BILL ANALYSIS Ó
AB 2833
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB
2833 (Cooley)
As Amended June 21, 2016
Majority vote
--------------------------------------------------------------------
|ASSEMBLY: |80-0 |(May 31, 2016) |SENATE: |38-0 |(August 16, |
| | | | | |2016) |
| | | | | | |
| | | | | | |
--------------------------------------------------------------------
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:
AB 2833
Page 2
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,
AB 2833
Page 3
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
AB 2833
Page 4
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,
AB 2833
Page 5
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;
AB 2833
Page 6
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.
AB 2833
Page 7
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.
AB 2833
Page 8
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
AB 2833
Page 9