BILL ANALYSIS                                                                                                                                                                                                    



          SENATE COMMITTEE ON
          PUBLIC EMPLOYMENT AND RETIREMENT
                               Dr. Richard Pan, Chair
                                2015 - 2016  Regular 

          Bill No:            AB 2833         Hearing Date:    6/27/16 
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          |Author:    |Cooley                                               |
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          |Version:   |6/21/16    As amended                                |
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          |Urgency:   |No                     |Fiscal:    |Yes              |
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          |Consultant:|Glenn Miles                                          |
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          Subject:  Public retirement systems:  funds:  disclosures

            SOURCE:  California State Treasurer
          
            ASSEMBLY VOTES:
          
          
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          |Assembly Floor:                 |80 - 0                          |
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          |Assembly Appropriations         |20 - 0                          |
          |Committee:                      |                                |
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          |Assembly Public Employees,      |7 - 0                           |
          |Retirement/Soc Sec Committee:   |                                |
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           DIGEST:    This bill requires every public investment fund, as  
          defined, to require each alternative investment vehicle in which  
          it invests to make specified disclosures related to management  
          fees and charges and to present the disclosed information in a  
          report at a public meeting at least annually.

          ANALYSIS:
          
          Existing law:
          
          1)Provides, under the provisions of Section 17 of Article XVI of  
            the California Constitution, that a public retirement board  







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            has plenary authority and fiduciary responsibility over the  
            investment of retirement plan assets and is required to  
            discharge its duties solely in the interest of the members and  
            beneficiaries for the exclusive purpose of providing benefits.  
             The board must invest the assets of the plan with the care,  
            skill and diligence of a prudent person engaged in a similar  
            enterprise so as to maximize the investments and minimize the  
            risk of loss.  When considering investments, the preservation  
            of principal and maximization of income is the primary and  
            underlying criteria for the selection and retention of  
            securities.

          2)Establishes the California Public Records Act (CPRA) which  
            mandates that public records are open to inspection at all  
            times during the office hours of the state or local agency and  
            every person has a right to inspect any public record, except  
            as provided.

          3)Requires, except with respect to public records exempt from  
            disclosure by express provisions of law, that each state or  
            local agency, upon a request for a copy of records that  
            reasonably describes an identifiable record or records, shall  
            make the records promptly available to any person upon payment  
            of fees covering direct costs of duplication, or a statutory  
            fee if applicable.  Upon request, an exact copy shall be  
            provided unless impracticable to do so.

          4)Exempts the following information regarding alternative  
            investments in which public investment funds invest from  
            disclosure under the CPRA unless the information has already  
            been released publicly 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,








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             f)   Alternative investment agreements and all related  
               documents.

          5)Provides that specified information regarding alternative  
            investments in which public investment funds invest is subject  
            to disclosure under the CPRA and may not be considered a trade  
            secret exempt from CPRA disclosure, including:

             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 year-end 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 year-end 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.









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          This bill:

          1)Expresses the intent of the Legislature to increase the  
            transparency of fees paid by public investment funds to  
            alternative investment vehicles.  Because fees paid to  
            alternative investment vehicles reduce returns, public  
            investment fund trustees need to see and understand all fees  
            they are charged.

          2)Requires every public investment fund to require each  
            alternative investment vehicle in which it invests to disclose  
            the following:

             a)   The fees and expenses that the public investment fund  
               pays directly to the alternative investment vehicle, the  
               fund manager, or related parties.

             b)   The public investment fund's pro rata share of fees and  
               expenses that are paid from the alternative investment  
               vehicle to the fund manager or related parties, including  
               carried interest, to the fund manager or related parties.   
               The public investment fund may independently calculate the  
               same information based on information contractually  
               required to be provided by the alternative investment  
               vehicle to the public investment fund.

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

             d)   The public investment fund's pro rata share of aggregate  
               fees and expenses paid by all of the portfolio companies  
               held within the alternative investment vehicle to the fund  
               manager or related parties.

             e)   Any additional information described in subdivision (b)  
               of Section 6254.26 of the CPRA.

          3)Provides that every public investment fund shall disclose the  
            information required pursuant to this bill at least once  
            annually in a report presented at a meeting open to the  
            public.  The report shall also include the gross and net rate  
            of return of each alternative investment vehicle since  
            inception in which the public investment fund participates.









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          4)Authorizes the public investment fund to report the gross and  
            net rate of return and disclosable information required by  
            this bill based on its own calculations or based on  
            calculations provided by the alternative investment vehicle.

          5)Defines terms relative to alternative investments. 

          6)Applies to all new contracts the public investment fund enters  
            into on or after January 1, 2017, and to all existing  
            contracts pursuant to which the public investment fund makes a  
            new capital commitment on or after January 1, 2017.

          7)Provides that the public investment fund should undertake  
            reasonable efforts to obtain the information described in and  
            comply with the reporting requirements contained in this bill  
            with respect to any information so obtained after January 1,  
            2017, for existing contracts.

          8)Contains legislative findings and declarations stating that  
            the information and disclosures required by this bill further  
            the purposes of constitutional provisions providing for the  
            right of public access and is necessary to ensure public  
            confidence in the integrity of investments made by retirement  
            boards pursuant to alternative investments.

          9)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, as specified.

          Background

          California Public Records Act (CPRA)

          In June 2003, the Alameda County Superior Court, citing the  
          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.









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          Securities and Exchange Commission (SEC) Enforcement

          According to the Director of the Securities and Exchange  
          Commission (SEC) Division of Enforcement,

               Prior to 2010, private equity fund advisers typically did  
               not register with the Commission, and the Commission staff  
               often had limited visibility into their practices.   
               However, in 2010, two significant events occurred:  (i)  
               Dodd-Frank was enacted; and (ii) the SEC's Division of  
               Enforcement announced the creation of specialized units -  
               including the Asset Management Unit.  Dodd-Frank required  
               many private equity fund advisers to register with the  
               Commission and be subject to periodic examination by the  
               Office of Compliance Inspections and Examinations (OCIE),  
               giving us increased visibility into the advisers.  At the  
               same time, the Asset Management Unit began developing the  
               expertise necessary to understand private equity fund  
               advisers and their practices.  In October 2012, OCIE  
               launched the Presence Exam Initiative, which included  
               extensive engagement with the private equity industry, and  
               created its own specialized unit - the Private Funds Unit.   
               OCIE examined many private equity advisers (often for the  
               first time) and identified a number of deficiencies.  And  
               we have continued our focus on private equity firms under  
               Chair White's leadership.

          Additionally, the SEC Director noted,

               Our sense is that through the Commission's focus on the  
               industry, we have helped to significantly increase the  
               level of transparency into fees, expenses, and conflicts of  
               interest, and have prompted real change for the benefit of  
               investors.

               As a preliminary matter, beginning in 2014, a number of  
               advisers revised their Form ADV filings to more fully  
               disclose their fee and expense practices.  Perhaps more  
               significantly, certain private equity advisers have taken  
               affirmative steps to change their fee and expense practices  
               and bring them in line with their organizational documents.  
                For example, as the Commission noted in the Blackstone  
               enforcement action, in 2014, Blackstone announced certain  
               changes to its business practices, including that it would  
               no longer take accelerated monitoring fees when it  








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               completely exits a portfolio company through a private  
               sale.  I hope that these actions will lead other advisers  
               as well to proactively change their practices to seek to  
               avoid conflicts of interest with clients and to ensure, at  
               a minimum, that they are in line with their organizational  
               documents.

               Finally, there has been a significant and encouraging  
               uptick in investors seeking additional transparency  
               concerning advisers' fee and expense practices.  For  
               example, the Institutional Limited Partners Association  
               (ILPA) released a Fee Transparency Initiative in 2015 which  
               aims to establish consistent standards for fee and expense  
               reporting and compliance disclosures.  Similarly, a group  
               of comptrollers and treasurers has sought clearer and more  
               consistent disclosures in order to strengthen their  
               retirement systems' negotiating position, which they  
               believe will result in more efficient investment options.

          California Public Pension Plans

          CalPERS and CalSTRS both have indicated that they have worked  
          with the author and the sponsor to address several concerns  
          regarding AB 2833.  The CalSTRS analysis of the bill states  
          that, "Even though AB 2833 seeks to drive fees down,  
          fund-by-fund disclosures could result in some managers choosing  
          to forgo California public pension plan partnerships and instead  
          accept commitments from other investors without the same  
          requirements."  Additionally, the analysis notes that better  
          performing private equity funds that are oversubscribed and more  
          selective about limited partners may exclude California public  
          investment funds requiring fee disclosures or "may not offer  
          favorable fees to CalSTRS if those lowered fees are disclosed to  
          the public, including other investors."

          Related/Prior Legislation
          
          SB 574 (Pan, 2015) would have required the University of  
          California (UC) to obtain the information required in Government  
          Code Section 6254.26(b) from each private equity fund, venture  
          fund, hedge fund, or absolute return fund in which the UC  
          provides or has provided funds for investment.  The bill was  
          held in Assembly Appropriations.

          SB 439 (Simitian, Chapter 258, Statutes of 2005) required the  








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          public disclosure of some information regarding investment  
          performance while protecting the confidentiality of some  
          proprietary information.

          FISCAL EFFECT:                 Appropriation:  No    Fiscal  
          Com.:             Yes          Local:          Yes


          According to the Assembly Appropriations Committee, this bill  
          will result in "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."


          SUPPORT:

          California State Treasurer (source)
          American Federation of State, County and Municipal Employees,  
          AFL-CIO
          California Federation of Teachers
          California Nurses Association
          Unite Here

          OPPOSITION:

          None received

          ARGUMENTS IN SUPPORT:    According to the sponsor, "Every dollar  
          that is paid to the general partner of an alternative investment  
          vehicle is one less dollar in the funds of California's public  
          pension plans.  Once public pension funds and their trustees  
          receive information on fee payments annually, they can assess  
          whether the management fees on these alternative investment  
          vehicles are justified and continue to be a responsible  
          investment choice for public employees and California  
          taxpayers."

          According to the California Federation of Teachers, "Fees and  
          expenses that are overly burdensome can result in a direct  
          transfer of wealth from taxpayers and members to the wealthy  








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          managers of these alternative investment vehicles."