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EXECUTIVE DIRECTIVE No. 2003-11

TO: Department Directors and Autonomous Agency Heads
FROM Governor Jennifer M. Granholm
SUBJECT: Investment of State Funds to Promote Corporate Responsibility and Investment Protection Principles

Because this administration is committed to safeguarding the public treasury; protecting pensioners, families, and taxpayers; and improving the faith and confidence of investors, it is important that the State of Michigan take an active role in advancing corporate reform, using the power of Michigan’s investment portfolio and market presence to combat corporate fraud and abuse, and setting new standards of integrity and corporate responsibility. Accordingly:

1. Every financial organization that is retained or utilized by a state department or autonomous agency to provide investment banking services or broker research services, including but not limited to services for the Judges’, Municipal Employees’, Public School Employees’, State Employees’, and State Police Retirement Systems, shall as a condition of new retention by this state or renewal of an existing retention, adopt the following investment protection principles:

a. Sever any link between compensation for analysts and investment banking.
b. Prohibit investment banking input into analyst compensation.
c. Create a review committee to approve all research recommendations.
d. Require that upon discontinuation of research coverage of a company, the firm will disclose the coverage termination and the rationale for the termination.
e. Disclose in research reports whether the firm has received or is entitled to receive any compensation from a covered company over the past 12 months.
f. Establish a monitoring process to ensure compliance with these principles (the “Investment Protection Principles”).

2. Every money management firm or investment fiduciary retained by a state department or autonomous agency, as a condition of a new retention or renewal of an existing retention, shall:

a. Disclose periodically any client relationship, including management of corporate 401(k) plans, where the money management firm or investment fiduciary could invest state or retirement system funds in the securities of the client.
b. Disclose annually the manner in which their portfolio managers and research analysts are compensated, including but not limited to any compensation resulting from the solicitation or acquisition of new clients or the retention of existing clients.
c. Report quarterly the amount of commissions paid to broker-dealers, and the percentage of commissions paid to broker-dealers that have publicly announced that they have adopted the Investment Protection Principles.
d. If affiliated with banks, investment banks, insurance companies, or other financial services corporations, adopt safeguards to ensure that client relationships of any affiliate company do not influence investment decisions of the money management firm or investment fiduciary. Each money management firm or investment fiduciary retained by a state department or autonomous agency shall provide the State Treasurer with a copy of its safeguards plan and shall certify annually to the State Treasurer that the plan is being fully enforced.
e. In making investment decisions, consider the quality and integrity of the subject company’s accounting and financial data, including the company’s 10-K, 10-Q, and other public filings and statements, as well as whether the company’s outside auditors also provide consulting or other services to the company.
f. In deciding whether to invest state or retirement system funds in a company, consider the corporate governance policies and practices of the subject company.

3. The principles set forth in Paragraphs (2)(e) and (2)(f) are designed to assure that in making investment decisions, a money management firm or investment fiduciary gives specific consideration to the subject information and are not intended to preclude or require investment in any particular company.

4. State departments and autonomous agencies when making investment decisions must consider:

a. The quality and integrity of the subject company’s accounting and financial data, including the company’s 10-K, 10-Q, and other public filings and statements.
b. Whether the subject company’s outside auditors also provide consulting or other services to the company.
c. The corporate governance policies and practices of the subject company.
d. Whether the subject company has relocated off-shore, outside of the United States, in name only, to avoid taxes and weaken shareholder protections.

5. The considerations set forth in paragraph 4 are designed to assure that in making investment decisions state departments and autonomous agencies must give specific consideration to the subject information and are not intended to preclude or require investment in any particular company, or in a manner inconsistent with the Public Employee Retirement System Investment Act, 1965 PA 314, MCL 38.1121 to 38.1140l, or Section 91 of the Executive Reorganization Act of 1965, 1965 PA 380, MCL 16.191.

6. The requirements of Paragraph 4 do not apply to an investment of surplus funds under the control of the State Treasurer pursuant to 1855 PA 105, MCL 21.141 to 21.147.

Your cooperation in complying with this Directive is appreciated.

Issued this 4th day of April, 2003.

______________________________
Jennifer M. Granholm
Governor

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