Given the COVID-19 pandemic, I’ve had several clients request to cancel their March 31, 2020 investment reviews. Earlier this week, as part of this conversation, my client asked if their Investment Policy Statement (IPS) required them to take any action. Happily, I was able to respond that the way Multnomah Group writes a draft IPS does not force an action by our clients, nor does it contain any “if-then” language.
But, this got me thinking about general governance and oversight. So today, I wanted to give our readers two tips.
Tip #1. Check your Charter, or fiduciary delegations from the Board. Many of our clients have Fiduciary Responsibility Delegation Charters that say, “Except to the extent that the Committee shall otherwise determine, meetings of the Committee shall be held at least once each semi-annual period.” This gives our committees the flexibility to miss a meeting and not violate their Charters. However, given the current state of the world, I could see a situation where some of our healthcare clients may have to miss two meetings. If they do, the first part of that Charter, “Except to the extent that the Committee shall otherwise determine…” will come into play. Sadly, this may not be the case for other committees.
Tip #2. Check your IPS. When a client engages Multnomah Group, we do a review of the policy documents, and far too often, we find that their IPS has “if-then” statements. Meaning, if a fund underperforms for X periods, then action Y is taken. Well, that can be a big problem if the committee doesn’t meet. In fact, that would be a violation of the committee’s policies and could lead to further legal challenges. At Multnomah Group, we do not write “If-then” statements into a draft IPS. What we do is fully describe all investment attributes that will be considered in the evaluation of the fund as well as all the actions that the committee “may” take. To further reinforce the flexibility of the committee’s decision criteria and timing, we add to a IPS the following statement:
While this Investment Policy Statement describes specific acts and criteria, they are for purposes of guidance only. The plan fiduciaries are not bound by the literal terms of this Investment Policy Statement but should instead exercise discretion and considered judgment in making their decisions for the benefit of Plan participants.
An IPS is a critical document for investment advisors and their clients. It clearly defines the fund objectives, allowable asset classes, as well as benchmarks, risk metrics and constraints, special restrictions and the selection, monitoring and removal criteria. Keep in mind, these are legally binding documents that can help protect you by showing the prudent process you follow in monitoring your investments, but a poorly written IPS can be a trap.
So, before you cancel that Q2 meeting, please review your governance document to clearly understand any actions they command of you.
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.