An Audit Report on Selected Investment Practices at the Texas Treasury Safekeeping Trust Company, the Employees Retirement System, and the Texas A&M University System
September 2010
Report Number 11-003
Overall Conclusion
The Texas Treasury Safekeeping Trust Company (Texas Trust), the Employees Retirement System (ERS), and the Texas A&M University System (Texas A&M System) substantially had and adhered to policies, procedures, and controls that were consistent with applicable statutory requirements and best practices for the specific investment practices audited.
While the extent of the controls over investment practices differed among the audited entities, overall, the controls that auditors tested at each entity operated effectively. However, all three entities have opportunities to strengthen certain controls. Specifically:
- Documentation. All three entities should improve the documentation of certain aspects of their initial due diligence for, and ongoing monitoring of, alternative investments and externally managed traditional investments. For example, all three entities should improve their documentation of reference checks of investment firms and their key professionals. The Texas Trust and ERS should improve their documentation of site visits and meetings. The Texas A&M System should improve its documentation of the rationale for investment decisions and its review of fees that alternative investments managers charge. The Texas Trust should improve its documentation of written procedures for ongoing monitoring.
- Investment Policies. The Texas A&M System should enhance certain provisions of its investment policy, implement additional controls to strengthen the independence of its oversight processes, and improve its documentation of noncompliance with investment policies. The Texas Trust should improve its monitoring of compliance with certain key investment policy provisions.
- Securities Lending Policies. ERS and the Texas A&M System have securities lending programs; the Texas Trust suspended its securities lending program in October 2008, but it still has a contract with a securities lending agent through which it could resume securities lending. ERS's board-approved securities lending policy does not address certain statutory limitations on its securities lending program. In addition, ERS and the Texas A&M System (and the Texas Trust, if it reinstates its securities lending program) should consider incorporating certain best practice provisions directly into their formal securities lending policies. ERS also should improve its communication process for certain violations of its internally adopted securities lending policy.
The contracts that ERS, the Texas A&M System, and the Texas Trust have with their securities lending agents addressed all or most best practice provisions (and, for ERS, all statutory limitations); however, opportunities exist for the Texas A&M System to strengthen certain contractual language.
Auditors communicated other less significant issues separately in writing to management of the audited entities.
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