BILL ANALYSIS                                                                                                                                                                                                    



                                                                    AB 2833


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          Date of Hearing:   April 20, 2016


           ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT, AND SOCIAL  
                                      SECURITY


                                  Rob Bonta, Chair


          AB 2833  
          (Cooley) - As Amended April 12, 2016


          SUBJECT:  Public retirement:  pension funds:  disclosures


          SUMMARY:  Requires every public retirement system, including the  
          University of California Retirement System (UCRS), to require  
          alternative investment vehicles in which they invest to annually  
          make various disclosures, as specified, and requires the public  
          retirement systems to disclose that information, along with  
          other specified information, at least annually in a report  
          presented at a public meeting.  Specifically, this bill:





          1)Expresses the intent of the legislature to increase the  
            transparency of fees paid by public pension funds to  
            alternative investment vehicles.  Because fees paid to  
            alternative investment vehicles reduce returns, public fund  
            trustees need to see and understand all fees they are changed.
          2)Requires every public pension or retirement system, including  
            the UCRS, to require each alternative investment vehicle in  
            which it invests to disclose specified fees, expenses, and the  
            gross and net rate of return associated with these vehicles  
            and the underlying investments on a form prescribed by the  








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            system.



          3)Requires every public pension or retirement system, including  
            the UCRS, to disclose the information received in connection  
            with alternative investment vehicles at least annually in a  
            report presented at a public meeting.



          4)Defines the following terms:



             a)   "Alternative investment" means an investment in a  
               private equity fund, venture fund, hedge fund, or absolute  
               return fund.

             b)   "Alternative investment vehicle" means the limited  
               partnership, limited liability company, or similar legal  
               structure through which a public pension or retirement  
               system invests in an alternative investment.



             c)   "Fund manager" means the general partner, managing  
               manager, adviser, or other person with primary investment  
               decision making authority over an alternative investment  
               vehicle and related parties of the fund manager. 



             d)   "Carried interest" means any share of profits from an  
               alternative investment vehicle that is allocated to a fund  
               manager or general partner, including allocations of  
               profits received by a fund manager in consideration of  
               having waived fees that the fund manager might otherwise be  
               entitled to receive.








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             e)   "Portfolio positions" means individual portfolio  
               investments made by the alternative investment vehicle.



          5)Contains legislative findings and declarations stating that  
            the information and disclosures required by this bill is  
            necessary to ensure public confidence in the integrity of  
            investments made by retirement boards pursuant to alternative  
            investments.  

          6)Specifies that no reimbursement for a state mandated cost is  
            required by this act because the only cost that may be  
            incurred by a local agency or school district under this act  
            would result from a state mandate that is within the scope of  
            provisions in the California Constitution that require local  
            agencies to comply with a statutory enactment that is related  
            to public records or open meetings, as specified.


          


          EXISTING LAW:  



          1)Pursuant to Government Code Section 6254.26(b), the following  
            information regarding alternative investments in which public  
            investment funds invest are subject to disclosure:

             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  








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               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, on a fiscal yearend basis, of cash  
               distributions received by the public investment fund plus  
               remaining value of partnership assets attributable to the  
               public investment fund's investment in each alternative  
               investment vehicle;





             f)   The net internal rate of return of each alternative  
               investment vehicle since inception;



             g)   The investment multiple of each alternative investment  
               vehicle since inception;

             h)   The dollar amount of the total management fees and costs  
               paid on an annual fiscal yearend basis, by the public  
               investment fund to each alternative investment vehicle;  
               and,









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             i)   The dollar amount of cash profit received by public  
               investment funds from each alternative investment vehicle  
               on a fiscal year-end basis.



          2)Pursuant to Government Code Section 6254.26(a), the following  
            records regarding alternative investments in which public  
            investment funds invest are not subject to disclosure, 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;



             d)   Records containing information regarding the portfolio  
               positions in which alternative investment funds invest;



             e)   Capital call and distribution notices; and,



             f)   Alternative investment agreements and all related  
               documents.









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          FISCAL EFFECT:  Unknown.


          COMMENTS:  In June 2003, the Alameda County Superior Court,  
          citing the California Public Records Act (CPRA), required the  
          University of California (UC) to reveal information regarding  
          individual venture-capital partnerships.  In 2005, in response  
          to concerns that this disclosure would lead to some funds  
          discontinuing partnership with UC, SB 439 (Simitian), Chapter  
          258, established Government Code 6254.26 to require the public  
          disclosure of some information regarding investment performance,  
          but to protect the confidentiality of some proprietary  
          information.





          According to the author, "Administration of California's pension  
          funds carries with it a fiduciary responsibility to act  
          exclusively for the plan's participants.  This is a moving  
          standard as financial markets evolve and the resulting  
          complexity of investments increase.  This bill's requirement for  
          more systematic disclosure of affected fees and charges will  
          ensure that, as fiduciaries, plan administrators will have this  
          information in a clear format that is both transparent but which  
          can also be understood in comparison to other investments.  This  
          more assertive disclosure coupled with comparison will advance  
          the fiduciary duties of these plans." 





          The author concludes, "All public pension plans are funded by  
          employee contributions and taxpayer dollars. These funds pay  
          significant fees to their alternative investment general  








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          partners but lack sufficient insight into the amount and nature  
          of those fees.  The investment portfolios of California's public  
          pension plans require certain levels of returns to fund  
          constitutionally guaranteed benefits for government workers.   
          Both management and carried interest payments to general  
          partners decrease the net returns on the portfolio.  If net  
          returns of the portfolio are reported to pension plans without  
          specific disclosure of the amount of fees paid to general  
          partners, public pension plans and the public have no means of  
          assessing whether the amount of compensation paid to private  
          equity managers or hedge fund managers is appropriate."





          




















          REGISTERED SUPPORT / OPPOSITION:









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          Support


          State Treasurer John Chiang (Sponsor)


          American Federation of State County and Municipal Employees  
          (AFSCME) Local 2399 (Sponsor)


          California Federation of Teachers




          Opposition


          None on file




          Analysis Prepared by:Karon Green / P.E.,R., & S.S. / (916)  
          319-3957



















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