BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 1151
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          Date of Hearing:   May 4, 2011

            ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT AND SOCIAL 
                                      SECURITY
                              Warren T. Furutani, Chair
            AB 1151 (Feuer and Blumenfield) - As Amended:  April 14, 2011
           
          SUBJECT :   Public retirement systems: investments: Iran.

           SUMMARY  :   Amends the California Public Divest from Iran Act to, 
          among other things, clarify that pension boards must divest 
          pension funds, as specified, unless to do so would breach a 
          fiduciary duty; modify the types of companies that fall within 
          the scope of the bill; and require that certain findings and 
          determinations must be made in noticed public hearings.  
          Specifically,  this bill  :  

          1)Provides that the boards of CalPERS and CalSTRS (board) shall 
            not invest public employee retirement funds in a company which 
            has business operations in Iran, as identified by the board 
            through publicly available information, if the company meets 
            either of the following criteria:

             a)   The company has an investment of $20 million or more in 
               the energy sector of Iran, including a company that 
               provides oil or liquefied natural gas tankers, or products 
               used to construct or maintain pipelines used to transport 
               oil or liquefied natural gas, for the energy sector of 
               Iran, and that company is subject to sanctions under 
               relevant federal law.

             b)   The Company has demonstrated complicity with an Iranian 
               organization that has been labeled as a terrorist 
               organization by the United States government.

          2)Requires the board to annually review its investment portfolio 
            based on publicly available information.

          3)Requires that board determinations as to whether a company is 
            subject to, or remains subject to, divestment be based on 
            credible information available to the public and supported by 
            findings adopted by a roll call vote in open session during a 
            properly noticed public hearing of the full board.  Requires 
            further that all proposed findings of the board shall be made 
            public 72 hours before they are considered by the full board, 








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            and the board shall maintain a list of interest parties who 
            shall be notified.

          4)Provides that if a company fails to take substantial action, 
            as defined, within one year, then the board shall not make 
            additional, or renew, investments in that company, and, 
            thereafter, the board shall liquidate investments in this 
            company within 18 months in a manner consistent with its 
            fiduciary responsibilities.

          5)Specifies that nothing in this bill would require the board to 
            take an action pursuant to the above provisions if the board 
            determines, in good faith, that an action would be a breach of 
            the fiduciary responsibilities of the board as described in 
            the California constitution.  However, any determination that 
            an action would be a breach fiduciary duty shall be made in a 
            public hearing of the full board after proper notice and an 
            opportunity for public comment.

          6)Eliminates existing exemptions from the California Public 
            Divest from Iran Act for companies engaged in certain 
            humanitarian, educational, religious, journalistic, or welfare 
            activities.  

           EXISTING LAW  :

          1)Prohibits the boards of CalPERS and CalSTRS from investing 
            public employee retirement funds in a company which has 
            business operations in Iran if the company (a) is invested in 
            or engaged in business operations with entities in the defense 
            or nuclear sectors in Iran or involved in the development of 
            petroleum or natural gas resources of Iran OR (b) has 
            demonstrated complicity with an Iranian organization that has 
            been labeled as a terrorist organization by the United States 
            government.  (Government Code Section 7513.7 (b).) 

          2)Requires the board to identify and notify any company that may 
            be subject to divestment. If the company fails to take 
            corrective measures within one year, as specified, then the 
            board shall not make any new or additional investments in that 
            company and, thereafter, shall liquidate existing investments 
            within 18 months.  (Government Code Section 7513.7 (c)-(h).)

          3)Requires that the board shall file an annual report with the 
            Legislature detailing relevant investments in companies 








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            subject to divestment, any actions that the board has taken to 
            reduce investments or transfer funds in compliance with the 
            above provisions, and a calculation of any costs or losses 
            associated with compliance.  (Government Code Section 7513.7 
            (i)-(j).)

          4)Specifies that the above provisions do not require the board 
            to take a divestment action unless the board determines, in 
            good faith, that the action is consistent with its fiduciary 
            responsibilities, as described in the state constitution.  
            (Government Code Section 7513.7 (k).)

          5)Exempts from the above provisions companies that are engaged 
            in certain humanitarian, educational, religious, journalistic, 
            or welfare activities.  (Government Code Section 7513.7 (l).) 

          6)Provides that the above provisions shall cease to be operative 
            if Iran is removed from the United States Department of 
            State's list of countries that have been determined to support 
            international terrorism AND the President of United States, as 
            provided by federal law, determines that Iran has ceased its 
            efforts to design, develop, manufacture, or acquire a nuclear 
            explosive device or related materials or technology.  
            (Government Code Section 7513.7 (m).)

          7)Provides that the board of a public pension fund shall have 
            sole and exclusive fiduciary responsibility over the assets of 
            the public pension fund and that the members of the board 
            shall discharge their duties solely in the interest of 
            providing benefits to participants and their beneficiaries.  
            However, the Legislature may by statute prohibit certain 
            investments where it is in the public interest to do so, and 
            provided that any prohibition satisfies the standards of 
            fiduciary care, as specified.  (Section 17 of Article XVI of 
            the California Constitution.)

           FISCAL EFFECT  :   Unknown.

           COMMENTS  :   Existing law prohibits the boards of CalPERS and 
          CalSTRS (boards) from making new investments in companies that 
          do business in Iran's energy sector and generally requires the 
          boards to liquidate existing investments in such companies.  
          This bill seeks to clarify that these actions are required 
          unless doing so would constitute a breach of the boards' 
          constitutionally-mandated fiduciary responsibilities.  In 








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          addition, this bill would require that certain board 
          determinations be adopted by a rollcall vote at a noticed public 
          hearing.  

           Federal Law Background  :  For more than a decade the United 
          States government has condemned the government of Iran for its 
          support of international terrorism, human rights violations, and 
          efforts to develop nuclear weapons in defiance of the 
          international community.  Although federal law has for some time 
          prohibited American companies from engaging in specified 
          business practices with Iran, it has no similar power to ban the 
          actions of foreign companies.  However, the United States does 
          have the power to penalize foreign companies by denying them 
          certain advantages of U.S. law.  As such, the key provisions of 
          the Iran Sanctions Act require the President to impose two of 
          seven possible sanctions on foreign persons or companies that 
          make an investment of more than $20 million in Iran's energy 
          sector.  Sanctions primarily include denial of access to certain 
          forms of credit, denial of licenses for the export of certain 
          U.S. military technologies, and various prohibitions relating to 
          dealing in U.S. bonds, acting as a repository of U.S. funds, or 
          securing certain government procurements.  More recently, the 
          Iran Refined Petroleum Act amended the ISA to direct the 
          President to impose sanctions on any person, entity, business, 
          or corporation that has knowingly made an investment of $20 
          million or more that directly or significantly contributes to 
          Iran's ability to develop its petroleum resources.  Persons or 
          companies could also face sanctions for providing refined 
          products or goods, services, technology or information worth 
          $200,000 or more.  

           Background: the California Public Divest from Iran Act of 2007  .  
           AB 221 (Anderson, Chapter 671, Statutes of 2007) enacted the 
          California Public Divest from Iran Act.  This legislation 
          prohibits the boards of CalPERS and CalSTRS from investing 
          public employee retirement funds in companies that have 
          specified energy- or defense-related operations in Iran.  In 
          addition, AB 221 required the boards to independently review 
          publicly available information regarding companies with business 
          operations in Iran and, based on that review, to notify such 
          companies that they must take "substantial action" to reduce or 
          eliminate investments in Iran or face the prospect of withdrawal 
          of public pension funds.  If the company fails to satisfactorily 
          take substantial action within a year, then the boards of 
          CalPERS and CalSTRS are required to liquidate investments in 








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          that company within 18 months.  

          According to information provided to this Committee by the 
          Assembly Judiciary Committee, "Existing law, however, contains a 
          significant loophole: it specifies that CalPERS and CalSTRS are 
          only required to divest funds to the extent that it is 
          'consistent' with their fiduciary responsibilities.  The authors 
          of the present bill point to recent legislative oversight 
          hearings which found that CalPERS has 'increased investments in 
          several energy companies doing business in Iran, while 
          decreasing investments in other energy companies which do not do 
          business in Iran.'  Arguably, one of the reasons that CalPERS 
          and CalSTRS have not been as successful in achieving divestment 
          as one might hope is a byproduct of the somewhat vague standard 
          that requires divestment only if doing so is 'consistent' with a 
          board's fiduciary responsibilities.  It is not quite clear what 
          'consistent' means in this context, and the word 'consistent' 
          has no meaning in the case law defining the scope of fiduciary 
          duties.  For example, would an action be 'inconsistent' with 
          fiduciary responsibilities only if it rose to the level to a 
          'breach' of fiduciary responsibility, or could something less 
          than a legal breach still be 'inconsistent' with that 
          responsibility?  

          "In order to clarify this issue, this bill would clearly state 
          that a board is required to take a divestment action unless to 
          do so would create a 'breach of fiduciary responsibility,' a 
          term which has a more definite legal meaning.  For example, 
          while the implications of an action that is 'consistent' with 
          fiduciary duty is not clear, a 'breach' of fiduciary duty means 
          that the fiduciary is liable to the beneficiaries for any 
          damages caused by the action.  

          In addition, this bill seeks to increase greater accountability 
          and transparency by requiring that certain board findings and 
          determinations be adopted at a noticed public hearing.  
          Specifically, existing law requires the boards to request that a 
          notified company take "substantial action," as specified, toward 
          curtailing business in Iran and requires the boards to determine 
          a company's compliance at 90-day intervals.  This bill would 
          require that the determinations be based on credible information 
          available to the public and be adopted by a rollcall vote at a 
          properly noticed public hearing of the full board.  In addition, 
          this bill would require that any determination that an action 
          would be a breach of fiduciary duty similarly be adopted by a 








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          rollcall of the full board following a presentation and 
          discussion of findings in an open session, during a properly 
          noticed public hearing. 

           Constitutional Requirements  .  Section 17 of Article XVI of the 
          California Constitution, as amended by Proposition 162 in 1992, 
          provides that the boards of California's public retirement 
          systems have "plenary authority and fiduciary responsibility for 
          investment of monies and administration of the system".  This 
          section also states that the "members of the retirement board of 
          a public pension or retirement system shall discharge their 
          duties with respect to the system solely in the interest of, and 
          for the exclusive purposes of providing benefits to, 
          participants and their beneficiaries."  However, this section is 
          equally clear that the Legislature retains its authority to 
          "prohibit certain investments by a retirement board where it is 
          in the public interest to do so, and provided that the 
          prohibition satisfies the standards of fiduciary care and 
          loyalty required of a retirement board."  The authors and 
          supporters of this bill contend that it is certainly in the 
          public interest of Californians to ensure that public funds are 
          not used to sponsor international terrorism or support a regime 
          that violates human rights and pursues nuclear weapons in 
          defiance of the international community.  Consistent with the 
          California Constitution, the bill expressly states that its 
          prohibitions only apply to the extent that they permit the 
          members of the boards to meet their constitutionally mandated 
          standards of fiduciary care and loyalty to beneficiaries. 

          According to the authors, even though existing law requires 
          California public pension funds to divest from companies doing 
          business with Iran, "CalPERS continues to invest in companies 
          with interests in Iran and has failed to satisfactorily comply 
          with statutorily mandated reporting requirements to the 
          Legislature."  In support of this position, the authors point to 
          a 2010 legislative oversight hearing showing that CalPERS has 
          "increased investments in several energy companies doing 
          business in Iran, while decreasing investments in other energy 
          companies that do not do business with Iran."  In addition, the 
          authors contend that CalPERS required report to the Legislature 
          failed to adequately explain why CalPERS continues to invest in 
          companies that do business with Iran.  

          The bill is supported by several human rights organizations.  
          For example, the Simon Wiesenthal Center argues that this bill 








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          "would increase accountability by requiring that any 
          determination that an action would breach a fiduciary duty be 
          done by a roll call vote of the board, following a presentation 
          and discussion of the findings in open session, during a 
          properly noticed public hearing of the full board."  In 
          addition, the Simon Wiesenthal Center argues that this bill, 
          coming from a key American state, "will send a message to the 
          long-suffering people of Iran that Californians stand with their 
          quest for freedom and will not, under any circumstances, help to 
          prop up an evil regime that threats the region and oppresses its 
          own people."

          The Center for the Promotion of Democracy and Human Rights 
          argues that this bill will "continue California's long-standing 
          leadership" in this area and will address the instances of 
          non-compliance that were revealed in the 2010 legislative 
          oversight hearing.

          CalSTRS opposes the bill stating, "This measure would require 
          the board to potentially compromise its fiduciary responsibility 
          and infringe on its investment authority.  Requiring investment 
          decisions to be made in a public hearing could adversely affect 
          the market conditions for those investments, resulting in harm 
          to the value of those investments and a negative impact to the 
          Teachers' Retirement Fund."

          This bill was also heard in the Assembly Judiciary Committee 
          where is passed out of Committee on a vote of 9 to 0.

          The Committee is informed the author will be offering amendments 
          in Committee that restore "defense and nuclear sectors of Iran" 
          to the description of companies from which pension funds must 
          divest. 

           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          30 Years After
          American Jewish Committee 
          Anti-Defamation League
          City of Beverly Hills
          Jewish Community Relations Council 
          Jewish Labor Committee, Western Region 
          Jewish Public Affairs Committee








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          Simon Wiesenthal Center 
          United Against Nuclear Iran

           Opposition 
           
          California State Teachers' Retirement System
           
          Analysis Prepared by  :    Karon Green / P.E., R. & S.S. / (916) 
          319-3957