BILL ANALYSIS Ó
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.
AB 2833 (Cooley) Page 4 of ?
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.
AB 2833 (Cooley) Page 5 of ?
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."