STATE RETIREMENT and PENSION SYSTEM of MARYLAND STATE RETIREMENT

STATE RETIREMENT and PENSION SYSTEM of MARYLAND

STATE RETIREMENT AGENCY

INVESTMENT POLICY MANUAL

Originally Adopted by the Board of Trustees, August 2005 Updated, August 2006

INVESTMENT POLICY MANUAL TABLE OF CONTENTS

Section GENERAL POLICY PageI Purpose 4 II Scope 6 III Fiduciary Standards 7 IV Investment Mission & Guiding Principles 11 V Plan Investment Performance Objectives 13 VI Performance Benchmarks for Asset Classes 14 VII Asset Allocation Policy 15 VIII Roles & Responsibilities 17 IX Investment Restrictions 21 X Disclosure of Information 22 APPENDICES

A Rebalancing and Tactical Asset Allocation Policy 25

B Selection, Monitoring, & Termination of Managers 28

C Watch List Policy 32 D Emerging Manager Policy 34 E Private Equity Asset Policy 37 F Real Estate Asset Policy (NEW) 45 G Optional Retirement Program 64

H Directed Brokerage and Commission Recapture Policy 65

I Corporate Governance and Proxy Voting Policy 68 J Securities Litigation Policy 82 K Securities Lending Policy 87 L Economically Targeted Investments 88 M Staff Trading in Public Securities 91 N Procurement Policies & Procedures 96

Investment Policy Manual of the State Retirement & Pension System of Maryland 8/2006

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GENERAL POLICY


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I. PURPOSEAdopted by the Board of Trustees in 2002. The State Retirement and Pension System of Maryland (“SRPS” or “System”) is overseen by a Board of Trustees (“Board”). The role of the Board of Trustees is to act as a fiduciary overseeing the assets of the System. The System is presented with numerous investment opportunities on an on-going basis. At the same time, the System's long-term rate of return is directly related to asset allocation and the effectiveness of the investments made. In order to manage in a dynamic environment, under the Board's guidance, the Investment Policy Manual has been developed to provide a framework to govern the management of the System's assets. The purpose of the Investment Policy Manual is to define policies to guide the implementation of the Board of Trustees’ investment goals and objectives in addition to establishing delegations of authority and responsibility, with the end result being effective management and control of the investment process. This document is binding upon all persons with authority over the Trust’s assets, including: investment managers/advisors; custodians; consultants; brokers/dealers; all members of the SRPS Investment Division; the SRPS Investment Committee; and the SRPS Board of Trustees. The Investment Committee of the Board of Trustees is to advise the Board on the preparation and maintenance of this manual. State Personnel and Pensions Article 21-116(c) of the Annotated Code of the State of Maryland specifies that the Board of Trustees shall adopt an Investment Policy Manual that details the following:

• The functions of the Investment Division of the Retirement Agency;

• Goals and objectives of the several investment programs; and

• Policies governing the selection and retention of investments and investment managers.

The Code also specifies that the Investment Committee shall:

• Prepare and maintain the Investment Policy Manual; and

• Submit the Investment Policy Manual, and any subsequent amendments to the manual, to the Board of Trustees for approval.

This Investment Policy Manual shall:


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• Memorialize the System’s objectives and set forth appropriate and prudent policies and guidelines to assist in the achievement of those objectives, while at the same time allowing sufficient flexibility to permit the System to capture investment opportunities.

• Provide an investment framework for the System that sets parameters to ensure prudence and care in the execution of the investment program.

• Establish criteria to evaluate the System’s investment performance.

• Communicate investment policies, objectives, guidelines, and performance criteria to the SRPS’s Board, Investment Committee, staff, external investment managers/ advisors, consultants, custodians and all other interested parties.

• Serve as a document to guide ongoing oversight of the System’s investments.

• Demonstrate the fulfillment of the responsibilities of the SRPS Investment Division, Investment Committee and Board to manage the investments of the System solely in the interest of participants.

• Document the fulfillment of the overall fiduciary responsibilities of the SRPS Investment Division, Investment Committee and Board.


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II. SCOPE Adopted by the Board of Trustees in 2002. The Board of Trustees of the State Retirement and Pension System is responsible for the general administration and proper operation of the System, including investment of the System’s assets. This Investment Policy Manual applies to all assets invested by the System. The assets of the SRPS represent funds set aside to provide disability, death or retirement benefits to active, retired or non-active vested members (or their survivors) of the systems identified in SPP Section 21-102.


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III. FIDUCIARY STANDARDS Adopted by the Board of Trustees in 2002. The role of the Board of Trustees is to supervise and make policy decisions regarding assets invested by the System. As fiduciaries, the Board of Trustees of the State Retirement and Pension System has the duty to invest the assets:

• For the exclusive purposes of providing benefits to participants and for reasonable expenses of administering the several systems;

• 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;

• By diversifying the investments of the System so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and

• In accordance with the laws, documents and instruments governing the several systems.

As a public pension plan, the System is not subject to the fiduciary standards found in ERISA. SPP Sections 21-201 through 21-210 sets forth the responsibilities of fiduciaries of the System. A. DEFINITIONS

The Maryland code defines a "fiduciary" as a person who renders service in a fiduciary capacity.

Service in a fiduciary capacity is defined as the exercise of any discretionary authority or control concerning the management or disposition of the assets of the System.

The term "person" means the State of Maryland or any political subdivision or any agency or instrumentality, an individual partnership, joint venture, corporation, unincorporated organization, association, or employee organization.

B. IDENTIFICATION

Specifically named as fiduciaries are:

1. persons serving as members of the Board of Trustees;

2. persons serving as members of the SRPS Investment Committee;


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3. employees of the Retirement Agency who exercise discretionary authority or control over the management or administration of the System or its assets; and

4. persons, other than trustees, who are designated by the trustees to carry out fiduciary responsibilities including the external investment managers, the general investment consultant, specialized investment consultants, and the custodian.

C. DUTIES AND RESPONSIBILITIES OF TRUSTEES

1. Trustees shall use reasonable care to prevent another trustee from committing a breach.

2. Trustees shall jointly manage and control the assets of the System. (However, pursuant to subsections C.3 through C.5 below, certain allocations and designations of fiduciary responsibility may insulate a trustee from liability with respect to any loss resulting to the System arising from the acts or omissions on the part of another fiduciary to whom such responsibilities have been allocated or designated.)

3. Trustees may allocate fiduciary responsibilities among fiduciaries.

4. Trustees may designate persons other than themselves to carry out fiduciary responsibilities.

5. Trustees shall not be liable for an act or omission of any person who the Trustees designated to carry out a fiduciary responsibility. However, the trustees shall be liable to the extent that the Trustees violated the aforementioned fiduciary standards with respect to (1) the allocation or designation; (2) the establishment or implementation of the procedures for the allocation or designation; or (3) the continuance or review of the allocation or designation.

D. PROHIBITED TRANSACTIONS

1. A fiduciary shall not have any direct interest in the gains or profits of any investment made by the System.

2. A fiduciary shall not, directly or indirectly, for himself or as an agent, in any manner use the gains or profits of the System except to make such current and necessary payments as are authorized by the Board of Trustees (SPP Section 21-202).

3. A fiduciary shall not become an endorser or surety, or in any manner an obligor, for money loaned to or borrowed from the System (SPP Section 21-205(4)).


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4. A fiduciary shall not deal with the assets of the System in his own interest or for his own account (SPP Section 21-205(1)).

5. A fiduciary shall not in his individual or in any other capacity act in any transaction involving the System on behalf of a party (or represent a party) whose interests are adverse to the interests of the System or the interests of its participants (SPP Section 21-205(2)).

6. A fiduciary shall not receive any consideration for his own personal account from any person dealing with the System in connection with a transaction involving the assets of the System (SPP Section 21-205(3)).

E. LIABILITY FOR BREACH OF DUTY

1. Subject to the provisions for appropriate indemnification set forth below under "Indemnification", any person who is a fiduciary who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries shall be personally liable to make good to the System any losses to the System resulting from each breach, and to restore to the System any profits of the fiduciary which have been made through use of assets of the System by the fiduciary, and shall be subject to the equitable or remedial relief which a court may deemed appropriate, including removal of the fiduciary.

2. No person who has been convicted of any felony, or any misdemeanor involving moral turpitude, violated of the fiduciary responsibility provisions of State pension law, or conspiracy to commit any of these crimes, or attempt to commit any of these crimes, or any crime in which any of the foregoing crimes is an element, shall serve or be permitted to serve as a fiduciary of the System. No person shall knowingly permit any other person to serve as fiduciary in violation of these disqualification provisions.

3. Maryland law stipulates that any person who intentionally violates the disqualification provisions shall be subject to a fine of not more than $10,000 or imprisonment for not more than one year, or both.

4. For the purposes of this section, a person shall be deemed to have been "convicted" from the date of judgment of the trial court or the date of the final sustaining judgment on appeal, whichever is the later date.

5. No fiduciary may be liable with respect to a breach of fiduciary duty under this section if the breach was committed before he or she became a fiduciary or after he or she ceased to be a fiduciary.

6. Except as indicated in section III.C. above, any provision in an agreement or instrument which purports to relieve a fiduciary from a responsibility, obligation or duty or liability for any responsibility, obligation, or duty shall be void as against public policy.

F. BONDING


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1. Every fiduciary of the System and every person who handles funds or other property of the System shall be bonded.

2. A fiduciary may not exercise custody or control of any assets of the System unless the fiduciary is bonded in accordance with State law. A fiduciary may not allow another fiduciary to act in violation of this requirement

G. INDEMNIFICATION

1. Maryland law provides that the State shall indemnify every fiduciary who is made, or is threatened to be made, a party to any action or proceeding by reason of the fiduciary’s service as a fiduciary, in accordance with and subject to conditions stated in this section.

2. Indemnification may not be made with respect to any action or proceeding as

to which the fiduciary was adjudged to be liable for gross negligence or willful misconduct in the performance of the fiduciary’s duty to the System.

3. The State may not indemnify an independent contractor furnishing services

to the System.

4. Standards for indemnification; included expenses: If, with respect to a civil, administrative, or investigative action or proceeding, the fiduciary acted in good faith and in a manner the fiduciary reasonable believed to be in or not opposed to the best interest of the System, and, with respect to a criminal action, the fiduciary did not have reasonable cause to believe the fiduciary’s conduct was unlawful, then indemnification shall be provided to a fiduciary for expenses of the action or proceeding, including reasonable attorney's fees, judgments, fines, and other expenses which were actually and reasonably incurred by the fiduciary in connection with the action or proceeding.

5. Effect of termination of any action or proceeding: The termination of any action or proceeding does not, of itself, create a presumption that the fiduciary did not meet the standards for indemnification described in subsection G.4. above.

6. Insurance provided: The State shall provide insurance for a fiduciary eligible for indemnification. The State may provide self-insurance for this purpose, under terms and conditions satisfactory to the State Treasurer. A fiduciary may not be required to pay amounts attributable to liability described in this section because the State does not provide adequate insurance coverage or otherwise fails to indemnify.


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IV. INVESTMENT MISSION & GUIDING PRINCIPLES Adopted by the Board of Trustees in 2002. A. INVESTMENT MISSION

The Board of Trustees of the System is charged with the fiduciary responsibility for ensuring that sufficient assets are available to fund the benefits when due. To accomplish this mission, the System has key goals including the prudent investing of System assets in a well-diversified manner to optimize long-term returns, while controlling risk through excellence in execution of the investment objectives and strategies of the System, and to ensure the timely payment of all present and future benefits.

B. GUIDING PRINCIPLES

The objectives of the Board will be implemented based on the following principles:

1. Asset allocation is the most important determinant of investment performance.

2. Liquidity will be emphasized to meet benefit payment requirements.

3. The investment strategy is long-term, recognizing that the average age of the System’s liabilities is relatively long. For this reason, emphasis will be placed upon long-term or strategic decisions rather than tactical or short-term market timing decisions, recognizing the long-term horizon could result in short-term volatility.

4. Where tactical or short-term decisions are employed, they will be limited in scope and monitored, so as to maintain a focus on the longer term.

5. Common stocks will be emphasized because, over the long-term, equity investments have to provided superior real rates of return compared to fixed income. Modern portfolio theory has shown that over time, equity markets offer an opportunity for higher returns relative to most other major asset classes. The Board recognizes that the volatility of investment returns for common stocks may exceed that for fixed income investments, and equity exposure can cause short-term volatility.

6. All major sectors of the capital markets should be considered in order to diversify and minimize total investment program risk. Such sectors may include, but are not limited to, equities (both U.S. and international, public and private), fixed income, convertible bonds, short-term cash equivalents, real estate property and securities, and alternative investments.

7. Periodic rebalancing of the allocation of assets among asset classes will be considered in order to control risk and improve returns.

8. A portion of the System's investments should be managed using passive management techniques in order to lower costs and reduce the active management risk.


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9. Internal and external management of assets may be employed in active and/or passive strategies.

10. The Board of Trustees has delegated to the Investment Committee the responsibility for monitoring the implementation of policies approved by the Investment Division and for making appropriate recommendations to the Board.

11. The Investment Committee may appoint sub-committees to investigate investment matters as deemed appropriate.

12. Commitment to excellence should be reflected in a manager's performance ranking over a market cycle, typically a three to five-year period or as otherwise determined by the Board of Trustees.

13. Separate accounts are preferred over commingled accounts in most, but not all, cases.

14. Cost control is valued, particularly regarding investment management fees, and the focus will be on returns net of fees.

15. The selection of the System’s investment vehicles and policies will be compared relative to other public pension funds. Investment performance, asset management costs, staffing and overall expenses will be compared to other public pension plans, with special emphasis on comparisons with other public funds of comparable size.

16. Economic justification for investment proposals will override social and/or local justifications. Social and/or local investments will only be considered when they provide reasonable and competitive rate of return expectations versus other comparable investments.

17. The investment program must operate in compliance with all applicable State and Federal laws and regulations concerning the investment of pension assets.


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V. PLAN INVESTMENT PERFORMANCE OBJECTIVESAdopted by the Board of Trustees 2002; amended December 2004. The Board desires to balance the goal of higher long-term returns with the goal of minimizing contribution volatility, recognizing that they are often competing goals. This requires taking both assets and liabilities into account when setting investment strategy, as well as an awareness of external factors such as inflation. Therefore, the investment objectives over extended periods of time (generally, ten to twenty years) are to achieve an annualized investment return that: A. In nominal terms, equals or exceeds the actuarial investment return assumption of

the System adopted by the Board of Trustees. The actuarial rate of interest is reviewed and monitored as a measure of the long-term rate of growth of SRPS’ assets. The actuarial rate of interest as of 6/30/05 was 7.75%. When adopting the actuarial rate of interest, the Board anticipates the investment portfolio may achieve higher returns in some years and lower returns in other years.

B. In real terms, exceeds the U.S. inflation rate by at least 3.0%. The inflation related objective compares the investment performance against the rate of inflation as measured by the Consumer Price Index (CPI) plus 3.0 percent. The inflation measure provides a link to SRPS’ liabilities.

C. Meets or exceeds the System’s static investment policy benchmark, which equals the weighted average of the benchmarks for each asset class and the target weightings for each asset class. The static policy benchmark enables comparison of the SRPS’s actual performance to a passively managed proxy, and it measures the contribution of active investment management and policy implementation.

SRPS Static Investment Policy Benchmark

Asset Class BenchmarkPercentage

Contribution to Benchmark

U.S. Stocks Wilshire 5000 Index 40% Non-U.S. Stocks MSCI All Country ex-US Free Index 13% Global Equities MSCI All Country Index 10% Private Equity Russell 3000 Index + 400 basis points 2%

Total Equity 65% Fixed Income Lehman Brothers Universal Index 28% Real Return Strategies Lehman Brothers US TIPs Index 2% Real Estate NCREIF/Wilshire Real Estate Index 5%

Total 100% Adopted by the Board of Trustees December 2004


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VI. PERFORMANCE BENCHMARKS FOR ASSET CLASSESAdopted by the Board of Trustees in 2004. To facilitate periodic reporting and to provide a relative measure to gauge success, performance benchmarks are approved by the Board. These benchmarks include, but are not limited to, the broad asset class benchmarks used in the calculation of the policy benchmark. The approved performance benchmarks for asset classes are shown in the table below:

Asset Class Benchmark (as of 12/31/04)

Domestic Equity Wilshire 5000 Index

International Equity MSCI All Country ex-US Free Index

Global Equities MSCI All Country Index

Private Equity Russell 3000 Index + 400 basis points

Fixed Income Lehman Brothers Universal Index

Real Return Strategies Lehman Brothers US TIPs Index

Real Estate NCREIF Index

REITs Wilshire Real Estate Securities Index

Cash 30-day Treasury bill In addition to benchmarks for asset classes, SRPS employs benchmarks for each one of its investment managers. The individual manager benchmarks are approved by the Board and addressed in their contracts.


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VII. ASSET ALLOCATION POLICY Adopted by the Board of Trustees in 2002. At least every two years, the SRPS performs an asset allocation study to assist the Board of Trustees in determining its strategic asset allocation targets and ranges, as well as overall policy. Adoption of the asset allocation recommendation requires a vote of the majority of the Board. The asset allocation study should incorporate both the asset and the liability sides of the equation. The assets exist to support the plan’s liabilities, and the risks that a pension plan faces are not limited to purely asset-based risks. Therefore, the plan’s liabilities need to be taken into consideration in setting investment strategy. On an annual basis, the Board reviews its asset allocation policy to determine if it is necessary to perform a formal study for the Board’s consideration. At this time, the Board determines whether there have been significant changes with regard to (1) the economic environment, (2) the Board’s objectives, and/or (3) other considerations affecting the asset allocation policy. If the answer to any of these three items is yes, then the Board will commission an asset allocation study to reassess and possibly change its asset allocation policy. On a monthly basis, the Investment Committee conducts a review of the actual weightings of each asset class versus the targets for each asset class. The Board weighs three competing liability-oriented objectives1 when making asset allocation determinations. The importance weightings assigned to each of these three objectives by the Board determines the risk profile of the System. The liability oriented objectives are:

● Achieve and maintain a fully funded pension plan.

● Minimize contribution volatility year to year.

● Achieve surplus assets.

These liability related performance objectives recognize that liabilities must be paid in full and in a timely manner. The liabilities are the future claims of the SRPS’ participants. The actuarial rate of interest is used to discount the future value of the SRPS’ liabilities and to calculate the System’s funded ratio. The foundation of asset allocation rests on the principles of expected return and diversification. A diversified investment portfolio consists of multiple asset classes whose investment returns respond differently to varying economic scenarios. Diversified portfolios can reduce expected risk for a given level of expected return. Maximizing return for a desired level of risk would be expected to increase the probability of meeting the aforementioned objectives 1 Board of Trustees and Investment Committee, March, 2001


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A table showing the SRPS approved asset allocation targets and ranges is below:

SRPS ASSET ALLOCATION POLICY

Target Range

U.S. Stocks 40% 35 – 45%

Non-U.S. Stocks 13% 10 – 16%

Global Stocks 10% 8 – 12%

Private Equity 2% 0 – 3%

Total Equity 65% 60 – 70%

Fixed Income 28 23 – 33%

Real Return Strategies 2 1 – 3%

Real Estate 5% 3 – 7%

TOTAL ASSETS 100% Adopted by the Board of Trustees December 2004


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VIII. ROLES AND RESPONSIBILITIES Adopted by the Board of Trustees, 2005

A. Board of Trustees

Adapted from Policies and Charter adopted by the Board of Trustees December 2003

Subject to certain restrictions imposed by state law and its fiduciary duties, the Board has the full power to invest the assets of the several systems. In carrying out its fiduciary duties with respect to the assets of the System, the Board will:

Consider and act upon recommendations made by the Investment Committee with respect to the investment programs and compliance of the investment programs with board policies;

Adopt an Investment Policy Manual that details, at a minimum, the:

• functions of the Investment Division of the Agency;

• investment goals and objectives of the several investment programs;

• policies that govern the selection and retention of direct investments;

• asset allocation guidelines;

• policies that govern the selection and removal of investment managers;

• eligible investment categories; and

• proxy voting guidelines.

• Review compliance with, and the continued appropriateness of, the provisions of the Investment Policy Manual;

• Monitor the performance of the total fund, each asset category, and each investment manager of the fund;

• Review the performance of the investment consultants to the Board;

• Select an external investment manager for any direct owned real estate purchased as an investment;

• Ensure that a study of the relationship between the System’s assets and liabilities is performed at least every two years; and

• Consider appropriate corporate governance actions.

B. Investment Committee


• The Investment Committee shall generally meet each month but may meet more or less frequently as required.


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• The Investment Committee shall advise the Board and make recommendations on the investment programs of the System and compliance of the investment programs with Board policies.

• The Investment Committee shall be responsible for preparing an Investment Policy Manual for submission to the Board that shall detail all of those items set forth in Section VIII. A. above.

• The Investment Committee shall maintain the Investment Policy Manual and shall be responsible for preparing and submitting any amendments to the Board for approval.

• The Investment Committee shall advise the Board and make recommendations with respect to the appointment of the following service providers:

Investment managers and general partners of investment partnerships;

Transition managers;

General investment consultants;

Investment consultants for private equity, real estate, and other specialty investment consultants;

Optional Retirement Program Consultant; and

Custodian banks.

• The Investment Committee will recommend to the Board specific actions to achieve the investment goals and objectives of the System, including active and passive investment strategies as well as internal and external investment strategies.

• The Investment Committee will:

Monitor the System’s compliance with the Investment Policy Manual for the investment programs, and report to the Board as appropriate;

Monitor asset allocation to individual asset classes utilized in the investment programs;

Monitor active and passive and internal and external investment management strategies utilized in the investment programs;

Review the performance of each asset class within the investment programs;

Review both the internal and external investment manager performance;

Review staff’s due diligence activities concerning the selection of investment managers and consultants to assure that they are consistent with the policies of the Board;


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Review the cost effectiveness of the investment program, including trading efficiency and external manager fees; and

Review the performance and independence of the investment consultant(s).

• Review the performance and independence of specialized consultants.

• The Investment Committee will keep minutes of its meetings and ensure the minutes are made available to trustees.

C. Executive Director


Through the Chief Investment Officer and other professional investment staff, the Executive Director will carry out the following duties:

• Recommend to the Investment Committee the Investment Policy Manual;

• Recommend to the Investment Committee strategies to achieve the investment goals and objectives;

• Recommend to the Investment Committee an external investment manager for any direct owned real estate purchased investment;

• Within the policy parameters approved by the Board, implement investment manager structures for each asset category in which the System invests, including but not limited to the funds to be allocated to active and passive portfolios, and to internally and externally managed portfolios;

• Conduct all necessary due diligence, utilizing consultants when appropriate, relating to the appointment of investment managers, general partners, consultants, and custodians;

• Approve guidelines and contracts for each investment manager retained by the System;

• Execute portfolio tactical asset allocation and rebalancing in accordance with the policies of the Board;

• Recommend to the Investment Committee any corporate governance actions for consideration; and

• Advise the Board and the Investment Committee on any other investment matters and make recommendations for Board or Investment Committee action when necessary.

D. Investment Division

Adapted from SPP § 21-122


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The Investment Division of the Retirement Agency is delegated responsibility for the day-to-day investment of the funds of the System in accordance with policies, regulations and objectives specified by the Board. The Chief Investment Officer of the Agency is responsible for planning, directing and executing the functions of the Division and shall serve as secretary to the Investment Committee of the Board.

Specifically, the Chief Investment Officer shall be responsible for:

• Supervising and monitoring external and internal asset managers;

• Exploring, analyzing and recommending changes in investment programs and external fund managers to the Executive Director for recommendation to the Investment Committee and the Board of Trustees;

• Evaluating the effectiveness of prevailing policies, regulations, objectives and strategy, and proposing, when appropriate, suitable modifications to the Executive Director for recommendation to the Investment Committee and the Board of Trustees; and,

• Providing periodic reports to the Investment Committee and the Board of Trustees.

E. Independent Investment Consultant(s)

Adapted from the contracts and RFPs for Investment Consulting Services

The System may hire one or more Independent Investment Consultant(s) to provide advice and services including but not limited to the following areas:

• Research and Reporting,

• Benchmark and performance measurement and analytics,

• External manager and general partner oversight,

• Asset allocation, and structural analysis,

• Risk management,

• Investment policies and procedures,

• Systems and technological services,

• Ongoing Trustee education,

• Presentations and advice at Investment Committee and Board of Trustee meetings and others as requested, and

• Assistance with external manager and general partner searches as needed.


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IX. INVESTMENT RESTRICTIONS

The System may not invest more than 25% of the total assets (at market value) invested in common stocks in non-dividend-paying common stocks. (SPP § 21-123(c)(ii)).

Unless the Board of Trustees grants prior authorization, the System MAY NOT:

• Invest more than 5% of the total assets of the System in any one company.

• Invest any funds of the System in any one company in excess of 5% of that company's total capital.

• Borrow money.

• Purchase securities on margin when the notional value of open positions exceeds the market value of the account.

• Effect short sales of equities, other than those executed by external managers or for the implementation of tactical asset allocation on a market sector.

• Pledge or hypothecate securities with the exception of fully collateralized security lending agreements and reverse repurchase agreements.

• Employ derivatives to reduce portfolio duration to less than that of cash equivalents or to increase duration to more than that available from owning long term U.S. Treasury Bonds.


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X. DISCLOSURE OF INFORMATION

Adopted by the Board of Trustees October 2004 The System may keep all analyses, forecasts, negotiations, papers, records, recommendations, and reports closed to public inspection until (1) the release of the information would not adversely affect the negotiation for or market price of a security; and (2) completion of a proposed purchase or sale of certain assets has been completed. (SPP § 21-123(f)) PRIVATE EQUITY INVESTMENTS A. Policy with regard to “top line” information

The Board of Trustees’ policy is that the System should be prepared to disclose “top line” information if, as and when (a) the System receives a PIA request covering such information and (b) a determination is made by the Agency that disclosure is required under State law.

1. Top line information in private equity “fund of funds” – In the case of the

System’s private equity “fund of funds” investments, top line information includes the following data:

a. Name of Fund of Funds Manager and Title of Fund b. Investment Focus of the Fund of Funds c. Vintage Year of the Fund of Funds d. Amount of the System’s Capital Commitment to the Fund of Funds

(broken down by Funded and Unfunded Capital Commitments) e. Total Amount of Distributions from the Fund of Funds to the

System f. Reported Value of the System’s interest in the Fund of Funds, with

appropriate explanatory notes.1

g. Internal Rate of Return, with appropriate explanatory notes (see fn. 1)

1 The explanatory note would use language substantially similar to the following: “The Maryland State Retirement and Pension System uses dollar- weighted Internal Rates of Return (IRR) to measure private equity performance as recommended by the Association of Investment Management and Research. The IRRs contained in this report are calculated by the State Retirement and Pension System of Maryland, and have not been reviewed by the General Partners. Until a partnership is liquidated, typically over 10 to 12 years, the IRR is only an interim estimated return and may not be indicative of ultimate performance. There are no generally accepted standards for reporting private equity valuations, and interim reported values could differ materially from the values realized when the portfolio companies are sold. The IRR calculated in the early years of a partnership tend to be less meaningful given the J-curve effect, characterized by negative returns in the early years due to the payment of fees and start-up costs before any distributions are made to the investor. Interim IRR comparisons are not always meaningful due to different vintage years or investment strategies.”


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2. Top line information in private equity limited partnerships – In the case of the System’s direct investment in a private equity limited partnerships (hereafter, a “Partnership”), top line information includes the following data: a. Name of Partnership b. Investment Focus of Partnership c. Vintage Year of Partnership d. Amount of the System’s Capital Commitment to Partnership

(broken down by Funded and Unfunded Capital Commitments) e. Total Amount of Distributions from the Partnership to the System f. Reported Value of the System’s interest in the Partnership, with

appropriate explanatory notes (see fn. 1) g. Internal Rate of Return, with appropriate explanatory notes (see fn.

1) B. Policy with regard to “bottom line” information

The Board of Trustees’ policy is that the System should not voluntarily disclose “bottom line” information if, as and when the System receives a PIA request covering such information. Bottom line information includes the following data:

1. Name of each portfolio company within a partnership and description of

the portfolio company’s business 2. Cost of each portfolio company 3. Current value of each portfolio company 4. Material events related to a portfolio company

C. Process for handling PIA Requests

Whenever the Agency’s PIA Liaison (currently the Public Information Officer) receives a PIA request that deals with the System’s private equity investments, the PIA Liaison will promptly convene a working group consisting of appropriate Investment Division staff and legal counsel. The PIA request will be promptly reviewed, input solicited from general partners, and determinations made about how to proceed, all in accordance with the requirements of State law.


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APPENDICES


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APPENDIX A: REBALANCING AND TACTICAL ASSET ALLOCATION POLICY

The Board of Trustees has approved a Tactical Asset Allocation Policy for the System. It defines the ranges within which the Staff has the flexibility to adjust asset classes for tactical purposes or rebalancing without approval from the Investment Committee or the Board of Trustees. Those ranges are shown below:

SRPS TACTICAL ALLOCATION POLICY

Asset Class Strategic Target (%)

Policy Range (%)

TAA Capability

US Stocks* 40% 35 - 45 + or – 2% from target

US Stocks N/A N/A Shift up to 2% of the total assets between growth and value styles

within the US equity passive asset class.

Non-US Stocks 13% 10 – 16 + or – 2% from target

Global Stocks 10% 8 to 12 Greater than 1% over or underweight vs. target is

considered a tactical asset allocation bet.

Private Equity 2% 0 to 3 No latitude

Total Equity 65% 60 to 70 + or – 2% from target

Fixed Income 28% 23 to 33 + or – 2% from target (may be directed to cash)

Cash 0% 0 to 2% + 2% from target

Real Return Strategies 2% 1 to 3 No latitude

Real Estate 5% 3 to 7 No latitude

Total Assets 100%

*Until private equity reaches the 2% allocation target, money intended for private equity will be held in US equity and therefore the interim US equity target is above the 40% long-term strategic target. Rebalancing towards target is mandatory in any asset classes that exceed the upper or lower limits of the range established by the Board of Trustees. If staff allows global equity to become over or underweight greater than 1.0% from target, that will be considered a tactical asset allocation decision to be measured by the general consultant. Staff is therefore responsible for the performance changes caused by


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not rebalancing global equity to within 1.0% of the target allocation. Staff is responsible for immediately informing the general consultant when the over or under weight position is greater than 1.0% and when the position falls back within 1.0% of target. Tactical Asset Allocation may be conducted by transferring cash and/or securities between asset classes or through employing futures and other derivatives. Futures and other derivatives may not be used to take positions outside these ranges or to leverage the portfolio. Futures and other derivatives must be liquid and traded on a recognizable exchange. Allowable instruments will include, but will not be limited to the following:

Fixed Income Futures US Treasuries US Agencies Canadian Gov’t Bond Eurodollars Japanese Gov’t Bond Bond Swap Futures AUD 10-year Bond UK Gilt German Bund Domestic Equity Futures S&P 500 Indexes Russell Indexes NASDAQ 1000

International Equity FuturesMSCI Indexes FTSE Indexes Cac 40 Spanish Ibex Index Swedish OMX Index Dow Jones Euro Stox 50 Index DAX Index Nikkei Indexes Topix Index Hang Seng Index Australian SPI 200 Italian Mib30 Index Other Instruments Forward Currency Contracts

REPORTING Staff will report all tactical asset allocation moves to the Investment Committee as an information item on a monthly basis. The general investment consultant will present an assessment of the Staff’s value added from tactical asset allocation activity to the Investment Committee of the Board of Trustees at least quarterly. DECISION MAKING The Chief Investment Officer has final responsibility for making all TAA decisions, informing the System’s investment consultant of all changes made in the TAA program and overseeing implementation of TAA moves involving the use of derivatives.


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1. The Quantitative Strategy Unit of the Investment Division, as well as other members of Investment Division staff, will contribute research and provide other support for the TAA program.

2. In the absence of the Chief Investment Officer, the Managing Director,

Quantitative Strategy Unit has final responsibility for making all TAA decisions, informing the System’s investment consultant of all changes made in the TAA program and overseeing implementation of TAA moves involving the use of derivatives.

IMPLEMENTATION If a tactical asset allocation move is to involve cash and securities, transfers will be conducted by a System fund manager and the System’s custodian upon receipt of a Letter of Direction (LOD) from an authorized staff member delivered by facsimile. The LOD must have two authorized signatures, those of an initiator and a counter-signer. Staff members authorized to sign the LOD are named on the incumbency certificate signed by the Executive Director. If a tactical asset allocation move is to involve the use of derivatives, staff will follow the procedures stated below:

1. Authorized staff calls the fund manager and states the desired allocation change. This is confirmed by e-mail.

2. The fund manager e-mails a list to Staff of the derivatives and actions that

would be necessary to complete the transaction with a cost estimate. 3. The quantitative unit of the Investment Division will review the list, the action

plan and the cost to verify that it is reasonable and the cost is acceptable. 4. The Chief Investment Officer will also review the list, action plan and the cost

to verify that it is reasonable and the cost acceptable. 5. The fund manager will be instructed with a Letter of Direction to execute the

transaction from an authorized staff person via facsimile. The letter of direction must have two authorized signatures, those of an initiator and a counter-signer. Staff members authorized to sign the LOD are named on the incumbency certificate signed by the Executive Director.


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APPENDIX B: SELECTION, MONITORING AND TERMINATION OF MANAGERS Originally adopted by the Board of Trustees in 1994; amended in 1999, 2001, 2006.

Investment managers for a fee provide investment management services for externally managed assets invested in accordance with Board approved delegations and guidelines. The Board of Trustees has final responsibility for selecting and terminating managers. The Investment Committee has responsibility for monitoring performance and allocating funds to current managers within Board approved targets. The following summarizes the process followed by staff when selecting, monitoring and terminating managers: MANAGER SELECTION PROCESS:

1. Staff creates a detailed questionnaire (RFI) covering all pertinent quantitative and qualitative issues and determines screening criteria to be used in creating a list of potential candidates.

2. The RFI is sent to the investment consultant to review.

3. Staff creates a list of potential managers. This list may be compiled using one or more external data bases. Staff will check the State list of certified Minority Business Enterprises (MBE) at the beginning of a search to identify possible bidders or offerors who are certified MBEs, and will contact them about the procurement.

4. The System’s general investment consultant will be asked to send staff the names of recommended managers who would qualify for the search. These will be added to the list compiled by staff.

5. The System’s general investment consultant will also be asked to identify and recommend in writing to staff, through their internal database and external research, emerging managers who would qualify for the search.,

6. Before Staff distributes the RFI, the System’s general investment consultant will review the entire list of prospective managers and identify those managers they feel would not be suitable, including reasons, in writing to staff.

7. Staff will review responses to the RFI and eliminate those firms that are not likely to be hired based on the screening criteria.

8. Staff will conduct manager interviews, revise or reaffirm the screening criteria in light of the data gathered to use during the interview phase, and select finalists.

9. The System’s general investment consultant will provide a written report to staff opining on the finalists selected, and assessing and identifying emerging managers that should be included as finalists.

10. Staff will perform due diligence on all managers selected for finalist interviews, including on-site visits if necessary.


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11. The System’s general investment consultant will perform due diligence on any manager selected for finalist interviews that is not well known to them. For emerging managers, the System’s general investment consultant will provide a written assessment of their business model, financial statements, and business plan.

12. At least two (2) finalists will be presented to the Investment Committee, along with staff’s recommendations and the System’s general investment consultant’s comments. Both staff and the investment consultant will be available for comments and questions.

13. The Investment Committee will approve the hiring of none, one or more of the finalists and make a recommendation to the Board that the manager(s) be hired and that Staff be authorized to proceed with fee negotiations, contract negotiations, and funding.

14. An investment manager is a fiduciary appointed by the Board. Each investment manager is selected to meet specific investment objectives and/or performance standards. An investment manager has full discretion to prudently execute investment transactions on behalf of the Board in accordance with the Board’s approval of the delegation and guidelines.

The Investment Committee approves the hiring of one or more of the finalists and makes a recommendation to the Board that the manager(s) be hired and that staff be authorized to proceed with fee negotiations, contract negotiations, and funding. An Investment Manager is a fiduciary appointed by the Board. Each manager is selected to meet specific investment objectives and/or performance standards. The manager has full discretion to prudently execute investment transactions on behalf of the Board in accordance with the Board approval of the delegation and guidelines. ON-GOING MONITORING

The Board of Trustees continually seeks to employ investment managers that it believes have the ability to outperform their benchmarks net of fees. The primary objective of on-going monitoring of investment managers is to ensure that each manager is satisfactorily performing its duties and is in compliance with various obligations set forth in their contract.

When the Board engages an investment manager, the firm typically is expected to perform in accordance with a certain style, be organizationally sound and outperform its assigned benchmark. The Chief Investment Officer is responsible for monitoring the managers and reporting performance to the Investment Committee. The Chief Investment Officer will be supported by staff and may also utilize an investment consultant to assist with monitoring managers.

Performance data and other significant items are reviewed by the Investment Division on a regular basis. Performance is reported by the Investment Division to the Investment Committee on a monthly basis. Significant issues such as change in ownership,


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personnel, or style will be reviewed by the Investment Division and reported to the Investment Committee in a timely manner.

1. Evaluating Performance Data

The assigned performance benchmarks are described in the investment management guidelines for each manager. The manager is responsible for ensuring that performance figures provided by the custodian are reconciled with its own performance figures.

2. Periodic visits with Managers

The Investment Division meets with all separate account managers face to face at least twice a year, and will meet at the manager’s office at least once every two years. The purpose of the meetings will be to evaluate performance and other issues as outlined above. A brief summary of the meeting is reported to the Investment Committee. As a part of their ongoing manager monitoring efforts, the investment consultant will also meet with and have ongoing discussions with the investment managers, reporting any concerns to the Investment Division and the Investment Committee.

3. Presentations to the Investment Committee

When requested by the Investment Committee, staff will coordinate presentations by managers.

4. Watch List

A manager Watch List will be maintained as described in Appendix C: Watch List Policy.

5. Other

All external investment managers enter into written contracts with the System. These contracts document all of the terms and conditions applicable to the manager’s provision of investment services to the System, including (a) the specific mandate of the manager, (b) those delegations of fiduciary duty made by the Board of Trustees to the manager, (c) other authorizations requested by the manager that have been granted by the Board of Trustees, and (d) the investment guidelines applicable to the manager. Accordingly, in the event of a conflict between the provisions of this Investment Policy Manual and a manager’s contract, the manager’s contract will control.

MANAGER TERMINATION

The Board may dismiss a manager for any reason at any time upon written notice to the manager.


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QUICK TERMINATION POLICY

(Adopted by the Board of Trustees March 2004)

Occasionally a manager issue arises that requires action and cannot wait for the next scheduled Investment Committee or Board of Trustees meeting. Examples include mass departure of investment professionals, material organizational missteps (such as criminal indictments), or other news that might cause rapid, material outflows from a specific investment product and/or firm.

1. As soon as event is known:

a. Staff and consultant discuss the situation and whether to recommend an immediate termination. If they conclude that immediate action is necessary:

i) Contact head of Investment Committee by phone and discuss rationale for termination

ii) Staff and consultant prepare supporting memo for termination, proposed transition and new manager (likely to be an existing manager or an index fund)

iii) Send termination memo to Committee by e-mail (with call to notify members of issue)

2. Within 24 hours:

a. Arrange for a quorum of Board members, plus members of the Investment Committee who do not serve on the Board, if available, on the phone to vote on termination.

b. If it is agreed to terminate, Staff notifies manager of termination and begins the restructuring process with a transition manager

3. Within 48 hours:

a. Staff notifies the new manager;

b. Staff effects transition with assistance of transition manager (duration of transition may be longer for less liquid securities)

c. Portfolio may need to be temporarily invested in derivatives or exchange-traded funds while new manager contracts are finalized

4. Post-transition

a. Report back to Committee on transition and costs


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APPENDIX C: WATCH LIST POLICY Originally Adopted by the Board of Trustees October 2004. The watch list is under the direction of staff and is a means for providing the Investment Committee and the Board of Trustees with additional information about the managers. Staff will present a Watch List Report to the Investment Committee at each regularly scheduled meeting.

When a manager is placed on the Watch List, it is effective immediately. There is no minimum time requirement on the Watch List before a termination may be made. A manager’s contract may be terminated for any reason at any time, whether on Watch List or not.

1. A manager may be added to the Watch List for any of the following reasons:

a. Organizational Issues (People) • Change in ownership or control of the company

• Significant change in team composition or responsibilities

• Material change in the business organization of the manager

• Departure of significant personnel

b. Performance

• 1, 3 and 5-year performance net of fees below benchmark

• 1, 3 and 5-year performance net of fees below peers (below median of relevant peer universe)

• Performance inconsistent with manager’s style and risk control

c. Other

• Material guideline violation not brought to our attention by the manager

• Failure to comply with terms of contract that is not corrected within 60 days

• Any extraordinary regulatory action or other proceeding affecting the manager’s ability to perform its duties under the contract

• Unsatisfactory client service

• Any other reason as determined by staff

2. During a manager’s tenure on the Watch List, staff will provide the Investment

Committee and the Board of Trustees with regular reports, including background information and support, about the progress the manager is making.


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3. A manager may be dropped from the Watch List if staff believes the issues that placed the firm on the Watch List are resolved. Staff will provide the Investment Committee and the Board of Trustees with a report (including background information and support) demonstrating that all issues have been resolved.

4. While there is no requirement that the manager be notified when they are placed on the watch list, staff will communicate their concerns to the manager regarding the exact nature of the problem(s) as outlined under paragraph 1 above.


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APPENDIX D: SELECTION OF EMERGING MANAGERS Adopted by the Board of Trustees December 2004; restated August 2006 The System attempts to identify and hire emerging managers through two separate programs: its general public markets investment program and its emerging manager program. I. General Public Markets Investment Program

A. The Board of Trustees has directed that all searches conducted in the System’s general public markets investment program consider emerging managers, with the understanding that specific qualifications will vary with the search mandate.

B. Definition of emerging manager: an Emerging Manager is a firm that has less than $2 Billion in assets under management or has been in the business of managing institutional assets for less than 5 years.

II. Emerging Manager Program (adopted by the Board of Trustees March 2006) The emerging manager program authorized by the System will be structured as follows:

A. Size of Program

1. Range from 0 to 2% of total System assets.

2. Initial target of 1% or approximately $340,000,000.

3. If the Program is successful, it may be increased in size.

B. The Program will be designed for the System with the following features:

1. “Best in Class”

a. The Program Manager will hire the best emerging managers whether they manage stocks or bonds.

b. Potential emerging managers may be selected in any of the following four asset classes: US fixed income, US equity, developed global equity and developed international equity.

i) Developed global equity and developed international equity managers must have at least $1 billion under management, a five-year track record, and a robust risk management system. No more than 20% of the funds in the Program may be invested in those asset classes.


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2. Risk Buckets

In order to avoid hiring only emerging managers with little experience, the System’s Program will be diversified among emerging managers with different assets-under-management sizes.

a. Two Risk Buckets

The Program Manager will have oversight responsibility for the managers in both risk buckets.

i) 1st Bucket:

a) Up to 50% of the assets of the Program may be assigned to emerging managers with less than $900 million assets under management.

b) There may be no more than two firms whose principals have less than a three year performance history or with less than $100 million in assets under management.

ii) 2nd Bucket:

a) Up to 100% of the assets of the Program may be assigned to emerging mangers with between $900 million and $3.0 billion assets under management.

b) No emerging manager may have more than $2.0 billion assets under management at the time of funding.

3. Performance Analysis and Risk Management

a. Each emerging manager in the Program shall be judged against the appropriate index for the emerging manager’s style benchmark.

b. The Program Manager shall establish tracking error bands for each emerging manager.

c. At no time will there be more than ten emerging managers in the Program.

d. At the time of funding, the Retirement System’s portion may not exceed 20% of an emerging manager’s total assets under management.

e. Risk controls (including, but not limited to, manager concentration limits and prohibited investments) shall be developed for each


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emerging manager by the Program Manager in conjunction with Agency staff and included in the emerging manager’s contract.

f. The System and Program Manager will determine the Program’s overall performance benchmark.

4. Transition out of the Emerging Manager Program

Once an emerging manager’s assets under management exceed $3.0 billion, the Agency will consider the manager for a separate account.

If a former emerging manager is asked to present to the Investment Committee, there are two choices which ultimately will be made by the Board of Trustees after getting input and recommendations from staff and the general consultant:

a. Terminate; or

b. Establish a separate account with the emerged manager.


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APPENDIX E: PRIVATE EQUITY POLICY Adopted by the Board of Trustees August 2004. This document outlines the goals and objectives of Maryland’s private equity program (the “Program”). It also sets forth the policies and procedures pursuant to which the Program will be managed. These policies and procedures will be reviewed and approved by Maryland’s Board of Trustees (the “Board of Trustees”) and cannot be changed without explicit approval by the Board of Trustees.

There is an associated document entitled Strategy Paper which will also be used to govern the Program. The Strategy Paper will include items such as the performance benchmark for the Program and its sub-sector target allocations and ranges. This paper will also be approved by Maryland’s Board of Trustees. These documents will be maintained separately. This Policies and Procedures document is designed to be a long-term instrument, to be changed, if required, only every four to five years. The Strategy Paper will be short-term in nature and may be updated annually.

A. FIDUCIARY STANDARDS The role of the Board of Trustees is to supervise and make policy decisions regarding assets invested by the Maryland Retirement System. As fiduciaries, the Board of Trustees has the duty to invest the assets:

1. For the exclusive purposes of providing benefits to participants and for reasonable expenses of administering the several systems;

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 a like character and with like aims;

3. By diversifying the investments of the System so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and

4. In accordance with the laws, documents and instruments governing the several systems.

B. OBJECTIVE OF THE PROGRAM The goal of the Program is to generate returns over the long-term that will exceed those of the broad public equity markets, while using prudent risk management methods. Generating high returns will be the primary objective and will be reflected in the Program’s benchmarks.

A significant level of diversification has already been achieved by Maryland through its investments in other assets classes, such as public stocks, fixed income, and real estate. The Program will be built with this existing level of


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diversification in mind.

C. ALLOCATION As of July 30, 2004, Maryland has a private equity target allocation of 2% of its total assets, with a range of 0% to 3%. Maryland will need to commit more than 2% of its total assets to reach and maintain a 2% invested exposure to private equity. This is because managers have four to six years to invest committed capital and capital may well be returned to investors from recapitalizations or realizations over that period. Thus it takes time for commitments to be invested, and the net invested position is often below the commitment amount. Maryland’s private equity consultant will help Maryland determine the level of over-commitment that may be required.

D. INVESTMENT VEHICLES The Program may consist of (i) individual fund direct investments, (ii) fund of funds investments or (iii) other types of private equity investments, all as recommended by the private equity consultant in the performance of its fiduciary responsibilities (collectively, the “Recommended Investments”). Individual fund investments and fund of funds can be called “funds” for the purposes of this document.

E. SECTORS The Program will be invested in a prudent, balanced manner in some or all of the sectors described below. The goal is to invest in sectors that will provide the best risk-adjusted returns. Parameters (targets and ranges) will be established in the Strategy Paper to prevent over-investment in any one sector. The investments will be monitored to prevent unintended over-concentrations. The sectors are:

1. SUB-ASSET CLASS

The buy-out and venture segments are the largest parts of the market and will contain most of Maryland’s investments. Other sectors include growth, distressed (control and non-control), mezzanine, secondary investments, and energy and natural resources. Note: these, and other terms, are more fully defined in the attached Glossary.

2. VINTAGE YEAR

A fund’s vintage year is set by the date of the first drawdown. Commitments will be made for the Program consistently over vintage years, as long as the best opportunities can be found, in order that the Program may (1) take advantage of the best opportunities over time and (2) achieve greater balance and diversification.

3 GEOGRAPHY


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Maryland is a U.S. investor with a dollar denominated liability to its participants. The U.S. is also by far the largest private equity market. The majority of Maryland’s investment will thus be in the U.S. Geographic targets and ranges will be established for the Program in the Strategy Paper.

4. MARYLAND INVESTMENTS

The Board of Trustees supports economic development for the State of Maryland. However, the Board of Trustees is also acutely aware of its fiduciary responsibilities. Private equity investment funds that are seen to aid economic development in the State of Maryland will be handled by exactly the same process as all other investment opportunities for the Program: All managers for the Program will be subjected to the same rigorous analysis. Should an investment opportunity be referred to a member of the Board of Trustees, the opportunity will be forwarded to staff, and staff will forward the opportunity to the private equity consultant, and the private equity consultant will review the opportunity using its normal review process.

5. INDUSTRY

The portfolio will be invested in companies in standardized industry categories such as manufacturing, technology, and medical. Industry category weights and exposures will be monitored.

F. ROLES AND RESPONSIBILITIES Maryland’s Board of Trustees shall approve these Policies and Procedures and the Strategy Paper, and retain final responsibility for:

1. Establishment and direction of the Program; and

2. Retention or termination of the private equity consultant

Maryland’s Investment Committee is delegated the responsibility to:

1. Review the Program and its performance on behalf of the Board of Trustees, apprising the Board on a regular basis of progress and achievements.

2. Monitor and review compliance of the private equity consultant with its contract, these Policies and Procedures, and the Strategy Paper, as well as System staff’s compliance with these Policies and Procedures and the Strategy Paper.

3. Approve commitments where the planned commitment amount is $50 million or greater per fund.

Maryland’s private equity consultant will work with Maryland’s staff to achieve the successful implementation of the Program and ongoing compliance with these Policies and Procedures and the Strategy Paper. Implementation issues to be


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handled by the private equity consultant and staff include preparation of required reports and investment recommendations, management of Maryland’s approval process, ongoing implementation strategy, reporting and monitoring, monthly reporting of new commitments, and requested commercial documentation changes made by managers (e.g. amendments).

The private equity consultant will also work with Maryland’s staff to prepare the investment strategy and synthetic or model portfolio for the Program. It will also prepare written investment recommendations for individual funds. Individual funds will be considered within the framework of the model portfolio.

G. POLICIES AND PROCEDURES FOR COMMITMENT

The Private Equity commitment process allows the private equity consultant to make commitments to individual funds without approval from the Investment Committee or Board of Trustees for planned commitments under $50 million subject to the limitations set forth in this document and in the contract with the private equity consultant. The Investment Committee has the responsibility to approve all single fund commitments of $50 million or greater. The Investment Division staff has responsibility for oversight and management of the commitment process. Legal review of investments proposed for the program is to be provided be the Office of the Attorney General. The private equity consultant will be actively involved in any negotiation and in the review of the commercial terms of all proposed investments. The process for any proposed investment will consist of the following: 1. Due Diligence Report - A comprehensive written due diligence report and

recommendation will be provided by the private equity consultant.

2. Conflict Disclosure Statement – The private equity consultant will deliver to Agency staff a statement describing their relationship with the general partners/promoters of any recommended investment.

3. Review by Investment Division Staff – Staff will conduct a compliance review to ensure that the proposed investment complies with the Private Equity Policies and Procedures Document, Strategy Paper, and Model Portfolio.

4. Legal Review – A memorandum will be submitted to Agency staff by the System’s legal counsel summarizing the results of the legal review of the “Transaction Documents” (typically, the Offering Memorandum, the Limited Partnership Agreement (including any side letters and required opinions) and the Subscription Agreement). This Legal Review memo should be discussed with the private equity consultant for comment, and forwarded to the general partner/investment manager for comment/explanation.


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5. Compliance Checklist for Executive Director – When items G:1-4 above are completed and the Transaction Documents are ready to be signed, staff will provide the Executive Director with a Compliance Checklist with supporting documentation indicating that the Approval Process (items G:1-4 above) has been followed.

6. Execution of Transaction Documents by Executive Director – After receipt and review of the Compliance Checklist Memo, the Executive Director may execute the Transaction Documents for the recommended investment.

7. Reports on New Investments – Promptly after the System closes on an investment for the Program, Staff will prepare an information report for the Investment Committee regarding the new investment.

H. TERMS AND CONDITIONS – LIMITED PARTNERSHIP AGREEMENT Individual private equity fund commitments made by Maryland are controlled primarily by the limited partnership agreement (“LPA”). This document is somewhat standardized in theory but can differ in reality due to different commercial terms, legal jurisdictions, the lawyers involved, and the history of the legal document (the starting document for subsequent funds managed by the same manager is most often the LPA for the prior fund).

LPA due diligence is divided into commercial and legal parts. The commercial due diligence covers fees, profit participation, and other such commercial items (many of which are listed below). The legal due diligence covers the structural aspects of the LPA and includes Maryland’s ability, as constituted, to commit to the fund.

An alignment of interest is sought between the manager of the fund and Maryland as an investor because the manager should benefit when its investors benefit.

Some of the key terms that are evaluated during the legal due diligence and negotiation are:

1. Term of the fund and extension ability

2. Investment period

3. Management fee (and management fee offsets)

4. Carried interest (and associated items including preferred return, and carried interest “waterfall”)

5. Claw back

6. General partner restrictions, including restrictions on personal investment and ability to raise other / subsequent funds

7. Investment limitations

8. Key man clause


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9. Termination clauses

10. No fault divorce clause

11. Amendment voting

12. Limited partner Advisory Board (function, rights thereof)

13. Co-investment ability

14. Transfer in interests

15. Results of defaulting on payments

16. Confidentiality/access to records provisions

17. Indemnification provisions

I. APPROVAL PROCESS The private equity consultant shall comply with its contract, these Policies and Procedures, and the Strategy Paper.

The private equity consultant shall undertake the due diligence on individual funds and will provide Maryland with written due diligence reports. The private equity consultant will have the ability to commit Maryland to individual funds, subject to the following limitations:

1. A written due diligence report presented to Maryland’s staff before any commitments are made;

2. Satisfactory completion of legal review; and

3. Maryland’s Investment Committee must approve any commitment proposed for the Program where the planned commitment is $50 million or greater per fund.

Investment Division staff will have responsibility for oversight and management of the approval process. Legal review of investments proposed for the Program will be provided by the Office of the Attorney General. The private equity consultant will be actively involved in any negotiation and in the review of the commercial terms of all proposed investments.

J. EVALUATION CRITERIA

The factors that will contribute to a positive recommendation from Maryland’s private equity consultant in relation to individual managers and their associated funds will include, but is not limited to:

1. Fit with Maryland’s Policies and Procedures, Strategy Paper, and commitment plans

2. Quality, experience, and integrity of the manager


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3. History of success (as demonstrated by investment returns and demonstrated value creation)

4. Strategy and market positioning that are expected to generate superior returns

5. Ability to add value

6. Alignment of interests between Maryland and its managers

7. Quality of reporting

8. Quality of its interactions with its investors

K. MONITORING AND REPORTING The private equity consultant is contractually obligated to provide an array of ongoing monitoring and reporting services relating to the Program. The private equity consultant’s reporting services will include quarterly reports to Maryland’s Investment Committee. These reports will cover items such as committed amounts, fund names, funded status, and the performance of the Program’s portfolio.

L. DRAWDOWNS AND DISTRIBUTIONS: Requests for drawdowns and distributions, will be sent to Maryland’s staff by its private equity managers, and copied to the private equity consultant, and to the custodial bank. Maryland’s staff will approve transfers of cash, and will perform these transfers with the assistance of its custodial bank.

M. GLOSSARY OF COMMON TERMS

Buy-out (also known as leveraged buy-out) The acquisition of an existing, typically profitable, business. The company is bought with a combination of debt and equity. Generally, the target company’s assets act as the collateral for the loans taken out by the acquirer.

Distressed Investments made into businesses that are struggling from operating and /or financing issues. Investments can with be made as a non-control investment (often trading in the companies debt) or control where the manager will own the company with a view to turn it around.

Energy and natural resources Investments in the exploration, extraction, accumulation, generation, movement or sale of energy (e.g., oil, gas, coal, electricity), and other natural resources and related service companies.

Fund of funds A vehicle with typically multiple investors established to distribute investments


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among a selection of private equity fund managers, who in turn invest the capital directly.

Growth A segment the lies between venture capital and buy-outs. These are usually companies that are profitable but are growing rapidly and need expansion capital. Often this is there first receipt of private equity capital, and this investment will often be structures as a minority investment.

Mezzanine A subordinated debt or debt-like instrument with an interest payment comprising a cash (and sometimes an accrued non-cash portion) roll-up element and frequently equity warrants. Mezzanine financing can fill gaps between senior debt and equity financings and is frequently used as part of financing of a private equity backed acquisition.

Russell 3000 Index Stock index consisting of the 3000 largest publicly listed U.S. companies, representing about 98% of the total capitalization of the entire U.S. stock market.

Secondary investments The purchase of an existing interest or interests in a private equity limited partnership. The goal is to buy the asset for less than its intrinsic value and benefit from any uplifts in future value.

Venture capital This can be a wide-ranging definition, but here is applies to investments in typically young, unprofitable companies who are growing rapidly and where technology is a large aspect of the business model. Venture investment can range from seed (company may just be a concept), to start-up / early-stage, to later-stage / pre initial public offering.

Vintage year The year in which a private equity fund or fund of funds makes its first investment. This can be a different date from the date the fund is closed.

N. PRIVATE EQUITY DISCLOSURE

The private equity disclosure policy is included in Section X, Disclosure of Information,


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APPENDIX F: REAL ESTATE POLICY Real Estate Investments are governed by SPP 21-123(f) 2 and 21-123(g) and the Real Estate Investment Master Plan. Originally adopted by the Board of Trustees in 1994; amended in March 2004; revised March 2006.

REAL ESTATE INVESTMENT POLICY PURPOSE, GOVERNANCE & ASSOCIATED DOCUMENT Purpose The purpose of the real estate asset class is to generate attractive risk-adjusted rates of return while providing diversification to the System’s overall investment portfolio. This document sets forth guidance pursuant to which the System’s real estate investment program (the “Program”) will be managed. This Policy will cover: • Purpose / Governance / Associated Document • Policy Objectives • Performance Metrics • Risk Management

Governance The State Retirement & Pension System of Maryland’s real estate asset class is governed by State law (including SPP 21-123(f)(2) and 21-123(g)) and this Policy. This Policy supersedes the original 1994 policy adopted by the Board of Trustees, as amended from time to time. Associated Document An associated document, entitled the Strategic Real Estate Investment Plan (the “Strategic Plan”), will be used in conjunction with this Policy in governing the Program. The Strategic Plan will be maintained separately and will cover: • Plan Purpose / Governance / Associated Document • Strategic Objectives • Portfolio Characteristics & Strategic Direction


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POLICY OBJECTIVES The Program shall be managed in accordance with the following objectives:

1. Provide overall expected returns in the context of the System’s current assumed actuarial rate of return, and that are competitive, on a risk adjusted basis, with other asset classes in which the System invests.

2. Provide a consistent flow of qualified investment opportunities that represent the

most attractive investment vehicles currently available in the marketplace. 3. Hold a diversified and balanced portfolio of real estate investments structured in a

manner that minimizes the risks inherent in these generally illiquid and long-lived assets.

PERFORMANCE METRICS Policy Benchmarks

Performance shall be benchmarked against a 70/30 weighted return of the National Council of Real Estate Investment Fiduciaries Property Index (“NCREIF Property Index” or “NPI”)3 and the Wilshire Real Estate Securities Index (“WRESI”) 4, respectively and net of fees.

Individual Real Estate Investment Account Benchmarks

Additional criteria will be applied to the performance expectations of individual real estate investment mandates, investments having a focus on a particular property sector or geographic location, and for investments having higher risk strategies, such as opportunistic investments.

Individual real estate investment account benchmarks will be determined at the time of investment. RISK MANAGEMENT Diversification The objective of diversification is the reduction of risk without a corresponding reduction in the portfolio’s return. This can be accomplished through allocation of the investment of capital among a number of different investment management organizations and in a

3 The NPI is an index of the unleveraged performance of core real estate properties (office, retail, hotel, industrial and apartment) held for tax-exempt institutional investors. The NPI returns are gross of fees. 4 The WRESI is a capitalization weighted index which began in 1978, coinciding with the inception of the NPI. Unlike the NAREIT Index, the WRESI excludes mortgage REITs, healthcare REITs, net-lease REITs, real estate finance companies, home builders, large landowners and sub-dividers and hybrid REITs.


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variety of real estate investment strategies and structures, including, but not limited to, geographic regions, property sectors, investment life cycles, and investment size. Asset Allocation • Real Estate Asset Class Allocation The amount allocated to the Program will comply with the asset allocation targets

and ranges approved by the Board of Trustees. • Sub-asset Class Allocation Allocations to sub-asset class segments provide a mechanism for maximizing total

return to the Program while mitigating risk. The Program will be divided into four segments: core, value added, opportunistic, and publicly traded. Sub-asset class segment definitions are included in Attachment A. The allocation ranges for the Program’s sub-asset classes are as follows:

Segment Allocation Range

Core 40% - 70% Value Added 0% - 25% Opportunistic 0% - 25% Publicly Traded 20% - 40%

• U.S. / Non U.S. geographic diversification ranges:

Geographic Region Diversification Range U.S. 70% - 100% Non U.S. 0% - 30%

From time to time and generally as a result of fluctuations in market values of individual investments, the actual sub-asset class and geographic allocations may fall outside of the respective recommended ranges. In these instances, it is expected that adjustments from actual to the prescribed segment allocation range will be implemented over a reasonable time frame, and with ample consideration given to preserving investment returns. Liquidity

Where possible and appropriate, investments should include liquidity enhancement features such as shorter investment time horizons and holding periods, provisions for interim liquidation of investments, multiple exit strategies, a readily tradable market for investor holdings, and clearly defined redemption provisions.


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Leverage

To the extent leverage exceeds the following limitations – a situation that could occur as a result of market fluctuations - all reasonable efforts will be taken to reduce the leverage ratio below the foregoing limitations within a reasonable time frame.

Segment Expected Leverage Restrictions

Core

• Separate Direct 0% - 40% Individual properties shall not exceed 65%

• Indirect 0% - 40% Use determined at time of investment

Value-added 35% - 65% Use determined at time of investment

Opportunistic 65% - 85% Use determined at time of investment

Publicly Traded 45% - 50% Represents embedded leverage.


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Attachment A: Sub-asset Class Segment Definitions

Core investment strategies generally have the following characteristics: o Portfolios are well diversified by geography and property type o Assets emphasize current income o Minimal leverage is employed o Little or no development and / or construction o Assets have low vacancy at the time of acquisition o Properties have balanced lease expiration schedules o Portfolios own no unusual property types and / or transactions o Significant liquidity and / or control over invested capital at the asset level (may

have separate liquidity issues on a commingled fund format) Value added investment strategies generally have the following characteristics:

o Assets may have near term lease rollover o Properties may have moderate vacancy at acquisition o Moderate degrees of leverage are employed o Select development / redevelopment o Increased portion of the total return originating from appreciation o Some specialty property types may be included (e.g. timber, self storage, hotels)

Opportunistic investment strategies generally have the following characteristics: o Use of development, rehabilitation or change of use at the property level o Investment based on some form of market dislocation (e.g. distressed sellers) o Moderate to high degrees of leverage employed o Greater emphasis on the appreciation return, as opposed to the income return o Reduced emphasis placed on geographic region or property type diversification o Focus on property types that include a high degree of business risk such as hotels,

mini-warehouses, senior assisted living, residential housing, etc. o Unusual transactions with investments in operating businesses, real estate

leveraged buy-outs, non-diversified “bets” o International investments

Publicly traded generally include publicly traded real estate securities of real estate investment trusts (“REITs”) and real estate companies, sometimes referred to as real estate operating companies (“REOCs”).


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ROLES & RESPONSIBILITIES

Adopted by the Board of Trustees April 2006.

The Board of Trustees (the “Board” or “BOT”) has the final responsibility for establishing and directing the real estate investment program (the “Program”) of the System. The Board distinguishes the scope of delegation among:

1. The Board of Trustees, 2. The Investment Committee of the Board, 3. The State Retirement Agency (the “Agency”), and 4. The System’s Real Estate Consultant (“the Consultant”).

The specific type of the individual real estate investment will determine the process followed. Investments will be classified as one of the following:

Type I: Private market real estate investments - Direct Equity Type II: Private market real estate investments - Indirect Funds Type III: Publicly traded real estate investments.

The Board of Trustees preserves unto itself the following:

1. Establishment and direction of the Program. 2. Approval of the Policy, the Strategic Plan, and Program processes to be

maintained in the Investment Policy Manual (IPM). 3. Selection and / or termination of the Consultant. 4. Right to pre-screen potential real estate investment opportunities in the Type I:

Private market real estate investments - Direct Equity component, of the Program.

5. Selection and / or termination of external real estate investment managers and advisors for Type III: Publicly traded real estate investments component of the Program.

The Investment Committee is delegated responsibility for:

1. Review of the Program’s performance on behalf of the Board of Trustees, apprising the Board on a regular basis of progress and achievements.

2. Recommending changes to the Policy, the Strategic Plan, Program processes to be maintained in the IPM.

3. Recommending the selection and / or termination of the Consultant to the Board. 4. Appointing a Real Estate Subcommittee (“RESC”) from its membership, as

considered necessary, to facilitate the orderly conduct of real estate investment matters.


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5. Establishing and maintaining a Registry of potential real estate investments for the Type I: Private market real estate investments - Direct Equity component of the Program.

6. Approval of Type II: Private market real estate investments – Indirect Funds where the planned commitment exceeds $50 million.

7. Recommending to the Board selection and / or termination of external real estate investment managers and advisors for Type III: Publicly traded real estate investments.

The State Retirement Agency is delegated responsibility for:

1. Overall Program compliance with the Policy, the Strategic Plan, and Program processes.

2. Recommending changes to the Policy, the Strategic Plan, and Program processes maintained in the IPM.

3. Management and oversight of the investment process, including ensuring legal review of proposed investments for the Program by the Office of the Attorney General.

4. Oversight of the selection and termination process, as well as ongoing performance and guideline compliance monitoring of managers.

5. Working with the Consultant to achieve successful implementation of the Program and ongoing compliance with the Policy, the Strategic Plan, and Program processes.

6. Executing transactions for recommended and authorized investments, and 7. Periodic reporting to the Investment Committee and / or the RESC including, but

not limited to the following: a. Monthly performance, b. Quarterly Consultant reports covering Type II committed amounts, fund

names, funded status and fund performance , c. Semi-annual compliance reports on Type III investments, and d. Annual hold / sell analysis for Type I investments.

The Real Estate Consultant shall:

1. Work with the Agency to achieve the successful implementation of the Program and ongoing compliance with the Policy, the Strategic Plan and established Program processes.

2. Prepare periodic written reports, including but not limited to: a. Quarterly performance reports, b. Quarterly reports covering Type II committed amounts, fund names,

funded status and fund performance, and c. Other reports and analysis as requested.

3. Manage, in collaboration with the Agency, the Program’s approval process, ongoing implementation strategy, reporting and monitoring, periodic reporting of new commitments, and requested commercial documentation changes made by managers (e.g. amendments).


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4. Work with the Agency in preparing the investment strategy and model portfolio for the Program.

5. Prepare written investment opinions for all Program investments. 6. Review, recommend, and collaborate with the Agency with respect to

commitments for planned investments that do not exceed $50 million for Type II: Private market real estate investments - Indirect Funds. Type II investments that exceed $50 million require approval from the Investment Committee.

7. Provide those other services required under the Consultant’s contract with the System.

PROCESS GUIDANCE:

Type I: Private market real estate investments - Direct Equity

As required by SPP 21-123 (f) (2), the sale or purchase of real estate shall be subject to the approval of the Board of Public Works and shall be included on a Board of Public Works agenda. The following applies only to Type I investments. I. Goals of the Direct Equity Component of the System’s Real Estate Program

The goals of the direct equity component of the System’s real estate program apply to the direct equity component in the aggregate rather than to individual properties, and are intermediate in nature, spanning an investment time horizon of up to ten years. Except as otherwise noted below, the System seeks to:

A. Achieve diversification by location, property type and property age in order to

control portfolio risk, to reduce the effects of the cyclical nature of regional economics and to minimize the periodic imbalance of supply and demand; and

B. Achieve a sensitivity to inflation by structuring investments and lease

arrangements which respond to cost of living increases via both rental income adjustments and expense protection; and

C. Preserve capital and control volatility by investing in income producing

properties with a resilience of cash flow and which offer high expectations of at least maintaining property values over time.

II. Objectives of the Direct Equity Component of the System’s Real Estate Program

Except as otherwise noted below, in the direct equity component of the System’s real estate program, the System seeks: A. To diversify geographically in directly owned properties located within

metropolitan statistical areas. (Source: Statistical Abstracts, U.S. Bureau of Census.) Properties purchased as part of the direct equity separate account shall be located in the United States of America.


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B. To invest in market areas with a consistent history of successful leasing of similar properties.

C. To invest no more than 25% of the total market value of the direct equity separate account in a single metropolitan area, excluding the State of Maryland.

D. To diversify as to property type (except as otherwise noted below), focusing on office, retail and industrial properties.

E. To generally concentrate (except as otherwise noted below) on existing properties, which are 85 percent leased exclusive of contiguous land.

F. To accumulate unleveraged properties, though leverage may be used as appropriate and within the limits described in the System’s Real Estate Investment Policy document.

G. To invest in properties whose maximum potential would, on average and as more fully described below, be achieved over an anticipated holding period of at least five years.

H. To achieve going-in, a minimum cash-on-cash return of four percent with potential for escalating cash flows, except as otherwise described below.

I. Over the expected holding period, the real rate of return shall be 5 percent net of inflation and expenses.

J. To invest in properties where design of the occupiable space is functional for not only present tenants but also for future tenants engaged in similar uses.

K. To invest in properties only after a thorough analysis of all environmental matters related to the project.

L. To invest amounts equal to or less than the project's current appraisal value.

M. Investments based on good opportunities as they become available and not conforming to a timetable or deadlines.

N. To develop an exit strategy at the time of investment and which shall be reviewed at least annually for each property holding.

O. To legally insulate other assets of the System from real estate holdings.

III. Specific Property Criteria for the Direct Equity Component of the System’s Real

Estate Program

In furtherance of the mission, goals and objectives established for the System’s real estate program generally and the direct equity component thereof, the following criteria are adopted in addition to those stated above and subject to subsequent modifications by the Board of Trustees when deemed appropriate:


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The direct equity component of the System’s real estate program is intended to be a “Core” investment. Core properties have stabilized occupancy levels and a verifiable history of generating net operating income. Core investments will likely derive at least 65% of their return potential from income. The following criteria shall be considered when determining the suitability of an investment for the direct equity component of the System’s real estate program:

A. Investments shall be made only in existing properties deemed to be of

institutional quality.

B. Investments in single-use properties which cannot be easily adapted for alternative uses or tenancies shall be avoided.

C. Investments in apartments, hotels, congregate care facilities, mini-storage warehouses, predevelopment land (unless such land is part of a potential core investment or adjacent to an existing Core holding), timberland, energy producing acreage, farmland and non-affiliated real estate investment trusts shall be avoided unless prior authorization is granted by the Board of Trustees.

D. Investment in properties with environmental risks, including toxic waste, hazardous waste, asbestos, et al. shall be avoided.

E. Related-party transactions shall offer market rates of return, shall meet all criteria of this plan, and shall be subjected to an independent fairness opinion by an organization or firm approved by the Board of Trustees.

F. Joint venture or structured debt transactions where the joint venture partner or borrower has no equity interest at risk shall be avoided.

G. Credit tenants with staggered lease expiration terms shall be sought to the maximum extent possible within any single property, except in multi-property developments in which the System may own multiple properties, in which case the overall credit quality and lease expiration schedule may be considered.

H. A concentration of lease expirations at a given point in time shall be avoided, both at the property and portfolio level.

I. Lease provisions shall, if possible, include increases based on inflation and expense protection either through straight pass-through or expense stops provisions.

J. At the time of acquisition, existing rent levels shall be at market levels or below to permit renewal increases. Where rent levels are above current market rates, the acquisition price shall be based on market conditions rather than stated lease rates.

K. Heavily weighting any single property type shall be avoided.

L. To the extent possible, free rent and other rental concessions, if any, shall be reflected in the year incurred and not spread over the term of the lease.


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M. Fee simple ownership, exclusive of ground leases, is strongly preferred.

N. Properties shall be substantially leased (85% occupancy or higher) at the time of acquisition.

O. A holding period of at least five years shall be contemplated at the time of acquisition and when determining the suitability of the investment.

P. Investments shall only be made in established submarkets.

Q. The property shall be appraised not less frequently than once every three years by an independent appraiser.

R. At the time of investment, potential exit strategies shall be developed and approved by the manager.

IV. Fiduciary Roles / Responsibilities with Regard to the Direct Equity Component of

the System’s Real Estate Program A. Registry of Potential Investments

The Board of Trustees as ultimate fiduciary reserves the right to pre-screen potential real estate investment opportunities in the direct equity component of the System’s real estate program. In order to fulfill this responsibility without impeding the actual closing process, there shall be established a Registry of potential real estate investments for the direct equity component of the System’s real estate program (the “Registry”). The Registry shall provide whatever information the Board of Trustees shall stipulate from time to time, including a minimum expected holding period and an expected purchase price range. The Investment Committee of the Board of Trustees shall maintain the Registry.

B. Process to include investment on real estate registry:

1. Initial information package to be received from the Real Estate Manager ("Manager") or other party.

2. If property under consideration complies with the Policy and Strategic Plan (including the mission, goals and objectives set forth in those documents), the Manager shall request the Investment Committee (“IC”) and the BOT approve its inclusion on the Registry under the "Tracking" category.

3. Location, property type, square footage, asking price, broker and seller shall be listed on the Registry.

4. Initial action by the IC and the BOT:

a) Shall review the Registry to determine if any reason exists, such as a conflict of interest, to reject proposed property acquisition;

b) If so, the property shall be removed from the "Tracking" category and any further consideration.


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c) If approved, the property review shall continue and the due diligence process shall proceed. A letter of intent to purchase property shall at this time or shortly thereafter be delivered to seller.

C. Process to Upgrade Proposed Investment under Serious Consideration on the Registry.

1. Once the Manager determines that a property should be acquired, the Manager shall present to the Investment Committee and / or the RESC information which includes, but is not limited to, the following:

a) Property Profile

i) Property Description

ii) Location Description

iii) Land Area

iv) Building Specifications

v) Age

vi) Tenancy

b) Investment Proposal

i) Seller

ii) Acquisition Price

iii) Purchase Terms

iv) Estimated Closing Date

v) Estimated Closing Costs

vi) Projected Returns, including IRRs, NOI Yields, Cash Yields

vii) Primary Conditions to Close

viii) Strengths & Weaknesses

ix) Map of Property Location

c) Discussion of why this opportunity meets the System’s investment guidelines.

d) Building Specifications

i) Year Built

ii) Square Footage

iii) Parking Spaces

iv) Acreage

e) Photographs

f) Tenant/Guarantor Analysis


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g) Market Analysis

i) Regional Overview ii) Economic Analysis

h) Location Property/Market Analysis

i) Risk and Return Evaluation

i) Analysis

ii) Financial Returns

iii) Valuation

iv) Cash Flow Projections

2. The System’s real estate consultant shall review the information supplied by the Manager and shall deliver a written recommendation to the Investment Committee and / or the RESC regarding the proposed investment.

3. Following its consideration of the information supplied by the Manager and the System’s real estate consultant, the Investment Committee and / or the RESC shall:

a) Determine if there is a reason to reject the property from further consideration;

b) If so, the Investment Committee and / or the RESC shall direct the Manager to remove the property from the Registry. If not, the Investment Committee and / or the RESC shall authorize the Manager to proceed with the property acquisition within the upper limit of the expected price range.

c) Once approved, the Manager has the authorization to proceed with no further BOT approval required provided the purchase price is within the upper limit of the expected price range and provided further that the Manager and Agency satisfy the conditions set forth in Section IV.D. below.

D. Steps Following Real Estate Subcommittee Approval 1. The property shall be reclassified on the Registry to "Under Serious

Consideration," and the Department of General Services ("DGS") shall be notified.

2. The Manager shall continue negotiations to finalize the purchase within the range approved by the Real Estate Subcommittee. Legal representation shall be provided through the Office of the Attorney General. The Manager shall proceed with further due diligence including but not limited to:

a) Survey and title matters;

b) Engineering and environmental reviews; and

c) Appraisal review.


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3. The Manager shall keep Agency staff and DGS advised of developments. Subject to Manager's due diligence and negotiations, a purchase contract shall be finalized with closing under the contract contingent upon approval from the Board of Public Works ("BPW").

4. Agency staff shall notify the Investment Committee and / or the RESC of the agreed upon price and the date the acquisition is expected to be placed on the BPW agenda for approval.

5. Agency staff shall request DGS place the recommendation to approve the acquisition by the System on the BPW agenda.

6. All real estate acquisitions and dispositions in the direct equity component of the System’s real estate program shall be subject to final approval by the BPW.

7. After receiving BPW approval, the Agency and the Manager shall take all actions necessary to finalize purchase of property in accordance with the contract.

V. Manager Discretion

With respect to the approval process, the real estate manager(s) shall be granted discretion for final property acquisition and disposition, subject to conditions outlined in the Manager’s contract, Section IV above and State law.

Real estate manager(s) shall be granted full discretion regarding real estate portfolio management, subject to conditions outlined in the Manager’s contract, this Strategic Plan document and State law.

An investment manager shall be responsible and accountable for the actual closing process for each transaction using policies and procedures which have been established by the Board of Trustees and State law.

It is the expressed intent of this grant of full discretion that the System’s real estate managers in the direct equity component of the System’s real estate program can react and perform quickly to complete real estate transactions which will most likely be successful in achieving investment objectives. Given the competitive nature of the real estate industry, the System seeks to compete effectively with other institutional investors in today's market place.

VI. Manager Functions

The System’s real estate managers in the direct equity component of the System’s real estate program are expected to perform, at the minimum, the following functions:

A. Strategic three-year plan - Managers shall prepare and maintain three-year strategy plans which shall be reviewed by the Investment Committee and / or RESC at the time of initiation and at least annually thereafter.


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B. Due diligence - Managers are fully responsible and accountable for conducting due diligence on potential investments and for the actual closing process for each transaction.

C. Legal reviews – With assistance from the Office of the Attorney General and outside counsel, Managers shall insure that complete legal reviews are undertaken prior to any investment decision under the direction of the Manager.

D. Environmental reviews - Managers shall insure that professional environmental consultants prior to any investment decision conduct complete environmental reviews. Managers shall develop written criteria specifying the procedures to be followed in selection of environmental consultants.

E. Exit strategy - Managers are required to develop an exit strategy for each property acquired by a manager and to communicate the exit strategy or any changes thereto to the Investment Committee and / or RESC.

F. Property appraisals - Managers shall arrange property appraisals at least annually. Third-party MAI-certified appraisers shall prepare all appraisals. The appraiser and the appraisal process shall be pre-approved by the Investment Committee and / or RESC shall include use of standard engagement letters, a rotational pattern of appraisers and require an independent appraisal no less than every three years. Internal valuations shall be performed by the Manager in those years in which a property is not appraised.

G. Legal structure - Managers shall ensure that the legal structure of real estate acquisitions isolates and protects other assets of the System from liability.

H. Manager reporting - Managers shall furnish to the Investment Committee and / or RESC:

a. Registration reports on viable potential investment opportunities,

b. Pre- and post-acquisition reports,

c. Annual reports by a CPA for acquired property,

d. Annual budgets for acquired property,

e. An annual report of return expectations for the System’s portfolio compared to the manager's outlook for the real estate market,

f. An annual report of planned investment strategies and their intended impact on performance,

g. Quarterly performance reports,

h. Quarterly budgeted versus actual performance analysis for each property with explanations of all material variances, and

i. Pre and post disposition reports.


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Managers shall utilize accounting policies and procedures and performance reporting methodology as directed by the Investment Division.

I. Property Management - Managers shall choose on-site property management firms, which may include wholly owned subsidiaries which have been pre-approved. Managers shall be responsible for lease rollovers, tenant mix, on-site property maintenance and budgeting. A specified asset management plan shall be prepared for each property prior to its acquisition.

VII. Manager Compensation

It is intended that manager compensation shall focus on achieving after-fee performance objectives. Fees shall be targeted to the performance of assets under control relative to the System’s return objectives and not relative to market proxies. Performance goals shall be linked to the entire real estate portfolio under management and not to individual properties.

Real estate manager compensation will consist of (1) an annual retainer fee linked to the original cost of acquired properties, and (2) an incentive bonus based on real return performance and not nominal returns. Incentive compensation recognizes that both cash flow and residual value can increase or decrease and can be influenced by astute management.

Annual Retainer Fee:

The Annual Retainer Fee shall be equal to a percentage of the combined original cost of acquired properties grossed up to include projected annual fees and expenses.

To qualify for annual retainer fee compensation, a manager's portfolio must generate current cash-on-cash returns in excess of four percent.

Incentive Bonus Fee:

Incentive Bonus Fees may be paid, starting in the fourth year, to managers who provide the System with average annual real return exceeding five percent net of inflation and expenses, including Annual Retainer Fee.


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Type II: Private market real estate investments - Indirect Funds The process for any Type II - Private market real estate investments - Indirect Funds will comprise the following:

I. Limitations

Investment funding - the Type II investment process allows the Agency, in collaboration with the Consultant, to make commitments to Type II investments without approval from the Investment Committee or Board of Trustees for planned commitments that do not exceed $50 million, subject to the following limitations:

A. A written due diligence report presented to Agency before any commitments are made;

B. Satisfactory completion of legal review;

C. Notification from the Agency to proceed; and

D. Investment Committee approval of any commitment proposed for the Program where the planned investment is $50 million or greater per fund.

II. Approval Process

A. Due diligence report – a comprehensive written due diligence report and recommendation will be provided by the Consultant. Factors that will contribute to a positive recommendation from the Consultant in relation to individual managers and their associated funds will include, but not be limited to:

1. Fit with Program Policy and Strategic Plan,

2. Quality, experience, and integrity of the manager,

3. History of success (as demonstrated by investment returns and demonstrated value creation),

4. Strategy and market positioning that are expected to generate superior returns,

5. Ability to add value,

6. Alignment of interests between System and its managers,

7. Quality of reporting, and

8. Quality of interactions with investors.

B. Conflict disclosure statement - the Consultant will deliver to Agency staff a statement describing their relationship with the general partners / promoters of any recommended investment.


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C. Review by Agency – Agency will conduct a compliance review to ensure that the proposed investment complies with the Real Estate Policy and Strategic Plan.

D. Legal Review – a memorandum will be submitted to Agency staff by the System’s legal counsel summarizing the results of the legal review of the “Transaction Documents” (typically, the Offering Memorandum, the Limited Partnership Agreement (including any side letters and required opinions) and the Subscription Agreement). The legal review memorandum should be discussed with the Consultant for comment, and forwarded to the general partner / investment manager for comment / explanation.

III. Executive Director Review & Execution

A. Compliance Checklist for Executive Director – when items II.A – D of the Type II Approval Process above are completed, and the Transaction Documents are ready to be signed, Agency staff will provide the Executive Director with a Compliance Checklist Memorandum with supporting documentation that the Approval Process has been followed.

B. Execution of Transaction Documents by Executive Director – after receipt and review of the Compliance Checklist Memorandum, the Executive Director may execute the Transaction Documents for the recommended investment.

IV. Investment Reporting

Reports on new investments – promptly after the System closes on a Type II investment for the Program, Agency staff will prepare an information report for the Investment Committee regarding the new investment.

V. Monitoring and Periodic Reporting

Quarterly performance reports will be presented to the Investment Committee regarding all Type II investments, covering such items as committed amounts, fund names, funded status, and the performance of the Program’s portfolio.

VI. Drawdowns and distributions

Requests for drawdowns and distributions will be sent to the Agency by its real estate investment managers, and copied to the Consultant and custodian bank. Agency staff will approve transfers of cash, and will perform these transfers with the assistance of the custodian bank.


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Type III: Publicly traded real estate investments The processes for selecting, monitoring and terminating publicly traded real estate investment managers will be as established in Appendix B: Selection, Monitoring and Termination of Managers of the Investment Policy Manual.


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APPENDIX G: OPTIONAL RETIREMENT PROGRAM The Optional Retirement Program is governed by SPP 21, Section 30. The Board of Trustees, with the help of staff and the ORP Consultant, may determine to develop an Investment Plan Statement for the ORP.


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APPENDIX H: DIRECTED BROKERAGE and COMMISSION

RECAPTURE POLICY Originally adopted by the Board of Trustees in 1994; amended in 1999 and 2005.

I. DIRECTED BROKERAGE

The Board of Trustees (Trustees) of the State Retirement and Pension System (System) adopts the following policy regarding the distribution of brokerage commission business generated by the State Retirement Agency (Agency) and by external managers retained by the Agency to manage assets of the System.

A. The Trustees generally support an open door policy whereby all soundly

financed and reputable firms are encouraged to compete for the System's business, recognizing that only so much business and time is available and a certain level of relationship investing is required.

B. Commissions flowing from the System's business shall only be directed to

brokerage firms offering competitive execution services. C. Subject to paragraph B of this section I, selection of brokerage firms on

assets externally and internally managed shall be determined by each external manager or internal manager, respectively; provided however that each equity manager shall distribute its brokerage commission business so as to satisfy the following targets: 1. 5% of the commissions flowing from purchase and sale orders

shall be credited to: a. Maryland-based branches of brokerage firms headquartered

outside of the state of Maryland; and

b. Brokerage firms headquartered in Maryland; and 2. 10% of the commissions flowing from purchase and sale orders

shall be credited to brokerage firms that qualify as “minority business enterprises” within the meaning of §14-301(f) of the State Finance and Procurement Article of the Annotated Code of Maryland. A “minority business enterprise” is a business that is at least 51% owned and controlled by one or more individuals who are “socially and economically disadvantaged”. A “socially and economically disadvantaged individual” is defined as an individual who is African American, Hispanic American, Asian American, Native American, a woman, a person with a certain type of physical or mental disability, or otherwise found by the


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certification agency to be socially and economically disadvantaged.

D. The brokerage firm executing the order shall determine apportionment of

commissions among Maryland-based branches of brokerage firms headquartered outside of the State of Maryland.

E. Brokerage firms associated with the furnishing of ancillary services and

advice, provided said firms offer competitive execution services, may be reasonably employed to execute purchase and sale orders of the System.

F. External managers retained by the Agency to manage equity and fixed

income assets may use their discretion in selecting brokers or dealers to execute transactions, provided:

1. The external manager files a copy of its broker selection criteria

with the Agency; 2. The external manager uses the delivery versus payment structure

for the Agency's account in minimizing transaction risk of broker delivery failure; and

3. The external equity manager agrees to structure its brokerage

commission business to satisfy the targets specified in paragraph C of this section I.

G. The external managers shall compile and furnish to the Agency on a

quarterly basis, a report on commission activity. The Agency shall compile and furnish to the Trustees on a quarterly basis, a report on commission activity. The reports shall detail the recipients of the commissions, the dollar amount of commission business, the average price-per-share charged by recipients and a reasonable history of commission allocations. Further, the reports for external equity managers shall specify the amount of brokerage business allocable to: 1. Maryland-based branches of brokerage firms headquartered

outside of the state of Maryland;

2. Brokerage firms headquartered in Maryland; and 3. Brokerage firms that qualify as “minority business enterprises”

within the meaning of §14-301(f) of the State Finance and Procurement Article of the Annotated Code of Maryland. A “minority business enterprise” is a business that is at least 51% owned and controlled by one or more individuals who are “socially and economically disadvantaged”. A “socially and economically


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disadvantaged individual” is defined as an individual who is African American, Hispanic American, Asian American, Native American, a woman, a person with a certain type of physical or mental disability, or otherwise found by the certification agency to be socially and economically disadvantaged.

II. COMMISSION RECAPTURE Adopted by the Board of Trustees January 19, 1995 The Board of Trustees approved a directed brokerage program with Frank Russell Securities, Inc. in order to recapture some of the agency commissions paid on international equity transactions. Russell has negotiated agreements with various international brokers that offer cash rebates for directed brokerage. The Board recognizes that trading style, transaction order flow, broker selection decisions and research requirements of managers should not be adversely affected by this program. Whenever an international equity manager places an agency trade with a broker who participates in the program, the international equity manager is asked to direct the commissions on the trade to this program, provided commissions are competitive. The Board recognizes that commission costs are only one component of execution costs and that managers should follow a best execution strategy.


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APPENDIX I: CORPORATE GOVERNANCE AND PROXY VOTING POLICY

Adopted by the Board of Trustees February 2005 The Board of Trustees has a corporate governance program. The program is based on the proposition that the integrity of the capital markets directly affects the Retirement System and all of its participants and stakeholders. Good governance and responsible practices should be followed by all entities in which Retirement System assets are invested. The Board of Trustees will actively work to ensure that such standards are met by these entities. Good corporate governance should maintain the appropriate balance between the rights of shareholders—the owners of the corporations—and the needs of the board and management to direct and manage effectively the corporation’s affairs, and thereby further the System’s mission as an investor. Therefore, the System is committed to actively, but selectively and prudently, addressing poor corporate governance structures or regulatory constructs and otherwise responding to those problems when discovered in the capital markets and its participants utilizing the tools and methods of corporate governance. The System believes that good governance and responsible practices should be followed by publicly traded companies, companies in the process of going public, private companies and limited partnerships and that all major sectors of the capital markets should be monitored. PROXY VOTING The Board believes that the voting of proxies is a fundamental aspect of stock ownership, and recognizes that proxy voting issues that are not addressed by the System’s existing policy or are novel and/or controversial can quickly arise during a given proxy season. Accordingly, the Corporate Governance Subcommittee will on an ongoing basis, with the assistance of staff and consultants, recommend revisions and updates to the System’s Proxy Voting Policy. It is acknowledged and understood that the Proxy Voting Policy will determine how the System’s proxies are voted on the vast majority of issues. In furtherance of the goals and objectives established for the System’s corporate governance program, the following proxy voting policy has been adopted by the Board of Trustees: CORPORATE GOVERNANCE ISSUES 1. Classified Boards of Directors

All directors should be elected annually.

2. Independence of Board Members


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A substantial majority (at least two-thirds) of the board should be directors who are independent.

An independent director is someone whose only nontrivial professional, familial or financial connection to the corporation, its chairman, CEO or any other executive officer is his or her directorship. (CII, March 2004)

3. Qualifications of Outside Directors

Election of directors should be on a case-by-case basis and not constrained by arbitrary limits such as age or term limits.

Directors with full-time jobs should not serve on more than three for-profit corporations’ boards. No director should serve on more than five for-profit corporate boards. Currently serving CEOs should only serve as a director of one other company.

4. Board Size

The board of directors should have at least six and not more than 15 members. Shareholders should be allowed to vote on any major change in board size.

5. Separate Chairman and CEO

All such proposals should be evaluated on a case-by-case basis; generally vote for the separation of the chairman and CEO positions.

6. Nominations to the Board of Directors

Shareowners should have effective access to the director nomination process.

7. Voting for Directors

Directors should be elected by a majority of the shareholders casting votes.

All votes for directors should be evaluated on a case-by-case basis. This will be based on several factors, including:

Long-term company financial performance relative to a market index, The composition and level of independence of the board and key board

committees, Individual attendance history (attendance at 75% of all meeting is

expected), Corporate governance provisions and takeover activity, Directors’ investment in the company, Whether the chairman also serves as CEO or other corporate officer, Previous experience on the Board, Role in previous Board actions

8. Committees of the Board

The three key board committees (audit, compensation, and nominating) should consist solely of independent outside directors. The board, not the CEO, should appoint these members. The creation and membership of other committees will be reviewed on a case-by-case basis.


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9. Cumulative Voting for Directors

Generally favor resolutions that eliminate cumulative voting, but all votes for cumulative voting should be evaluated on a case-by-case basis.

10. Indemnification of Directors

Evaluated on a case-by-case basis using Delaware law as the standard.

Vote AGAINST proposals that would:

Eliminate entirely directors' and officers' liability for monetary damages for violating the duty of care or

Expand indemnification beyond just legal expenses to acts, such as negligence, that are more serious violations of fiduciary obligation than mere carelessness

11. Term Limits

Generally oppose term limits because time served is not a substitute for a thoughtful evaluation of director performance.

12. Director Compensation

Directors should be compensated only in cash or stock, with a significant portion of the compensation in stock, and an appropriate vesting or holding period.

Shareholder approval should be required for all equity-based compensation plans that include any director or executive officer of the company

13. Minimum Stock Ownership for Directors

Directors should own a meaningful position in the company’s common stock, appropriate to their personal circumstances.

14. Annual Meeting

Vote against proposals to cancel the annual shareholders meeting or to reduce the quorum required.

Support proposals that encourage meaningful meetings that are open to shareholders.

15. Change Company Name

Generally vote FOR proposals to change the corporate name.

16. Ratify Auditor

Vote for proposals to ratify auditors, unless: (1) an auditor has a financial interest in or association with the company, and is therefore not independent; (2) fees for non-audit services are excessive (greater than audit fees), or (3) there is reason to believe that the independent auditor has rendered an opinion, which is neither accurate nor indicative of the company's financial position.

17. Board Communications with Shareholders


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Shareholders should have the ability to communicate effectively with the board of directors. Formal procedures should be created to enable shareholders to communicate their views and concerns directly to board members.

18. Shareholder Access to the Board

All directors should attend the annual shareholders' meeting and be available, when requested by the chair, to answer shareholder questions.

Shareowners should have effective access to the director nomination process.

19. Amend Bylaws without Shareholder Consent

Shareholders should always be allowed to vote on amendments to the bylaws.

Vote against proposals giving the board exclusive authority to amend the bylaws.

20. Bundled Issues

Shareholders should be allowed to vote on unrelated issues separately. Vote bundled or "conditioned" proposals on a case-by-case basis taking into account the aggregate effect of the items.

21. Supermajority Voting Provisions

In general, vote against super-majority proposals, except if necessary to protect the interests of minority stockholders where there is a single dominant shareholder.

22. Confidential Voting at Annual Meetings

Shareholders should be able to cast proxy votes in a confidential manner to a proxy tabulator independent of management, except in circumstances of a contest for control.

23. Dual-class Stock or Unequal Voting Shares

Shareholders should have the right to a vote in proportion to their economic stake in the company. Each share of common stock should have one vote. (One Share-One Vote)

Authorized unissued common shares that have voting rights should not be issued with unequal voting rights without shareholder approval.

24. Shareholders' Ability to Act by Written Consent

Vote against proposals to restrict or prohibit shareholders' ability to take action by written consent. A majority of shareowners should be able to act by written consent.

25. Shareholders' Ability to Call Special Meetings

Vote against proposals to restrict or prohibit shareholder ability to call special meetings, and for proposals that remove restrictions on the right of shareholders to act independently of management.

26. Transact Other Business


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Vote against proposals to approve other business when it appears as voting item.

27. Mergers and Acquisitions

Evaluated on a case-by-case basis.

Generally vote for mergers and other transactions that will enhance long-term shareholder returns for the company's existing shareholders.

28. Stock Distributions: Splits and Dividends

Vote FOR management proposals to increase the common share authorization for a stock split or share dividend, provided that the increase in authorized shares would not result in an excessive number of shares available for issuance

29. Increased Common Shares

Evaluate on a case-by-case basis. Generally, vote against any increases in authorized common shares where management's only purpose is to discourage unwanted bids for the company's stock.

30. Payment of Greenmail

Generally vote in favor of resolutions prohibiting management from repurchasing the stock of an individual investor unless all shareholders are extended the opportunity to participate in the transaction.

31. Leveraged Recapitalization

Evaluated on a case-by-case basis

32. Changing State of Incorporation

Generally oppose proposals to reincorporate in jurisdictions that would result in a weakening of shareholder rights unless there are overriding benefits to shareholders.

33. Opt Out of State Anti-Takeover Statutes

Generally, vote in favor of resolutions that remove a company from anti-takeover statutes in its state of incorporation.

34. Executive Compensation

All compensation proposals will be reviewed on a case-by-case basis.

Executive compensation programs should be designed and implemented to ensure alignment of interest with the long-term interests of shareowners and to reasonably reward superior performance that meets or exceeds well-defined and clearly disclosed performance targets that reinforce long-term strategic goals set and approved by the board and written down in advance of the performance cycle.

Executive compensation programs should be transparent to shareowners, and should be fully disclosed, with adequate information to judge the “drivers” of incentive components of compensation packages.


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Executive compensation programs should be a combination of cash and equity based compensation, reflect responsibilities, tenure and past performance, be tax efficient, and direct equity ownership should be encouraged.

Special retirement arrangements, including ones structured to permit employees whose compensation exceeds IRS limits to fully participate in similar plans covering other employees, should be consistent with programs offered to the general workforce, and they should be reasonable.

Prefer that golden parachutes and severance packages be put to shareholder vote

Oppose salary caps

35. Equity Based Compensation

All plans that provide for the distribution of stock or stock options to employees and/or directors should be submitted to shareholders for approval.

Stock awards should be tied to the achievement of specified goals, and there should be appropriate limits on the size of long-term incentive awards granted to executives

36. Issuance of Stock

Vote against unspecified exercise price or exercise price below 100% of fair market value on the date of the grant.

37. Replacing out of Money Stock Options

Vote against repricing out-of-the-money executive stock options with exercise prices under the market price at the time of issue.

38. Employee Stock Ownership Plan (ESOP)

Vote against ESOPs where management's clear purpose is to fend off possible bidders for the company's stock

Vote against ESOPs when the number of shares allocated to the ESOP is "excessive" (i.e., generally greater than five percent of outstanding shares).

39. Poison Pills (or Shareholder Rights Plans)

Vote for proposals to redeem existing poison pills. Shareholders should have the right to approve any new poison pills. Vote against any new poison pills.

CORPORATE RESPONSIBILITY ISSUES

1. Board Diversity

Generally vote FOR requests for reports on the company's efforts to diversify the board, unless:

The board composition is reasonably inclusive in relation to companies of similar size and business, and


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The board already reports on its nominating procedures and diversity initiatives

Vote CASE-BY-CASE on proposals asking the company to increase the representation of women and minorities on the board, taking into account:

The degree of board diversity Comparison with peer companies Established process for improving board diversity Existence of independent nominating committee Use of outside search firm History of EEO violations

2. Equal Opportunity Reports

Generally vote FOR requests for reports outlining the company's affirmative-action initiatives unless:

The composition of senior management and the board is fairly inclusive, The company has well-documented equal opportunity programs, The company already publicly reports on its company-wide affirmative-

action initiatives and provides data on its workforce diversity, and The company has no recent EEO-related violations or litigation.

Generally vote FOR proposals seeking information on the diversity efforts of suppliers and service providers, which can pose a significant cost and administrative burden on the company, unless:

The composition of senior management and the board is fairly inclusive, The company has well-documented equal opportunity programs, The company already publicly reports on its company-wide affirmative-

action initiatives and provides data on its workforce diversity, and The company has no recent EEO-related violations or litigation.

3. Sexual Orientation

Generally vote FOR proposals to amend the company's Equal Employment Opportunity (EEO) statement to include reference to sexual orientation, unless the implementation of a policy would result in excessive costs for the company.

Vote CASE-BY-CASE on proposals regarding extension of company benefits to domestic partners, taking into account the costs of doing so.

4. Animal Rights

Vote CASE-BY-CASE on proposals to phase out the use of animals in product testing, taking into account:

The nature of the product and the degree that animal testing is necessary or federally mandated (such as medical products)

The availability and feasibility of alternatives to animal testing to ensure product safety

The degree that competitors are using animal-free testing


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Generally vote FOR proposals seeking a report on the company's animal welfare standards unless:

The company has already published a set of animal welfare standards and monitors compliance

The company's standards are comparable to or better than those of peer firms, and

There are no serious controversies surrounding the company's treatment of animals

5. Drug Pricing (Pharmaceutical Companies)

Vote CASE-BY-CASE on proposals asking the company to implement price restraints on pharmaceutical products, taking into account:

Whether the proposal focuses on a specific drug and region Whether the economic benefits of providing subsidized drugs (e.g., public

goodwill) outweigh the costs in terms of reduced profits, lower R&D spending, and harm to competitiveness

The extent that reduced prices can be offset through the company's marketing budget without affecting R&D spending

Whether the company already limits price increases of its products Whether the company already contributes life-saving pharmaceuticals to

the needy and Third World countries The extent that peer companies implement price restraints

6. Genetically Modified Foods (GMO)

Vote CASE-BY-CASE on proposals asking for a report on the feasibility of labeling products containing GMO ingredients taking into account:

The relevance of the proposal in terms of the company's business and the proportion of it affected by the resolution

The quality of the company’s disclosure on GMO product labeling and related voluntary initiatives and how this disclosure compares with peer company disclosure

The company’s current disclosure on the feasibility of GMO product labeling, including information on the related costs

Any voluntary labeling initiatives undertaken or considered by the company.

Vote CASE-BY-CASE on proposals asking for reports on the financial, legal, and environmental impact of continued use of GMO ingredients/seeds, taking into account:

The relevance of the proposal in terms of the company's business and the proportion of it affected by the resolution

The quality of the company’s disclosure on risks related to GMO product use and how this disclosure compares with peer company disclosure

The percentage of revenue derived from international operations, particularly in Europe, where GMO products are more regulated and consumer backlash is more pronounced.


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Generally vote AGAINST proposals asking companies to voluntarily label genetically modified (GMO) ingredients in their products or alternatively to provide interim labeling and eventually eliminate GMO ingredients due to the costs and feasibility of labeling and/or phasing out the use of GMO ingredients.

Generally vote AGAINST on proposals seeking a report on the health and environmental effects of genetically modified organisms (GMOs). Health studies of this sort are better undertaken by regulators and the scientific community.

Generally vote AGAINST proposals to completely phase out GMO ingredients from the company's products or proposals asking for reports outlining the steps necessary to eliminate GMO ingredients from the company’s products. Such resolutions presuppose that there are proven health risks to GMO ingredients (an issue better left to federal regulators) that outweigh the economic benefits derived from biotechnology.

7. HIV/AIDS

Generally vote FOR requests for reports outlining the impact of the health pandemic (HIV/AIDS, malaria, and tuberculosis) on the company’s operations and how the company is responding to it, taking into account:

The nature and size of the company’s operations in affected regions and the number of local employees

The company’s existing healthcare policies, including benefits and healthcare access for local workers

Company donations to healthcare providers operating in the region Generally vote FOR proposals asking pharmaceutical companies to

establish, implement, and report on a standard of response to the HIV/AIDS, tuberculosis and malaria health pandemic, taking into account:

The company’s actions in developing countries to address HIV/AIDS, tuberculosis and malaria, including donations of pharmaceuticals and work with public health organizations

The company’s initiatives in this regard compared to those of peer companies

8. Handguns

Generally vote AGAINST reports on a company's policies aimed at curtailing gun violence in the United States unless the report is confined to product safety information. Criminal misuse of firearms is beyond corporate control, but rather is the purview of law enforcement agencies.

9. Predatory Lending

Generally vote FOR reports on the company's procedures for preventing predatory lending, including the establishment of a board committee for oversight, unless it would cause the company to incur excessive costs, taking into account:

The extent of the company’s consumer lending operations Whether the company adequately discloses mechanisms in place to

prevent abusive lending practices


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Whether the company adequately discloses the financial risks of its sub-prime business

If the company was subject to violations of lending laws or serious lending controversies

Peer companies' policies to prevent abusive lending practices

10. General Environmental Reports

Generally vote FOR proposals requesting reports disclosing the company's environmental policies unless it already has well-documented environmental management systems that are available to the public.

11. Recycling

Generally vote FOR proposals to adopt a comprehensive recycling strategy, taking into account the nature of the company's business and the percentage affected.

12. Renewable Energy

Vote CASE-BY-CASE on proposals to invest in renewable energy sources, taking into account:

The nature of the company's business and the percentage affected The extent that peer companies are switching from fossil fuels to cleaner

sources The timetable and specific action prescribed The costs of implementation The company's initiatives to address climate change

Generally vote FOR requests for reports on the feasibility of developing renewable energy sources, unless the report is duplicative of the company's current environmental disclosure and reporting or is not integral to the company's line of business.

13. Environmental-Economic Risk Report

Generally vote FOR proposals requesting reports assessing economic risks of environmental pollution or climate change, taking into account whether the company is already doing so

14. Arctic National Wildlife Refuge

Generally vote FOR requests requesting reports outlining potential environmental damage from drilling in the Arctic National Wildlife Refuge (ANWR).

15. Global Warming

Generally vote FOR requests requesting reports on the level of greenhouse gas emissions from the company's operations and products, unless the report is duplicative of the company's current environmental disclosure and reporting or is not integral to the company's line of business. However, additional reporting may be warranted if:

The company's level of disclosure lags that of its competitors, or


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The company has a poor environmental track record, such as violations of federal and state regulations

16. General Environmental Reports

Generally vote FOR proposals requesting reports disclosing the company's environmental policies unless it already has well-documented environmental management systems that are available to the public.

17. CERES Principles

Generally vote FOR proposals to adopt the CERES Principles, taking into account:

The company's current environmental disclosure beyond legal requirements, including environmental health and safety (EHS) audits and reports that may duplicate CERES

The company's environmental performance record, including violations of federal and state regulations, level of toxic emissions, and accidental spills

Environmentally conscious practices of peer companies, including endorsement of CERES

Use of independent, third-party monitoring Costs of membership and implementation

18. Stronger product warnings

Generally vote FOR proposals seeking stronger product warnings.

19. Advertising to youth

Vote FOR proposals that would extend restrictions on the marketing of tobacco products to youth in foreign countries.

20. Secondhand smoke

Generally Vote FOR proposals asking that the company's operating facilities be smoke-free

21. Cease production/sale of cigarette components

Vote CASE-BY-CASE on proposals asking the company to cease production of tobacco-related products or cease selling products to tobacco companies, taking into account:

The percentage of the company's business affected The economic loss of eliminating the business versus any potential

tobacco-related liabilities

22. Spin-off tobacco-related businesses

Vote CASE-BY-CASE on proposals to spin off a tobacco-related unit, taking into account:

The percentage of the company's business affected The feasibility of a spin-off Potential future liabilities related to the company's tobacco business


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23. Investment in tobacco stocks

Vote AGAINST proposals prohibiting investment in tobacco equities. Such decisions are better left to portfolio managers.

24. Charitable and Political Issues

Generally vote FOR proposals asking the company to affirm political nonpartisanship in the workplace

Generally vote FOR proposals to report or publish in newspapers the company's political contributions. Federal and state laws restrict the amount of corporate contributions and include reporting requirements.

Vote AGAINST proposals disallowing the company from making political contributions. Businesses are affected by legislation at the federal, state, and local level and barring contributions can put the company at a competitive disadvantage.

Vote AGAINST proposals restricting the company from making charitable contributions. Charitable contributions are generally useful for assisting worthwhile causes and for creating goodwill in the community. In the absence of bad faith, self-dealing, or gross negligence, management should determine which contributions are in the best interests of the company

25. Link Executive Compensation to Social Performance

Vote CASE-BY-CASE on proposals to review ways of linking executive compensation to factors such as corporate downsizings, customer or employee satisfaction, community involvement, human rights, environmental performance, predatory lending, and executive/employee pay disparities. Such resolutions should be evaluated in the context of:

The relevance of the issue to be linked to pay Violations or complaints filed against the company relating to the

particular measure Artificial limits sought by the proposal, such as freezing or capping

executive pay Degree of independence of the compensation committee Current company pay levels Financial Performance of the company

26. Country-Specific Human Rights Reports

Generally vote FOR requests requesting reports outlining vendor standards compliance unless either:

The company does not operate in countries with significant human rights violations

The company has no recent human rights controversies or violations The company already publicly disclosed information on its vendor

standards compliance


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Generally vote FOR requests requesting reports detailing the company's operations in a particular country and steps to protect human rights, based on:

The nature and amount of company business in the country The company's workplace code of conduct Proprietary and confidential information involved Company compliance with U.S. regulations on investing in the country Level of peer company involvement in the country

27. MacBride Principles

Generally vote FOR proposals to endorse or increase activity on the MacBride Principles, taking into account:

Company compliance with or violations of the Fair Employment Act of 1989

Company antidiscrimination policies that already exceed the legal requirements

The cost and feasibility of adopting all nine principles The cost of duplicating efforts to follow two sets of standards (Fair

Employment and the MacBride Principles) The potential for charges of reverse discrimination The potential that any company sales or contracts in the rest of the United

Kingdom could be negatively impacted The level of the company's investment in Northern Ireland The number of company employees in Northern Ireland The degree that industry peers have adopted the MacBride Principles Applicable state and municipal laws that limit contracts with companies

that have not adopted the MacBride Principles.

27. International Codes of Conduct/Vendor Standards

Generally vote FOR proposals to implement certain human rights standards at company facilities or those of its suppliers and to commit to outside, independent monitoring. In evaluating these proposals, the following should be considered:

The company's current workplace code of conduct or adherence to other global standards and the degree they meet the standards promulgated by the proponent

Agreements with foreign suppliers to meet certain workplace standards Whether company and vendor facilities are monitored and how Company participation in fair labor organizations Type of business Proportion of business conducted overseas Countries of operation with known human rights abuses Whether the company has been recently involved in significant labor and

human rights controversies or violations Peer company standards and practices Union presence in company's international factories


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28. China Principles

Generally vote FOR proposals to implement the China Principles unless:

There are serious controversies surrounding the company's China operations, and

The company does not have a code of conduct with standards similar to those promulgated by the International Labor Organization (ILO).

.


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APPENDIX J: SECURITIES LITIGATION POLICY Adopted by the Board of Trustees, January 2003 The purpose of this document is to set forth the Board of Trustees’ policies with respect to securities litigation. SUMMARY The Board of Trustees believes that the most effective class action evaluation processes consists of three components: (1) initial identification of claims, (2) further, in-depth assessment of certain claims and (3) active participation in securities litigation, where warranted. The services of a claims monitor, claim evaluator and specialized securities litigation counsel will be supplied by third party providers through the procurement process.

1. CLAIMS MONITOR The Board of Trustees believes that the first element of an effective securities litigation evaluation process is to have a “claims monitor” promptly identify all pending class actions in which the Retirement System may be a class member and to make a preliminary calculation of the Retirement System’s losses in a given case. The claims monitor shall provide the following services to the Retirement System:

Identify all newly-filed class action suits in which the System may be a class member, and notify the OAG of same no less frequently than once a week;

Make a preliminary calculation of the System’s losses in each case;

The claims monitor shall notify the OAG of those cases where estimated losses for the System are $10 million or greater based on the class period proposed in the litigation;

Monitor pending class action suits in which the System may be eligible to be a class member and notify the OAG weekly of any changes to pending litigation, including: updates to the “class periods” (these start and end dates, which could effect the System’s potential losses, may change throughout the litigation), updates to case’s status (is the case still active, has it been settled or dismissed), or any new data regarding settlement, including settlement notices and disbursements of funds;

Provide a complete list of all CUSIP numbers (security ID numbers) and company names according to the System’s portfolio that are eligible to participate in each class action and updated when a settlement is pending;

Provide a weekly "Hot List" of upcoming claims filing deadlines;


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Provide timely, web based delivery of monitor’s findings and research; and

Offer OAG and Investment Division staff access to online securities litigation database, including all eligible CUSIPs, class periods, settlement dates, etc. Database should also include information regarding state and SEC settlements (disgorgements).

The roles and responsibilities of other parties involved in the claims monitoring process are as follows:

Custodial Bank: As the claims monitor will need access to several years of historical transactional data as well as current transactional data, State Street or any future custodian will be directed to provide the claims monitor with a data interface and access to necessary investment records (both current and historical), and to otherwise cooperate with the claims monitor.

OAG: Will be responsible for (a) procurement of claims monitor and oversight of claims monitor’s work, (b) referring cases exceeding the dollar threshold to the claim evaluator, and (c) providing updates to the Board.

Investment Division Staff: Will timely provide claims monitor with any requested information. Will assist OAG in providing claims monitor with any data required from custodial bank or investment managers.

2. CLAIMS EVALUATOR The Board believes that the second element of an effective securities litigation evaluation process is to have a “claim evaluator” promptly conduct an in-depth assessment of any case where the System’s potential damages are above the dollar threshold established by the Board of Trustees. In order to prevent bias, the claim evaluator will not be eligible to be considered for appointment as the System’s litigation counsel in the event that a decision is made to actively pursue litigation in a case. The claim evaluator will be expected to provide the following services to the Retirement System:

Assess and evaluate the known facts and the law applicable to the case;

Determine what other institutional investors are doing;

Review, refine estimate of System’s damages;

Where necessary and appropriate, review System’s investment records, interview Investment Division staff, external managers, others.

Provide a written, confidential report containing (a) summary of findings and (b) a recommendation as to the position the System should take in the litigation to the OAG, with copies to all members of the Board (distributed


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via the Board Secretary) and the Chief Investment Officer. The report will include a full explanation of reasons supporting recommendation, including, at a minimum, the following:

a. Whether the Retirement System’s potential damages are large enough to warrant the expenditure of staff/counsel time that would be required for active involvement in the case;

b. Whether other institutional investors are likely to become actively involved;

c. Whether the Retirement System’s involvement as lead plaintiff would add value to the potential settlement or help achieve a corporate governance goal or other policy goal of the Retirement System; and

d. Whether there are other exceptional circumstances warranting seeking appointment as lead plaintiff.

Be available, on an “as needed” basis, to confer with OAG, staff, Investment Committee and/or the Board of Trustees regarding findings and recommendations.

Where a decision is made to seek lead plaintiff status, assist OAG and System in arranging fees structure with litigation counsel.

The roles and responsibilities of other parties involved in the claim evaluation phase are as follows:

OAG: Shall procure the claim evaluator and oversee the claim evaluator’s work. Will timely provide claim evaluator with any requested information. After the claim evaluator’s report is received, the OAG will confer with the Investment Committee and the Board and a decision will be reached regarding the position the System should take in the litigation.

Investment Division staff: Will timely provide claim evaluator with any requested information. Will participate in interviews or meetings requested by claim evaluator. Will provide claim evaluator with any data required from custodial bank.

External managers: Will timely provide claim evaluator with any requested information. Will participate in interviews or meetings requested by claim evaluator.

Claims monitor: Will timely provide claim evaluator with any requested information. Will participate in interviews or meetings requested by claim evaluator.

Custodial bank: Will timely provide claim evaluator with any requested information.


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Investment Committee: Will review the claim evaluator’s reports and make recommendations to the Board of Trustees.

The Board of Trustees: Will receive and act on the Investment Committee’s recommendations.

Investment Committee and Board of Trustees: Because of the 60 day “time clock” for seeking appointment as lead plaintiff, the trustees recognize and understand that it may, from time to time, be necessary to conduct a telephone poll of the Investment Committee and/or the full Board of Trustees to act on the claim evaluator’s recommendations.

3. SECURITIES LITIGATION COUNSEL The Board believes that the third and last element of an effective securities litigation evaluation process is to have the ability to retain the services of specialized securities litigation counsel in the event that a decision is made to seek lead plaintiff status. Where a decision is made to seek lead plaintiff status or to otherwise commence litigation (e.g., an “opt-out” action special securities litigation counsel shall provide the following services on behalf of the System:

Diligently gather facts and assess laws applicable to the case;

Zealously represent the System and the plaintiff class at all stages of litigation;

Review System’s investment records, interview Investment Division staff, external managers, others;

If settlement is proposed, provide a written, confidential report containing (a) summary of findings and significant events in the litigation and (b) recommendation as to whether System should accept the proposed settlement to the OAG, with copies to all members of the Board (distributed via the Board Secretary) and the Chief Investment Officer. The report will include a full explanation of reasons supporting recommendation; and

Be responsive to, and available on an “as needed” basis to confer with, OAG, staff, Investment Committee and/or the Board of Trustees regarding status, findings, settlement proposals and recommendations.

The roles and responsibilities of other parties in the conduct of litigation are as follows:

OAG: Shall select through the procurement process, with input from the System, a panel of three qualified law firms which would be available to act as special securities litigation counsel on a contingency fee basis. Will be responsible for establishing, with input from the System, the fees payable to counsel, and overseeing special securities litigation counsel’s work. In keeping with its constitutional and statutory obligations, the


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OAG will give the System its independent evaluation of, and advice regarding, issues arising during the course of litigation. Will timely provide counsel and Board with any requested information.

Investment Division staff: Will timely provide counsel with any requested information. Will participate in interviews, meetings, depositions or other proceedings as requested by counsel. Will provide counsel with any data required from custodial bank.

External managers: Will timely provide counsel with any requested information. Will participate in interviews, meetings, depositions or other proceedings as requested by counsel.

Custodial Bank: Will timely provide counsel with any requested information.

Investment Committee and Board of Trustees: Will timely provide counsel with any requested information. Will participate in interviews, meetings, depositions or other proceedings as requested by counsel.

FILING OF CLAIMS

Upon the settlement or other resolution of class action or other securities litigation, the System’s custodial bank shall timely file all documents and take other steps necessary to insure that (a) the System’s interests are protected and (b) all monies due the System from such litigation are collected.


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APPENDIX K SECURITIES LENDING POLICY Originally adopted by the Board of Trustee in 1994. Securities Lending is the lending of a security held in safekeeping by the custodial bank or a third party and the simultaneous reinvestment of the proceeds. The System may enter into a securities lending program with its custodian bank and/or a third party lending agent only with the authorization of the Board of Trustees. The terms of the Securities Lending Authorization Agreements will be negotiated by the Executive Director and the Chief Investment Officer to ensure that the System will benefit, and that the System's investment policy is observed. Security lending will be limited to one or more recognized security-lending agents approved by the Board of Trustees. The Agent will indemnify the System against any borrower default loss. The System may require a higher credit quality for borrowers, and may also establish a maximum outstanding with any one borrower. All loans will have an initial margin of 102% for domestic securities and 105% for international securities. All loans will be marked to market daily. The System may recall any loaned security or restrict any un-lent security during the 15 days prior to record date for the purpose of voting proxies and has implemented this recall for U.S. equities and ADRs. The short term investment, money market or STIF used an investment vehicle for the cash collateral shall meet or exceed the requirements established by the System for minimum and average credit quality, maturity and diversity. Lending income profits and payment thereof are specified in the contract between the System and the lending agent.


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APPENDIX L: ECONOMICALLY TARGETED INVESTMENT POLICY Originally adopted by the Board of Trustees in 1994. A. POSITION PAPER ON TARGETED INVESTING OF ASSETS

The purpose of this paper is to establish and promulgate the position of the Board of Trustees regarding exercise of its fiduciary responsibilities with specific references to targeted investing.

1. BACKGROUND

Maryland code provides that the Board of Trustees shall be Trustees of the several funds created to provide benefits to participants. Trustees are granted full power to invest and reinvest such funds including full power to hold, purchase, sell, assign, transfer and dispose of any securities and investments. The fiduciary status of Trustees is firmly established by law.

As fiduciaries, Trustees are charged (§ 21-203) with a standard of care:

"A fiduciary shall discharge the fiduciary’s duties with respect to the several systems solely in the interest of the participant and beneficiaries and as follows:

a. For the exclusive purpose of providing benefits to participants and for reasonable expenses of administering the several Systems;

b. 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;

c. By diversifying the investments of the several systems so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so;

d. In accordance with the laws governing the several systems; and

e. In accordance with the, documents and instruments governing the several systems to the extent that the documents and instruments are consistent with the provisions of this subtitle.”

2. DEFINITION

An economically targeted investment (ETI) is an investment that is designed to yield a competitive market rate of return commensurate with the risk associated with the investment, and which simultaneously provides a collateral economic benefit for the State of Maryland, its political subdivisions, or Maryland residents.

3. POSITION STATEMENTS


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Trustees support the exclusivity clause incorporated in the Maryland code, to wit: "The Board of Trustees shall hold the assets of each of the several systems for the exclusive purpose of providing: (1) benefits to participants; and (2) for reasonable expenses of administration." (§ 21-202)

It is the position of the Trustees that investments which are designed to promote or further some objective or special interest other than the exclusive interest of participants and their beneficiaries shall be rejected.

Trustees recognize the magnitude of the accrued actuarial liability of the State Retirement and Pension System and the unfunded accrued liability flowing wherefrom. It is the position of the Trustees that SRPS investment programs shall continually seek maximum competitive returns within the bounds of reasonable risk in order to achieve a reduction in the unfunded accrued liability which will, in turn, lead to delivery of promised benefits.

Trustees are aware that cyclical movements of securities markets can result in opportunities either (1) to enhance investment performance or (2) to protect against potential capital erosion. It is the position of the Trustees to avoid investments whose ready liquidity is questionable lest the opportunity for risk control and management be impaired.

Trustees accept the concept that risk assumption is an integral part of any investment program and that in the long run a positive correlation exists between risk and return. It is the position of the Trustees that appropriate additional compensation on investments shall be offered whenever higher levels of risk are undertaken.

Trustees are cognizant of the desire by interested parties to allocate a portion of SRPS' assets for specific or targeted investment programs. It is the position of the Trustees that investments shall be evaluated, regardless of extrinsic factors, on the basis of:

The ETI must be designed to yield a competitive market rate of return, commensurate with the risk, so that the security, liquidity, yield and administrative costs are comparable with standard risk adjusted investment returns for the applicable asset classes;

The use of private and or government guarantees shall be utilized to insure against loss of principal on debt instruments and shall be a material factor the Board shall analyze before making a decision to invest in an ETI;

Collateral benefits to or for the target shall not be considered part of the return, nor shall any improvement to the economy be considered part of risk reduction. The decision to fund an ETI may occur only after the investment is deemed acceptable to the Fund exclusively on its economic investment merits;

For allocation purposes ETI's shall be categorized with similar


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investments that are free of the economically targeted elements, and the combined assets shall be subject to the Board's asset allocation parameters (e.g. ETI bonds included as part of the fixed income asset class, ETI stocks included as part of the equity asset class, and ETI real estate as part of the real estate asset class);

ETI's returns shall be quantifiable and measurable, valued at market, subject to performance measurement and analysis by SRPS staff on a monthly basis and reported to the Board as similar investments in the same asset class are currently;

Any collateral benefit an ETI may confer on the State of Maryland, its political subdivisions, or Maryland residents is not the responsibility or within the ability or control of the State Retirement and Pension System, but only of those who manage or are otherwise responsible for the target. This will be made clear to third parties and State Retirement and Pension System beneficiaries and participants;

Meeting the quality standards established by the Trustees; and,

Consistency with investment objectives of the SRPS funds.

Trustees totally reject investments which represent direct or indirect subsidies or concessions to governmental entities, businesses, groups, or individuals, such subsidies or public concessions represent indirect appropriations of public monies; fail to provide the necessary controls required by the direct legislative appropriation process; and over time, will produce earnings shortfalls which must be restored by the taxpayer or met by benefit adjustments.


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APPENDIX M: STAFF TRADING IN PUBLIC SECURITIES POLICY Policy Statement The Maryland State Retirement Agency employees shall not derive personal gain from knowledge of the occurrence and / or timing of future purchases or sales by the System.

A. Scope:

This policy applies to all Designated Employees of the Maryland State Retirement Agency.

B. Interpretive Authority & Exceptions to the Policy:

The Executive Director of the Maryland State Retirement Agency will be the interpretive authority for this policy and provide for exceptions to this policy.

C. Roles & Responsibilities:

The Executive Director has overall responsibility for the Maryland State Retirement Agency’s Staff Trading in Public Securities Policy. The Chief Investment Officer, or designee, has responsibility for oversight and management, including assuring compliance with reporting requirements. The Deputy Chief Investment Officer, or designee, has responsibility for designing, developing, implementing, administering, maintaining and monitoring the reporting requirements and related procedures to provide for compliance with the Agency policy. All Designated Employees have responsibility for compliance with policies and procedures.

D. General Policy

1. Personal gain based on knowledge of occurrence and timing of future purchases or sales by the System’s external managers is prohibited.

2. The use of Agency resources, such as computers, to place personal trades or to conduct other personal investment-related business is prohibited.

3. This policy shall be reviewed and revised if any portion of the System’s assets becomes managed internally by Investment Division staff.


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E. General Definitions:

1. The Restricted List is a list of companies for which trading of public securities by the System or by designated employees is limited.

2. Designated Employees are staff identified as key investment personnel with designated or expected routine access to information relating to future System purchases or sales.

a. Executive Director b. Chief Investment Officer c. Deputy Chief Investment Officer d. All Investment Division Staff e. All Investment Division Accounting Staff f. Other Agency employees as identified specifically by the

Deputy Chief Investment Officer

3. The Investment Disclosure Statement is the required reporting format of all designated employees, due within 45 days of the end of the semi-annual reporting period. This report is in addition to any other reporting requirements (i.e., the annual financial disclosures required by the Maryland State Ethics Commission).

4. Immediate Family includes the spouse, dependent children, other dependent relatives if living in the household and any other household member, whether or not related.

F. Procedures:

1. The Deputy Chief Investment Officer (DCIO), or designee, will compile and maintain a restricted list of securities which staff may not transact in for personal portfolios.

2. The restricted list shall include the names of any individual securities for which System staff has knowledge of current or future purchases or sales by external investment managers of the System. Securities held in the portfolios of external managers will not be considered restricted for purposes of this policy unless Agency Staff possesses confidential information regarding the timing of current or future security transactions by that manager.

3. Additions & deletions to the restricted list shall occur through the following process:

a. Each Investment Division staff member will be responsible for communicating immediately to the DCIO the individual securities - regarding which they have gained knowledge about future purchases or sales.


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b. The DCIO will periodically solicit Investment Division staff as to additions and deletions to the list.

4. The notification of a restricted list modification will be distributed

to all designated employees via email each time securities are added or deleted from the list.

5. Once designated employees have received the notification of a restricted list or modification and they plan to transact in any security during the time a restricted list exists, the designated employee will be responsible for obtaining a copy of the restricted list from the DCIO, or designee. Designated employees may not transact in any security on the restricted list until such time as they receive a notice from DCIO that the restricted list has been pulled. .

6. Any security, other than those on the list, shall be allowable for purchase or sale in personal portfolios.

7. It is anticipated that with the use of external investment managers, the restricted list may contain few or no securities since manager reporting of transactions and staff knowledge of those transactions typically occurs after the fact. An exception to this would be during periods of manager transitions.

G. Periodic Reporting & Investment Disclosure Statements

1. The DCIO or designee will maintain a list of designated employees who will be required to file Investment Disclosure Statements, and will be responsible for sending out disclosure statements semi-annually.

2. Designated employees (including the Chief Investment Officer) shall report to the DCIO on a semi-annual basis a list of all individual security purchases and sales, other than those securities specifically excluded under 6. below, for their personal portfolios or those of immediate family members as defined in this policy.

3. The Chief Investment Officer or designee will receive the investment disclosure statement of the DCIO.

4. Positive reporting is required by all designated employees. If there are no transactions during the period, this must be reported. The investment disclosure statements will be due within 45 days after the close of the reporting period.

5. The investment disclosure statements will require, but not be limited to, the following:

a. Trades during the period and trade dates


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b. Broker names

c. Individual security / company names

6. For purposes of this policy and reporting requirements, the following investments shall be excluded: (a) investments made for the employee’s account with the Maryland Supplemental Retirement System, (b) mutual funds, (c) certificates of deposits (CDs) and money market funds, (d) U.S. government bonds, and (e) exchange traded funds.

H. Accountability / Investigations / Enforcement

1. Accountability & disclosing compliance issues

a. Each designated employee is responsible for submitting an investment disclosure statement on a semi-annual basis by the due date.

b. All employees are responsible for reporting non-compliance, or knowledge thereof, immediately to the DCIO.

2. The DCIO is responsible for:

a. Monitoring investment disclosure statements, and

b. Referring to the CIO and Executive Director known situations of non-compliance that have been deemed to warrant further investigation.

3. Corrective action for non-compliance shall be determined by the DCIO in consultation with the CIO and Executive Director.

4. Employees violating this policy are subject to disciplinary action, up to and including termination of employment.

5. Record of corrective actions will be placed in employee personnel files.


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Required Supporting Documentation, Forms & Information:

Investment Disclosure Statement Designated Agency Positions List Required to Report

Staff Policy Acknowledgement for Designated Agency Positions General Questions should be addressed to:

Maryland State Retirement Agency Chief Investment Officer 16th Floor 120 East Baltimore Street Baltimore, Maryland 21202 410-625-5621


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APPENDIX N: PROCUREMENT POLICIES & PROCEDURES Adopted by the Board of Trustees July 2006. I. KEY SERVICE PROVIDER SELECTION POLICY

A. INVESTMENT MANAGERS and TRANSITION MANAGERS

The System’s Manager Selection Policy is part of Appendix B of the Investment Policy Manual. It was originally adopted by the Board of Trustees in 1994 and amended in 1999 and 2001. It applies to searches for public market investment managers and transition managers.

1. Staff creates a detailed request for information questionnaire (RFI) covering all pertinent quantitative and qualitative issues and determines screening criteria to be used in creating a list of potential candidates.

2. The RFI is sent to the System’s general investment consultant to review.

3. Staff creates a list of potential managers. This list may be compiled using one or more external data bases.

4. The System’s general investment consultant will be asked to send Staff the names of recommended managers who would qualify for the search. These will be added to the list compiled by Staff.

5. The System’s general investment consultant will also be asked to identify and recommend in writing to Staff, through their internal database and external research, emerging managers who would qualify for the search.

6. Before Staff mails the RFI, the System’s general investment consultant will review the entire list of prospective managers and identify those managers they believe would not be suitable, including reasons, in writing to Staff.

7. Staff will review responses to the RFI and eliminate those firms that are not likely to be hired based on the screening criteria.

8. Staff will conduct manager interviews, revise or reaffirm the screening criteria in light of the data gathered to use during the interview phase, and select finalists.

9. The System’s general investment consultant will provide a written report to staff opining on the finalists selected, and assessing and identifying emerging managers that should be included as finalists.

10. Staff will perform due diligence on all managers selected for finalist interviews, including on-site visits if necessary.

11. The System’s general investment consultant will perform due diligence on any manager selected for finalist interviews that is not well known to them. For emerging managers, the investment consultant will provide a written assessment of their business model, financial statements, and business plan.


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12. Finalists will be presented to Investment Committee, along with Staff’s recommendations and the System’s general investment consultant’s comments. Both Staff and the investment consultant will be available for comments and questions.

13. The Investment Committee will approve the hiring of none, one or more of the finalists and make a recommendation to the Board that the manager(s) be hired and that Staff be authorized to proceed with fee negotiations, contract negotiations, and funding.

14. An investment manager is a fiduciary appointed by the Board. Each investment manager is selected to meet specific investment objectives and/or performance standards. An investment manager has full discretion to prudently execute investment transactions on behalf of the Board in accordance with the Board’s approval of the delegation and guidelines.

B. INVESTMENT CONSULTANTS & CUSTODIANS

When searching for investment consultants and custodians, the Agency will normally follow the process for competitive sealed proposals and issue a Request for Proposals (RFP).

The RFP will contain several sections, including a description of the Offeror’s Minimum Qualifications, the Scope of Work, the Requirements for Proposal Preparation, the Evaluation and Selection Procedure, and the Mandatory Contractual Terms. There is a detailed questionnaire that includes the pertinent screening criteria to be used in determining the eventual Contractor. The Offeror’s answers to these questions will make up the bulk of the Technical Proposal. The RFP also includes a format to be used for the Financial Proposal, and several affidavits.

The RFPs for specialty investment consultants or custodians may be sent to the System’s general investment consultant for review. The System’s general investment consultant may also be asked to provide the names of potential contractors who would qualify for the search. Staff will also determine if there are any Maryland or qualified certified minority business enterprise vendors.

The RFP will be advertised in Pensions & Investments magazine and on the P&I website.

The Chief Investment Officer or designee will appoint a Procurement Officer and an Evaluation Committee for the RFP. The Procurement Officer will review the complete proposal package for completeness and to determine whether the Offerors meet the minimum qualifications. The Evaluation Committee will then review all qualified Technical Proposals and may interview and/or hold discussions with one or more Offerors. One or more members of the Evaluation Committee will conduct due diligence on the selected Offerors before finalists are selected. At this point the Financial Proposals may be opened and evaluated by


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the Evaluation Committee. The Procurement Officer may recommend that Best and Final Offers be requested from some or all of the Offerors.

The Procurement Officer and the Evaluation Committee will, if applicable, present at least two finalists to the Investment Committee with a recommendation and the rationale for the recommendation. The recommendation may include comments from the System’s general investment consultant.

The Investment Committee may recommend to the Board of Trustees that one or more of the finalists be hired and that staff be authorized to proceed with contract negotiations.

II. NON-KEY SERVICE PROVIDERS

A. PROXY VOTING SERVICES

When searching for proxy voting service providers, the Agency will normally follow a streamlined process that is similar to that used for investment consultants and custodians, but will use a Request for Information (RFI) instead of the RFP.

The RFI will be a detailed questionnaire that includes the pertinent screening criteria to be used in determining the eventual provider, and will request sample reports and analysis.

Staff creates a list of potential Offerors to whom the RFI will be sent. In the past, the RFI has been sent to all known providers. Sources of providers’ names include other public funds, news stories, and the Council of Institutional Investors. Staff will also determine if there are any Maryland or qualified certified minority business enterprise vendors.

A search committee will be created to review the responses to the RFI. The search committee will determine if interviews are necessary or advisable.

The search committee will present recommendations to the Corporate Governance Subcommittee. These recommendations will, in turn, be reviewed and approved by the Investment Committee and Board of Trustees.

B. QUANTITATIVE AND ANALYTICAL SERVICES; MARKET INFORMATION AND NEWS SERVICES; PROFESSIONAL JOURNALS; OTHER

Staff will contact other plan sponsors, the System’s investment consultants and external money managers and inquire which information services they use and what they like or dislike about them. The search committee for information services shall include a Managing Director.


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The search committee will look at the websites of the suggested vendors to determine who they are and what they do. The search committee will also determine if any are Maryland or qualified certified minority business enterprise vendors. The search committee will request materials from vendors that appear to best meet the desired qualifications.

The most qualified vendors will be asked to discuss their services with the search committee and demonstrate their products. Where possible, the most qualified will be asked to provide a free trial of at least 30 days.

After the trials are over, the search committee will select one or more vendors and review the selections with the Chief Investment Officer and Division’s Budget Officer. If all agree, the team will negotiate terms of the contract with the vendor(s).


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