Amended in Senate June 21, 2016

Amended in Assembly April 12, 2016

Amended in Assembly March 28, 2016

Amended in Assembly March 17, 2016

California Legislature—2015–16 Regular Session

Assembly Bill No. 2833

Introduced by Assembly Member Cooley

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(Principal coauthor: Assembly Member Gatto)

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February 19, 2016

An act to add Section 7514.7 to the Government Code, relating to retirement.

LEGISLATIVE COUNSEL’S DIGEST

AB 2833, as amended, Cooley. Public begin delete retirement systems: end delete begin insert investment end insert funds: disclosures.

The California Constitution commits to the retirement board of a public pension or retirement system plenary authority and fiduciary responsibility for investment of moneys and administration of the system. Existing law requires a retirement board to develop and implement a policy requiring disclosure of payments to placement agents, as defined, in connection with system investments in or through external managers that includes prescribed elements. Existing law requires disclosure of campaign contributions or gifts made by a placement agent to any member of a public pension retirement board, as specified. Existing law requires a public retirement system to obtain an actuarial valuation of the system not less than triennially and submit audited financial statements to the State Controller who then publishes a report on the financial condition of public retirement systems.

This bill, for begin insert new end insert contracts entered into on and after January 1, 2017, begin insert and for existing contracts for which a new capital commitment is made on or after January 1, 2017, end insert would require a public begin delete pension or retirement system, including that of the University of California, end delete begin insert investment fund, as defined, end insert to require alternative investment vehicles, as defined, to make specified disclosures regarding fees, expenses, and begin delete the gross and net rate of return end delete begin insert carried interest end insert in connection with these vehicles and the underlying investments, as well as other specified begin delete information, on a form prescribed by the system. end delete begin insert information. end insert Consistent with requirements relating to public records, the bill would require a public begin delete pension or retirement system, including that of the University of California, end delete begin insert investment fund end insert to disclose the information received in connection with alternative investment begin delete vehicles, end delete begin insert vehicles and the gross and net rate of return of each alternative investment vehicle, as specified, end insert at least once annually at a meeting open to the public. begin insert The bill would require a public investment fund to undertake reasonable efforts to obtain the above-mentioned information for any existing contract for which the public investment fund has not made a new capital commitment on or after January 1, 2017. end insert The bill would make a statement of legislative intent. Because this bill would impose new requirements on local entities relating to the collection of information and its presentation at an open meeting, it would impose a state-mandated local program.

The California Constitution requires local agencies, for the purpose of ensuring public access to the meetings of public bodies and the writings of public officials and agencies, to comply with a statutory enactment that amends or enacts laws relating to public records or open meetings and contains findings demonstrating that the enactment furthers the constitutional requirements relating to this purpose.

This bill would make legislative findings to that effect.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

Vote: majority. Appropriation: no. Fiscal committee: yes. State-mandated local program: yes.

The people of the State of California do enact as follows:

SECTION 1.  

It is the intent of the Legislature in enacting this
section to increase the transparency of fees paid by public begin delete pension end delete
begin insert investment end insert funds to alternative investment vehicles. begin delete Pension end delete begin insert Public
investment end insert funds pay significant fees to alternative investment
vehicles and do not have sufficient information regarding the
character and amount of those fees. As fiduciaries, public
begin insert investment end insert fund trustees have a duty to maximize investment
returns in order to ensure promised benefits are adequately funded
and to minimize taxpayer costs. Because fees paid to alternative
investment vehicles reduce returns, public begin insert investment end insert fund trustees
need to be able to see and understand all of the fees they are
charged.

SEC. 2.  

Section 7514.7 is added to the Government Code, to
read:

7514.7.  

(a) Every public begin delete pension or retirement system,
including that of the University of California, end delete begin insert investment fund end insert shall
require each alternative investment vehicle in which it invests to
make the following begin delete disclosures, at least annually, and on a form
prescribed by the system: end delete begin insert disclosures at least annually: end insert

(1) The fees and expenses that the begin delete retirement system end delete begin insert public
investment fund end insert pays directly to the alternative investment vehicle,
the fund manager, or related parties.

(2) The begin insert public investment fund’s pro rata share of end insert fees and
expenses not included in paragraph (1) that are paid from the
alternative investment begin delete vehicle, including carried interest, end delete begin insert vehicle end insert
to the fund manager or related parties. begin insert The public investment fund
may independently calculate this information based on information
contractually required to be provided by the alternative investment
vehicle to the public investment fund. If the public investment fund
independently calculates this information, then the alternative
investment vehicle shall not be required to provide the information
identified in this paragraph. end insert

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(3) The public investment fund’s pro rata share of carried
interest distributed to the fund manager or related parties.

end insert begin delete

(3)

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begin insert ( end insert begin insert 4) end insert  The begin insert public investment fund’s pro rata share of aggregate end insert
fees and expenses paid by begin insert all of end insert the portfolio begin delete positions end delete begin insert companies end insert
held within the alternative investment vehicle to the fund manager
or related parties.

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(4) The gross and net rate of return of each alternative
investment vehicle since inception.

end delete

(5) Any additional information described in subdivision (b) of
Section 6254.26.

(b) Every public begin delete pension or retirement system, including that
of the University of California, end delete begin insert investment fund end insert shall disclose the
information provided pursuant to subdivision (a) at least once
annually in a report presented at a meeting open to the public. begin insert The
public investment fund’s report required pursuant to this
subdivision shall also include the gross and net rate of return of
each alternative investment vehicle, since inception, in which the
public investment fund participates. The public investment fund
may report the gross and net rate of return and information
required by subdivision (a) based on its own calculations or based
on calculations provided by the alternative investment vehicle. end insert

(c) For purposes of this section:

(1) “Alternative investment” means an investment in a private
equity fund, venture fund, hedge fund, or absolute return fund.

(2) “Alternative investment vehicle” means the limited
partnership, limited liability company, or similar legal structure
through which a public begin delete pension or retirement system, including
the University of California, end delete begin insert investment fund end insert invests in an
alternative investment.

(3) “Fund manager” means the general partner, managing
manager, adviser, or other person or entity with primary investment
decisionmaking authority over an alternative investment vehicle
and related parties of the fund manager.

(4) “Carried interest” means any share of profits from an
alternative investment vehicle that is begin delete allocated end delete begin insert distributed end insert to a fund
begin delete manager or end delete begin insert manager, end insert general partner, begin insert or related parties, end insert including
allocations of alternative investment vehicle profits received by a
fund manager in consideration of having waived fees that begin delete the fund
manager end delete begin insert it end insert might otherwise have been entitled to receive.

(5) “Portfolio begin delete positions” end delete begin insert companies end insert begin insert ” end insert means individual portfolio
investments made by the alternative investment vehicle.

begin insert

(6) “Gross rate of return” means the internal rate of return for
the alternative investment vehicle prior to the reduction of fees
and expenses described in subdivision (a).

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(7) “Public investment fund” means any fund of any public
pension or retirement system, including that of the University of
California.

end insert begin insert

(8) “Operational person” means any operational partner, senior
advisor, or other consultant or employee whose primary activity
for a relevant entity is to provide operational or back office support
to any portfolio company of any alternative investment vehicle,
account, or fund managed by a related person.

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(9) “Related person” means any current or former employee,
manager, or partner of any related entity that is involved in the
investment activities or accounting and valuation functions of the
relevant entity or any of their respective family members.

end insert begin insert

(10) “Related party” means:

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(A) Any related person.

end insert begin insert

(B) Any operational person.

end insert begin insert

(C) Any entity more than 10 percent of the ownership of which
is held directly or indirectly, whether through other entities or
trusts, by a related person or operational person regardless if the
related person or operational person participates in the carried
interest received by the general partner or the special limited
partner.

end insert begin insert

(D) Any consulting, legal, or other service provider regularly
engaged by portfolio companies of an alternative investment
vehicle, account, or fund managed by a related person and that
also provides advice or services to any related person or relevant
entity.

end insert begin insert

(11) “Relevant entity” means the general partner, any separate
carry vehicle, the investor advisor, any of the investment advisor’s
parent or subsidiary entities, or any similar entity related to any
other alternative investment vehicle, account, or fund advised or
managed by any current or former related person.

end insert

(d)  begin insert (1) end insert begin insert   end insert This section shall apply to begin insert all new end insert contracts the begin delete system
entered into, extended, renewed, or amended end delete begin insert public investment
fund enters into end insert on or after January 1, begin delete 2017. end delete begin insert 2017, and end insert begin insert to all
existing contracts pursuant to which the public investment fund
makes a new capital commitment on or after January 1, 2017. end insert

begin insert

(2)  With respect to existing contracts not covered by paragraph
(1), the public investment fund shall undertake reasonable efforts
to obtain the information described in subdivision (a) and comply
with the reporting requirements contained in subdivision (b) with
respect to any information obtained after January 1, 2017.

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SEC. 3.  

The Legislature finds and declares that Section 2 of
this act, which adds Section 7514.7 to the Government Code,
furthers, within the meaning of paragraph (7) of subdivision (b)
of Section 3 of Article I of the California Constitution, the purposes
of that constitutional section as it relates to the right of public
access to the meetings of local public bodies or the writings of
local public officials and local agencies. Pursuant to paragraph (7)
of subdivision (b) of Section 3 of Article I of the California
Constitution, the Legislature makes the following findings:

The information in the disclosures required under subdivisions
(a) and (b) of Section 7514.7 of the Government Code is necessary
to ensure public confidence in the integrity of investments made
by retirement boards pursuant to alternative investment vehicles.

SEC. 4.  

No reimbursement is required by this act pursuant to
Section 6 of Article XIII B of the California Constitution because
the only costs that may be incurred by a local agency or school
district under this act would result from a legislative mandate that
is within the scope of paragraph (7) of subdivision (b) of Section
3 of Article I of the California Constitution.