BILL ANALYSIS Ó AB 2833 Page 1 ASSEMBLY THIRD READING AB 2833 (Cooley) As Amended April 12, 2016 Majority vote ------------------------------------------------------------------ |Committee |Votes|Ayes |Noes | | | | | | | | | | | | | | | | |----------------+-----+----------------------+--------------------| |Public |7-0 |Bonta, Waldron, | | |Employees | |Cooley, Cooper, | | | | |Cristina Garcia, | | | | |O'Donnell, Wagner | | | | | | | |----------------+-----+----------------------+--------------------| |Appropriations |20-0 |Gonzalez, Bigelow, | | | | |Bloom, Bonilla, | | | | |Bonta, Calderon, | | | | |Chang, Daly, Eggman, | | | | |Gallagher, Eduardo | | | | |Garcia, Roger | | | | |Hernández, Holden, | | | | |Jones, Obernolte, | | | | |Quirk, Santiago, | | | | |Wagner, Weber, Wood | | | | | | | | | | | | ------------------------------------------------------------------ AB 2833 Page 2 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 that 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 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 AB 2833 Page 3 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. 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 are 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: AB 2833 Page 4 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 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; AB 2833 Page 5 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, 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, AB 2833 Page 6 f) Alternative investment agreements and all related documents. FISCAL EFFECT: According to the Assembly Appropriations Committee, "Significant ongoing administrative costs to public retirement systems, including California State Teachers Retirement System (CalSTRs), California Public Employees' Retirement System (CalPERS), and the University of California Retirement System (UCRS), to update procedures and to collect data not already being collected. Across these public retirement systems, administrative costs are estimated to be in the range of $800,000 annually." 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, Statutes of 2005, 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 AB 2833 Page 7 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 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." Analysis Prepared by: Karon Green / P.E.,R., & S.S. / (916) 319-3957 FN: 0003120 AB 2833 Page 8