BILL ANALYSIS Ó
SB 574
Page 1
Date of Hearing: July 7, 2015
ASSEMBLY COMMITTEE ON HIGHER EDUCATION
Jose Medina, Chair
SB
574 (Pan) - As Amended April 22, 2015
SENATE VOTE: 37-0
SUBJECT: University of California: alternative investment
information.
SUMMARY: Requires 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.
EXISTING LAW:
1)Pursuant to Government Code Section 6254.26(b), the following
information regarding alternative investments in which public
investment funds invest are subject to disclosure:
a) The name, address, and vintage year of each alternative
investment vehicle;
SB 574
Page 2
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;
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.
SB 574
Page 3
2)Pursuant to Government Code Section 6254.26(a), the following
records regarding alternative investments in which public
investment funds invest are not subject to disclosure, 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,
f) Alternative investment agreements and all related
documents.
FISCAL EFFECT: According to the Senate Appropriations
Committee, UC indicates that this bill would require it to
obtain the required information from the investment firms
through litigation. UC anticipates such costs to be at least
$500,000.
SB 574
Page 4
COMMENTS: Background. In June 2003, the Alameda County
Superior Court, citing the California Public Records Act (CPRA),
required 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.
According to the Fact Sheet of SB 439 created by UC, concern
that "trade secrets" would be obtained by competitors led a
number of venture-capital firms to no longer offer UC
partnership opportunities, specifically "new funds offered by
the top two performing funds: Sequoia and Kleiner Perkins". In
2005, UC asserted that SB 439 achieved an "appropriate balance"
to enable the UC and other public investment systems to maintain
access to high-performing alternative investments, to reduce
legal challenges, and to ensure consistent disclosure.
Purpose of this bill. 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
SB 574
Page 5
the UC to obtain the specified information and allow
Californians and UC employees to track the performance of
investments on which their pensions rely.
Arguments in support. This bill is sponsored by the California
Newspaper Publishers Association (CNPA). According to CNPA,
this bill would overrule a portion of the Court of Appeal's
decision in Regents of the University of California v. Superior
Court (2013) 222 Cal. App. 4th 383, which allowed the UC to
refuse to obtain investment reports from its two largest venture
capital partners: Kleiner Perkins and Sequoia. The CNPA argues
that this ruling allows the UC to violate the agreement
negotiated as part of SB 439; this bill simply requires UC to
comply with the disclosure requirements of the law it sponsored
in 2005.
Arguments in opposition. The California Chamber of Commerce
(CalChamber) opposes this bill and argues that the CPRA only
applies to writings that are "prepared, owned, used, or retained
by any state or local agency," and therefore does not require UC
to obtain documents that were never in its possession merely
because they might contain information the public would find
valuable. According to CalChamber, this bill would set a
troubling precedent by expanding the reach of the CPRA to
include private entity documents. UC opposes this bill and
argues that forcing UC to obtain information that is not
critical to its investment decisions is "illogical and could
result in the University being prohibited from participating in
certain types of investments." UC argues that it "makes every
effort to be transparent and accountable, and to ensure that
investments it makes add significant value to the University."
SB 574
Page 6
UC Constitutional autonomy. The California Constitution
(Article IX, Section 9) establishes UC as a public trust and
confers the full powers of the UC upon the UC Regents. The
Constitution establishes that the UC is subject to legislative
control only to the degree necessary to ensure the security of
its funds and compliance with the terms of its endowments.
Judicial decisions have held that there are three additional
areas in which there may be limited legislative intrusion into
university operations: authority over the appropriation of state
moneys; exercise of the general police power to provide for the
public health, safety and welfare; and, legislation on matters
of general statewide concern not involving internal university
affairs. While the provisions of this bill are not binding on
UC, the sponsor points to prior legislation and past practice of
the UC Regents to voluntarily adopt legislative mandates.
REGISTERED SUPPORT / OPPOSITION:
Support
California Newspaper Publishers Association (Sponsor)
American Federation of State, County and Municipal Employees
One Individual
SB 574
Page 7
Opposition
California Chamber of Commerce
University of California
Analysis Prepared by:Laura Metune / HIGHER ED. / (916)
319-3960