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LOS ANGELES COUNTY EMPLOYEES RETIREMENT ASSOCIATION

REQUEST FOR PROPOSAL

U.S. EQUITY THIRD-PARTY AGENTSECURITIES LENDING SERVICES

Robert Z. SantosInvestment Officer, Fixed Income

LACERAGateway Plaza

300 North Lake Avenue, Suite 850Pasadena, CA 91101


REQUEST FOR PROPOSALU.S. EQUITY THIRD-PARTY AGENTSECURITIES LENDING SERVICES

Table of Contents

Page

I. Introduction 3

II. Instructions for Responses 4

III. Listing of Securities 4

IV. Questionnaire 5

A. Supplier Profile 5

B. Dimensions of Program 7

C. Operations 8

D. Systems / Client Reporting 9

E. Credit / Counter-Parties 10

F. Reinvestment of Cash Collateral 11

G. Revenue Guarantee / Fees 12

Exhibit I: Collateral Investment Policy Guidelines 13

Los Angeles County Employees Retirement Association (LACERA) January 15, 2007 of 20document.doc



I. Introduction

General Information

The Los Angeles County Employees Retirement Association (LACERA) was established under the provisions of the County Employees Retirement Law of 1937. The general management of LACERA is the responsibility of the Board of Retirement. The Retirement Board and LACERA’s staff are responsible for daily operations involving the administration of benefits, accounting functions, and portfolio administration. The Board of Investments is responsible for establishing investment policies and objectives for the employees’ retirement funds.

LACERA administers a pension fund with approximately $37.6 billion in total assets as of December 31, 2006. These assets were invested as follows: 57% in Domestic and International Equities, 28% in Fixed Income, 9% in Real Estate and 6% in Private Equity.

Services to be Provided

The purpose of this Request for Proposal (RFP) is to review the capabilities of potential providers of third-party agent securities lending services for LACERA’s estimated $2.48 billion in U.S. equity securities available for loan.

Notice to Respondents Regarding the Public Records Act

Responses to this RFP become the exclusive property of LACERA. At such time as LACERA recommends candidate(s) to the Board of Investments, and such recommendation appears on the agenda, all proposals submitted shall be regarded as public record. Exceptions will be those elements in each RFP which are defined by the respondent as business or trade secrets and are appropriately marked as "TRADE SECRETS," "CONFIDENTIAL," OR "PROPRIETARY."

LACERA shall not in any way be liable or responsible for the disclosure of any such records including, without limitations, those so marked if disclosure is deemed to be required by law or by an order of the court. The respondent shall indemnify LACERA for any and all attorney's fees awarded against LACERA based on LACERA's refusal to disclose those elements of the RFP marked by the respondent with a restrictive legend.




II. Instructions for Responses

Please respond to each question in the RFP. Final responses are due no later than Friday, March 9, 2007 at 3:00 P.M. (PST).

In addition to your response to the questions in the RFP, please provide the following:

A copy of your organization’s most recent Annual Report. Organizational charts identifying key functional areas and relevant personnel.

Please send three (3) hard copies of your response and one (1) copy using Microsoft Word on a CD-R (recordable compact disc) to:

Mr. Robert Z. SantosInvestment Officer, Fixed IncomeLACERA300 N. Lake Avenue, Suite 850Pasadena, CA 91101-4199Tel: (626) 564-6000 Ext. 3315Fax: (626) 564-6130E-mail: [email protected]

Please note that during this evaluation process LACERA staff will, respectfully, not answer any questions related to the RFP. If a question appears unclear to you, please state your interpretation of the question and answer it accordingly. Additionally, respondents are requested not to contact LACERA personnel for meetings, conferences or discussions related to this RFP.

III. Listing of Securities

To obtain a list of LACERA’s U.S. Equity securities, please send an email to Ms. Katie Hancock at [email protected].


mailto:[email protected]

mailto:[email protected]



IV. QuestionnaireA. Supplier Profile

1. Provide background information on your firm, including ownership structure and affiliated companies.

2. Provide an organizational chart for the firm as a whole, for your firm as a whole, and for your securities lending area. Is securities lending a separate business unit or is it an additional function of the trading desk?

3. What was the value of your parent company’s shareholders’ equity as of 12/31/06?

4. What are your current credit ratings (short-term and senior long-term debt) for Moody’s, S&P, Fitch, and Thomson Bankwatch?

5. What was the date of your organization’s last rating change? Please specify which rating firm made the change, if change was an upgrade or downgrade, and to/from what level.

6. What percentage of your parent company’s total revenues did fees from securities lending represent in 2005 and in 2006?

7. Please list types of insurance carried, name of carrier(s), and deductibles for calendar year 2006 policies.

8. Who are the auditors for your firm as a whole, and specifically for your securities lending area? (Please include location of primary office and partner responsible.) When was the last audit completed?

9. Please list any material recommendations made by third-party auditors pertaining to systems or controls used by your securities lending area from the last three internal control audits.

10.Do you have an internal audit department? If so, describe its responsibilities and reporting structure.




11.Provide a brief explanation and indicate the status of any business litigation or other proceedings related to your securities lending area during the past five years.

12.Have you been involved in any corporate mergers or acquisitions during the past five years pertaining to securities lending, prime brokerage, and/or other related businesses? If yes, provide details regarding size and scope of transactions and effect on your competitive position in the securities lending business.

13.Where is the headquarters of your securities lending department? Where do you have additional lending desks? What functions are performed from each of these sites?

14.Who are the individuals in the following positions and how long have they been in these roles?

Title Name TimeHead of Securities Lending BusinessHead of Securities Lending OperationsHead of Collateral Reinvestment GroupHead of Securities Lending TradingProposed Relationship Manager for LACERA

15.Provide the names of all investment professionals who have resigned, terminated, or transferred/rotated to another department, within the past three (3) years (lending and reinvestment). Provide a brief explanation for each departure. List any replacements for these vacancies.

16.Provide an overview of your approach to service for LACERA.

17.Do you operate more than one type of third-party lending program? If yes, what options are available? Please be specific.

18.List all clients for third-party securities lending services gained since 12/31/03. Include a description of each mandate including asset class(es), assets available for loan, type of program, and date of program inception.




19.List any third-party securities lending clients that have left your program since 12/31/03. Include a description of each mandate program type, including asset class(es), value of assets available for loan, and date of termination.

20.For which asset classes and/or program types do you feel your organization has the greatest competitive advantage? Please describe your advantages in the most specific terms possible for each asset class.

21.What is your philosophy with respect to the volume/margin trade-off? Is there some lower margin business that you are likely to turn down? Do you have a minimum transaction size?

22.How often and in what security classes are you faced with more security supply than meets demand? What is your system of distributing this business equitably among your clients?

23.Provide any comparative performance reports, provided internally or from any external sources that would substantiate your claims of having advantages in these areas.

24.What is your organization’s strategy for growing your securities lending business?

25.List five (5) third-party securities lending clients that we could contact for references. Note – we will not call any of these clients without contacting you in advance of our intention to do so. Also, if you have any clients that use more than one lending program and you have data that shows your comparative performance versus other lending programs, it would be especially advantageous to include this information at this juncture.

B. Dimensions of Program

1. Outline the key strengths and weaknesses of your firm’s securities lending program.

2. What were your firm’s average total lendable asset base ($) for the years 2003, 2004, 2005 and 2006?




3. What were your firm’s percentages of total lendable assets on loan for the years 2003, 2004, 2005 and 2006?

4. What were the average spreads for 2006? Please break out intrinsic value versus reinvestment.

5. In aggregate, how many securities lending clients do you currently serve? Please provide a breakdown by client type (i.e., investment manager, mutual fund, public fund, corporate, endowment/ foundation, bank) including number of clients and total value of securities on loan. Also, please break out by client’s location (country).

6. How many full-time employees do you have in the following capacities:

Position Number of EmployeesSenior Management:Traders:Collateral Reinvestment Specialists:Operations:Systems:Credit:Other:

AccountingAdministrationAuditBusiness DevelopmentComplianceFinancial AccountingHuman ResourcesInstitutional Client Services

7. Describe your parent organization’s position in the prime brokerage or arbitrage business (if applicable).

8. If you lend to an affiliated entity, what steps do you take to ensure arms length transactions?

C. Operations

1. What specific procedures and control points do you rely on to support the operations of your lending program?




2. How are recalls and income collections handled for securities out on loan? What percentage of the time do you encounter problems recalling securities by the target date?

3. Have you ever experienced a situation in which you were unable to reclaim a client’s lent security? If yes, please describe the scenario and what steps you took to rectify the situation.

4. Can investment managers vote the proxy of a security that is out on loan? If yes, what constraints exist?

5. What forms of collateral do you accept?

6. What percent of your trades are collateralized with securities (versus cash)? In which markets? How does this percentage compare with industry averages? If there is a significant variance, please explain why it exists.

7. Outline the steps taken in the marking-to-market procedure, detailing the timing and frequency of the procedure, pricing sources and communication of collateral deficiencies to the counter party. What pricing vendors are used? Do you perform the marks or does the custodian?

8. Do you have an automated interface with Mellon Trust Boston Safe Deposit and Trust Company (Mellon Trust)? If yes, what information is uploaded/downloaded and on what frequency?

9. Who are current Mellon Trust clients that you currently interface with?

10.How would you characterize your relationship with Mellon Trust?

11.Specify what tasks you propose to be responsible for and what Mellon Trust would be required to do?

D. Systems / Client Reporting

1. Identify and describe the various systems used to support your securities lending program and explain how they are linked.

2. Which of these systems is developed internally? Externally?




3. How are these systems maintained? Which are maintained internally? Externally?

4. What functions are performed manually or using spreadsheets (i.e. not programmed as a part of your “core processing” system)?

5. Do you have more than one lending queue? If yes, please explain why. If not, can exceptions occur that could circumvent this queue? If yes, how do exceptions occur and what notification do you provide to clients?

6. What specific enhancements do you expect to make to these systems during the next 12-18 months? Rank the priority of these initiatives.

7. Are you planning to undertake any systems conversions during the next two years? If yes, please explain which systems will be converted, when such conversions will take place and how these conversions will benefit your clients.

8. Describe your backup and disaster recovery policies and procedures for all systems involved in supporting your securities lending business.

9. What reporting is available to enable clients to monitor and evaluate program effectiveness? What reports are available on-line? Which are available via the web?

10.Who are the auditors for your securities lending systems(s) and information technology (IT) department? How frequently do formal audits occur and when was the last one completed?

E. Credit / Counter-Parties

1. Provide a list of approved borrowers and specify credit limits for your top ten borrowers.

2. How are credit limits determined for counter-parties / borrowers? Please provide a detailed explanation of your process.

3. What sources of data do you rely on to determine these limits?




4. How frequently are limits monitored?

5. What are your policies and control points for notifying clients of material changes in limits?

6. What part of your organization is responsible for the credit review process? How many professionals do you have in this group?

7. Would LACERA have the opportunity to eliminate borrowers from this list?

8. Do you offer indemnification for borrower default? What organization provides it?

9. Please describe all possible scenarios in which the indemnity would not make LACERA fully whole should a borrower default.

10.Provide the specific contractual language surrounding the indemnity you would provide for borrower default.

11.How many and what percentage of your clients are you indemnifying against broker default? What was the dollar value of their outstanding loan amounts as of 12/31/06?

F. Reinvestment of Cash Collateral

1. How do you propose to manage the cash collateral for LACERA?

2. How many professionals work in this group/company?

3. Can you provide a separately managed account that meets LACERA’s collateral reinvestment guideline constraints as described in EXHIBIT I?

4. Do you provide commingled vehicles for reinvestment of cash collateral? If yes, provide spread and utilization figures (for your 2a-7 equivalent pool) for each month in 2005 as well as 2006.

5. Have any of your reinvestment pools or separately managed accounts ever had the N.A.V. drop below $.9975? If yes, please describe what happened, when it happened, how it happened and what policies you have implemented to prevent a similar occurrence.




6. What is your policy if the portfolio manager purchases an instrument that is (or becomes) outside the investment guidelines?

7. During the last five (5) years, have you ever had a situation in which you purchased (on behalf of an individual client or STIF pool) a security issued by a company (or its parent) that defaulted? If yes, please describe the specific details surrounding this circumstance and explain your course of action.

8. What procedures and control points do you use to ensure that cash collateral is managed to strictly conform with investment policy, and for matching up duration of loans to duration of purchases made with cash collateral? Is this process fully automated?

9. What types of management reports do you provide to clients regarding collateral reinvestment?

10.Through what mediums can LACERA view data pertaining to collateral reinvestment?

11.Where do your securities lending personnel currently sit relative to your cash reinvestment team? For how long has this arrangement been in place? What are the advantages/disadvantages of this arrangement?

G. Revenue Guarantee / Fees

1. Provide a detailed revenue projection and proposed revenue split, including all assumptions. Please make sure to segregate projected earnings at the most detailed level, and include utilization rates, average dollar value on loan, and projected spreads. Segregate all projected earnings by estimated intrinsic value and reinvestment spread. Make sure to use the current LACERA collateral reinvestment guidelines.

2. Identify all additional fees associated with your proposal including, but not limited to, fees for management of cash collateral, custody expense, interface development, or auditing.

3. Specify the length of the contract you are willing to provide.




EXHIBIT I

Proposed LACERA Collateral Investment Guidelines

Securities Lending Statement of Investment Policy

Capitalized terms used in this Exhibit shall have the same meaning as set forth in the body of this Agreement unless otherwise indicated.

1. Introduction.

Lending Agent acknowledges that this Investment Policy has been developed to serve two primary purposes: (i) to provide assurances to LACERA that Lending Agent shall maintain the financial security of all LACERA Collateral received by Lending Agent and its Agents from Securities lending transactions, and (ii) to establish investment standards for the investment and management of LACERA Collateral. Lending Agent agrees that this Investment Policy shall govern the Collateral investment activities of Lending Agent and its Agents at all of Lending Agent's offices and facilities, both domestic and foreign, including any offices established by Lending Agent after this Agreement is executed. Lending Agent and its Agents shall manage all investments of LACERA's cash Collateral according to the following objectives and standards set forth in this Exhibit.

All cash Collateral investments made on behalf of LACERA shall be managed by Lending Agent and its Agents in a segregated and separately managed fund. Lending Agent and its Agents shall not pool LACERA's Collateral investments with those of Lending Agent's other securities lending clients.

2. Objectives.

Lending Agent acknowledges and agrees that the key objectives of investing and managing LACERA's cash Collateral are to:

a. Preserve principal through the use of high quality investment instruments;

b. Ensure that all Collateral is invested in a timely manner;




c. Maintain a highly diversified portfolio of credit quality instruments;

d. Maintain adequate liquidity to meet the needs of LACERA and/or LACERA's investment advisors; and

e. Optimize, consistent with these guidelines, the spread between the rate earned on LACERA's Collateral and the rate rebated to the Borrowers of LACERA's Securities, while controlling the portfolio's investment risk.

In pursuing these objectives, Lending Agent and its Agents shall comply with all applicable laws, rules and regulations governing securities lending activities, collective trust funds, and the management of assets.

3. Use of Amortized Cost Valuation.

Collateral which is invested in a collective fund maintained by Lending Agent and its Agents shall be assigned a value of approximately $1 per unit. Such collective funds are operated on a cost, rather than a market value basis, for purposes of admissions and withdrawals. If non-cash assets are required to be sold prior to their maturity for purposes of affecting a participant's withdrawal from such fund, it is possible that a loss will be realized.

4. Credit Quality Standards.

Lending Agent's primary goal shall be to safeguard the return of LACERA's Collateral. To minimize the risk of default, the following credit standards shall apply to all Collateral investments:

a. Lending Agent will maintain a consolidated approval list for short-term paper. Inclusion on the approval list requires the highest rating by two rating agencies: A1 by Standard & Poor's (S&P) and P1 by Moody's, or A1 by S&P or P1 by Moody's and the equivalent by Duff and Phelps or Fitch.

b. Deposit instruments must be rated at least B/C by Thompson Bank Watch or the equivalent by a Nationally Recognized Statistical Rating Organization ("NRSRO") such as IBCA. If no such rating is available, the short-term rating




requirements stipulated in Section 4-a of this exhibit will be used.

c. Where an issuer has a long-term senior debt rating, a minimum long-term bond rating of single A, by either S&P or Moody's, must exist for any investment being contemplated. When no long-term rating exists for an issuer, the short-term rating standard for this policy will be used.

d. Guaranteed Investment Contract ("GIC's") must have a minimum AA rated claims paying ability by both S&P and Moody's at the time of purchase. Bank Investment Contracts ("BIC's") must be rated AA or higher by both S&P and Moody's at the time of purchase. Funding Agreements must issued by an insurer having a minimum of a AA rated claims paying ability by both S&P and Moody's at the time of purchase. In addition, Funding Agreements will reset daily and have a 90 day or less put.

e. Asset-backed securities must have a minimum rating of AAA by S&P, Moody's or equivalent nationally recognized securities rating organization ("NRSRO").

f. The credit quality of any guarantor must meet the minimum criteria stated above.

g. When an investment is unrated, the issuer of such investment must have a debt rating that meets the minimum credit quality criteria stated above.

If a security held as Collateral in LACERA's portfolio is downgraded below investment grade, or if any money market or investment instrument is downgraded by a major rating agency, below the acceptable credit ratings stipulated in this Agreement, the decision to sell the security shall be made by the portfolio manager and shall depend upon the time to maturity, the reason for downgrading and account considerations. If a below minimum rated security is to be held in LACERA's portfolio, a written recommendation must be forwarded to the governing Securities Lending Account Review Committee for approval.




5. Acceptable Investments.

Subject to the above Credit Quality Standards, all Collateral investments made shall have at least a minimum coupon of zero and a redemption price equal to the lower of purchase price or par value. The following investment sectors have been established as acceptable instruments for investing Collateral:

a. Money market instruments, including U.S. Treasury Bills, U.S. Agency obligations, time deposits, discount notes, commercial paper, banker's acceptances, certificates of deposit, Yankee CDs and Euro CDs.

b. Repurchase Agreements collateralized at a minimum level of:

(1) 102% utilizing obligations of the U.S. Government, Government agencies, mortgage-backed security agency pass-throughs, money market instruments and acceptable commercial paper.

(2) 105% utilizing asset backed securities and private label mortgage backed securities, with an S&P and Moody's credit rating of AA/Aa or better.

(3) 105% utilizing corporate bonds with an S&P and Moody's credit rating of A/A or better. Corporate securities that are registered under the Securities Act of 1933 and are not restricted securities within the meaning of Rule 144 of the Act are eligible investments.

(4) All Repurchase Agreements must be marked-to-market on a daily basis to ensure compliance with the aforementioned collateralization levels.

c. Reverse Repurchase Agreement transactions may be used only as a vehicle to meet LACERA's portfolio's 30% minimum daily liquidity requirement. The use of Reverse Repurchase Agreements for leveraging purposes is prohibited.




d. Tri-Party Repurchase Agreements, in a separate form to be mutually agreed upon in writing by the parties, will be subject to the same minimum collateralization and marked-to-market requirements as defined in the aforementioned Repurchase Agreement and Reverse Repurchase Agreement transactions.

e. Notes, bonds, and debentures issued by the U.S. Treasury, U.S. Government Agencies and U.S. corporations.

f. First-tier money market mutual funds, as defined under SEC Rule 2a- 7.

g. Short-term investment funds trusteed by Mellon Trust Boston Safe Deposit and Trust Company (Mellon Trust) or Lending Agent are approved investments and are subject to the same investment parameters described within this exhibit.

h. Issues of sovereign foreign Governments, supranational entities, and foreign corporations denominated in U.S. Dollars.

i. CATS, TIGRS, STRIPS, REMICS, CMOs, and other instruments collateralized by obligations of the U.S. Government and its Agencies.

j. Asset backed securities (i.e., CARS, CARDS, HELS).

k. Regular floating rate instruments indexed off of any one of the following indices: Federal Funds rate; U.S. Treasury Bills; London Interbank Offered Rate (LIBOR); and/or the Commercial Paper Index.

l. Guaranteed Investment Contracts ("GIC's"), Funding Agreements and Bank Investment Contracts ("BIC's") issued by insurance companies and banks.

Note: Master Notes are not acceptable instruments. Broker/dealer obligations are not acceptable investments if Securities Loans are outstanding to the respective broker/dealer.




6. Prohibited Investments.

Provider will maintain an approved Commercial Paper issuer list and a restricted issuer list. These lists will be updated regularly and approved by the Provider’s Credit Committee at least on a quarterly basis. The Provider will submit the lists to LACERA each time an addition or deletion is made. In addition, LACERA will retain the right to restrict any investment.

7. Maturity and Liquidity Constraints.

Lending Agent shall maintain the following maturity schedule and duration exposure to provide adequate liquidity to cover redemptions and protect LACERA's Collateral. "Liquidity" shall be defined as any acceptable investment which matures in one business day, is payable on demand, or provides access to funds on one business day's notice without resulting in a loss of principal (e.g., institutional money market funds).

a. The Lending Agent understands that LACERA wishes to maintain a liquidity level such that the lending program will not interfere with the management of LACERA’s portfolio. The Lending Agent will provide adequate liquidity in the form of overnight loans and investments and collateral not on loan to ensure that the lending program meets the above requirement.

b. Unless otherwise stated below and with the exception of collateralized mortgage obligations and asset backed securities, the maximum stated final maturity for any one investment will not exceed thirteen (13) months from time of purchase.

(1) Floating rate instruments may have a maximum stated final maturity of twenty-four (24) months from the time of purchase.

(2) Reset Dates of Floating rate instruments will not exceed three (3) months from the time of purchase. (Reset dates will be utilized to calculate average weighted maturity.)




(3) Guaranteed investment contracts, funding agreements and bank investment contracts may have a maximum stated final maturity of twenty-four (24) months from time of purchase. The put option date, payable on demand feature, or interest rate reset date, may not exceed three (3) months from the time of purchase. This reset date will be utilized to calculate the average weighted maturity.

(4) Call dates and put features may be used as the proxy for maturity date, only if there is substantial evidence that the call or put option will be exercised.

c. Fixed rate asset backed securities (ABS) will have a maximum average life that does not exceed thirteen (13) months and a final stated maturity that does not exceed sixty (60) months. Floating rate ABS will have a maximum average life that does not exceed twenty-four (24) months and a final stated maturity that does not exceed sixty (60) months.

d. Collateralized mortgage obligations (CMO's) will have a maximum average life that does not exceed thirteen (13) months and a final stated maturity that does not exceed thirty-six (36) months.

e. The average maturity of LACERA's entire portfolio will not exceed 90 days.

Note: Lending Agent will also establish a separate liquidity plan to monitor maturity exposure and liquidity demands.

8. Diversification Standards.

Lending Agent and its Agents shall comply with the following diversification standards:




a. No more than 10% of LACERA's portfolio will be exposed in the obligations of any one issuer, including all counterparty risk, except those of the U.S. Government or that which are U.S. Government guaranteed at the time of purchase.

b. Money market mutual funds will be limited to 10% of the value of the money market fund.

c. U.S. Government strips will constitute a maximum of 15% of LACERA's portfolio.

d. No more than 20% of LACERA's portfolio will be invested in any one sector at the time of purchase, except as noted below:

(1) Regular floating rate instruments will be limited to 40% of LACERA's portfolio at the time of purchase.

(2) U.S. government and government guaranteed issues will be limited to 100% of a portfolio at the time of purchase.

(3) Repurchase agreements will be limited to 100% of a portfolio.

9. Trading.

All trades are to be placed by Lending Agent and its Agents on a best effort/best price basis.


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