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R3214RESOLUTION NO. 3214 WHEREAS, the adoption of Resolution No. 3214 will authorize the Secretary- Treasurer of the Metropolitan St. Louis Sewer District to make changes to the District’s Defined Benefit Plan and Pension Plan Investment Policy. These changes fully comply with the criteria in the District’s Pension Plan as described in Ordinance 13796. WHEREAS, these changes will clarify inconsistent references, clarify the role of the Board of Trustees, clarify the definition of “prohibited transactions”, and clarify the investment goals, objects, guidelines, and performance benchmarks. WHEREAS, the Metropolitan St. Louis Sewer District has established an Employee Pension Plan in accordance with the Charter Plan, as amended June 5, 2012, Section 3.020(22). WHEREAS, in the form of a Pension Plan, Ordinance No. 13796, as amended, provides for the pensioning and other retirement benefits of employees of the MSD and spouses and minor children of deceased employees, and provides for the payment of public funds for such purposes, in accordance with the MO Constitution of 1945, as amended, and the MO Statutes enacted authorizing said Pension Plan, and WHEREAS, Resolution 3030, superseding resolution 2749 calls for the Board of Trustees of the Metropolitan St. Louis Sewer District to at least annually, review this Statement for relevance to and consistency with governing law and the financial objectives of the Fund. WHEREAS, the Board of Trustees of the Metropolitan St. Louis Sewer District presently receives services from Pavilion Advisory Group, Inc., per Ordinance No.13719, adopted September 12, 2013 to act as the employee pension fund investment consultant and provide investment advisory services, and WHEREAS, Pavilion Advisory Group, Inc. has conducted a review and evaluation of the Defined Contribution and Employee Pension Fund investment policy, and has made certain recommendations to the Board of Trustees, NOW, THEREFORE, BE IT RESOLVED, that the Secretary-Treasurer of the Metropolitan St. Louis Sewer District is hereby authorized to make changes to the District’s Defined Benefit Plan and Pension Plan Investment Policy that fully complies with the criteria in the District’s Pension Plan as described in Ordinance 13796 The foregoing Resolution was adopted on June 16, 2015 METROPOLITAN ST. LOUIS SEWER DISTRICT DEFINED BENEFIT PLAN STATEMENT OF INVESTMENT POLICY, OBJECTIVES AND OPERATING GUIDELINES 2 INVESTMENT POLICY GUIDELINES I. Introduction II. Identification of Duties A. Board of Trustees B. Investment Committee C. Secretary-Treasurer D. Investment Consultant E. Investment Manager F. Custodian III. Investment Goals and Objectives IV. Asset Allocation A. Policy Target and Ranges B. Rebalancing Procedures V. Investment Manager Appointment VI. Investment Manager Guidelines -- General A. Benchmarks B. Philosophy C. Compliance Monitoring D. Prohibited Transactions E. Use of Pooled Funds F. Derivative Guidelines VII. Investment Manager Guidelines – Asset Class Specific A. Domestic Equity Managers B. Global & International Equity Managers C. Passive Managers D. Domestic Fixed Income Managers E. Domestic High Yield Managers F. Global & International Fixed Income Managers G. Global Asset Allocation Managers H. Absolute Return & Hedge Fund Managers I. Real Estate Managers VIII. Standard of Investment Performance A. General Guidelines B. Manager Probation and Termination IX. Manager Reporting Requirements A. Immediately B. Quarterly C. Annually X. Implementation and Approval Appendices and Exhibits Appendix I: Asset Allocation Appendix II: Performance Benchmarks Appendix III: Manager Specific Guidelines and Exceptions Exhibit I: Resolution 2193 – Proxy Voting Exhibit II: Resolution 2177 – Trading and Brokerage Policy 3 METROPOLITAN ST. LOUIS SEWER DISTRICT STATEMENT OF INVESTMENT POLICY, OBJECTIVES AND OPERATING GUIDELINES I. INTRODUCTION A. The Metropolitan St. Louis Sewer District Pension Plan (the “Plan”) is a defined benefit plan which was established to provide retirement benefits to participants in accordance with the benefit structure adopted by the Board of Trustees (the “Board”). The Plan is maintained to provide benefits, and toward that end, invests contributions and reinvests investment proceeds for the exclusive benefit of plan participants and beneficiaries. Investments of the Plan shall be managed in accordance with applicable federal, state and local statutes, as well as with the Plan document. B. This Statement of Investment Policy, Objectives, and Operating Guidelines (the "Policy Statement") is set forth so that all fiduciaries, including the Board, investment managers (the “Manager(s)”), the investment consultant (the “Consultant”), and other Plan advisors will have a clear understanding of what is expected in the course of managing the assets of the Plan. C. It is the intent of this Policy Statement to establish an attitude and/or philosophy that will assure the achievement of the desired results. It is intended that this Policy Statement be sufficiently specific to be meaningful but sufficiently flexible to be practical. Specifically, this document is set forth to: 1. Briefly outline the investment-related responsibilities of the Board and the Managers it retains. 2. Establish formal, yet flexible investment guidelines incorporating prudent and realistic asset allocation and performance goals. 3. Establish investment guidelines regarding the selection of Managers, permissible investments and diversification of assets. 4. Provide a framework for regular constructive communication with the Board about its Managers. 5. Create standards of investment performance by which the Managers agree to be measured over a reasonable time period. D. This Policy Statement upon adoption by the Board shall supersede and replace all prior Policy Statement(s) and are hereby incorporated into all existing and any future Investment Manager Agreements. E. This Policy Statement may be amended by the Board both upon its own initiative and upon consideration of the advice and recommendation from the Consultant, the Managers, and other fund professionals. At least annually, the Investment Consultant Secretary-Treasurer and Investment Committee will review this Statement for relevance to and consistency with governing law and the financial objectives of the Plan. Proposed modifications should be documented in writing to the Board. II. IDENTIFICATION OF DUTIES This document will set forth specific duties and responsibilities for the investment-related parties as they carry out their specific roles towards achieving the objectives of the Plan. A. Board of Trustees The role of the Board is to oversee and make policy decisions regarding the investment of the Plan. As fiduciaries, the Board shall invest the Plan: 1. For the exclusive purposes of providing benefits to participants and for defraying 4 reasonable expenses of administering the Plan; and 2. With the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. The Board shall, 3. With the advice of the Consultant, Actuary and Managers, establish and develop the Plan’s Policy Statement, including the development of the long-term asset allocation and the appropriate mix of the Manager styles and strategies; 4. Periodically review and modify the Policy Statement in light of any changes in actuarial variables and market conditions; 5. Diversify the investments of the Plan to minimize the risk of large losses, unless under the circumstances, it is clearly prudent not to do so; 6. Select qualified Managers and Consultants to manage and advise on the Plan’s assets, as appropriate; 7. Monitor and review the investment performance of the Plan and Managers to determine achievement of goals and compliance with policy guidelines; 8. Establish a procedural due diligence search process; 9. Conduct Manager searches when needed for policy implementation; 10. Act in accordance with the laws, documents and instruments governing the Plan. B. Investment Committee 1. The Investment Committee shall assist the Board in developing and modifying policy objectives and guidelines, selecting Managers and in performing other duties and activities delegated to it by the Board. C. Secretary-Treasurer The Secretary-Treasurer is responsible for all day-to-day administrative functions required to support the Policy Statement, including 1. Overseeing the day-to-day activities of all Plan Advisors; 2. Coordinating the review of contracts when new service providers are engaged, and as necessary with incumbent providers; 3. Execute contracts upon approval of the Board as documented by the appropriate Resolutions and Ordinances as appropriate; 4. Coordinating funding of and withdrawals from the Managers; 5. Reviewing reports from the Managers, Consultant and other Plan Advisors and bringing to the attention of the Board items requiring Board review or action; and 6. Employing such assistance as necessary from the Managers, Consultant and other Plan Advisors. D. Investment Consultant The Consultant, acting as a fiduciary to the Plan, shall assist the Board and Investment Committee in: 1. Developing and monitoring investment objectives and guidelines, including the Plan’s assets allocation strategy and mix of Managers; 2. Measuring and evaluating the performance results of the Plan and Managers on an on-going basis and advising the Board as to their continued appropriateness; 3. Keeping the Board and Secretary-Treasurer informed of all significant matters pertaining to the Plan’s investments; 5 4. Providing timely written or oral information on the Managers and other related issues, as requested by the Board or the Secretary-Treasurer; and 5. Conducting such other duties as may be mutually agreed upon by the Board and the Consultant within the scope of the contractual agreement. E. Investment Managers All Managers must agree in writing that they are fiduciaries as defined in ERISA, with respect to the investment of all Plan assets over which they have investment discretion. The duties and responsibilities of each Manager include: 1. Managing the portion of the Plan under its discretion in accordance with prudency standards required by ERISA; (i.e., the Manager’s portfolio must be invested with the care, skill, prudence, and due diligence under the circumstances then prevailing that an experienced professional investment manager acting in a like capacity and fully familiar with such matters would use in the investment of like assets with like aims.); 2. Complying with all provisions and responsibilities under this Policy Statement. Except in the case of investments in mutual funds or commingled accounts, each Manager is required to comply with the policies and guidelines set forth in this Policy Statement. To the extent that the policies and guidelines in this Policy Statement are more restrictive than a Manager’s separate Investment Management Agreement with the Board, the Manager must follow the more restrictive rules in this Policy Statement. 3. Initiating communication with the Board, Secretary-Treasurer and Consultant when the Manager believes that this Policy Statement is inhibiting and/or should be changed. A Manager may suggest a modification to any policy or guideline with respect to the portfolio it manages by providing the Investment Committee and Consultant with a written submission describing the requested change, the reasons supporting the change, and any other relevant information. No deviation from the guidelines is permitted until the Board has approved the Manager’s requested changes. Failure to comply with any applicable policy or guideline may result in the Manager being liable for any corresponding loss to the Plan and/or in the Manager being terminated; 4. Exercising full discretion within the policy guidelines stated herein. Such discretion includes the decisions to buy, hold, and sell securities in amounts and proportions reflective of the Manager’s current invest strategy; 5. Using its best effort to ensure that portfolio transactions are placed on a “best execution” basis. (The Managers are expected to avoid all conflicts of interest when using Plan assets to pay brokerage expenses and to ensure that all trading expenditures are made for the exclusive benefit of the Plan.); 6. Exercising ownership rights, where applicable, through proxy voting in the best interests of the Plan's participants and beneficiaries; 7. Responding to funding requests within mutually agreed upon timelines; 8. Meeting with the Board, Secretary-Treasurer, and Consultant upon request; and 9. Providing monthly reports to the Custodian Bank in a timely fashion to meet the Bank’s timeline. (Does not apply to real estate and hedge fund Managers.) F. Custodian Bank The duties and responsibilities of the Custodian Bank include 1. Cash management, including: • Daily sweep of idle cash balances; • Interest and dividend collections; • Collecting proceeds from maturing securities; 6 2. Processing of the Managers’ transactions, and coordinating the availability of securities for the securities lending program and other deliveries as directed, if applicable. 3. Accounting for Managers’ transactions and holdings, including • pricing of holdings; • providing monthly statements sorted by Managers' accounts, either by hard copy or electronically as requested, and a consolidated statement of all assets in a timely fashion; • working with the Managers, Consultant and the Secretary-Treasurer to ensure accuracy in reporting; • providing monthly custody statements which allow custody and Managers’ accounting statements to be reconciled in a timely manner, including setup of new accounts and reporting assets in the new account in the month’s statement when a new account is established; • Researching transaction information as requested by the Secretary-Treasurer; • Reporting asset, account, and other information in a consistent manner. 4. Notify Investment Managers of proxies, tenders, rights, fractional shares or other dispositions of holdings. 5. Managing the Fund’s securities lending program, if applicable. 6. Providing the Secretary-Treasurer with an electronic interface to facilitate monitoring of cash equivalent balances, and additions to or withdrawals from the Fund’s accounts, and all other Fund transactions. 7. Disbursement of all income or principal cash balances as directed by the Secretary-Treasurer. III. INVESTMENT GOALS AND OBJECTIVES A. The Plan shall be invested to ensure that principal is preserved and enhanced over time, both in real and nominal terms. In addition, the Plan is expected to perform above average relative to comparable Plans without assuming undue risk, specifically: 1. The long term nominal rate of return objective is to meet or exceed the assumed actuarial rate of return of 7.25%. 2. The Plan’s total return shall meet or exceed the return of the Plan's Policy Index, which is the return the Plan would earn if the assets were invested according to the target asset class weightings and earned index returns. 3. The Plan’s return is expected to rank in the top half of the Consultant’s total public funds universe. 4. The Plan’s risk, as measured by the standard deviation of returns, shall meet or be below the risk of the Plan’s Policy Index. The return expectation for the individual Managers are listed in Appendix II and are also expected to exceed the median return of an appropriate peer universe. 5. Normally, results will be evaluated over rolling three- to five-year time horizons, but shorter-term results will be regularly reviewed and earlier action taken if the Board, in its sole discretion, determines such action to be in the best interest of the Plan. IV. ASSET ALLOCATION A. Policy Target and Ranges - The current asset allocation targets and permissible ranges, reflected in Appendix I, will be pursued by the Board on a long-term basis, but will be revised if significant changes occur in the Plan’s liability structure, plan assumptions or economic environment. 7 B. Rebalancing Procedures - The Secretary-Treasurer and the Consultant will review the Fund's asset allocation at least quarterly to determine if the allocation is consistent with the established exposure ranges. If an asset class is at or beyond the maximum/minimum range as determined at the quarterly asset allocation review, the Secretary-Treasurer, with the assistance of the Consultant, will develop a plan to rebalance the allocation to target. At a minimum, a rebalancing plan will move the allocation to the midpoint between the maximum/minimum limit violated and the target allocation. Market conditions and transaction costs will be considered, as well as any other relevant factors when rebalancing, but the predisposition shall be to transfer funds from asset classes that are out performing to asset classes that are under performing. V. INVESTMENT MANAGER APPOINTMENT 1. When, in consultation with the Secretary-Treasurer, and the Consultant, the Board determines that a Manager search is warranted, the Board will direct the Consultant to institute, coordinate and summarize the findings of the search. The Consultant, working with the Board, and the Secretary-Treasurer, will have established certain consistently applied minimum criteria for an investment manager to be considered eligible to participate in the searches in accordance with, but not limited to, the criteria listed below: 2. All qualified candidates will receive fair consideration. The Board will strive to hire Managers that offer the greatest incremental benefit to the Plan, net of fees and expenses, in accordance with, but not limited to the criteria listed below: 1. Length of firm history; 2. Tenure of key professionals; 3. Appropriateness of investment philosophy and process; 4. Fit between product and existing plan assets, liabilities and objectives; 5. Absolute and relative returns, and variability of returns; 6. Stability of the firm’s client base and assets under management; 7. Ownership structure; 8. Compensation structure; 9. Fee structure; and 10. References and professional qualifications. VI. INVESTMENT MANAGER GUIDELINES – GENERAL A. Benchmarks - Performance benchmarks are listed in Appendix II. B. Philosophy - It is expected that the Managers will adhere to their stated philosophies and that any material deviations will be communicated promptly to the Secretary-Treasurer and Consultant. C. Compliance Monitoring - Each Manager shall monitor compliance with all guidelines on an on-going basis, based on current market values. Securities that, at purchase, would move the Manager's portfolio out of compliance with these guidelines, based on the Manager’s most recent valuation, may not be purchased. In the event that a Manager's portfolio moves out of compliance with these guidelines (as identified in the Manager’s regular review of the portfolio) through changes in market conditions or other changes outside the Manager’s control, the Manager shall 1. Bring the portfolio back in compliance with the guidelines within the earliest time frame the Manager considers prudent; 2. Inform the Secretary-Treasurer and Consultant as soon as feasible that the guideline has been breached, and of the Manager’s plan for addressing the issue. D. Prohibited Transactions - Except for Real Estate, Real Asset, Global Asset Allocation, Absolute Return, and Hedge Funds strategies, the following transactions are prohibited: 8 • Uncollaterized derivatives may not be purchased; • Uncollaterized short positions are not permissible; • There shall be no use of financial leverage; • Private placements, except those eligible for resale under SEC rule 144A, are prohibited; E. Use of Pooled Funds - Mutual funds, collective trusts and other types of commingled investment vehicles provide, under some circumstances, lower costs and better diversification than can be obtained with a separately managed fund pursuing the same investment objectives. However, commingled investment funds cannot customize investment policies and guidelines to the specific needs of individual clients. Therefore, the written guidelines and policies of the commingled fund or the prospectus or statement of additional information for the mutual fund and any provisions set forth in any investment management agreement will replace this Policy Statement. 1. The Manager or other fund representative must provide the Consultant and the Secretary-Treasurer with a copy of the applicable commingled or mutual fund guidelines, policies, prospectus and other governing documents (and any amendments or updates thereto). 2. In addition, the Manager or other fund representative of any commingled fund or mutual fund must provide periodic reports and other communications to the Consultant and the Secretary-Treasurer. F. Derivatives Policy 1. A derivative is a security or contractual agreement, which derives its value from some underlying security, commodity, currency, or index. Derivatives exist in several types including, but not limited to, forward, future, swap and option contracts. 2. Managers may use derivative contracts for the following reasons: a. Hedging - To the extent that the portfolio is exposed to clearly defined risks and there are derivative contracts that can be used to reduce those risks, the Managers are permitted to use such derivatives for hedging purposes, including cross-hedging of currency exposures. b. Creation of Market Exposures - Managers are permitted to use derivatives to replicate the risk/return profile of an asset or asset class provided that the guidelines for the Manager allow for such exposures to be created with the underlying assets themselves. c. Leverage - Hedge fund Managers are permitted to use derivatives to magnify overall portfolio exposure to an asset, asset class, interest rate, or any other financial variable subject to the Manager’s risk management program. 3. Managers may not use derivative contracts or securities for the following purposes: a. Unrelated Speculation - Derivatives shall not be used to create exposures to securities, currencies, indices, or any other financial variable unless such exposures would be allowed by a portfolio’s investment guidelines if created with non-derivative securities. VII. INVESTMENT MANAGER GUIDELINES – Asset Class Specific A. Domestic Equity Managers 1. All domestic equity securities must be listed on a U.S. stock exchange. 2. Convertible bonds, warrants, and rights may be purchased as equity substitutes so long as they meet the equity guidelines. 3. Managers will be expected to diversify the portfolio in order to maximize long-term risk adjusted returns net of expenses. Cash balances will be the residual result of 9 trading securities. 4. Equity holdings in any one company should not exceed 10% of the market value of the Manager’s portfolio. 5. No purchase shall be made, which would cause a holding to exceed 5% of the market value of the issue outstanding. 6. Short selling, securities lending, and other specialized investment activity are expressly prohibited. 7. Managers may use futures contracts to equitize the cash portion of the portfolio. 8. Additional guidelines may be included in Appendix III. B. Global & International Equity Managers 1. International equity securities are listed on non-U.S. stock exchanges; however, the Manager has latitude to hold domestic equity securities provided that such investments are consistent with attainment of the portfolio’s investment objective. 2. Convertible bonds, warrants, and rights may be purchased as equity substitutes so long as they meet the equity guidelines. 3. Managers will be expected to diversify the portfolio in order to maximize long-term risk adjusted returns net of expenses. Cash balances will be the residual result of trading securities. 4. Short-term reserves may be held in U.S. dollar denominated securities or investment vehicles available through the Fund’s custodian. 5. Decisions as to the number of issues held and their geographic distribution shall be left to the Manager provided that equity holdings in any one company do not exceed 10% of the market value of the Manager’s portfolio. 6. No purchase shall be made, which would cause a holding to exceed 5% of the market value of the issue outstanding. 7. Managers may employ an active currency management program and utilize derivatives within the disciplines of the Manager’s risk and currency management program subject to the derivatives guidelines set forth in Section VI. F. Derivatives Policy. 8. Managers with specific emerging markets equity mandates are expected to invest in the emerging (non-developed) and frontier markets, subject to the guidelines listed above. 9. Additional guidelines for international equity managers may be included in Appendix III C. Passive Investment Managers 1. Passive strategies are expected to have characteristics similar to the underlying benchmark. For example, a large cap passive equity portfolio shall have similar capitalization and sector exposure to the S&P 500 or Russell 1000 benchmark. 2. Performance benchmarks are listed in Appendix II. D. Domestic Fixed Income Managers 1. Domestic fixed income securities include U.S. Government and Agency obligations, corporate bonds, asset backed securities, mortgage backed securities, municipal securities, and U.S. dollar denominated issues of international agencies, foreign governments and foreign corporations (i.e., Eurodollar and Yankee bonds). 2. Managers will be expected to diversify the portfolio in order to maximize long-term risk adjusted returns net of expenses. Cash balances will be the residual result of 10 trading securities. 3. The overall average quality rating of each high-grade portfolio shall be at least A- by S&P or A3 by Moody’s or better. 4. The diversification of securities by maturity, duration, quality, sector and coupon is the responsibility of the manager. 5. No security, except issues of the US Government or its Agencies shall comprise more than 5% of the market value of the Manager’s portfolio. 6. No purchase shall be made, which would cause a holding to exceed 5% of the market value of the issue outstanding except issues of the U.S. Government or its Agencies. 7. Additional guidelines for fixed income managers may be included in appendix III. E. Domestic High Yield Fixed Income Managers 1. The guidelines for domestic fixed income Managers apply to high yield fixed income Managers, except for the following differences: a. There is no limit on the portion of a high yield portfolio which can be invested in securities rated below investment grade. However, bonds rated below B- by S&P or B3 by Moody’s are expected to comprise no more than 10% of the market value of a portfolio. b. Non-rated issues may be purchased, provided that the Manager determines that, if such issues were rated, they would be allowed under the above limitations. c. Each portfolio shall maintain an average quality rating of B by S&P or B2by Moody’s or better. d. No more than 25% of a portfolio may be invested in a single industry, as defined by the BofA Merrill Lynch U.S. High Yield Cash Pay Index. F. Global & International Fixed Income Managers 1. Domestic fixed income securities include U.S. Government and Agency obligations, corporate bonds, asset backed securities, mortgage backed securities, municipal securities, U.S. dollar denominated issues of international agencies, foreign governments and foreign corporations (i.e., Eurodollar and Yankee bonds).International fixed income securities include non-U.S sovereign debt and non-U.S. corporate debt. . 2. Managers will be expected to diversify the portfolio in order to maximize long-term risk adjusted returns net of expenses. Cash balances will be the residual result of trading securities. 3. The overall average quality rating of each high-grade portfolio shall be at least A- by S&P or A3 by Moody’s or equivalent rating. 4. No single non-government debt security shall constitute more than 5% of the market value of the Manager’s portfolio. Securities issued by AAA Rated Supranational Organizations (such as the World Bank) shall be considered to be government equivalents. 5. Short-term reserves may be held in U.S. dollar- or local currency-denominated securities or in investment vehicles available through the Custodian Bank. 6. Managers may employ an active currency management program and utilize derivatives within the disciplines of the Manager’s risk and currency management program subject to the derivatives guidelines set forth in Section VI. F. Derivatives Policy. Opportunistic currency positioning may be utilized, in the Manager's discretion, to hedge and cross-hedge the portfolio’s currency risk exposure or in the settlement of securities transactions. The Manager may vary the total portfolio’s exposure to currency from fully unhedged to fully hedged. 11 7. Managers may purchase or sell currency on a spot basis to accommodate securities settlements. 8. The diversification of securities by geographic distribution, number of issues, maturity, duration, quality, sector and coupon is the responsibility of the manager. 9. The total non-investment grade exposure shall not exceed 15% of the market value of the Manager’s portfolio. 10. No security, country, or currency shall have a quality rating below BB- by S&P or Ba3 by Moody’s. 11. Additional guidelines for fixed income managers may be included in Appendix III. G. Global Asset Allocation (GAA) Managers 1. All GAA Manager investments are made through commingled investment trusts or similar vehicles. The investment guidelines for these vehicles are governed by the subscription documents. 2. GAA Manager is to provide an additional layer of diversification with the twin goals of increasing return and decreasing risk. GAA Managers have the ability to invest in more than one asset class and utilize multi-manager or multi-asset funds with full authority to adjust the weighting of the asset classes under their discretion. 3. Strategies may allow either passive or active approaches with regards to the underlying asset classes. 4. Strategies my entail the use of hedge funds that are conservative relative to the universe of alternative investments to achieve their objective of increasing returns while decreasing risk. 5. The global nature of these mandates permit Managers to evaluate and invest in both U.S. and non-U.S. securities. H. Absolute Return & Hedge Fund Managers 1. All Manager investments are made through commingled investment trusts, managed accounts, limited partnerships or similar vehicles. The investment guidelines for these vehicles are governed by the subscription documents. 2. The Managers will be expected to diversify the portfolio in order to maximize long-term risk adjusted returns net of expenses in a variety of capital market conditions. 3. The portfolio should achieve its objective by investing in various hedge funds or investment funds through a fund of funds structure that utilizes a broad range of investment strategies that, when taken as a whole, attempt to have low correlation to traditional asset classes. 4. Managers may employ derivatives and leverage to manage the portfolio in order to achieve its stated objectives. I. Real Estate Managers 1. All Manager investments are made through commingled investment trusts, managed accounts, limited partnerships, open or closed REITS or similar vehicles. The investment guidelines for these vehicles are governed by the subscription documents. 2. The Managers will have full discretion to invest portfolios in accordance with the terms of their subscription or advisory agreements. 3. It is expected that the Real Estate investment program shall be broadly diversified with respect to property type and geography, and primarily be in the equity of real property, which may or may not be levered. 4. The majority of real estate investments shall be “core” investments, with the remainder being styles complementary to core, such as “value-added” and “opportunistic” 12 VIII. STANDARD OF INVESTMENT PERFORMANCE A. General Guidelines 1. Performance of the Plan and individual Managers will be evaluated on a quarterly basis to determine their success in achieving the investment objectives outlined in this document over an appropriate time horizon. The Board realizes that most investments go through cycles; therefore, interim fluctuations should be viewed within the long-term perspective. Consideration will be given to the degree to which performance results meet the goals and objectives as set forth in these policy guidelines 2. In addition to reviewing each Manager’s results, the Board will re-evaluate, from time to time, its own progress in achieving the objectives set for the Plan overall. This re-evaluation will involve an assessment of the continued appropriateness of: (1) the overall asset allocation; (2) the allocation of assets among the Managers; and (3) the investment objectives for the Fund. 3. Risk as measured by volatility, or standard deviation, should be evaluated after twelve quarters of performance history and periodically thereafter. Performance dispersion of each individual Manager relative to other managed accounts of a similar style will be assessed from time-to-time. Such assessments will take into account the nature of the Manager’s style, portfolio constraints, and the market environment. B. Manager Probation 1. Managers may be placed on a watch list or probation in response to the Board’s concerns about significant changes in ownership structure, turnover in key personnel, changes in investment process, recent or long term investment results, failure to comply with the investment guidelines, or for any other reasons which the Board deems appropriate. 2. A Manager on the watch list or on probationary status will not be eligible to receive additional investment funds. 3. Attainment of investment objectives does not guarantee continued employment by the Board, nor does failure to achieve these guidelines ensure dismissal. Managers serve at the discretion of the Board. IX. MANAGER REPORTING REQUIREMENTS Managers shall meet the following reporting requirements by providing the Secretary-Treasurer and Consultant with the following written information: A. Immediately 1. A significant change in personnel, organization, philosophy, strategy or assets under management); 2. Discovery of a violation of the investment guidelines contained in this Policy Statement; 3. A significant change in investment strategy, portfolio structure, or market value or liquidity of managed assets; 4. A significant change, in the ownership affiliations, organizational structure, financial condition, or clientele of the Manager; 5. Sanctions against the firm or its employees by any state or federal governmental or regulatory agency, or by NASD, to the extent permissible by law. 6. Quality ratings on any bond held in a Manager’s portfolio that falls below the minimum quality rating required under these guidelines. B. Quarterly 1. A Summary of Investment Guidelines a. Brief review of investment process; 13 b. Discussion of any changes to the investment process; c. Investment strategy used over the past year and underlying rationale; d. Evaluation of strategy's successes/disappointments; 2. Performance Review a. Present annualized (periods over one year) total fund and benchmark returns for last calendar quarter, year-to-date, last year, last three years, last five years and since inception versus designated benchmarks both on a gross and net fee basis; b. Discuss performance and portfolio characteristics relative to benchmarks; provide attribution analysis, which identifies returns due to allocation and selection decisions, as appropriate; c. Provide portfolio holdings listing individual securities, as appropriate, by sector, asset class, or country; C. Annually Each separate account equity manager shall provide the following to the Secretary-Treasurer and Consultant 45 days after the end of the calendar year: a. A statement certifying compliance with the Policy Statement, or, if the portfolio has been out of compliance, an explanation. 1. Proxy Voting The Board shall delegate responsibility for the exercise of ownership rights through proxy voting to the Managers, who shall exercise this responsibility strictly for the economic benefit of the Plan and its participants. Managers shall adhere to the proxy voting guidelines set forth in the Proxy Voting Resolution No. 2193 of the meeting dated August 10, 1995 which is attached as Exhibit 1. 2. Commissions & Trading Costs The annual commission report should be delivered to the Board, Secretary-Treasurer, and Consultant within forty-five (45) days of the end of each calendar year. The Manager’s brokerage and trading activities share adhere to Resolution No. 2177 of the April 20, 1995 meeting which is attached as Exhibit 2. X. IMPLEMENTATION AND APPROVAL All monies invested for the Plan by its Managers shall conform to this Policy Statement after its adoption. It is understood that this investment policy is to be reviewed periodically by the Board to determine if any revisions are warranted by changing circumstances including, but not limited to, changes in financial status, risk tolerance, changes in the Fund or changes involving the Managers. 14 Chairman of the Board of Trustees Date Investment Manager Acceptance This Policy Statement has been reviewed and is hereby accepted on behalf of: ____________________________________ ____________________________________ _____________________________________ Name (please print or type) _____________________________________ (Signature) _____________________________________ (Title) ______________________________________ (Firm’s Name) 15 APPENDIX I – ASSET ALLOCATION The nominal long-term rate of return objectives for the Plan is 7.25%. In order to have a reasonable probability of achieving this return, the Board has adopted the asset allocation policy outlined below. ASSET CLASS TARGET ALLOWABLE % RANGE % Equity Large Cap Equity 20 15-25 SMID Cap Equity 6 2-8 International Equity 10 5-15 Emerging Markets Equity 4 2-8 Total Equity 40 Fixed Income Domestic Core Bonds 14 10-20 Core "Plus" Bonds 12 10-20 Global Bonds 9 4-14 Emerging Fixed Income 0 0-7 Opportunistic Credit 0 0-5 High Yield Bonds 0 0-7 Total Fixed Income 35 Real Estate 5 0-10 Global Tactical 0 0-12 Market Neutral 0 0-7 Real Assets 5 0-10 Absolute Return 0 0-7 Hedge Funds 15 0-20 Total 100 The current asset allocation of the Plan may deviate from the target asset allocation target due to returns among asset classes and individual Managers. The current allocation will be evaluated at least quarterly and may be rebalanced from time to time in accordance with Section IV. B. Asset Allocation – Rebalancing. 16 APPENDIX II - PERFORMANCE BENCHMARKS TOTAL FUND AND MANAGERS Asset Class Style Asset Class Benchmark Universe Universe Total Fund 20% Russell 1000 Index 6% Russell 2000 Index 10% MSCI EAFE Index 4% MSCI Emerging Markets 14% BC Intermediate Gov/Credit Index 12% BC Aggregate Index 9% Citigroup World Gov Bond 15% HRFI Fund of Funds Index 5% Wellington DIH Index 5% NCREIF Open End Core Index Public Pension NA Global Asset Allocation 65% MSCI World (net)/35% Barclays Aggregate Blend Balanced NA Domestic Large Cap Equity Domestic Large Cap Core – Active Domestic Large Cap Core - Passive Domestic Large Cap Growth Domestic Large Cap Value Russell 1000 Index S&P 500 Index Russell 1000 Growth Index Russell 1000 Value Index U.S. Large Cap Equity Large Core Large Growth Large Value Domestic Small/Mid Cap Equity Domestic Small Cap Growth Domestic Mid Cap Value Russell 2000 Growth Index Russell Mid-Cap Value Index U.S. Small-Mid Cap Equity Small Growth Mid-Cap Value International Equity International Developed MSCI EAFE Index International Equity International Core Emerging Markets Equities MSCI Emerging Markets Index Emerging Market Equity Emerging Markets Domestic Fixed Income Domestic Core Bonds Core “Plus” Bonds Barclays Intermediate Government/Credit Index Barclays Aggregate Index Intermediate Duration Fixed Income Intermediate Duration Emerging Markets Fixed Income JP Morgan GBI EM Global Diversified Index Emerging Market Local Currency Fixed Income Emerging Markets Fixed Income Opportunistic Credit Blended Index (50% BC Credit/25% S&P LSTA/25% BC High Yield Blend) High Yield Fixed Income Alternative Credit 17 High Yield Fixed Income BofA Merrill Lynch US High Yield Cash Pay Index High Yield Fixed Income High Yield Fixed Income Global Fixed Income Citigroup World Government Bond Index Global Fixed Income Global Fixed Income Real Assets Wellington DIH Index Commodity Funds NA Absolute Return or Market Neutral Funds Hedge Funds 90-day T-bills + 3% HFRI Strategy Specific Index Hedge Funds NA Real Estate NCREIF Fund Index Open End Diversified Core Real Estate Funds NA 18 APPENDIX III – Manager Specific Guidelines and Exceptions 19 (EXHIBIT 1) RESOLUTION NO. 2193 WHEREAS, the Board of Trustees of The Metropolitan St. Louis Sewer District is mindful of its fiduciary obligations with respect to the voting of proxies of companies whose securities are owned by The Metropolitan St. Louis Sewer District's Pension Plan, and WHEREAS, because of the complexity of issues, and further because of the direct impact on investment values involved, it is the Board's considered belief that the Investment Managers that are employed by the District are best suited to vote the proxies of shares held in the portfolios they manage, NOW, THEREFORE, BE IT RESOLVED BY THE BOARD OF TRUSTEES OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT, That, as part of the District's Investment Policy and the Investment Managers' guidelines, the Board hereby directs and instructs the Investment Managers to vote proxies of shares held in the portfolios they manage in accordance with said Investment Managers' own guidelines and policies and in the best interests of the Pension Plan beneficiaries. BE IT FURTHER RESOLVED, That all Investment Managers voting proxies shall provide to the Board their firms' proxy policies, and shall provide semi-annual reports to the Board showing securities voted, issues involved, and the vote made. The foregoing Resolution was adopted August 10, 1995. 20 EXHIBIT 2) RESOLUTION NO. 2177 WHEREAS, the Board of Trustees of The Metropolitan St. Louis Sewer District acts as fiduciary to the members and beneficiaries of the District's Pension Plan, and WHEREAS, as fiduciary, said Board has the responsibility for the evaluation and management of Pension Plan transaction costs for the exclusive benefit of members and beneficiaries, and WHEREAS, it is the intent of said Board that all Pension Plan transactions of publicly traded securities be effected through brokerage firms, regardless of location, in order to obtain the best execution and lowest cost of the transaction, and WHEREAS, it is the intent of said Board to establish guidelines for the selection of broker/dealer firms to be used by the District Pension Plan Investment Managers, NOW, THEREFORE, BE IT RESOLVED BY THE BOARD OF TRUSTEES OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT, that the Trading and Brokerage Policy as attached hereto and made a part hereof is and hereafter shall be the policy of the District for the selection of broker/dealer firms to be used by the District Pension Plan Investment Managers for all Pension Plan transactions of publicly traded securities. The foregoing Resolution was adopted April 20, 1995. 21 THE METROPOLITAN ST. LOUIS SEWER DISTRICT EMPLOYEE PENSION PLAN INVESTMENT POLICY STATEMENT TRADING AND BROKERAGE POLICY A. Security Transaction Policy 1. Introduction The Board of Trustees of The Metropolitan St. Louis Sewer District (District) intends to fulfill its responsibility for the evaluation and management of transaction costs for the exclusive benefit of participants and beneficiaries. To assist in accomplishing these duties, this Security Transactions Policy and these Guidelines for the Selection of Brokerage Firms have been approved by the Board. 2. Basic Principles The Board of Trustees requires that these principles guide all transactions for the Plan: • Best execution and lowest cost (including commission costs and market impact) and providing benefits exclusively for participants and beneficiaries of the District must apply to each trade. • Efforts to reduce trading costs, in terms of both commissions and market impact, provided the investment returns of the Pension Plan are not jeopardized, will be ongoing. • Only brokerage firms who meet the District's Guidelines for Selection with appropriate trading capabilities and market expertise should be utilized. • The Secretary Treasurer will retain the ability to enter into brokerage commission recapture agreement(s). • The Board may evaluate transaction activity annually through a Trading Cost Analysis. Provided that the total return of a manager's portfolio is not adversely affected or that the investment process is not affected so as to place the Plan in a disadvantageous position relative to the investment manager's other accounts, and provided that best execution and lowest cost are obtained, each manager is to direct a percentage of its trading to specified firms for the purpose of brokerage commission recapture programs. The Secretary-Treasurer will recommend the brokerage firms and establish the expected level of trading to be directed. The Board will review and approve the recommended brokerage firms. B. Guidelines for Selection of Brokerage Firm 22 1. Introduction and Basic Principles The primary responsibility of the Board of Trustees is to act as a fiduciary to the members and beneficiaries of the District's Pension Plan. It is the intent of the Board of Trustees that all transactions of publicly traded securities be effected through brokerage firms, regardless of location, in order to obtain the best execution and lowest cost of the transaction. Brokerage firms are an integral part of the investment process. Their services can significantly affect the investment performance of the fund. Hence, the Board of Trustees, in fulfilling their fiduciary responsibilities, is establishing guidelines for the selection of broker/dealer firms to be used by the Plan's investment managers. Each investment manager will be responsible for the selection of brokerage firms, or automated trading systems, through which trading will be completed for the Pension Plan. Their selection must in all cases be for the exclusive benefit of the Plan's participants and beneficiaries and should strive for best execution with lowest cost for each trade. 2. Guidelines for Selection The broker/dealer firm must: • Be in compliance with applicable Federal and State of Missouri laws relevant to the conduct of business as a broker/dealer. • Be a member in good standing of the major financial exchanges worldwide. • Have on-site, in-house trading capability and direct access to major markets. • Have in-house access to trading support equipment. • Be able to trade for competitive rates. • Have the financial capability to accommodate a capital commitment trade over a five day settlement period. • Have the ability to clear and settle trades without unnecessary delays or fails, and a record of doing so. • Have been in business as a broker/dealer for a reasonable period of time to ensure financial and operational stability. 3. Review/Evaluation 23 At least annually, the Board of Trustees may review the brokerage firms utilized by the Plan's investment managers and all transactions for compliance with these policies and procedures through an annual trading Cost Analysis. With the assistance of the District's custodian, the Board may monitor manager commission costs on a routine basis.