BILL ANALYSIS                                                                                                                                                                                                    



                                                                    AB 2833


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          CONCURRENCE IN SENATE AMENDMENTS


          AB  
          2833 (Cooley)


          As Amended  June 21, 2016


          Majority vote


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          |ASSEMBLY:  |80-0  |(May 31, 2016) |SENATE: |38-0  |(August 16,      |
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          Original Committee Reference:  P.E.,R., & S.S.




          SUMMARY:  Requires every public investment fund to require each  
          alternative investment vehicle in which it invests to make  
          specified disclosures regarding fees and expenses and to present  
          the disclosed information in a report at a public meeting at  
          least annually.  Specifically, 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  
            that are changed.
          2)Requires every public investment fund to require each  
            alternative investment vehicle in which it invests to disclose  
            the following:








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             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.  In lieu of  
               having the alternative investment vehicle provide this  
               information, the fund may calculate it using information  
               contractually required to be provided by the alternative  
               investment vehicle.


             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 already required to be  
               disclosed under the California Public Records Act (CPRA).


          3)Requires every public investment fund to disclose the  
            information received in connection with alternative investment  
            vehicles at least annually in a report presented at a public  
            meeting.  The report must also include the gross and net rate  
            of return of each alternative investment vehicle since  
            inception, which can, along with the other disclosed  
            information, be calculated by either the fund or the  
            alternative investment vehicle.


          4)Defines the following terms:  alternative investment,  








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            alternative investment vehicle, fund manager, carried  
            interest, portfolio companies, gross rate of return, public  
            investment fund, operational person, related person, related  
            party and relevant entity.


          5)Specifies that these provisions apply 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 make a new capital commitment on or  
            after January 1, 2017.


          6)Requires the public investment funds to undertake reasonable  
            efforts to obtain and disclose the same information with  
            respect to other existing contracts.


          7)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.  


          8)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)Provides, under the provisions of California Constitution  
            Article XVI Section 17, that a public retirement board has  
            plenary authority and fiduciary responsibility over the  
            investment of retirement plan assets and is required to  








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            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 CPRA which mandates that public records are  
            open to inspection at all time 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)Exempts the following information regarding alternative  
            investments in which public investment funds invest from  
            disclosure under the CPRA 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,










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             f)   Alternative investment agreements and all related  
               documents.


          4)Provides that the following 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:


             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;








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             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.


          The Senate amendments:


          1)Revise the description of the fees and expenses required to be  
            disclosed by alternative investment vehicles.


          2)Remove the requirement that disclosures be made on a  
            system-prescribed form.


          3)Allow public investment funds to calculate certain information  
            in lieu of having the alternative investment vehicle provide  
            the information.


          4)Define several terms.


          5)Apply the provisions to new contracts entered into, and to  
            existing contracts pursuant to which the fund makes a new  
            capital commitment, on or after January 1, 2017.


          6)Require public investment funds to undertake reasonable  
            efforts to obtain and disclose the same information with  
            respect to other existing contracts.










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          FISCAL EFFECT:  According to the Senate Appropriations  
          Committee, pursuant to Senate Rule 28.8, negligible state costs.




          COMMENTS:  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 Section 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  
          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.   








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          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."




          The California Public Employees' Retirement System and the  
          California State Teachers' Retirement System (CalSTRS) both have  
          indicated that they have worked with the author and the sponsor  
          to address several concerns regarding this bill.  The CalSTRS  
          analysis of the bill states that, "Even though AB 2833 seeks to  
          drive fees down, fund-by-fund disclosure 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."


          Analysis Prepared by:                                             
                          Karon Green / P.E.,R., & S.S. / (916) 319-3957    
                                                                    FN:  
          0003740


















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