§33.40: Trading and Brokerage Policy

(a) Security transaction policy.

(1) The following principles shall guide all Texas Permanent School Fund (PSF) transactions.

(A) Each manager shall be responsible for complying fully with PSF policies for trading securities and selecting brokerage firms, as specified in this section. In particular, the emphasis of security trading shall be on best execution; that is, the highest proceeds to the PSF and the lowest costs, net of all transaction expenses. Placing orders shall be based on the financial viability of the brokerage firm and the assurance of prompt and efficient execution.

(B) Ongoing efforts must be made to reduce trading costs, in terms of both commissions and market impact, provided the investment returns of the PSF are not jeopardized.

(2) The State Board of Education (SBOE) may enter into brokerage commission recapture agreements or soft dollar agreements.

(3) The SBOE may evaluate transaction activity annually through a trading cost analysis.

(b) Directed trades. The SBOE may adopt directed trade procedures for the PSF portfolio according to procedures developed by the SBOE Committee on School Finance/Permanent School Fund.

(c) Guidelines for selecting a brokerage firm and standards of ethical conduct for brokerage firms.

(1) Introduction and basic principles.

(A) The SBOE intends that any transaction of publicly traded security occur through a brokerage firm or automated trading system, regardless of location, to obtain the lowest transaction cost consistent with best execution.

(B) Each investment manager shall be responsible for selecting brokerage firms or automated trading systems through which PSF trading shall be completed. The selections must meet PSF guidelines and be for the exclusive benefit of the PSF.

(2) Guidelines for selection and standards of ethical conduct. The broker or dealer firm must:

(A) have appropriate trading and market expertise;

(B) have comprehensive, proprietary, in-house research capabilities;

(C) be in compliance with applicable federal and Texas laws related to conducting business as a broker or dealer, including the Anti-Fraud provisions of the Securities Exchange Act of 1934;

(D) be a member in good standing of the major financial exchanges;

(E) have on-site, in-house trading capability and direct access to major markets;

(F) have in-house access to trading support equipment;

(G) trade for competitive rates that provide the lowest transaction cost consistent with best execution;

(H) be financially able to accommodate a capital commitment trade over an industry standard settlement period;

(I) have the ability and record to clear and settle trades without unnecessary delays or fails; and

(J) have been in business as a broker or dealer for a reasonable period of time to ensure financial and operational stability.

(3) Exemptions.

(A) Broker/dealer firms that are certified as Texas based historically underutilized businesses (HUBs) are exempted from the requirements specified in paragraph (2)(B), (D), and (H) of this subsection; and

(B) broker/dealer firms that are operating as electronic communication networks are exempted from the requirements specified in paragraph (2)(B) of this subsection.

(4) Reporting requirements. The executive administrator of the PSF will report to the SBOE Committee on School Finance/Permanent School Fund, on an ongoing basis, a list of broker dealers with whom the PSF has conducted business during the fiscal year that have been granted exemptions under paragraph (2)(B), (D), and (H) of this subsection and will identify the specific exemptions granted.

(5) Review and evaluation. At least annually, the SBOE Committee on School Finance/Permanent School Fund shall review the brokerage firms used by PSF investment managers and all transactions for compliance with the provisions of this section.

(6) Broker expenditure report. A broker shall file a report annually on January 15 of each year on the expenditure report provided in §33.5(l)(2)(J) of this title (relating to Code of Ethics) entitled "Report of Expenditures of Persons Providing Services to the State Board of Education Relating to the Management and Investment of the Permanent School Fund." The report shall be for the time period beginning on December 1 of the previous year and ending on November 30 of the current year. The expenditure report must describe in detail any expenditure of more than $50 made by the person on behalf of:

(A) an SBOE Member;

(B) the commissioner of education; or

(C) an employee of the TEA or of a nonprofit corporation created under the Texas Education Code, §43.006.


Source Note: The provisions of this §33.40 adopted to be effective September 1, 1996, 21 TexReg 4609; amended to be effective September 1, 1998, 23 TexReg 7777; amended to be effective April 2, 2000, 25 TexReg 2568; amended to be effective October 11, 2000, 25 TexReg 10151; amended to be effective March 31, 2004, 29 TexReg 3174; amended to be effective October 10, 2004, 29 TexReg 9354