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INVESTMENT ADVISORY AGREEMENT (5) ~ependence INVESTMENTS December 21, 2006 Finance Director City of Clearwater 100 So. Myrtle Avenue Box 4748 Clearwater, FL 33758-4748 Re: Investment Advisory Agreement dated as of December 21,2006 (the "Agreement") between the City of Clearwater Employees' Pension Fund and Independence Investments LLC ("Independence") Dear Sir/Madam: We would like to thank the Board of Trustees for recently awarding the small cap growth mandate of the City of Clearwater Employees' Pension Fund (the "Pension") to Independence. We hope to justify your confidence in us by meeting or exceeding your expectations in our management of this account. As noted below, we also wanted to set out our understanding of a few points we noted during our review of the Statement ofInvestment Objectives and Guidelines for the Pension. 1. We would like to clarify the following language on Page 16, Section (6) of the Statement of Investment Objectives and Guidelines for the Pension that states: "The Plan believes than an investment manager should not buy or hold a security for the Funds portfolio if the aggregate holdings among all of that manager's other accounts in that same security would restrict the manager's ability to expeditiously liquidate the position at any time". Since Independence does hold small cap securities from time to time where the aggregate holdings among all of our small cap accounts may restrict our ability to expeditiously liquidate a position, we would like you to acknowledge and authorize Independence's ability to liquidate such positions in a prudent and reasonable manner which may sometimes take several days or more. 2. We request approval to invest in (i) Exchange Traded Funds (ETFs) for purposes of cash management and (ii) shares of initial public offerings (IPOs), in each case, as appropriate. Please acknowledge affirmatively your agreement with the above by executing below. Sincerely, /WVl}- ~ Miriam F. Cooper Chief Operating Officer Finance Director City of Clearwater December 21, 2006 Page 2 ACCEPTED AND AGREED: BOARD OF TRUSTEES OF THE EMPLOYEES' PENSION PLAN OF THE CITY OF CLEARWATER, FLORIDA By:. ~ J<~ 'F'ra;(k V Hibbard, Chairperson ~ependence INVESTMENTS INVESTMENT ADVISORY AGREEMENT BETWEEN THE BOARD OF TRUSTEES OF THE CITY OF CLEARWATER EMPLOYEES' PENSION FUND AND INDEPENDENCE INVESTMENTS LLC THIS AGREEMENT, ~~, 2006, is made and entered into this dJ!!. day of by and between the BOARD OF TRUSTEES OF THE CITY OF CLEARWATER EMPLOYEES' PENSION FUND, an autonomous governmental body, hereinafter referred to as the "BOARD" and INDEPENDENCE INVESTMENTS LLC, hereinafter referred to as the "INVESTMENT ADVISOR": WITNESSETH: WHEREAS, Florida Statutes Chapter 112 vests the BOARD with full authority, power and responsibility to manage and administer the Pension Fund; and WHEREAS, the INVESTMENT ADVISOR has expressed an interest in managing the small-cap growth component of the Pension Fund and any additions thereto, including proceeds of sales, dividends and interest (hereinafter referred to as the "Account"); NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, the parties agree as follows: 1. APPOINTMENT OF THE INVESTMENT ADVISOR. The BOARD does hereby appoint the INVESTMENT ADVISOR as the manager for the f/1 Account. The INVESTMENT ADVISOR hereby accepts such appointment and agrees to manage the investment and reinvestment of assets -1- dedicated to the Account. The BOARD represents that it has the authority to so appoint the INVESTMENT ADVISOR to manage the Account and any investment guidelines furnished hereunder are and will be permissible investments for the Account. The BOARD further represents that the Account constitutes only a portion of the total assets of the Pension Fund and that any duty on the part of the INVESTMENT ADVISOR to diversify investments is limited by this fact and by the INVESTMENT ADVISOR's mandate to invest only in certain types of assets on behalf of the Account. The BOARD acknowledges that the portfolio strategies contemplated by this Agreement and the guidelines involve risks, including the possible loss of principal. 2. TERM. This Agreement shall commence upon the date set forth above and shall terminate as provided herein. 3. DISCRETION. The INVESTMENT ADVISOR hereby acknowledges and agrees that it has been provided with the statement of investment policy duly adopted by the BOARD in accordance with its authority under state law. Consistent with that policy and the investment guidelines set forth herein as Exhibit C, the INVESTMENT ADVISOR shall place orders for the purchase, sale, or exchange of securities on behalf of the Account whenever the INVESTMENT ADVISOR deems it to be in the best interest of the -2- Account to do so. In this connection, the INVESTMENT ADVISOR shall have investment discretion and shall have full power and authori ty on behalf of the Account to (i) make purchases and sales of securities or other property; (ii) exercise or abstain from exercising any option, warrant, privilege or right with respect to the assets in the Account; (iii) issue orders for, or make purchases or sales of, securities or other property directly to or with a broker, dealer or other person; (iv) in its discretion to vote all proxies with respect to the assets in the Account; and (v) take any other action reasonably deemed necessary by it in the carrying out of the investment authority or powers necessary to perform its investment advisory services and other duties and responsibilities as set forth in this Agreement; provided that the INVESTMENT ADVISOR shall have no authori ty or responsibility to take any action or provide any legal advice concerning legal action with respect to holdings of securities in the Account that become subject to any legal notices or proceedings, including securities class actions and bankruptcies, or for otherwise pursuing litigation on behalf of the Account or Pension Fund. The INVESTMENT ADVISOR shall diligently execute all transactions in securities in a method and manner and at such times as to procure best execution. The INVESTMENT ADVISOR further acknowledges that it has been provided with and -3- understands the Commission Recapture Program duly adopted by the BOARD, together with a list of recapture agents. Subject to its continuing duty to secure best execution on behalf of the Account, the INVESTMENT ADVISOR agrees to utilize the recapture agents in all transactions where it is reasonable to do so. In selecting brokers or dealers for execution, the INVESTMENT ADVISOR will consider a number of factors including, but not limited to, price (including commissions or mark-up), the size and difficulty of the order, the reliability, integrity and financial soundness of the broker or dealer, the general operation or execution capabilities of the broker or dealer, the broker or dealer's expertise in particular markets and the research services provided by the broker or dealer. The INVESTMENT ADVISOR may pay a broker or dealer a commission in excess of that which another broker or dealer might have charged for executing a transaction if the INVESTMENT ADVISOR determines, in good faith, that the commission is reasonable in relation to the value of the brokerage and/or research services provided by such broker or dealer. Research services obtained by brokers or dealers may be used in servicing all accounts managed by the INVESTMENT ADVISOR and its affiliates. The BOARD shall provide the INVESTMENT ADVISOR, on a timely basis, with all material necessary to permit the INVESTMENT ADVISOR to vote all proxies with respect to the assets in the Account. The initial proxy voting policy which the INVESTMENT -4- ADVISOR shall follow with respect to the assets in the Account is attached hereto as Exhibit A, and the INVESTMENT ADVISOR shall notify the BOARD from time to time of any changes in such policy. The BOARD may at any time notify the INVESTMENT ADVISOR in writing that the BOARD will assume full responsibility for voting all proxies with respect to the assets in the Account. Upon receipt of any such notification, the INVESTMENT ADVISOR shall have no responsibility with respect to the voting of proxies and shall be expressly precluded from voting proxies with respect to the assets in the Account. 4 . INVESTMENT GUIDELINES. The INVESTMENT ADVISOR agrees to observe (i) Section 2.399 of the Code of the City of Clearwater and (ii) the City of Clearwater Employees' Pension Fund Statement of Investment Obj ecti ves and Guidelines as set forth by the BOARD and as attached hereto as Exhibit C. Any changes in the guidelines must be in writing and shall make due allowance for the time needed by the INVESTMENT ADVISOR to come into compliance with such changed guidelines. In the event that the INVESTMENT ADVISOR should purchase any security in violation of this Agreement, and as a result of any sale thereof realizes a loss as measured by the ini tial purchase price of the security, the INVESTMENT ADVISOR shall make the BOARD whole for any such losses. -5- 5. COMPENSATION AND EXPENSES. The BOARD shall compensate from the Pension Fund the INVESTMENT ADVISOR for its services under this Agreement in such amounts and manner as the BOARD and the INVESTMENT ADVISOR shall agree to in writing from time to time. Such compensation shall be computed in accordance with the fee schedule attached hereto as Exhibit B. It is understood that the INVESTMENT ADVISOR shall be responsible and liable for all expenses incurred by it in performing its obligations hereunder, except that any brokerage commissions, stock transfers and other similar charges which may become due on account of transactions for the Account shall be payable from the Account hereunder. 6. DELIVERY OF SECURITIES. The INVESTMENT ADVISOR shall direct that all securities purchased for the Pension Fund be registered in the name of, and be delivered to, the Pension Fund and/or the Trustee, custodian or its nominee. 7. REPORTS. The INVESTMENT ADVISOR shall provide the BOARD with a monthly statement of the status of the Account. In addition, the INVESTMENT ADVISOR shall provide quarterly written reviews of the performance of the Account, presented in person to the BOARD when reasonably requested by the BOARD, and such other periodic reports or information as the BOARD may reasonably -6- request. All performance reports reported to the BOARD shall be gross of all fees and transaction costs and shall be time weighted. The written quarterly report shall outline the overall posi tion of the Account's portfolio with a complete listing of each security showing the cost and market value at the close of the reporting period. The report shall also include all portfolio transactions for the Account during the preceding quarter. All monthly reports shall include a listing of all trades, broker utilized and the cost of the trade. 8. NON-DISCRIMINATION. The INVESTMENT ADVISOR shall not discriminate in its emploYment practices during the term of this Agreement on the basis on race, creed, color, sex, age, physical handicap, marital status, or national origin. 9 . PROHIBITION AGAINST CONTINGENT FEES. The INVESTMENT ADVISOR warrants that it has not employed or retained any company or person, other than a bona fide employee working solely for the INVESTMENT ADVISOR, to solicit or secure this Agreement and that it has not paid or agreed to pay any person, company, corporation, individual, or firm other than a bona fide employee working solely for the INVESTMENT ADVISOR, any fee, commission, percentage, gift, or other consideration contingent upon or resulting from the award or making of this Agreement. -7- 10. DISCLOSURE. The INVESTMENT ADVISOR agrees to disclose, in writing to the BOARD, within 10 business days, if the INVESTMENT ADVISOR becomes the subject of an investigation by the Securities and Exchange Commission for alleged breach of federal securi ties laws; any investigation by the U. S. Department of Justice for allegations relating to violation of federal securities laws or related allegations of fraud; or if the INVESTMENT ADVISOR is named as the defendant in any civil action alleging fraud, negligence or breach of fiduciary responsibility. 11. ACTING FOR OTHER ACCOUNTS. The INVESTMENT ADVISOR may act and continue to act as an investment manager for others and nothing in the right this Agreement shall in any way be deemed to restrict of the INVESTMENT ADVISOR to perform investment management or other services for any other person or entity, and the performance of such services for others shall not be deemed to violate or give rise to any duty or obligation to the BOARD, Account or Pension Fund. Nothing in this Agreement shall limit or restrict the INVESTMENT ADVISOR or any of its officers, directors, members, managers, controlling persons, employees or affiliates from buying, selling or trading in any securities for its or their own account or accounts or for the accounts of other clients. The BOARD acknowledges that the INVESTMENT ADVISOR and its officers, -8- directors, members, managers, controlling persons, employees and affiliates, and its and their other clients may at any time have, acquire, increase, decrease or dispose of positions in investments which are at the same time being acquired or disposed of for the Account under this Agreement. The INVESTMENT ADVISOR shall have no obligation to acquire with respect to the Account a posi tion in any investment which the INVESTMENT ADVISOR, its officers, directors, members, managers, controlling persons, employees or affiliates may acquire for its or their own accounts or for the account of another client, if in the sole discretion of the INVESTMENT ADVISOR, it is not feasible or desirable to acquire a position in such investment under this Agreement. 12. CONFIDENTIAL INFORMATION. Any information supplied by INVESTMENT ADVISOR, which is not otherwise in the public domain, in connection with the performance of its duties hereunder is to be regarded as confidential, provided that such information may be disclosed as required by law, rule or regulation or by order of a court or governmental authority. 13 . GENERAL . (a) The INVESTMENT ADVISOR warrants that it is registered as an investment advisor under the Investment Advisers Act of 1940, and that it will maintain such registration during the term of this Agreement. The INVESTMENT ADVISOR acknowledges that it -9- is a fiduciary 'wi th respect to the management of the assets of the Account and that it is subject to and shall be governed by the "prudent man rule," and the "prudent investor rule" as those terms are defined and interpreted under the provisions of the Employee Retirement Income Security Act and under the provisions of the law of Florida. (b) This Agreement may be terminated by either the INVESTMENT ADVISOR or the BOARD, on thirty (30) days I prior written notice, with or without cause. Within 30 days of the termination of this Agreement by either party, the INVESTMENT ADVISOR shall be paid any accrued but unpaid fees as of the date such termination. (c) No assignment of this Agreement shall be made by either party without the consent of the other party, and any attempted assignment without such consent shall be void. with respect to the INVESTMENT ADVISOR, the term "assignment" shall be construed in accordance with the provisions of the Investment Advisers Act of 1940 and the rules and regulations thereunder. (d) The INVESTMENT ADVISOR acknowledges that it is fully familiar with (i) the laws of the State of Florida governing public employee retirement systems (Chapter 112, Part VII) and (ii) Section 2.399 of the Code of the City of Clearwater, in each case, relating specifically to the management of this Pension Fund. The Agreement shall be performed in accordance with all -10- applicable federal, state, and local laws and administrative regulations and shall in its interpretation be governed by the laws of the State of Florida. (e) In any action to enforce the provisions of this Agreement venue shall be in pinellas County, Florida. Should any action be necessary to enforce the terms of this Agreement, the prevailing party shall be made whole, including any reasonable costs and legal fees. (f) The BOARD agrees to furnish the INVESTMENT ADVISOR with all documents, authorizations and powers as might be reasonably required by the INVESTMENT ADVISOR to carry out its obligations according to the terms of this Agreement. (g) The BOARD hereby acknowledges receipt of Part II of the INVESTMENT ADVISOR's Form ADV at least 48 hours prior to execution of this Agreement. The INVESTMENT ADVISOR shall, on an annual basis, provide the BOARD with a current copy of its Form ADV. (h) The INVESTMENT ADVISOR shall for the term of this Agreement maintain an errors and omissions insurance policy in the amount of one million dollars. The INVESTMENT ADVISOR shall furnish the BOARD with proof of its errors and omissions insurance. The Board will maintain a fidelity bond satisfying the requirements of Section 412 of ERISA and shall include the INVESTMENT ADVISOR as its agent in its coverage. -11- (i) The INVESTMENT ADVISOR will forward from time to time to the BOARD or its agents a list and specimen signatures of the parties who are authorized to act on its behalf. The BOARD and, if necessary, the trustee and/or the custodian of the Pension Fund will forward to the INVESTMENT ADVISOR a like list and specimen signatures. (j) The INVESTMENT ADVISOR will promptly inform the BOARD if any portfolio manager or other key personnel assigned by the INVESTMENT ADVISOR to performance under this Agreement is removed by the INVESTMENT ADVISOR. (k) In the event of a dispute between the parties, the parties may by mutual consent agree to submi t the matter to binding arbitration. (1) This Agreement constitutes the entire understanding of the BOARD and the INVESTMENT ADVISOR and may be amended only by written instrument executed by both parties. (m) Notices hereunder shall be in writing and shall be sent by first class mail, postage prepaid, by facsimile, or delivered by hand or by courier service, addressed as follows: A. To the BOARD: Board of Trustees of the Employees' Pension plan of the City of Clearwater, Florida 100 So. Myrtle Avenue Box 4748 Clearwater, Florida 33758-4748 -12- B. To the INVESTMENT ADVISOR: Independence Investments LLC 160 Federal Street Boston, MA 02110 Attention: Mark C. Lapman, President IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first above written. Attested: BOARD OF TRUSTEES OF THE EMPLOYEES' PENSION PLAN OF THE CITY OF CLEARWATER, FLORIDA ~ By: ~r~ ~k V. Hibbard ' Chairperson Attest: INDEPENDENCE INVESTMENTS By: ~+ ~ Miriam F. Cooper Chief Operating Officer -13- EXHIBIT A Independence Investments LLC Proxy Voting Policy and Procedures At Independence we recognize that many decisions regarding proxy voting may affect the value of a client's account, and, therefore, should be resolved based on in-depth analysis and careful consideration. The following proxy voting policy sets forth both our principles and our process for voting proxies on securities held in client accounts where Independence has discretion to vote the proxies. I. General Principles In order to set a framework within which proxy questions should be considered and voted, the following general principles should be applied: 1) As a fiduciary under ERISA or otherwise, the discretion to vote proxies for a client's account should be exercised keeping in mind a fiduciary's duty to use its best efforts to preserve or enhance the value of the client's account. We should vote on proxy questions with the goal of fostering the interests of the client (or the participants and beneficiaries in the case of an ERISA account) . 2) Proxy questions should be considered within the individual circumstances of the issuer. It is possible that individual circumstances might mean that a given proxy question could be voted differently than what is generally done in other cases. 3) If a proxy question clearly has the capability of affecting the economic value of the issuer's stock, the question should be voted in a way that attempts to preserve, or give the opportunity for enhancement of, the stock's economic value. 4) In certain circumstances, even though a proposal might appear to be beneficial or detrimental in the short term, our analysis will conclude that over the long term greater value may be realized by voting in a different manner. 5) It is our general policy that when we are given authority to vote proxies for a client's account, we must be authorized to vote all proxies for the account in our discretion. We do not generally accept partial voting authority nor do we -14- generally accept instructions from clients on how to vote on specific issues, except in the case of registered investment companies and, in limited instances, certain clients such as labor unions may direct us to vote proxies in accordance with a specific set of guidelines or recommendations appropriate to their circumstances, in which case we will not have voting discretion but will vote in accordance with the client's direction. Other clients may wish to retain proxy voting authority and vote their own proxies if necessary in order to satisfy their individual social, environmental or other goals. We maintain a set of proxy voting guidelines that describe in greater detail how we generally vote specific issues for our clients. While it is not an exhaustive list, it is intended to serve as the foundation on which we make most of our proxy voting decisions. The guidelines are available to clients upon request. We will from time to time review this proxy voting policy and our guidelines and may adopt changes from time to time. Clients may contact the Compliance Office by calling 617-228-8603 or via e- mail at compliance@independence. com for a copy of our current guidelines or to obtain a record of how we voted the proxies for their account. II. Process At Independence, the fundamental analysts are responsible for performing research on the companies in which we invest. The same analysts are generally responsible for decisions regarding proxy voting, as they are the most familiar with company-specific issues. Portfolio managers also provide input when appropriate. We currently use Glass Lewis & Co. ("Glass Lewis") to monitor and complete the proxy voting process for our equity portfolio holdings. Glass Lewis is responsible for ascertaining that proxies are received, voted and sent back on a timely basis, as well as maintaining all of the proxy voting records with respect to our clients' holdings. Each day we send Glass Lewis our complete list of portfolio holdings. Glass Lewis notifies us of shareholder meetings and provides us with an electronic platform on which to vote the proxies. Glass Lewis also provides us with recommendations for voting, based on criteria that we have approved. Our analysts will consider Glass Lewis's recommendations, but voting will be based upon our own analysis. Our analysts direct the manner in which proxies are to be voted, and Glass Lewis completes the voting process. III. Limitations on Exercising Right to Vote -15- We may abstain from voting a client proxy if we conclude that the effect on the client's economic interests or the value of the portfolio holding is indeterminable or insignificant. We may also abstain from voting a client proxy for cost reasons (e.g., costs associated with voting proxies of non-U.S. securities). In accordance with our fiduciary duties, we weigh the costs and benefits of voting proxy proposals relating to foreign securities and make an informed decision with respect to whether voting a given proxy proposal is prudent. Our decision takes into account the effect that the vote of our client, either by itself or together with other votes, is expected to have on the value of our client's investment and whether this expected effect would outweigh the cost of voting. Certain of our clients engage in securities lending programs under which shares of an issuer could be on loan while that issuer is conducting a proxy solicitation. As part of the securities lending program, if the securities are on loan at the record date, the client lending the security cannot vote that proxy. Because we generally are not aware of when a security may be on loan, we do not have an opportunity to recall the security prior to the record date. Therefore, in most cases, those shares will not be voted and we may not be able fully to reconcile the securities held at record date with the securities actually voted. IV. Conflicts of Interest We manage the assets of various public and private company clients, and invest in the equity securities of certain public companies on behalf of our clients). We recognize that the potential for conflicts of interest could arise in situations where we have discretion to vote client proxies and where we have material business relationships~ or material personal/family relationshipsl ! It is Independence's general policy not to invest in private securities such as Rule 144A securities. If a portfolio were to hold a private security, however, and a proxy needed to be voted, we would vote in accordance with our established proxy voting policy including our process for voting securities where a conflict of interest was present. ~ For purposes of this proxy voting policy, a "material business relationship" is considered to arise in the event a client has contributed more than 5% of Independence's annual revenues for the most recent fiscal year or is reasonably expected to contribute this amount for the current fiscal year. 1 For purposes of this proxy voting policy, a "material personal/family relationship" is one that would be reasonably likely to influence how we vote proxies. To identify any such relationships, the Proxy Voting Committee will obtain information on a regular basis about (i) personal and/or family relationships between any Independence employee who is involved in the proxy voting process (e.g., analyst, portfolio manager, and/or members of the Proxy Voting Committee, as applicable) or senior executives, and directors or senior executives of issuers for which the adviser may vote proxies, and (ii) personal and/or immediate family investments of such employees in issuers which exceed 5% of the outstanding stock of the issuers. -16- with these issuers (or with a potential target or acquirer, in the case of proxy vote in connection with a takeover). To address these potential conflicts we have established a Proxy Voting Commi ttee (the "Commi ttee") . The Committee consists of the Chief Operating Officer, the Director of Research and the members of the Compliance Office. The Committee will use reasonable efforts to determine whether a potential conflict may exist, including maintaining a list of clients with whom we have a material business relationship, and requiring analysts to screen the proxies identified by Glass Lewis against such list and to bring such conflicts, and any other conflicts of which they are aware, to the attention of the Committee. However, a potential conflict shall be deemed to exist only if one or more of the members of the Committee, or the analyst responsible for voting the proxy, actually knows of the potential conflict. The Committee will work with the analyst assigned to the specific security to oversee the proxy voting process for securities where we believe we may have potential conflicts. The Committee will meet to decide how to vote the proxy of any security with respect to which we have identified a potential conflict. The Committee will consider the analyst's recommendation, make a decision on how to vote the proxy and document the Committee's rationale for its decision. Independence is an indirect majority owned subsidiary of City National Corporation ("CNC"), a public company. It is our general policy not to acquire or hold CNC stock on behalf of our clients. However, in the event that a client were to hold CNC stock in a portfolio which we manage, and we were responsible for voting a CNC proxy on behalf of the client, the Committee would decide on how to vote the CNC proxy. The Committee would, in most cases, base its proxy voting decision according to the guidance provided by Glass Lewis. The Committee will document the rationale for its decision. It is Independence's policy not to accept any input from any other person or entity, including its affiliates when voting proxies for any security. In the event that an Independence employee was contacted by any affiliate, or any other person or entity, other than Glass Lewis or through standard materials available to all shareholders, with a recommendation on how to vote a specific proxy, the event would be reported to the Compliance Office and would be documented. The Committee would then decide how to vote the proxy in question and would document the rationale for its decision. If there is controversy or uncertainty about how any particular proxy question should be voted, or if an analyst or a Committee member believes that he or she has been pressured to vote in a certain way, he or she will consult with the Committee or with a -17- member of the Compliance Office, and a decision will be made whether to refer the proxy to the Committee for voting. Final decisions on proxy voting will ultimately be made with the goal of enhancing the value of our clients' investments. Adopted 10/06 -18- EXHIBIT B The Investment Management Agreement between the BOARD OF TRUSTEES OF THE CITY OF CLEARWATER EMPLOYEES' PENSION FUND (lithe Board II ) and Independence Investments LLC (the "Investment Advisor") provides that the Board shall compensate from the Pension Fund the Investment Advisor for its services under this Agreement in such amounts and manner as the Board and the Investment Advisor shall agree to in writing from time to time. It is hereby agreed that fees will be payable to the Investment Advisor at the completion of each calendar quarter, cormnencing with the partial quarter ending 3/J IllJl Such fees will be one-quarter of the "Annual Fee Rate" computed on the market value of the Account as determined by the Investment Advisor as of the end of each quarter for which such fee is paid, using an average of the end of month values for the three months comprising the quarter (or a pro-rated portion for a period of time less than a calendar quarter). The "Annual Fee Rate" will be 0.85% on the first $25 million of assets in the Account, and 0.75% on assets greater than $25 million but less than $100 million and 0.65% on assets greater than $100 million. This agreement will remain in effect until otherwise agreed upon in writing. INDEPENDENCE INVESTMENTS LLC By: ~~~ Miriam F. Cooper Chief Operating Officer .j)tt. Q I 9-d{)(P / Date: BOARD OF TRUSTEES OF THE EMPLOYEES' PENSION PLAN OF THE CITY OF CLEARWATER, FLORIDA By: ~,.~,: ~ Frarik V. Hibbard '. --.>----'--.:.: Chairperson -< - :~;-- -' " _/ '. - Attest: -i"'- .... _ .... A. Kaufman n Attorney - -.. ... -" .I' ... , ~ -19- " ..........'" EXHffiIT C STATEMENT OF INVESTMENT OBJECTIVES AND GUIDELINES CITY OF CLEARWATER EMPLOYEES' PENSION FUND 2004 PURPOSE The purpose of this Statement of Investment Objectives and Guidelines hereinafter referred to as the "Policy Statement" or "Policy" is to assist the City of Clearwater Employees" Pension Fund (hereafter referred to as the Fund) in more effectively supervising and monitoring the investment of the Fund's assets. In the various sections of this policy document, the Fund defines its investment program by: . stating in a written document the Fund's attitudes, expectations and objectives in the investment of Fund assets. . setting forth an investment "structure" for managing assets. This structure includes various asset classes and investment management styles that, in aggregate, are expected to produce a prudent level of diversification and investment return over time. . providing guidelines for each investment portfolio that control the level of risk assumed in the portfolio and ensure that assets are managed in accordance with stated objectives. . encouraging criteria to monitor and evaluate the performance results achieved by the investment managers. This Statement represents the Fund's current philosophy regarding the investment of Fund assets. In addition, although the Fund shall utilize this Policy Statement in making decisions concerning the Fund, it shall not necessarily be bound solely by its contents. PRUDENCE AND ETHICAL STANDARDS The standard of prudence to be applied by the trustees shall be the "Prudent Person" rule, which states: "Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income derived." The "Prudent Person" rule shall be applied in the context of managing the overall portfolio. The trustees shall also be governed by the fiduciary standard set forth in the Employee Retirement Income Security Act of 1974 at 29D.S.C. s. 1104 (a) (1) (A) - (C). 1 In the event of a conflict between the Policy and Florida Statutes or City ordinances, the .statutes and ordinances shall prevail. Funding Philosophy The Fund's funding objectives for the Fund is to be as fully funded as possible so that: . the ability to pay all benefits and expense obligations from the Fund when due is ensured; . there will be no principal erosion of contributed funds or the purchasing power thereof. . a "funding cushion" is maintained within the Fund for unexpected developments and for possible future increases in benefit structure and expense levels; . the Fund assets should earn sufficient total rate of return over time to reduce the Fund's dependency on employer contributions to meet all benefit and expense obligations. Investment results within the Fund are considered to be the major critical element in achieving these funding objectives stated above while reliance on contributions is a secondary element. Liquidity Posture The Investment Portfolio shall be structured in such a manner as to provide sufficient liquidity to pay obligations as they come due. Liquidity considerations are low in the short-term and intermediate-term resulting in an immaterial impact upon investment policy, objectives and guidelines. Authorized Investments The following is a list of authorized investments: . Invest and reinvest the assets of the pension fund in annuity (including group annuity contracts of the pension investment type) and life insurance contracts of legal reserve life insurance companies licensed to do business in the State of Florida, in amounts sufficient to provide, in whole or in part, benefits to which all of the participants shall be or become entitled under the provisions of the Fund, and pay the initial and subsequent premiums thereon. Provided that the amount invested with a life insurance company shall not exceed 3% of the insurance companies assets. 2 . Invest and reinvest the assets of the pension fund in: a. Time deposits, savings accounts, money market accounts, funds, certificates of deposits, or money market certificates of a national bank, a state bank, or a savings, building and loan association insured by the Federal Government or any agency thereof or collateralized by United States Government Agency securities. b. Negotiable direct obligations of, or obligations the principal and interest of which are unconditionally guaranteed by, and which carry the full faith and credit of the United States Government and its agencies. Investments in this category would include but not be limited to the following: United States Treasury Bills, Notes and Bonds, and securities issued by the Small Business Administration, Government National Mortgage Association (Ginnie Mae), Veterans Administration, and Federal Housing Administration. c. Fully collateralized United States Agency obligations which carry an implied guarantee and the implied full faith and credit of the United States government. Investments in this category would include but not be limited to the following: obligations of the Federal Home Loan Banks System (FHLB) or its distinct banks and Financing Corporation (FICO). d. Other United States Agency obligations which carry an implied guarantee (Government Sponsored Entities) and the implied full faith and credit of the United States Government. Investments in this category would include but not be limited to the following: obligations of the Federal Farm Credit Bank, Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), Student Loan Marketing Association (Sallie Mae), Financial Assistance Corporation and Federal Agriculture Mortgage Corporation (Farmer Mac). e. Collateralized Mortgage Obligations (CMO) and/or Real Estate Mortgage Investment Conduits (REMIC), rated investment grade or equivalent by Standard and Poor's, Moody's Fitch, or other recognized national rating agencies which are backed by securities otherwise authorized in this ordinance and which are guaranteed as to the timely payment of principal and interest by the U.S. Government or its agencies. f. County bonds {that containing a pledge of the full faith and credit of the county involved, bonds of the Florida Development Commission, or of any other state agency, which have been approved as to legal and fiscal sufficiency by the state board of administration. g. Obligations of any municipal authority issued pursuant to the laws of this state; provided, however, that for each of the five years next preceding the date of investment, the income of such authority available for fixed charges shall have been not less than one and one-half times its average annual fixed charge requirements over the life of its obligations. The bonds of the municipal authority shall be rated in any of the three highest rated categories by either of the three nationally recognized rating services; provided that 3 if the bonds are split rated that the bond must be rated in one of the two ~ghest classifications by one of the firms. (Ul I h. Common stocks, preferred stocks and bonds and other evidence of indebtedness issued or guaranteed by a corporation organized under the laws of the United States, any state, or organized territory of the United States or the District of Columbia or any non-U.S. corporation, provided: 1. The corporation is listed on anyone or more of the recognized national or international stock exchanges and/or in the case of bonds and mortgage backed securities, traded among dealers and investors in a recognized and agreed upon conventional format; 2. All corporate bonds shall carry an investment grade rating as established either by Standard & Poor's, Moody's, Fitch or other recognized rating agencies; and 3. Not more than three (3) percent of the equity assets of the pension fund shall be invested in the common stock or capital stock of anyone issuing corporation except to the extent a higher percentage of the same issue is included in a nationally recognized market index, based on market values, at least as broad as the Standard and Poor's Composite Index of 500 Companies, or except upon a specific finding by the investment committee that such higher percentage is in the best interest of the fund; nor shall the non-U.S. investments exceed ten percent of the pension fund's assets at cost; nor shall the aggregate of the investments under this subparagraph at cost exceed sixty-five percent of the pension fund's assets at cost. Investments not listed above in this section are prohibited. Bid Requirements All securities shall be competitively bid where feasible and appropriate. Except as otherwise required by law, the most economically advantageous bid must be selected. Executions must be made on a best-execution basis. llliquid Investments The Fund will not invest in illiquid investments. llliquid investments being defined as an investment for which there is no generally recognized market or generally accepted pricing mechanism. Once an investment becomes illiquid the money manager will notify the plan of the illiquid investment. Included in that notification will be how the money manager will handle the illiquid investment. Investment Management Structure 4 The Fund has reviewed the investment program for the City of Clearwater Employees' Pension Fund. The result of the review is an updated, long-term strategic asset allocation Fund. Initially, four distinct asset classes were considered for inclusion in the portfolio: Domestic Equities Internationa1/Non US Equities Domestic Fixed Income Cash After a thorough review, a permanent commitment to these four asset classes will be made to ensure diversification at the Fund level. The Fund may consider investments in other asset classes which offer potential enhancement to total return at risks no greater than the exposures under the initially selected asset classes. It is not the intention of the Fund to become involved in day-to-day investment decisions. Therefore, the assets will be allocated to professional investment managers in a manner consistent with the Policy's objectives. Each asset class will have its own investment managers. Diversification of the U.S. Market Equity commitment will be achieved through the employment of managers of complementary investment styles, Growth and Value. In the U.S. Fixed Income market a core bond managers will be utilized to stabilize the fund. In the International Equity market a diversified non-U.S. managers will be hired and achieve diversification. Cash and cash equivalents will be managed either by the Investment Managers or the custodian. In addition the City uses the pooling concept to meet the immediate cash needs of the city and to maximize the interest earnings. All cash placed in the City's pooled cash account shall be separately accounted for and listed as an asset of the Fund. The Fund will keep sufficient funds in the City's pooled cash account to meet the current obligations of the Fund. The guidelines for the allocation of assets, at cost, to investment managers are as follows: Lower Limit Upper Limit Cost or Market U.S. Market Equities 40% 65% Cost Growth 10% 40% Cost Value 10% 40% Cost Fixed Income 30% 50.0% Cost International Equity 5.0% 10.0% Cost Because the asset classes do not move in concert, deviations from the normal commitments will occur through normal market activity. The Upper and Lower Limits define the ranges within which market activity will be allowed to shift the allocations. The ranges are designed to allow for a reasonable period of time to elapse before rebalancing the portfolio. When the investments are out of policy the assets will be moved from the over-allocated to the under-allocated in a prudent manor. 5 When in market equilibrium, cash flows will be deployed in a manner that returns the portfolio to its normal commitments. Internal Controls As part of the city's annual financial audit the external CPA firm will review the internal controls of the Fund. The hiring or termination of all money managers, consultants or safekeeping custodians must be made by the trustees. No individual associated with the Fund may authorize any movement of monies or securities with out the approval of the trustees, if required, or by the approval of the Pension Investment Committee if trustee approval is not required. An instance not requiring trustee approval is rebalancing the portfolio. Internal controls will be designed to prevent losses of funds which might arise from fraud, error, and misrepresentation by third parties or imprudent actions by the trustees or city employees. Makeup of The Investment Committee The Pension Investment Committee shall be made up (at a minimum) of the following: Finance Director (Treasurer for the Trustees), Assistant Finance Director, and the Cash & Investments Manager. The Treasurer for the Trustees shall appoint/remove other Finance professionals as needs warrant. One representative for each of the unions will also serve on the Investment Committee. The Financial Director or their designee will chair the committee. The City Treasurer will make a recommendation to the Trustees as to any changes in the makeup of the committee. Continuing Education The annual budget for the pension Fund will include sufficient funding for the trustees and members of the Pension Investment Committee to participate in pension education opportunities. These educational opportunities will include education on the individual's duties and responsibilities as well as investments in general. The chief investment officer will complete no less than 8 hours of continuing educational opportunities on pension investments each fiscal year. Investment Return Objectives In formulating investment return objectives for the Fund objectives for the Fund assets, the Fund placed primary emphasis on the following goals: . Achieve investment performance that exceeds the rate of inflation over time thereby providing a real rate of return. . Achieve investment results of at least the actuarial rate of return. 6 . Achieve investment performance that is materially above average when compared to: Other investment managers Other investment manager peers of related investment style Other public retirement plans Several capital market indices For each actual valuation the Trustees will determine the expected rate of return of the current year, next several years and the long term. Based upon the above and the following the expected annual rate of return for the current year is 7.5%. The expected rate of return for the foreseeable future is also 7.5%. 1. Total Fund Return Objectives The following minimum comparative objectives have been established for the total Fund: . The total fund should rank in the upper fiftieth (50th) percentile compared to a recognized performance measure company's total public plan sponsor database measured over a minimum period of three (3) or maximum five (5) years. . The Fund's overall annualized total return should perform at least at the upper fiftieth (50th) percentile compared to investment style peers of similar type as found in recognized performance measure company's style database for each asset class segment. . The Fund's overall annualized total return (which is defined as all price changes plus all income and/or dividends) should exceed the actuarial assumption over a rolling three Q) or maximum of five (5) year period. . The Fund's overall annualized total return should exceed the returns that would have collectively been achieved if the Fund had been fully invested in the appropriate percentage of : Standard & Poor's 500 Stock Index Lehman Brothers Aggregate Bond Index Morgan Stanley Capital International EAFE Index This is a custom benchmark that will be calculated relative to the actual collective asset class mix of the Fund measured over a minimum of three (3) or maximum of five (5) years. 7 2. Equity Segment Return Objectives A. The following minimum performance goals have been established for the Fund's domestic equity segment: . The domestic equity segment total return should perform at least at the upper fiftieth (50th) percentile compared to a recognized performance measurement company's total U.S. equity database measured over a minimum period of three (3) or maximum of (5) years. . The individual domestic equity managers total return should perform at least at the upper fifth (50th) percentile compared to investment style peers of similar type as found in a recognized performance measure company's total U.S. equity database measured over a minimum period of three (3) or maximum of (5) years. . The total domestic equity segment total return should exceed the total return of the Standard & Poor's 500 Stock Index by at least one (1) percentage point per year measured over a minimum period of three (3) or maximum of (5) years. b. The following minimum performance goals have been established for the Fund's international equity segment: . The international equity segment total return should perform at least at the upper fiftieth (50th) percentile compared to recognized performance measure company's total non U.S. equity database measured over a minimum period of three (3) or maximum of (5) years. . The individual international equity managers total return should perform at least at the upper fiftieth (50th) percentile compared to the investment style peers of similar type as found in a recognized performance measure company's total non U.S. equity database measured over a minimum period of three (3) or maximum of (5) years. . The international equity segment total return should exceed the total return of the Morgan Stanley Capital International Europe, Australia, 8 Far East Index (EAFE) by at least two (2) percentage points per year over a minimum of three (3) or maximum of (5) years. 3. Fixed Income Segment Return Objectives A. The following minimum performance goals have been established for the Fund's domestic fixed-income segment: · The domestic fixed-income segment total return should perform at least at the upper fiftieth (50th) percentile compared to the recognized performance measure company's total domestic fixed income database measured over a minimum period of three (3) or maximum of (5) years. · The individual domestic fixed income managers total return should perform at least at the upper fiftieth (50th) percentile compared to investment style peers of similar type as found in a recognized performance measure company's total domestic fixed income database measured over a minimum period of three (3) or maximum of (5) years. · The domestic fixed income segment total returns should exceed the total return of the Lehman Brothers Aggregate Bond Index by at least one-half (.5) percentage point per year measured over a minimum period of three (3) or maximum of (5) years. 4. Responsibilities of the Third Party Custodian A third party custodian will hold all Fund assets other than commingled accounts. In order to maximize the Fund's return, no money should be allowed to remain idle. Dividends, interest, proceeds from sales, new contributions and all other monies are to be invested or reinvested promptly. If funds are not reinvested, then they will be placed in money market instruments or a money market fund immediately by the designated cash manager working in concert with the custodian. The custodian will be responsible for performing the following functions: . Accept daily instructions from the investment managers; . Advise investment managers daily of changes in cash equivalent balances; 9 . Immediately advise investment managers of additions or withdrawals from account; · Notify investment managers of tenders, rights, fractional shares or other dispositions of holdings; . Resolve any problems that investment managers may have relating to custodial account; · Safekeeping of securities; · Interest and dividend collection; · Daily cash sweep of idle principal and income cash balance; · Process all investment manager transactions on a delivery vs. payment basis; · Collect proceeds from maturing securities; · Provide monthly statements by investment manager account; · All securities purchased by the Fund shall be properly designated as an asset of the Fund; · No withdrawal of securities, in whole or in part shall be made except by an authorized member of the committee or the committee's designee. RESPONSIBILITIES OF INVESTMENT MANAGERS The duties and responsibilities of each of the registered investment advisors retained by the Fund include: 1. Managing the assets under its management in accordance with the policy guidelines and objectives expressed herein, or expressed in a separate written agreement when deviation is deemed prudent and desirable. 2. Exercising full investment discretion within the guidelines and objectives stated herein. Such discretion includes decisions to buy, hold or sell securities in amounts and proportions reflective of the manager's current investment strategy and compatible with investment objectives. 10 3. Promptly informing the Fund regarding all significant matters pertaining to the investment of the fund assets, for example: . changes in investment strategy, portfolio structure and market value of managed assets; . the manager's progress in meeting the investment objectives set forth in this document; and · significant changes in the ownership, affiliations, organizational structure, financial condition, professional personnel staffing and clientele of the investment management organizations. 4. No deviation from guidelines and objectives established in the Statement should occur until after such communication has occurred and the Fund has approved such deviation in writing. 5. The Fund formally delegates full authority to each investment manager for exercising all proxy and related actions of the Fund's investment assets assigned to it. Each manager shall promptly vote all proxies and related actions in a manner consistent with the long-term interests of the Fund and its Participants and Beneficiaries. Each investment manager shall keep detailed records of all said voting of proxies and related actions and will comply with all regulatory obligations related thereto. The Fund shall periodically audit and review each investment manager's policies and actions in this area. 6. Each Investment Manager shall utilize the same due care, skill, prudence and diligence under the circumstances then prevailing that experienced, investment professionals acting in a like capacity, as a fiduciary, and fully familiar with such matters would use in like activities for like Funds with like aims, while maintaining appropriate diversification to avoid the risks of large losses, in accordance and compliance with all applicable laws, rules and regulations from local, state, federal and international political entities as it pertains to fiduciary duties and responsibilities. 7. Notifying the Fund of the filing of a lawsuit by a client against the manager alleging breach of fiduciary duty or other willful conduct. EVALUATION AND REVIEW 11 On a timely basis, but not less than four times a year, the Fund will review actual investment results achieved by each manager (with a perspective toward a five-year time horizon) to determine whether: . the investment managers performed in adherence to the investment philosophy and policy guidelines set forth herein; and · the investment managers performed satisfactorily when compared with: the objectives set forth in Appendix "A", as a primary consideration, their own previously stated investment style, other investment managers, both in asset class and in style group, other retirement Funds, several different market indices. In addition to reviewing each investment manager's results, the Fund will re-evaluate, from time to time, its progress in achieving the total fund, equity, fixed-income, international, and cash and equivalents segment objectives previously outlined. The periodic re-evaluation also will involve an evaluation of the continued appropriateness of: (1) the manager structure set forth in Appendix "A"; (2) the allocation of assets among the managers; and (3) the investment objectives for the Fund's assets. The Fund may appoint investment consultants to assist in the on-going evaluation process. The consultants selected by the Fund are expected to be familiar with the investment practices of other similar retirement plans and will be responsible for suggesting appropriate changes in the Fund's investment program over time. Filing of Investment Policy Upon adoption by the trustees, the investment policy shall be promptly filed with the Department of Management Services, the City Clerk, and the consulting actuary. The effective date of changes to the Investment policy will be 31 days after the filing date with the city. 12 APPENDIX A: FUND SEGMENT AND INDNIDUAL MANAGER GUIDELINES 13 CITY OF CLEARWATER EMPLOYEES PENSION FUND INVESTMENT STRUCTURE January. 2003 Investment Manager Target Allocation Domestic Equity Specialist Manager Value Orientation 10% - 40% Domestic Equity Specialist Manager Growth Orientation 10% - 40% International Equity Specialist Manager 5% - 10% Domestic Fixed Income Specialist Manager Core Fixed Income Orientation 30% - 50% 14 APPENDIX A: FUND SEGMENT AND INDNIDUAL MANAGER GUIDELINES 1. Manager Structure The Fund will retain investment managers that specialize in the use of particular asset classes. The targeted distribution of Fund assets among specialist managers will be as illustrated on the previous page. The Fund believes that the established structure: . is consistent with the practices of other similar-sized retirement funds; and . offers an appropriate "blend" of investment styles that will produce a sufficient level of diversification and investment return over time. 2. Cash Flow Allocation The allocation of assets is consistent with the Fund's desire to diversify its investment management program. The Fund intends to review on a periodic basis the allocation of assets among its investment managers. To the extent that it is practically possible, it is expected that any cash flow will be allocated to or taken from the managers in the same proportions that each manager's assets represent to total fund assets in the target asset allocation outlined previously. 3. Trustee Utilization Restrictions All domestic Fund assets, in any form, shall be solely and exclusively: (a) settled at, (b) held in custody at, and (c) safe-kept only at custodians designated by the Fund at its sole discretion. International Fund assets may be held in commingled accounts provided that all of the normal protection of the Fund's assets is provided for. 4. Transaction Agent Assignment Restrictions Assignment of specific brokerage firms, dealers, financial institutions, and other transaction execution agents to all investment managers shall be the sole responsibility of the Fund. From time to time, the Fund at its sole discretion may specify certain transaction agents that investment transactions shall be executed through. 5. Short Selling and Related Restrictions There shall be no: short selling, non-collateralized and/or non-delivered repurchase agreements, use of financial futures or options, non-marketable direct investments in equity 15 or debt private placements or lease-backs or any other specialized investment activity without the prior written consent of the Fund. 6. Liquiditv and Marketabilitv Restrictions Liquidity and marketability frequently are perceived to be a function of the quality and the market capitalization of each security holding. From the Fund's perspective, liquidity and marketability also may be a function of a manager's aggregate holdings in a particular security. The Plan believes that an investment manager should not buy or hold a security for the Funds portfolio if the aggregate holdings among all of that manager's other accounts in that same security would restrict the manager's ability to expeditiously liquidate the position at any time. From a total Fund perspective, the Fund believes the collective holdings among all Fund managers accounts in that same security would restrict all managers collective ability to expeditiously liquidate their respective positions in that same security. Therefore, the Fund retains the sole right to limit any manager's holding of any security in the Fund at any time in order to prevent the potential for said Fund's collective liquidation and market risk. 7. Usage of Custodian STIF on all Idle Cash Restrictions Any idle cash not invested by the investment managers shall be invested daily via an automatic sweep STIF managed by the Custodian or by others in behalf of each investment manager. It is the Fund's objective to have no idle cash at any time in any manager's portfolios. 8. Usage of Cross Asset Segment Investment Guideline Restrictions When a manager's holdings include Fund assets outside of their primary assigned asset segment assignment (e.g. a primary domestic equity manager also holds some cash equivalents or fixed income securities as well as equities) the guidelines stated therein for the non primary asset segment shall fully apply to the manager, in addition to the primary asset assigned segment guidelines. 9. Diversification Restrictions Except for criteria noted elsewhere in this Policy and in specific written contracts with each manager, the appropriate and reasonable diversification of securities by such factors as geography, region, sovereign risk, native currency, quality, coupon, country risk, maturity, 16 industry, duration, and sector is within the full discretion and responsibility of the investment managers. 10. Other Obiectives. Guidelines and Restrictions Forthcoming The Fund may I develop additional objectives, guidelines and restrictions and may amend the Policy from time to time. 11. Fund Segment Guidelines Following are guidelines and objectives established for the fund segments and for each investment manager retained by the Fund. Individual manager guidelines are designed to be consistent, in aggregate, with the total fund asset allocation guidelines and investment objectives set forth in the Statement of Investment Obiectives and Guidelines. llA. Domestic Equity Segment Each equity manager is expected to adhere to the following guidelines: · Equity holdings in anyone company (including common and preferred stock, convertible securities and debt) should not exceed 10% of the market value of the manager's portion of the Fund without the consent of the Fund. · Equity holdings in anyone industry (as defined by Standard & Poor's) should not exceed 50% of the market value of the manager's portion of the Fund. · Cash equivalents and fixed income positions should not exceed twenty five percent (25%) of the manager's portfolio. A manager may invest in fixed income securities if projected returns on such securities are perceived to be competitive with potential equity returns. However, fixed income securities will not represent more than twenty-five percent (25%) of a manager's portfolio without the prior written consent of the Fund. · No purchase shall be made by an investment manager that would cause a holding to exceed 5% of the issue outstanding. lIB. International Equitv Segment 17 Each international equity manager is expected to adhere to the following ITIlmmum guidelines: · Equity holdings in anyone company and all of its subsidiaries and affiliates (including equities, convertible securities and debt) should not exceed five percent (5%) of the market value of the manager's portion of the Fund portfolio without the prior written consent of the Fund. · Equity holdings in anyone industry should not exceed fifty percent (50%) of the market value of the manager's portion of the Fund portfolio. Equity holdings in anyone sector (e.g., consumer cyclical, energy, technology, etc.) should not exceed fifty (50%) of the market value of the manager's portfolio without the prior written consent of the Fund. · Cash equivalents and fixed income positions should not exceed fifty percent (50%) of the manager's portion of the Fund assets. A manager may invest in fixed income securities (Le. securities with more than two years to maturity) if projected returns on such securities are perceived to be competitive with potential equity returns. · The manager may enter into foreign exchange contracts on currency provided that: (a) such contracts have a maturity of one year or less, and (b) use of such contracts is limited solely and exclusively to hedging currency exposure existing within the manager's portfolio. The intent is to dampen portfolio volatility and prevent currency loss. There shall be no direct foreign currency speculation or any related investment activity. · The manager may purchase or sell currency on a spot basis to accommodate specific securities settlements. 11 C. Fixed Income Segment Each fixed income manager is expected to adhere to the following guidelines: . All Fixed Income Securities held in each portfolio should have a Moody's, or Standard & Poor's quality rating of no less than Investment Grade from any of these rating services. (For an issue, which is split-rated, the lower quality designation will govern. Once a security falls below investment grade the money manager will notify the plan of the downgrade as soon as practical. Included in that notification will be how the money manager will handle the below investment grade security. 18 . The diversification of securities by maturity, quality, sector, coupon and geography is the responsibility of the manager. . The exposure of each manager's portfolio to any single security other than a security backed by the full faith and credit of the U.S. Government or any of its instrumentalities should be limited to five (5) of the manager's portion of the Fund measured at market value. . No purchase shall be made by a Fixed Income Manager which would cause a holding to exceed ten (10) of the issue outstanding. . There shall be no use of options, financial futures, derivatives or other specialized investment activity without the prior written approval of the Fund. . Not more than 10% of an investment manager's portfolio, valued at market, shall be invested in certificates of deposit, time deposits, bankers acceptances, commercial paper, or related investments of a single issuer financial institution or financial institution holding company family. lID. Cash and Equivalents Segment Although investment managers will be retained for their expertise in a certain investment segment, it is expected that from time-to-time each will have some cash and equivalents in their portfolios as a result of discretionary asset allocation decisions. Any idle cash not invested by the investment managers shall be invested daily via an automatic sweep STIF managed by the custodian. It is the Fund's objective to have no idle cash at any time in any manager's portfolio. lIE. Pooled Vehicles To the extent that the Fund invests a portion of the Fund's assets in commingled vehicles or institutional mutual funds, then the investment guidelines of the Fund's prospectus will be adopted as this fund's guidelines. IIF. Master Repurchase Agreement 19 The money managers and safekeeping custodian will use a master repurchase agreement whenever appropriate. All repurchase agreements transactions shall adhere to the requirements of the master repurchase agreement. 20 12. Individual Manager Descriptions and Five- Year Expectations All expectations are minimums. All investment managers shall exceed the stated expectations. Investment Manager Percentile Percentile Expectation Expectation Relative To Relative To Other Managers Style Peers Domestic Equity Specialist Manager 50th 50th Value Orientation Domestic Equity Specialist Manager 50th 50th Growth Orientation International Equity 50th 50th Specialist Manager Domestic Fixed Income Specialist Manager 50th 50th Core Fixed Income Orientation Cash and Equivalents and 50th 50th STIF Portfolios In addition, each domestic equity and fixed income manager is expected to achieve positive risk-adjusted (alpha) performance over a three (3) or maximum of (5) year periods. 13. Reporting Requirements: Consultant Reporting The Pension Fund's Consultant will provide quarterly reports to the Pension Fund which, at a minimum, will review the following information about each Investment Manager and the Total Fund: . Overview of the most recent quarter and year-to-date investment indicators . Total Fund asset allocation . Comparison of total Fund return versus the customized benchmark . Performance results by individual Manager and Total Fund compared to appropriate benchmarks. 21 Investment Reporting: . On not less that an annual basis the Trustees will receive a report showing a list of all of the securities held by investment manager. This report will be provided by the safekeeping custodians and shall include the portfolio by class or type, book value, income earned, and market value as of the date of the report. This report will be filed with the city. Proxy Voting: . On not less that a quarterly basis, money manager will report to the Plan their proxy voting during the last period. Review of Policy This Statement of Investment Policy must be reviewed annually by the Pension Investment Committee with a recommendation to revise or confirm to the Trustees. Meeting Agenda At each meeting, the written and oral presentations shall cover the following points: . A report of performance for past periods. Standard time periods for each report will be last quarter, last year, year to date, latest twelve (12) months, two years, three years, etc., and since inception and by calendar year. Returns should be annualized and calculated on a time-weighted basis for the total portfolio. All returns should include price change plus income and/or dividends. . Discussion of the rationale for performance results by relating them specifically to investment strategy and tactical decisions implemented during the current review period. . Discussion of the investment manager's specific strategy for the portfolio over the next six to twelve months with specific reference to asset allocation and sector weighting, as appropriate. 22 · Supporting discussion of the next period's strategy with reference to investment manager's capital market and economic assumptions, if applicable. Ten (12) copies of the written summary should be received by the Fund at least five (5) business days prior to the meeting. The Fund is interested in fostering an effective working relationship with its investment managers through a discipline of good communication. The establishment of Objectives, Performance Standards, Policies and Guidelines, and Reporting Requirements is intended to provide the Fund with a good foundation from which to understand specific management styles and strategies, evaluate results and oversee progress toward overall investment objectives. The Fund shall be using a third party consultant selected, hired and directed by the Fund to: (1) assist in appraising performance, (2) to provide performance comparison data with other retirement plans, several capital market indices, and to other investment managers, (3) assist in evaluating manager style discipline and peer comparisons, (4) assist in strategic funding and management of the Fund, and (5) other factors the Fund deems appropriate. Investment managers are required to support and assist the consultant with their fullest cooperation. 23