BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON EDUCATION
                              Senator Carol Liu, Chair
                                2015 - 2016  Regular 

          Bill No:             SB 574               
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          |Author:    |Pan                                                  |
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          |Version:   |April 22, 2015                             Hearing   |
          |           |Date:     April 29, 2015                             |
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          |Urgency:   |No                     |Fiscal:     |Yes             |
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          |Consultant:|Kathleen Chavira                                     |
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          Subject:  University of California:  alternative investment  
          information

            SUMMARY
          
          This bill requires the University of California (UC) to obtain  
          specified information from each private equity fund, venture  
          fund, hedge fund, or absolute return fund in which the UC  
          provides or has provided funds for investment.

            BACKGROUND
          
          Existing law defines "alternative investment" as an investment  
          in a private equity fund, venture fund, hedge fund, or absolute  
          return fund.

          Existing law exempts specified records regarding alternative  
          investments in which public investment funds are invested from  
          disclosure, unless the information has already been publicly  
          released by the keeper of the information.  Information exempted  
          from disclosure includes due diligence materials that are  
          proprietary, quarterly and annual financial statements, meeting  
          materials, records containing information regarding the  
          portfolio positions in which alternative investment funds  
          invest, capital call and distribution notices, and alternative  
          investment agreements and all related documents.

          Existing law requires disclosure of specified information  
          regarding alternative investments. These required disclosures  
          include the following:







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             1.   The name, address, and vintage year of each alternative  
 
               investment vehicle.

             2.   The dollar amount of the commitment made to each  
               alternative investment vehicle by the public investment  
               fund since inception.

             3.   The dollar amount of cash contributions made by the  
               public investment fund to each alternative investment  
               vehicle since inception.

             4.   The dollar amount, on a fiscal year-end basis, of cash  
               distributions received by the public investment fund from  
               each alternative investment vehicle.

             5.   The dollar amount, on a fiscal year-end 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.

             6.   The net internal rate of return of each alternative  
               investment vehicle since inception.
             7.   The investment multiple of each alternative investment  
 
               vehicle since inception.

             8.   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.

             9.   The dollar amount of cash profit received by public  
               investment funds from each alternative investment vehicle  
               on a fiscal year-end basis.
          (Government Code § 6254.26) 

          Existing law, the California Public Records Act (CPRA) governs  
          the disclosure of information collected and maintained by public  
          agencies. Generally, all public records are accessible to the  
          public upon request, unless the record requested is exempt from  
          public disclosure. There are 30 general categories of documents  
          or information that are exempt from disclosure, essentially due  








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          to the character of the information.  Unless it is shown that  
          the public's interest in disclosure outweighs the public's  
          interest in non-disclosure of the information, the exempt  
          information may be withheld by the public agency that has  
          custody of the information. 

          Existing law defines state agency, for purposes of the CPRA, to  
          include every state officer, department, division, bureau,  
          board, and commission or other state body or agency, except for  
          the Legislature and the Judiciary.  The California State  
          University, the University of California, and the California  
          Community Colleges are considered to be state agencies for this  
          purpose.  (Government Code § 6250, et. al.)
            
          ANALYSIS
          
          This bill requires the University of California to obtain the  
          information required to be disclosed under specified Government  
          Code provisions (§ 6254.26) from each private equity fund,  
          venture fund, hedge fund, or absolute return fund in which the  
          UC provides, or has provided, funds for investment.

          STAFF COMMENTS
          
          1.   Need for the bill.  Under the California Public Records  
               Act, specified information about alternative investments  
               must be disclosed if public funds are used for investment.   
               According to the author, the courts recently ruled that the  
               UC Regents are allowed to refrain from obtaining this  
               information from the two largest venture capital partners  
               with whom the UC invests.  As a result, the UC Regents can  
               avoid the disclosure requirements which would otherwise  
               apply since they cannot disclose information which they do  
               not possess.  

          According to the author, the UC has invested over $239 million  
          in 10 venture capital funds.  This bill would require the UC to  
          obtain the specified information and allow Californians and UC  
          employees to track the performance of investments on which their  
          pensions rely. This bill is sponsored by the California  
          Newspaper Publishers Association.

          2.   Related Court Cases. This bill is intended to respond to a  
               ruling by the California Court of Appeals in Regents of the  








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               University of California v. Superior Court (2013) 222 Cal.  
               App. 4th 383, appealing the decision of the Superior Court  
               for Alameda County in regards to a request by Reuters  
               America LLC for specific financial information from the UC  
               Regents pertaining to their investments in specified funds.

          The court noted that the primary issue in the case was whether a  
          public agency can be required under the California Public  
          Records Act (Government Code § 6250, et. seq.) to seek records  
          it does not prepare, own, use or retain in the conduct of its  
          business. 

          The Superior Court found that the Regents were required to use  
          "objectively reasonable efforts" to obtain individual fund  
          information for the Regent's current investments from Kleiner  
          Perkins Caulfield & Byers (Kleiner Perkins) and Sequoia Capital  
          (Sequoia) even though the Regents had not prepared, owned, used,  
          or retained this fund information.  However, this ruling was  
          overturned by the appeals court which found that, because the  
          information was not prepared, owned, used, or retained by the  
          Regents, records reflecting such information in the hands of  
          Kleiner Perkins and Sequoia were not "public records" within the  
          meaning of the California Public Records Act. 

          3.   History.  Court documents noted that as of October 2012,  
               the Regents owned investment assets of about $71.6 billion  
               which help pay for employee pensions, student scholarships,  
               research, and other university operations.  Since 1979,  
               about 2 percent of the Regent's multi-billion dollar  
               investment portfolio has been invested in "private equity;"  
               limited partnerships formed and managed by private parties  
               to invest in private companies. 

          Until 2003, the Regents did receive information from the private  
          equity firms that allowed it to monitor its private equity  
          investments.  In 2003, however, in response to a claim by the  
          Coalition of University Employees, the Alameda County Superior  
          Court ruled that this information was subject to disclosure  
          under the California Public Records Act.  A UC Regents petition  
          to seek review of that decision by an appeals court was denied.   
          Following this decision, the two private equity firms that were  
          the subject of the 2013 court case, Kleiner Perkins and Sequoia,  
          stopped providing fund specific information and stopped inviting  
          the Regents to participate in new funds.  It appears that  








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          Sequoia did allow the Regents to invest in private equity funds  
          again beginning in 2010. 

            SUPPORT
          
          American Federation of State, County and Municipal Employees,  
          AFL-CIO
          California Newspaper Publishers Association, CNPA Services, Inc.

            OPPOSITION
           
           University of California

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