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A Follow-up Audit Report on Ethics Policies for Trustee Investing Practices at the Employees Retirement System, the Teacher Retirement System, and the University of Texas Investment Management Company

April 2013

Report Number 13-030

Overall Conclusion

The Employees Retirement System (ERS), the Teacher Retirement System (TRS), and the University of Texas Investment Management Company (UTIMCO) have made progress in implementing recommendations from An Audit Report on Ethics Policies for Trustee Investing Practices at the Employees Retirement System, the Teacher Retirement System, and the University of Texas Investment Management Company (State Auditor's Office Report No. 09-031, April 2009).

Of the 47 recommendations in that report, auditors selected 38 for follow-up, including 12 at ERS, 13 at TRS, and 13 at UTIMCO. Auditors identified the following:

- ERS fully or substantially implemented 8 (66 percent) of the 12 recommendations tested. Those recommendations were related to identifying and resolving employees' and contractors' potential conflicts of interest, strengthening processes for monitoring employees' personal securities trades and safeguarding confidential investment information, and conducting employee background checks and annual ethics training.

ERS chose not to implement recommendations related to filing board members' and executive director's financial disclosure statements with the ERS ethics compliance officer, reviewing board members' financial disclosure statements for conflicts of interest, and requiring all employees involved in investment decisions to file financial disclosure statements. Additional information on ERS's implementation of the recommendations is available in Chapter 1.

- TRS fully or substantially implemented all 13 recommendations tested. Those recommendations were related to identifying and disclosing board members', employees', and contractors' potential conflicts of interest, strengthening monitoring of employees' personal securities trades, safeguarding confidential investment information, obtaining ethics training, and reporting ethics violations.

TRS considered a recommendation to conduct FBI criminal background checks for job applicants and certain employees, and it substantially implemented that recommendation by enhancing its criminal background checks to include FBI background checks on new employees. Additional information on TRS's implementation of the recommendations is available in Chapter 2.

- UTIMCO fully or substantially implemented 12 (93 percent) of the 13 recommendations tested. Six of those recommendations were related to identifying and resolving employees' and contractors' potential conflicts of interest and safeguarding confidential investment information. UTIMCO also considered and substantially implemented recommendations to verify information that board members and employees disclose, obtain affirmations regarding employees' undisclosed brokerage accounts, and conduct criminal background checks on all job applicants for positions covered by its ethics policies and all existing employees covered by its investment ethics policies. In addition, UTIMCO considered and fully implemented recommendations for enhancing its controls over gifts and travel for which its vendors pay.

UTIMCO did not implement a recommendation to enforce penalties for violations of personal trading policies. Additional information on UTIMCO's implementation of the recommendations is available in Chapter 3.

It is important to note that 11 of the 38 recommendations auditors selected for follow-up were recommendations that had been offered for the entities to consider, rather than to take a specific action. For each of those recommendations, auditors determined whether an entity considered the recommendation, as well as the implementation status of the recommendation. The entities considered each of those recommendations and took action on all of them.

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