable, paragraph (3) apply only at the time the investment is made.

6) The definitions set out below the exceptions shall have effect for interpreting the table.

15) Requirements for increased limits

1) An administering authority which decides to increase limits under regulation 14(3) must comply with the requirements of this regulation.

2) The authority must have taken proper advice.

3) The authority must take account of the matters set out in regulation 11(2).

4) Where there is a decision to use the increased limits under regulation 14(3) in relation to item 13 of the table in Schedule 1, the additional risks of the increased limit must have been taken into account in addition to those matters set out in regulation 11(2).

5) The decision must specify:

a) the description of investment to which it applies;

b) the limit on the amount of the investment;

c) the reason for that decision;

d) the period for which the decision will apply;

e) if the authority intend to review the decision before the end of the period in (d), the date when the decision will be reviewed;and

f) that the decision complies with these Regulations.

6) Where the period for which the decision will apply comes to an end, the limits will be those set out in Column 1 of the table unless before the end of that period the administering authority reviews the decision in accordance with this regulation.

7) A decision following a review to continue to use limits increased under regulation 14(3), whether or not the increased limits have been altered, must—

a) take account of the matters set out in paragraphs (2)-(4); and

b) specify the matters set out in paragraph (5).

8) Before a decision under regulation 14(3) or under paragraph (7) of this regulation can take effect, the administering authority must revise and publish the written statement of investment principles which it is required to maintain under regulation 12 so as to include the matters specified in paragraph (5).

16) Use of fund money by an administering authority

1) An administering authority must pay interest on the total from day to day of any fund money used under regulation 3(4) and not repaid.

2) That interest may not be paid at a rate lower than the lowest rate at which the authority could have obtained a commercial loan of that amount at 7 days’ notice (otherwise than by bank overdraft).


Supplementary

17) Revocations

The instruments listed in Column (1) of the table in Schedule 2 are revoked to the extent stated, in relation to each, in Column (3) of that table.

Signed by authority of the Secretary of State for Communities and Local GovernmentRosie Winterton Minister of State

Department for Communitiesand Local Government

24 November 2009

Schedule 1 Regulation 14(1)

Table of Limits on Investments

Investment Column 1 Column 2Limits under regulation 14(2) Increased limits under regulation 14(3)

1) Any single sub-underwriting contract 1% 5%

2) All contributions to any single partnership 2% 5%

3) All contributions to partnerships 5% 30%

4) The sum of: 10% —

a)all loans (but see paragraph 1 below; and

b)any deposits with:

i) any local authority; or

ii) anybody with power to issue a precept or requisition to a local authority, or to the expenses of which a local authority can be required to contribute, which is an exempt person (within the meaning of the 2000 Act) in respect of accepting deposits as a result of an order made under section 38(1) of that Act.

5) All investments in unlisted securities of companies 10% 15%

6) Any single holding (but see paragraphs 2 and 3 below) 10% —

7) All deposits with any single bank, institution 10% —or person (other than the National Savings bank).

8) All sub-underwriting contracts 15% —

9) All investments in units or shares of the investments 25% 35% subject to the trusts of unit trust scheme managed by any one body but see paragraph 3 below.

10) All investments in open-ended investment companies 25% 35% where the collective investment schemes constituted by the companies are managed by one body.

11) All investments in units or other shares of the investments 25% 35% subject to the trusts of unit trust schemes and all investments in open-ended investment companies where the unit trust schemes and the collective investment schemes constituted by those companies are managed by any one body (but see paragraph 3 below).

12) Any single insurance contract. 25% 35%

13) All securities transferred (or agreed to 25% be 35% transferred) by the authority under stocklending arrangements.


Exceptions to limits in the table

1) The restriction in item 4 of the table does not apply to a Government loan.

2) The restriction in item 6 of the table does not apply if:

a) the investment is made by an investment manager appointed under regulation 8; and

b) the single holding is in units or other shares of the investments subject to the trusts of any one unit trust scheme.

3) The restrictions in items 6, 9 and 11 do not apply to:

a) National Savings Certificates;

b) fixed-interest securities issued by Her Majesty’s Government in the United Kingdom, the Government of Northern Ireland or the Government of the Isle of Man and registered in the United Kingdom or the Isle of Man or Treasury Bills;

c) any securities the payment of interest on which is guaranteed by Her Majesty’s Government in the United Kingdom or the Government of Northern Ireland; or

a) a deposit with a relevant institution.

Interpretation

‘Collective investment scheme’ has the meaning given in section 235 of the 2000 Act.

‘Companies’ includes companies established under the law of any territory outside the United Kingdom. ‘Government loan’ means aloan:

a) to Her Majesty’s Government in the United Kingdom; or

b) to the Government of the Isle of Man.

‘Listed securities’ means securities quoted on a recognised stock exchange. ‘Loan’ does not include:

a) investing money in registered securities to which section 1 of the Stock Transfer Act 1963(a) applies (transfer by stock transferforms) or in listed securities; or

b) depositing money with a relevant institution, and “lent” must be understood in that way.

‘Open-ended investment company’ means an open-ended investment company as defined in section 236 of the 2000 Act which is an undertaking for collective investment schemes to which Council Directive No. 85/611/EEC co-ordinating the laws, regulations andadministrative provisions relating to undertakings for collective investment in transferable securities, as last amended by EuropeanParliament and Council Directive No. 2001/108/EC (b) applies.

‘Relevant institution’ means:


b) an EEA firm of the kind mentioned in paragraph 5(b) of Schedule 3 (EEA passport rights) to that Act(c) which has permission under paragraph 15(1) of that Schedule(d) (as a result of qualifying for authorisation under paragraph 12 of that Schedule) to accept deposits; or

c) a person who is an exempt person in respect of accepting deposits as a result of an order made under section 38(1) of that Act (exemption orders);

‘Single holding’ means investments:

a) in securities of, or in loans to or deposits with, any one body;

b) in units or other shares of the investments subject to the trust of any one unit trust scheme; or

c) in transactions involving any one piece of land or other property.

‘Unlisted securities’ means securities which are not quoted on a recognised stock exchange.


Schedule 2 Regulation 17

Revocations

1) Regulations Revoked 2) References 3) Extent of revocation

The Local Government Pension Scheme S.I. 1998/1831 The whole Regulations(Management and Investment of Funds) Regulations 1998

The Local Government Pension Scheme S.I. 1999/3259 The whole Regulations(Management and Investment of Funds) (Amendment) Regulations 1999


The Local Government Pension Scheme S.I. 2000/3025 Regulation 4(Pension Sharing on Divorce) Regulations 2000

The Financial Services and Markets Act S.I. 2001/3649 Regulations 574 to 578200 (Consequential Amendments and Repeals) Order 2001


The Collective Investment Schemes S.I. 2003/2066 Regulation 13(3)(Miscellaneous Amendments) Regulations 2003



The Local Government Pension Scheme S.I. 2008/2425 Regulations 11-14(Miscellaneous)Regulations 2008


Explanatory Note (This note is not part of the Regulations)

These Regulations consolidate the Local Government Pension Scheme (Management and Investment of Funds) Regulations 1998(S.I. 1998/1831) with subsequent amending instruments. In addition to minor and drafting amendments, the following changes of substance have been made.

Paragraph (4) of regulation 3 (definition of ‘investment’) provides that the use of pension fund money for any purpose for which thelocal authority may borrow money shall count as an investment for the purposes of these Regulations prior to 1 April 2010 whereupon it will cease to count as an investment.

Regulation 5 (power to borrow) sets out the circumstances in which the administering authority may borrow money for the purposesof its pension fund and the rules applying to the repayment of any such borrowing.

Regulation 6 (separate bank account) provides that pension fund money must be kept in a separate bank account held by the administering authority for that purpose by 1 April 2011.

Other provisions provide for: general definitions (regulation 2), what counts as an investment (regulation 3), the sums which an administering authority must pay to and may pay from its pension fund (regulation 4), the power to appoint an investment managerincluding the terms of such appointment and the requirement to keep the performance of any such manager under review (regulations 7-10), general provisions concerning investments (regulation 11) including the requirement to prepare and maintain an investment policy (regulation 12), the limits which apply to certain types of investments and the requirements which apply if such limits are to be increased (regulations 14 and 15) and the requirement to pay interest on fund money used by the administering authority (regulation 16). Regulation 17 and Schedule 2 revoke the instruments and provisions which these Regulations replace.

An impact assessment has not been produced for this instrument as it has no impact on the costs of businesses, charities or voluntary bodies and it does not have a significant financial impact on any public bodies.


Made 24 November 2009Laid before Parliament 1 December 2009Working copy coming into force 1 January 2010

Contents

Preliminary1) Citation, commencement and application2) General definitions3) Definition of ‘investment’

Management of Pension Fund4) Management of pension fund5) Power to borrow6) Separate bank account

Investment Managers7) Definition of ‘investment manager’8) Choice of investment managers9) Terms of appointment of investment managers10) Review of investment manager’s performance

Investment and Use of Fund Money11) Investment of pension fund money12) Statement of investment principles13) Investments under section 11(1) of the Trustee Investments Act 196114) Restrictions on investments15) Requirements for increased limits16) Use of fund money by an administering authority

Supplementary17) Revocations

Schedule 1 - Table of limits on investments Schedule 2 - Revocations

Appendix E: LGPS (Management & Investmentof Funds) Regulations 2009 – 1 January 2010


These Regulations are made in exercise of the powers conferred by section 7 of, and Schedule 3 to, the Superannuation Act 1972(a).

In accordance with section 7(5) of that Act the Secretary of State has consulted (a) such associations of local authorities as appearedto the Secretary of State to be concerned; (b) the local authorities with whom consultation appeared to the Secretary of State to be desirable; and (c) such representatives of other persons likely to be affected by the Regulations as appeared to the Secretary of Stateto be appropriate.

The Secretary of State makes the following Regulations:

Preliminary

1) Citation, commencement and application

1) These Regulations may be cited as the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009 and shall come into force on 1 January 2010.

2) These Regulations apply in relation to England and Wales (b).

2) General definitions

1) In these Regulations:

‘the 2000 Act’ means the Financial Services and Markets Act 2000(c);

‘administering authority’ means a body required to maintain a pension fund under the Administration Regulations;

‘the Administration Regulations’ means the Local Government Pension Scheme (Administration) Regulations 2008(d);‘fund money’ means money in the pension fund maintained by an administering authority;

‘proper advice’, in relation to an administering authority, means the advice of a person whom the authority reasonably believes to be qualified by their ability in and practical experience of financial matters (including any such person who is an officer of the administering authority);

‘recognised stock exchange’ has the same meaning as in section 1005(1) of the Income Tax Act 2007(e); ‘securities’ includes shares, stock and debentures;

‘statement of investment principles’ means the statement referred to in regulation 12(1) or any revision of it, as appropriate;

‘stocklending arrangement’ means an arrangement such as is mentioned in section 263B of the Taxation of Chargeable Gains Act 1992(f); and

‘sub-underwriting contract’ means a contract with a person who is underwriting a share issue to acquire the shares from that person if that person requires it.

2) Paragraphs (5) to (7) of regulation 3, paragraphs (2)(a) and (2)(b) of regulation 6, regulation 7 and item 4 of the table and the definition of ‘relevant institution’ in Schedule 1, must be read with:

a) section 22 of the 2000 Act (classes of activity and categories of investment);

b) any relevant order under that section; and

c) Schedule 2 to that Act (g) (regulated activities).

a) 1972 c.11.b) The Secretary of State’s functions under section 7 of the Superannuation Act 1972 in so far as they were exercisable in relation to Scotland were devolved to Scottish

Ministers by section 63 of the Scotland Act 1998 (c.46) and article 2 of, and Schedule 1 to, the Scotland Act 1998 (Transfer of Functions to Scottish Ministers etc.) Order 1999(S.I. 1999/1750).

c) 2000 c.8.d) S.I. 2008/239, amended by S.I. 2008/1083, 2008/2425, and S.I. 2008/3245.e) 2007 c.3; section 1005(1) was amended by paragraph 1 of Schedule 26 to the Finance Act 2007 (c.11).f) 1992 c.12; section 263B was inserted by paragraph 5(1) of Schedule 10 to the Finance Act 1997 (c.16).g) Amended by section 1 of the Regulation of Financial Services (Land Transactions) Act 2005 (c.24), and paragraph 1 of Schedule 2 to the Dormant Bank and Building Society

Accounts Act 2008 (c.31).


3) Definition of ‘investment’

1) In these Regulations ‘investment’ and related expressions have their normal meaning.

2) But the following provisions of this regulation specify things which count as investments for these Regulations, although they might not otherwise do so, and exclude things which might otherwise count.

3) A contract entered into in the course of dealing in financial futures or traded options is an investment.

4) Prior to 1 April 2010, if the administering authority uses fund money for any purpose for which it may borrow money, that useis an investment.

5) A contract of insurance is an investment if it is a contract of a relevant class, and is entered into with a person within paragraph(6) for whom entering into the contract constitutes the carrying on of a regulated activity within the meaning of the 2000 Act.

6) The persons within this paragraph are:

a) a person who has permission under Part 4 of the 2000 Act (permission to carry on regulated activities) to effect or carry outcontracts of insurance of a relevant class;

b) an EEA firm of the kind mentioned in paragraph 5(d) of Schedule 3 to the 2000 Act(h) (EEA passport rights), which has permission under paragraph 15 of that Schedule (as a result of qualifying for authorisation under paragraph 12 of that Schedule(i)) to effect or carry out contracts of insurance of a relevant class; and

c) a person who does not fall within sub-paragraph (a) or (b) and who, because that person’s head office is in an EEA State within the meaning of the 2000 Act other than the United Kingdom, is permitted by the law of that State to effect or carry out contracts of insurance of a relevant class.

7) A contract of insurance is of a relevant class for the purposes of paragraphs (5) and (6) if it is:

a) a contract of insurance on human life or a contract to pay an annuity on human life where the benefits are wholly or partly to be determined by reference to the value of, or the income from, property of any description (whether or not specified in the contract) or by reference to fluctuations in, or in an index of, the value of property of any description (whether or not so specified); or

b) a contract to manage the investments of pension funds, whether or not combined with contracts of insurance covering either conservation of capital or payment of a minimum interest.

8) A stocklending arrangement is an investment if, and only if, in respect of it, the conditions in rules 5.4.4R and 5.4.6R, modified as specified in paragraph (9) of this regulation(j), in the Collective Investment Schemes Sourcebook made by the Financial Services Authority(k) are fulfilled in relation to that arrangement.

9) The modifications mentioned in paragraph (8) are that:

a) in rules 5.4.4R and 5.4.6R references to the depositary must be read as if they were references to the administering authority;

b) in paragraph 1 of rule 5.4.4R for the words ‘An ICVC, or the depositary at the request of the ICVC, or the trustee at the request of the manager, may enter into a repo contract, or’ there shall be substituted the words ‘The administering authority may enter into’;

c) in paragraph 1(a) of rule 5.4.4R, the words ‘for the account of the ICVC or by the trustee,’ and the words ‘or to the trustee’ shall be omitted;

d) sub-paragraphs 1(b) (iii) and 1(b) (iv) of rule 5.4.4R shall not apply;

h) Amended by S.I. 2004/3379.i) Amended by S.I. 2007/126, S.I. 2007/3253.j) The Department for Communities and Local Government has produced a document setting out rules 5.4.4R and 5.4.6R of the Collective Investment Schemes Sourcebook,

modified as specified in regulation 3(9). A copy of this document may be obtained by contacting the Department’s Workforce Pay and Pensions Division (tel. 0303 444 2184 or email [email protected]).

k) The Collective Investment Schemes Sourcebook (known as COLL) is made by the Financial Services Authority by virtue of Part X and sections 247 and 248


e) paragraph 1A of rule 5.4.6R shall not apply;

f) in paragraph 5 of rule 5.4.6R the words ‘under COLL 6.3 (Valuation and pricing) or this chapter,’ shall be omitted, and the reference to the authorised fund must be read as if it were a reference to the pension fund; and

g) in paragraph 6 of rule 5.4.6R references to scheme property must be read as if they were references to fund money, andthe words in sub-paragraph (a) ‘for the purposes of COLL 6.3 or this chapter’ and in sub-paragraph (b) ‘of this chapter’ shall be omitted.

10) It is an investment to contribute to a limited partnership in an unquoted securities investment partnership.

11) A sub-underwriting contract is an investment.

12) For the purposes of this regulation:

‘limited partnership’ means a partnership where the partners are not liable for the debts or obligations of the partnership beyond the amount which they contributed at the time of becoming a partner;

‘traded option’ means an option quoted on a recognised stock exchange or on the London International Financial Futures Exchange; and

‘unquoted securities investment partnership’ means a partnership for investing in securities which are normally not quoted on a recognised stock exchange when the partnership buys them.

Management of Pension Fund

1) Management of pension fund

1) This regulation is about the sums which an administering authority must pay or credit to and may pay from the pension fund which it administers.

2) An authority must pay or credit to its pension fund, in addition to any other sum the Benefits Regulations, the Transitional Regulations or the Administration Regulations specify must be paid or credited to the fund:

a) the amounts payable by it or paid to it for the credit of the fund by any other authority under regulations 39 to 41 of the Administration Regulations (employers’ contributions and payments);

b) all members’ contributions including those made by virtue of the Transitional Regulations, except contributions payable under regulation 25 of the Administration Regulations (additional voluntary contributions and shared cost additional voluntary contributions);

c) all income arising during the year from investment of the fund;

d) all capital money deriving from such investment; and

e) all additional payments received by the authority under the Benefits Regulations, the Transitional Regulations or the Administration Regulations.

3) In the case of an administering authority which maintains more than one pension fund, as respects sums which relate to specific members the references in paragraph (2) to an authority’s fund are to the fund which is the appropriate fund for the members in question in accordance with Schedule 4 to the Administration Regulations (appropriate funds).

4) Interest under regulation 44(1) of the Administration Regulations (interest) must be credited and paid to the fund to which the overdue payment is due.

5) Any costs, charges and expenses incurred administering a pension fund may be paid from it except those costs and charges prescribed by regulations made under section 23 (supply of pension information in connection with divorce etc.), 24 (charges by pension arrangements in relation to earmarking orders) or 41 (charges in respect of pension sharing costs) of the Welfare Reform and Pensions Act 1999(l) which the administering authority is enabled to recover by or under any such regulations.

l) 1999 c. 30; sections 23 and 24 were amended by the Civil Partnership Act 2004 (c.33), Schedule 27, paragraphs 157 and 158 and Schedule 30.


6) In this regulation:

‘member’ means any active or deferred member or any pensioner but does not include a person who has rights to future benefits under the scheme which are attributable (directly or indirectly) to a credit under section 29(1) (b) of the Welfare Reform and Pension Act 1999(m) or corresponding Northern Ireland legislation;

‘the Benefits Regulations’ means the Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007(n); and

‘the Transitional Regulations’ means the Local Government Pension Scheme (Transitional Provisions) Regulations 2008(o).

5) Power to borrow

1) Except as provided in this regulation, an administering authority must not borrow money where the borrowing is liable to be repaid out of its pension fund.

2) An administering authority may borrow by way of temporary loan or overdraft from a bank or otherwise any sums which it may require for the purpose of:

a) paying benefits due under the scheme, or

b) to meet investment commitments arising from the implementation of a decision by it to change the balance between different types of investment.

3) An administering authority may only borrow money under paragraph (2) if, at the time of borrowing, the authority reasonably believes that the sum borrowed and interest charged in respect of such sum can be repaid out of its pension fund within 90 days of the date of the borrowing.

6) Separate bank account

1) On and after 1st April 2011, an administering authority must hold in a separate account kept by it with a deposit-taker in accordance with this regulation:

a) all monies held by the authority on that date; and

b) all monies received by it on or after that

2) ‘Deposit-taker’ for the purposes of paragraph (1) means:


b) an EEA firm of the kind mentioned in paragraph 5(b) of Schedule 3 to the 2000 Act (EEA passport rights) which has permission under paragraph 15 of that Schedule (as a result of qualifying for authorisation under paragraph 12 of that Schedule(p)) to accept deposits;

c) the Bank of England or the central bank of an EEA state other than the United Kingdom; or

d) the National Savings Bank.

3) The deposit-taker shall not; in relation to the account referred to in paragraph (1), exercise any right of set-off it may have in respect of any other account held by the administering authority or any party connected to the administering authority.

m) 1999 c.30.n) S.I. 2007/1166, amended by S.I. 2008/1083, 2008/2425, 2009/1025.o) S.I. 2008/238, amended by S.I. 2008/1083, 2008/2425.p) Amended by S.I. 2007/126, S.I. 2007/3253.


Investment Managers

7) Definition of ‘investment manager’

For the purposes of regulations 8 to 10, an ‘investment manager’ is:

a) a person who has permission under Part 4 of the 2000 Act (permission to carry on regulated activities) to manage investments and may lawfully manage the assets of occupational pension schemes;

b) an EEA firm of the kind mentioned in sub-paragraph (a), (b) or (c) of paragraph 5 of Schedule 3 to that Act(q) (EEA passport rights), which has permission under paragraph 15 of that Schedule (as a result of qualifying for authorisation under paragraph 12 of that Schedule(r)) to manage investments and may lawfully manage the assets of occupational pension schemes; or

c) a person:

i) who does not carry on regulated activities (within the meaning of the 2000 Act) from a permanent place of business maintained by that person in the United Kingdom;

ii) whose head office is situated in an EEA State (within the meaning of the 2000 Act) other than the United Kingdom;

iii) who is recognised by the law of that EEA State as a national of that or another EEA State;

iv) who is authorised under that law to carry on one or more regulated activities (within the meaning of the 2000 Act); and

v) who is not prevented by that law from managing the assets of occupational pension schemes or assets belonging to another person.

8) Choice of investment managers

1) Instead of managing and investing fund money itself, an administering authority may appoint one or more investment managers to manage and invest fund money, or any part of such money, on its behalf.

2) But the authority may only appoint an investment manager if the authority complies with paragraphs (3) to (6).

3) The authority must reasonably believe that the investment manager’s ability in and practical experience of financial matters makes that investment manager suitably qualified to make investment decisions for it.

4) The investment manager must not be its employee.

5) The authority must be satisfied:

a) that the fund, or the relevant part of it, is managed by an adequate number of investment managers; and

b) that where there is more than one investment manager, the value of fund money to be managed by any one of them will not be disproportionate in comparison with the value of fund money managed by other investment managers.

6) The authority must have taken proper advice in relation to the appointment.

9) Terms of appointment of investment managers

1) An investment manager must be appointed on the terms set out in paragraphs (2) to (7).

2) The administering authority must be able to terminate the appointment by not more than one month’s notice.

3) The investment manager must report to the administering authority at least once every three months on the action the investment manager has taken on behalf of the authority.

4) The investment manager must comply with all the administering authority’s instructions.

q) Amended by S.I. 2003/1473, S.I. 2007/126, S.I. 2006/3221.r) Amended by S.I. 2007/126, S.I. 2007/3253.


5) In managing the fund, the investment manager must take into account:

a) that fund money must be invested in a wide variety of investments;

b) the suitability for the fund of particular types of investment, or of any particular investment; and

c) the administering authority’s statement of investment principles.

6) But paragraph (5) (a) does not apply where the investment manager only manages part of the fund and the terms of the investment manager’s appointment provide that it does not apply.

7) The investment manager must not make investments which would contravene the administering authority’s statement of investment principles or regulation 14 (restrictions on investments).

8) In determining the investment manager’s terms of appointment, the administering authority must take proper advice.

10) Review of investment manager’s performance

1) Where an administering authority has appointed an investment manager it must keep the investment manager’s performanceunder review.

2) At least once every three months, the authority must review the investments the investment manager has made for the fund and any other action that has been taken by the manager in relation to it.

3) Periodically, the authority must consider whether or not to retain the investment manager.

4) In reviewing an investment manager’s decisions and appointment, the authority must take proper advice:

a) if regulation 9(5)(a) applies, about the variety of investments the investment manager has made; and

b) about the suitability of those investments for the fund generally and as investments of their type.

Investment and the Use of Fund Money

11) Investment policy and investment of pension fund money

1) An administering authority must formulate a policy for the investment of its fund money.

2) The authority’s investment policy must be formulated with a view:

a) to the advisability of investing fund money in a wide variety of investments; and

b) to the suitability of particular investments and types of investments.

3) The authority must invest, in accordance with its investment policy, any fund money that is not needed immediately to make payments from the fund.

4) The authority may vary its investments

5) The authority must obtain proper advice at reasonable intervals about its investments.

6) The authority must consider such advice in taking any steps in relation to its investments.

12) Statement of investment principles

1) An administering authority must, after consultation with such persons as it considers appropriate, prepare, maintain (in accordance with paragraph (5)) and publish a written statement of the principles governing its decisions about the investment of fund money.

2) The statement must cover its policy on:

a) the types of investment to be held;

b) the balance between different types of investments;

c) risk, including the ways in which risks are to be measured and managed;

d) the expected return on investments;


e) the realisation of investments;

f) the extent (if at all) to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments;

g) the exercise of the rights (including voting rights) attaching to investments, if the authority has any such policy; and

h) stocklending.

3) The statement must also state the extent to which the administering authority complies with guidance given by the Secretary of State, and, to the extent the authority does not so comply, the reasons for not complying.

4) The first such statement must be published no later than 1 July 2010.

5) The statement must be reviewed, and if necessary, revised, by the administering authority from time to time and, in the case of any material change in the authority’s policy on the matters referred to in paragraphs (2) and (3), before the end of a period of six months beginning with the date of that change.

6) A statement revised under paragraph (5) must be published.

13) Investments under section 11(1) of the Trustee Investments Act 1961

An administering authority may invest, without any restriction as to quantity, in any investment made in accordance with a scheme under section 11(1) of the Trustee Investments Act 1961 (which enables the Treasury to approve schemes for local authorities to invest in collectively).

14) Restrictions on investments

1) The table in Schedule 1 and the exceptions specified below that table (“the exceptions”) shall have effect for the purpose of limiting the making of investments of the types described in the table.

2) Subject to paragraph (3), and, where relevant, the exceptions, a percentage listed in Column 1 of the table in relation to a type of investment so described is the limit on the proportion of fund money which may be invested in that type of investment.

3) An administering authority may, in accordance with regulation 15, decide to increase the limit in relation to a particular type of investment so described, but only where a percentage is shown in relation to that type of investment in Column 2 of the table, and may not exceed that percentage.

4) The percentages mentioned in paragraphs (2) and (3) are percentages of the total value of all existing investments of fund money immediately before the making of the investment concerned.

5) Paragraph (2) and, if applicable, paragraph (3) apply only at the time the investment is made.

6) The definitions set out below the exceptions shall have effect for interpreting the table.

15) Requirements for increased limits

1) An administering authority which decides to increase limits under regulation 14(3) must comply with the requirements of this regulation.

2) The authority must have taken proper advice.

3) The authority must take account of the matters set out in regulation 11(2).

4) Where there is a decision to use the increased limits under regulation 14(3) in relation to item 13 of the table in Schedule 1, the additional risks of the increased limit must have been taken into account in addition to those matters set out in regulation 11(2).

s)1961 c. 62.t) The Occupational Pension Schemes (Investment) Regulations 2005 (S.I. 2005/3378, amended by S.I. 2007/814 and S.I. 2009/615) which, in particular, prescribe certain

investments as employer-related investments in addition to those specified in section 40(2) of the Pensions Act 1995, set out restrictions on employer-related investments andmake provision as regards the application of the restrictions to schemes in relation to which there is more than one employer, may further restrict or limit investment of fund money.


5) The decision must specify:

a) the description of investment to which it applies;

b) the limit on the amount of the investment;

c) the reason for that decision;

d) the period for which the decision will apply;

e) if the authority intend to review the decision before the end of the period in (d), the date when the decision will be reviewed;and

f) that the decision complies with these Regulations.

6) Where the period for which the decision will apply comes to an end, the limits will be those set out in Column 1 of the table unless before the end of that period the administering authority reviews the decision in accordance with this regulation.

7) A decision following a review to continue to use limits increased under regulation 14(3), whether or not the increased limits have been altered, must—

a) take account of the matters set out in paragraphs (2)-(4); and

b) specify the matters set out in paragraph (5).

8) Before a decision under regulation 14(3) or under paragraph (7) of this regulation can take effect, the administering authority must revise and publish the written statement of investment principles which it is required to maintain under regulation 12 so as to include the matters specified in paragraph (5).

16) Use of fund money by an administering authority

1) An administering authority must pay interest on the total from day to day of any fund money used under regulation 3(4) and not repaid.

2) That interest may not be paid at a rate lower than the lowest rate at which the authority could have obtained a commercial loan of that amount at 7 days’ notice (otherwise than by bank overdraft).


Supplementary

17) Revocations

The instruments listed in Column (1) of the table in Schedule 2 are revoked to the extent stated, in relation to each, in Column (3) of that table.

Signed by authority of the Secretary of State for Communities and Local GovernmentRosie Winterton Minister of State

Department for Communitiesand Local Government

24 November 2009

Schedule 1 Regulation 14(1)

Table of Limits on Investments

Investment Column 1 Column 2Limits under regulation 14(2) Increased limits under regulation 14(3)

1) Any single sub-underwriting contract 1% 5%

2) All contributions to any single partnership 2% 5%

3) All contributions to partnerships 5% 30%

4) The sum of: 10% —

a)all loans (but see paragraph 1 below); and

b)any deposits with:

i) any local authority; or

ii) anybody with power to issue a precept or requisition to a local authority, or to the expenses of which a local authority can be required to contribute, which is an exempt person (within the meaning of the 2000 Act) in respect of accepting deposits as a result of an order made under section 38(1) of that Act.

5) All investments in unlisted securities of companies 10% 15%

6) Any single holding (but see paragraphs 2 and 3 below) 10% —

7) All deposits with any single bank, institution 10% —or person (other than the National Savings bank).

8) All sub-underwriting contracts 15% —

9) All investments in units or shares of the investments 25% 35% subject to the trusts of unit trust scheme managed by any one body but see paragraph 3 below.

10) All investments in open-ended investment companies 25% 35% where the collective investment schemes constituted by the companies are managed by one body.

11) All investments in units or other shares of the investments 25% 35% subject to the trusts of unit trust schemes and all investments in open-ended investment companies where the unit trust schemes and the collective investment schemes constituted by those companies are managed by any one body (but see paragraph 3 below).

12) Any single insurance contract. 25% 35%

13) All securities transferred (or agreed to 25% be 35% transferred) by the authority under stocklending arrangements.


Exceptions to limits in the table

1) The restriction in item 4 of the table does not apply to a Government loan.

2) The restriction in item 6 of the table does not apply if:

a) the investment is made by an investment manager appointed under regulation 8; and

b) the single holding is in units or other shares of the investments subject to the trusts of any one unit trust scheme.

3) The restrictions in items 6, 9 and 11 do not apply to:

a) National Savings Certificates;

b) fixed-interest securities issued by Her Majesty’s Government in the United Kingdom, the Government of Northern Ireland or the Government of the Isle of Man and registered in the United Kingdom or the Isle of Man or Treasury Bills;

c) any securities the payment of interest on which is guaranteed by Her Majesty’s Government in the United Kingdom or the Government of Northern Ireland; or

a) a deposit with a relevant institution.


Interpretation

‘Collective investment scheme’ has the meaning given in section 235 of the 2000 Act.

‘Companies’ includes companies established under the law of any territory outside the United Kingdom. ‘Government loan’ means aloan:

a) to Her Majesty’s Government in the United Kingdom; or

b) to the Government of the Isle of Man.

‘Listed securities’ means securities quoted on a recognised stock exchange. ‘Loan’ does not include:

a) investing money in registered securities to which section 1 of the Stock Transfer Act 1963(a) applies (transfer by stock transferforms) or in listed securities; or

b) depositing money with a relevant institution, and ‘lent’ must be understood in that way.

‘Open-ended investment company’ means an open-ended investment company as defined in section 236 of the 2000 Act which is an undertaking for collective investment schemes to which Council Directive No. 85/611/EEC co-ordinating the laws, regulations andadministrative provisions relating to undertakings for collective investment in transferable securities, as last amended by EuropeanParliament and Council Directive No. 2001/108/EC (b) applies.

‘Relevant institution’ means:


b) an EEA firm of the kind mentioned in paragraph 5(b) of Schedule 3 (EEA passport rights) to that Act(c) which has permission under paragraph 15(1) of that Schedule(d) (as a result of qualifying for authorisation under paragraph 12 of that Schedule) to accept deposits; or

c) a person who is an exempt person in respect of accepting deposits as a result of an order made under section 38(1) of that Act (exemption orders);

‘Single holding’ means investments:

a) in securities of, or in loans to or deposits with, any one body;

b) in units or other shares of the investments subject to the trust of any one unit trust scheme; or

c) in transactions involving any one piece of land or other property.

‘Unlisted securities’ means securities which are not quoted on a recognised stock exchange.

a) 1963 c.18.b) S.I. 2003/2066.c) Amended by S.I. 2003/1473 and S.I. 2006/3221.d) Amended by S.I. 2007/3253.


Schedule 2 Regulation 17

Revocations

1) Regulations Revoked 2) References 3) Extent of revocation

The Local Government Pension Scheme S.I. 1998/1831 The whole Regulations(Management and Investment of Funds) Regulations 1998



The Local Government Pension Scheme S.I. 2000/3025 Regulation 4(Pension Sharing on Divorce) Regulations 2000

The Financial Services and Markets Act S.I. 2001/3649 Regulations 574 to 578200 (Consequential Amendments and Repeals) Order 2001


The Collective Investment Schemes S.I. 2003/2066 Regulation 13(3)(Miscellaneous Amendments) Regulations 2003



The Local Government Pension Scheme S.I. 2008/2425 Regulations 11-14(Miscellaneous)Regulations 2008


Explanatory Note (This note is not part of the Regulations)

These Regulations consolidate the Local Government Pension Scheme (Management and Investment of Funds) Regulations 1998(S.I. 1998/1831) with subsequent amending instruments. In addition to minor and drafting amendments, the following changes of substance have been made.

Paragraph (4) of regulation 3 (definition of ‘investment’) provides that the use of pension fund money for any purpose for which thelocal authority may borrow money shall count as an investment for the purposes of these Regulations prior to 1 April 2010 whereupon it will cease to count as an investment.

Regulation 5 (power to borrow) sets out the circumstances in which the administering authority may borrow money for the purposesof its pension fund and the rules applying to the repayment of any such borrowing.

Regulation 6 (separate bank account) provides that pension fund money must be kept in a separate bank account held by the administering authority for that purpose by 1 April 2011.

Other provisions provide for: general definitions (regulation 2), what counts as an investment (regulation 3), the sums which an administering authority must pay to and may pay from its pension fund (regulation 4), the power to appoint an investment managerincluding the terms of such appointment and the requirement to keep the performance of any such manager under review (regulations 7-10), general provisions concerning investments (regulation 11) including the requirement to prepare and maintain an investment policy (regulation 12), the limits which apply to certain types of investments and the requirements which apply if such limits are to be increased (regulations 14 and 15) and the requirement to pay interest on fund money used by the administering authority (regulation 16). Regulation 17 and Schedule 2 revoke the instruments and provisions which these Regulations replace.

An impact assessment has not been produced for this instrument as it has no impact on the costs of businesses, charities or voluntary bodies and it does not have a significant financial impact on any public bodies.


West Midlands Pension Fund Confidentiality Statement

TO: THE COMPLIANCE OFFICERWOLVERHAMPTON CITY COUNCIL

FROM:

Name (BLOCK CAPITALS please)

I confirm that I am aware of my duty as an employee of Wolverhampton City Council to treat anyinformation that comes into my possession as a result of my employment as confidential. I shallnot pass on such information to persons who are not currently employed by the Council for pension fund investment purposes or who are not currently members of the Pensions Committee, unless I am duly authorised to do so.

Furthermore, I will not make use of this information in my personal capacity, either for my ownor for any other person’s benefit. I shall deal in stock markets on a personal basis only in accordance with the Fund's personal dealing rules.

I am aware that any breach of these obligations will be considered grounds for disciplinary procedures that may include my dismissal.

I understand that I may be required to make good any losses suffered as a result of my ownfraudulent action.

Signed:

Dated:

Appendix F: Staff Declaration