BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | AB 2833| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: AB 2833 Author: Cooley (D), et al. Amended: 6/21/16 in Senate Vote: 21 SENATE PUBLIC EMP. & RET. COMMITTEE: 5-0, 6/27/16 AYES: Pan, Morrell, Beall, Hall, Moorlach SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8 ASSEMBLY FLOOR: 80-0, 5/31/16 - See last page for vote SUBJECT: Public investment funds: disclosures SOURCE: California State Treasurer 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 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. AB 2833 Page 2 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, f) Alternative investment agreements and all related documents. AB 2833 Page 3 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. This bill: AB 2833 Page 4 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. 4)Authorizes the public investment fund to report the gross and AB 2833 Page 5 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, 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. Securities and Exchange Commission (SEC) Enforcement. According AB 2833 Page 6 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 completely exits a portfolio company through a private AB 2833 Page 7 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 AB 2833 Page 8 public disclosure of some information regarding investment performance while protecting the confidentiality of some proprietary information. FISCAL EFFECT: Appropriation: No Fiscal Com.:YesLocal: Yes SUPPORT: (Verified8/2/16) California State Treasurer (source) American Federation of State, County and Municipal Employees, AFL-CIO California Federation of Teachers California Nurses Association Unite Here OPPOSITION: (Verified8/2/16) 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 managers of these alternative investment vehicles." ASSEMBLY FLOOR: 80-0, 5/31/16 AB 2833 Page 9 AYES: Achadjian, Alejo, Travis Allen, Arambula, Atkins, Baker, Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper, Roger Hernández, Holden, Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Quirk, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams, Wood, Rendon Prepared by:Glenn Miles / P.E. & R. / (916) 651-1519 8/3/16 18:32:00 **** END ****