Are Your General Board Investments Safe?

Recent media headlines and commentaries have raised concerns about the safety of investments, particularly when multibillion-dollar frauds have been perpetrated by long-respected investment advisors, such as Bernard Madoff and Allen Stanford.

Fortunately, neither of these investment advisors managed General Board of Pension and Health Benefits (General Board) investment funds—but the situation has raised questions among our participants about the safety of the investments supporting their account balances.

The General Board does business with many investment managers (or service providers), and we understand the concerns around the possible risk for a future fraud or bankruptcy by one of them. For that reason, let us explain how our investments are handled.

Investments Held "in Trust"

The majority of the General Board’s investments are held "in trust" with its custodial bank, the Bank of New York/Mellon (BNY Mellon). "In trust" means that investments are secure and held in the equivalent of a safety deposit box by our custodian. Just as the contents of a safety deposit box cannot be surrendered to creditors if a bank’s deposits are seized by federal regulators, the General Board’s investments are safely isolated from deposits held in BNY Mellon’s general banking accounts. As the custodian of the General Board’s investments, BNY Mellon’s primary role is to act as an accountant, accurately administering the flow of funds and securities through an independent organization known as the Depository Trust Corporation.

Role of the Depository Trust Corporation (DTC)

The DTC is a member of the U.S. Federal Reserve System—it is a limited-purpose trust company under New York State banking law and a registered “clearing agent” with the Securities and Exchange Commission. It essentially serves as the lifeblood of the U.S. securities industry; its activities are regulated and monitored by the Federal Reserve.

Most securities issued in the United States (bonds, stocks and other similar investments) are held in electronic form at the DTC. In 2008, the DTC settled transactions worth almost $455 trillion and processed 316.6 million book-entry deliveries. In addition to settlement services, the DTC provides efficiency to the securities industry by retaining custody of almost 3.5 million securities issued in the U.S. and more than 110 other countries, worth approximately $27.6 trillion. Foreign government and quasi-government institutions, similar to the DTC, perform a comparable clearing agent function for the General Board’s investments in foreign securities (not held by the DTC).

Limited Partnership Investments

While most of the General Board’s investments are held in custody at the DTC or similar foreign institutions, some of our investments represent interests in a number of limited partnerships invested in real estate and private companies. Because of the nature of these limited partnership investments (interests in physical property, such as office buildings or interests in companies that are not publicly traded), the General Board’s ownership interests are held elsewhere. For that reason, it is possible that fraud or bankruptcy could adversely affect these investments. In order to mitigate these risks, the General Board performs extensive and ongoing due diligence of its limited partners and closely monitors their investments.

Routine Audits

The activities of the DTC, BNY Mellon and other clearing agents are routinely audited by several entities, including the U.S. Treasury Department, the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve System and one or more of the large U.S. accounting firms, as well as their foreign counterparts. All of the general partners managing the General Board’s investment interests held outside of our custodial bank are also subject to audit reviews by reputable, independent accounting firms and other regulatory oversight organizations.

Continuous Oversight

The General Board’s investments are broadly diversified, and no single vendor represents a risk to a significant percentage of the assets we hold. We cannot guarantee, however, that each investment manager or service provider will perform without the possibility of loss from fraud or bankruptcy. The U.S. financial system is built on a foundation of trust and ethics—every year millions of transactions occur, and trillions of dollars are entrusted to our institutions without incident. We work every day to ensure the investments we oversee on behalf of our participants are monitored, reviewed and audited, assuring the benefits you have earned will be there when you need them.