U-M responses to June 2016 memo

Information to support fulfillment or FAI Committee charter
University Audits suggested periodically disclosing a number of fees, and the composition of the investment benchmarks.

Response by the CFO: Information regarding investment benchmarks and fees associated with outside fund managers is shared with members of the Finance, Audit and Investment Committee of the Board of Regents. Benchmarks also are described in the annual Report of Investments.

Separation of duties
University Audits suggested increased involvement by the Investment Accounting function of Financial Operations – an office separate from the Investment Office – in preparation of review of activity initiated and reported by the Investment Office.

Response by the CFO: The Investment Accounting office, a function that is independent from the Investment Office, is an internal control function that reviews investment activities and is responsible for investment accounting and monitoring and verifying investment performance. As noted by University Audits, the hiring of a new director of investment accounting by Financial Operations did take place and the recommended separation of duties was solidified at that time.

Conflicts of interest or commitment
University Audits noted the chief investment officer properly disclosed external board memberships but suggested a management plan to address related matters related to compensation for any board membership.

Response from CFO: The CFO requires the chief investment officer to submit annually a written attestation that he has read and understands the Investment Office’s Conflict of Interest Policy and that he has complied with the terms and conditions of the policy. The attestation includes a list of boards or committees on which the chief investment officer participates, as well whether any compensation if paid and the disposition of the compensation. A copy of the 2016 and most current 2017 annual attestation is attached.

The CFO monitors the disclosure and compensation to determine whether any such participation represents a conflict of interest or commitment. To date the CFO has determined that each of the chief investment officer’s commitments are very much in the best interest of the university and do not represent conflicts of interest.

The chief investment officer’s board work is not designed to increase his compensation.

To the contrary, when the chief investment officer receives compensation for such service the agreed-to practice is to contribute any funds received back to the university for the benefit of a need-based student scholarship fund.

Additionally, all investment office staff members are required to annually complete the same conflict of interest attestation.

Monitoring of personal trading
University Audits did not find any instances where employees were trading in investments held by the university but did recommend implementing an annual employee attestation process.

Response from CFO: The chief investment officer annually reminds the investment office staff of the Investment Office policy on prohibited trading. The annual attestation required to be submitted by each employee requires that the employee attest, among other items, that they do not engage in prohibited trading (See attached policy).

Further, it should be noted that the university does not directly trade in marketable securities but rather invests in managers and funds that in turn execute an investment strategy. The overwhelming majority of funds and managers in which the university invests would not be available to a small individual investor.

Fiscal 2017 audit activity
The FAI Committee requested an aspect of the Investment Office be included in the FY 2017 plan for University Audits.

Response from CFO: The university continues to be very satisfied with the auditing work of PricewaterhouseCoopers, which handles the annual audit of university financial records. The university’s endowment and investment portfolio are included in that audit work every year.

The most recent audit indicates that PwC found that controls and process were in place to fairly report the valuations of university investments. The audit focuses on the risks and controls surrounding the operations of the university’s Investment Office, including the oversight of external managers. PwC reviewed due diligence processes with respect to the back offices of nonmarketable limited partnerships and other alternative investments. Prior audits have focused on other aspects of the investment portfolio.

The complete financial report for FY2017 can be found here:

University Audits noted a detailed audit of complex investment vehicles was beyond the scope of the internal audit. The university has received proposals from outside firms for an audit of the investment portfolio during fiscal year 2017. However, the bids received were too general in nature. In April 2018, the university signed an agreement to have the external auditing firm of PricewaterhouseCoopers conduct an audit. The work is expected to be completed by the end of June.