BILL ANALYSIS �
AB 382
Page 1
Date of Hearing: April 23, 2013
ASSEMBLY COMMITTEE ON JUDICIARY
Bob Wieckowski, Chair
AB 382 (Mullin) - As Amended: April 15, 2013
SUBJECT : STATE AND LOCAL GOVERNMENT: ALTERNATIVE INVESTMENTS:
PUBLIC ACCESS
KEY ISSUE : IN ORDER TO HELP COUNTY RETIREMENT SYSTEMS BECOME
MORE COMPETITIVE IN THE MARKETPLACE, SHOULD INFORMATION
PERTAINING TO ALTERNATIVE INVESTMENTS BE ADDED TO THE TYPES OF
OTHER INFORMATION ALREADY EXEMPTED FROM DISCLOSURE AND OPEN
MEETING REQUIREMENTS UNDER THE BROWN ACT?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
Under existing law, "alternative investments" are investments in
a private equity fund, venture fund, hedge fund, or absolute
return fund. County and statewide retirement systems currently
may invest in alternative investment vehicles in their quest to
achieve profitability. According to the author, however, these
pension funds are at a distinct disadvantage in the marketplace
because many documents associated with alternative investments
are required to be publicly disclosed under the Brown Act -
despite the fact that the same business records are currently
exempted from disclosure under the California Public Records Act
(PRA). This bill, sponsored by the State Association of County
Retirements Systems, seeks to resolve this inconsistency by
adding alternative investments to the list of written records
currently exempt from the Brown Act if those records are part of
a public hearing. In addition, this bill seeks to clarify that
a local agency that invests pension funds may hold a closed
session to simply consider information related to alternative
investments, rather than only to consider the purchase or sale
of particular, specific alternative investments, under a strict
reading of the statute. A number of organized labor
organizations have contacted the Committee to officially remove
their opposition to the bill as currently in print, and the bill
currently has no known opposition. This bill is double-referred
to the Assembly Local Government Committee should it be approved
by this Committee.
AB 382
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SUMMARY : Amends the Brown Act to include information about
alternative investments among the types of information already
exempted from the Act. Specifically, this bill :
1)Permits a legislative body of a local agency that invests
pension funds to hold a closed session to consider the
purchase or sale of alternative investments and related
information, as specified.
2)Provides that specified written information concerning
alternative investments shall be exempt from the general
requirement that writings, when distributed to all, or a
majority of all, of the members of a legislative body of a
local agency in connection with a matter subject to discussion
or consideration at an open meeting of the body, are
disclosable public records under the California Public Records
Act.
3)Makes Legislative findings and declarations with respect to
the Brown Act, specifically that the public interest in
nondisclosure pursuant to the Act outweighs the public
interest in disclosure, since disclosure of the information
under the Act puts public pension funds at a competitive
disadvantage in the marketplace, likely reducing a pension
fund's return on investment and thereby necessitating greater
contribution from the public for the support of public
pensions.
EXISTING LAW :
Pursuant to the California Public Records Act (PRA):
1)Exempts the following records, regarding alternative
investments in which public investment funds invest, from
disclosure pursuant to the California Public Records Act,
unless the information has already been publicly released by
the keeper of the information:
a) Due diligence materials that are proprietary to the
public investment fund or the alternative investment
vehicle.
b) Quarterly and annual financial statements of alternative
investment vehicles.
c) Meeting materials of alternative investment vehicles.
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d) Records containing information regarding the portfolio
positions in which alternative investment funds invest.
e) Capital call and distribution notices.
f) Alternative investment agreements and all related
documents. (Government Code 6254.26(a). Unless otherwise
noted, all further references are to this code.)
2)Specifies information, regarding alternative investments in
which public investment funds invest, that shall be subject to
disclosure, and shall not be considered a trade secret exempt
from disclosure, including, among other things:
a) The name, address, and vintage year of each alternative
investment vehicle.
b) The dollar amount of the commitment made to each
alternative investment vehicle by the public investment
fund since inception.
c) The dollar amount of cash contributions made by the
public investment fund to each alternative investment
vehicle since inception.
d) The dollar amount, on a fiscal yearend basis, of cash
distributions received by the public investment fund from
each alternative investment vehicle.
e) The dollar amount of cash profit received by public
investment funds from each alternative investment vehicle
on a fiscal year-end basis. (Section 6254.26(b).)
Pursuant to the Brown Act:
3)Permits a legislative body of a local agency that invests
pension funds to hold a closed session to consider the
purchase or sale of particular, specific pension fund
investments. Further provides that all investment transaction
decisions made during the closed session shall be made by
roll-call vote entered into the minutes of the closed session.
(Section 54956.81.)
4)Provides that agendas of public meetings and any other
writings, when distributed to all, or a majority of all, of
the members of a legislative body of a local agency by any
person in connection with a matter subject to discussion or
consideration at an open meeting of the body, are disclosable
public records under the California Public Records Act and
shall be made available upon request without delay. (Section
54957.5(a).)
AB 382
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5)Exempts from the above disclosure requirement several types of
writings, including, among other things, preliminary drafts,
notes or interagency memoranda; records pertaining to pending
litigation against a public agency; personnel or medical
files; and many more. (Section 54957.5(a).)
6)Requires the above writings that are public records and
distributed during a public meeting to be made available for
public inspection at the meeting if prepared by the local
agency or a member of its legislative body, or after the
meeting if prepared by some other person. (Section
54957.5(c).)
COMMENTS : County and statewide retirement systems invest in
alternative investment vehicles in their quest to achieve
profitability. According to the author, however, these pension
funds are at a distinct disadvantage in the marketplace because
many documents associated with alternative investments are
required to be publicly disclosed under the Brown Act - despite
the fact that the same business records are currently exempted
from disclosure under the California Public Records Act (PRA).
This bill, sponsored by the State Association of County
Retirements Systems, seeks to resolve this inconsistency by
adding alternative investments to the list of written records
currently exempt from the Brown Act if those records are part of
a public hearing. In addition, this bill also modestly expands
the authority of retirement boards to meet in closed session to
discuss information relating to alternative investments, as
specified.
Stated Need for the Bill . According to the author:
The purpose of this bill is to make public pension
systems more competitive in the marketplace. The
forced disclosure of alternative investments impedes
and hinders investment returns. For example, release
of investment research on a commercial property could
lead to investor speculation on that property, drive
up price, and limit return on investment. It also
makes retirement systems less desirable partners
because many documents associated with a business
transaction become public records.
It is in the public interest to avoid the disclosure
AB 382
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of sensitive information regarding alternative
investments because we need to ensure that pension
funds are as profitable as possible, otherwise
taxpayers could have to foot the bill for the
pension's unfunded liabilities. This bill basically
extends the same protections currently available to
CalPERS, CalSTRS, and UCERS under the Public Records
Act to County Retirement systems who are subject to
the Brown Act.
Background on alternative investments . Under existing law, the
term "alternative investment" refers to an investment in a
private equity fund, venture fund, hedge fund, or absolute
return fund. (Government Code Section 6254.26(c).) Venture
capital is a source of financing for start-up companies that
entails some investment risk but offers the potential for
above-average profits. A hedge fund is commonly used by wealthy
investors and institutions to employ aggressive strategies that
are unavailable to holders of mutual funds, including selling
short, leverage, program trading, swaps, arbitrage, and
derivatives.
Prior to 2005, there were reports that some venture capital
firms and hedge funds were denying access to their investments
to public institutions such as the University of California
because of the fear that sensitive financial information about
the funds was vulnerable because it could be obtained pursuant
to the California Public Records Act, requiring disclosure of
public records unless exempted. In addition, public pension
funds were reportedly getting sued to compel the disclosure of
information related to these highly profitable investments in
venture capital funds, hedge funds, and other alternative
investments.
In response, the Legislature approved and the Governor signed SB
439 (Simitian), Ch. 258, Stats. 2005, which established that
specified information related to alternative investments would
be exempt from disclosure under the PRA, so as to restore some
competitive advantage to public pension systems competing in the
marketplace.
According to the author, some examples of the types of
information related to alternative investments that are now
exempted from the PRA include capital call and distribution
notices, meeting materials, and portfolio positions. Capital
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call and distribution notices are formal requests from partners
and outside managers identifying specific assets and how much is
being distributed to them--information that proponents contend
could lead to inflating the costs of potential investments.
Meeting materials are documents from meetings between
representatives of the retirement system and potential sellers,
buyers, partners, investors and others. These documents could
include strategies for each asset, plans for maximizing value,
risks impacting an asset, concerns about competitors, and
discussions that could culminate in sales, investments or
acquisitions. Finally, portfolio positions are documents that
detail how much individuals or partnerships own of specific
investment vehicles.
This bill seeks to address two inconsistencies in the Brown Act
that appear to hinder the purpose of SB 439. First, the bill
seeks to harmonize exemptions for alternative investment
information between the Brown Act and the Public Records Act.
Currently, the Brown Act generally requires that written
material that is part of a public hearing shall be part of the
public record and available for inspection, but it also exempts
from disclosure certain written materials that are already
exempt from disclosure under the PRA. Section 54957.5(a), part
of the Brown Act, provides this extensive list of exemptions by
cross referencing numerous sections of the PRA that identify
various kinds of records exempted under the PRA. However,
alternative investments are not included among the records
specifically exempted by this section of the Brown Act.
Despite the fact that SB 439 made information concerning
alternative investments exempt from the Public Records Act,
proponents note that if a local agency is making decisions
relating to alternative investments at a public meeting, the
material must still be made available under the Brown Act, thus
effectively negating the PRA exemption and making it moot. To
address this, this bill would amend the Brown Act to include
alternative investments among the list of information and
records that are also exempt under the Brown Act as well as the
PRA.
In addition, this bill modestly expands the authority of
retirement boards to meet in closed session to discuss
information relating to alternative investments. Under the
Brown Act, a local board or agency may meet in closed session to
discuss the purchase or sale of pension fund investments. In
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those cases, investment transaction decisions are recorded by
vote and are appropriately made public. According to the
author, however, retirement boards acting as limited partner
investors often meet to consider amendments and other
information related to partnership agreements after a "purchase"
of pension fund investments was already made in closed session.
Proponents contend that such amendments and information are also
very sensitive, and their disclosure could materially affect
investment return in the same manner as information related to
the original purchase, which is currently protected. To address
this, the bill seeks to clarify that a local agency that invests
pension funds may hold a closed session to simply consider
information related to alternative investments, rather than only
consideration of the purchase or sale of particular, specific
alternative investments.
REGISTERED SUPPORT / OPPOSITION :
Support
State Association of County Retirements Systems (sponsor)
Opposition
None on file
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334