BILL ANALYSIS �
AB 1151
Page 1
Date of Hearing: April 26, 2011
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 1151 (Feuer and Blumenfield) - As Amended: April 14, 2011
SUBJECT : Public Retirement Systems: Investments: Iran
KEY ISSUES :
1)Should public pension boards be required to divest funds from
A company that does substantial business in the energy sector
of Iran, unless to do so would constitute a breach of the
board's fiduciary duty?
2)Should certain board findings and determinations of fiduciary
responsibility be adopted by rollcall vote in a properly
noticed public hearing?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
This bill would amend the California Public Divest from Iran Act
(Act), which generally prohibits the investment of public
pension funds in companies that do business in Iran's energy,
nuclear, and defense sector and requires divestment where such
investments have already been made. Under existing law, the
California Public Employee's Retirement System (CalPERS) and the
State Teacher's Retirement System (CalSTRS) are prohibited from
investing funds in a company with business operations in the
defense or energy sectors of Iran, or in a company that has
demonstrated complicity with an Iranian organization that has
been labeled as a terrorist organization by the United States
government. Existing law specifies, however, that CalPERS and
CalSTRS are required to divest funds only if their respective
boards determine that doing so is "consistent with their
fiduciary responsibilities," as mandated by the California
constitution. This bill seeks to clarify these provisions and
to ensure greater transparency and accountability. Specifically,
this bill would require divestment unless to do so would result
in a " breach of fiduciary responsibility" (as opposed to the
vaguer standard that only requires divestment to be " consistent
with fiduciary responsibility.") In addition, this bill would
AB 1151
Page 2
require that a determination of fiduciary responsibility, as
well as preliminary findings relating to a company's business
relations in Iran, be adopted by a rollcall vote at a noticed
public hearing. This bill would also specify that the Act only
applies to companies with investments of $20 million or more,
and it would remove current exemptions for companies that are
primarily engaged in educational and humanitarian activities,
presumably since those entities would generally not be doing $20
million worth of business in Iran's energy sector and therefore
would not be subject to the Act. This bill is supported by
several human rights groups.
SUMMARY : Amends the California Public Divest from Iran Act to,
among other things, clarify that pension boards must divest
pension funds, as specified, unless to do so would breach a
fiduciary duty; modify the types of companies that fall within
the scope of the bill; and require that certain findings and
determinations must be made in noticed public hearings.
Specifically, this bill :
1)Provides that the boards of CalPERS and CalSTRS (board) shall
not invest public employee retirement funds in a company which
has business operations in Iran, as identified by the board
through publicly available information, if the company meets
either of the following criteria:
a) The company has an investment of $20 million or more in
the energy sector of Iran, including a company that
provides oil or liquefied natural gas tankers, or products
used to construct or maintain pipelines used to transport
oil or liquefied natural gas, for the energy sector of
Iran, and that company is subject to sanctions under
relevant federal law.
b) The Company has demonstrated complicity with an Iranian
organization that has been labeled as a terrorist
organization by the United States government.
2)Requires the board to annually review its investment portfolio
based on publicly available information.
1)Requires that board determinations as to whether a company is
subject to, or remains subject to, divestment be based on
credible information available to the public and supported by
findings adopted by a roll call vote in open session during a
AB 1151
Page 3
properly noticed public hearing of the full board. Requires
further that all proposed findings of the board shall be made
public 72 hours before they are considered by the full board,
and the board shall maintain a list of interest parties who
shall be notified.
2)Provides that if a company fails to take substantial action,
as defined, within one year, then the board shall not make
additional, or renew, investments in that company, and,
thereafter, the board shall liquidate investments in this
company within 18 months in a manner consistent with its
fiduciary responsibilities.
3)Specifies that nothing in this bill would require the board to
take an action pursuant to the above provisions if the board
determines, in good faith, that an action would be a breach of
the fiduciary responsibilities of the board as described in
the California constitution. However, any determination that
an action would be a breach fiduciary duty shall be made in a
public hearing of the full board after proper notice and an
opportunity for public comment.
4)Eliminates existing exemptions from the California Public
Divest from Iran Act for companies engaged in certain
humanitarian, educational, religious, journalistic, or welfare
activities.
EXISTING LAW :
1)Prohibits the boards of CalPERS and CalSTRS from investing
public employee retirement funds in a company which has
business operations in Iran if the company (a) is invested in
or engaged in business operations with entities in the defense
or nuclear sectors in Iran or involved in the development of
petroleum or natural gas resources of Iran OR (b) has
demonstrated complicity with an Iranian organization that has
been labeled as a terrorist organization by the United States
government. (Government Code Section 7513.7 (b).)
2)Requires the board to identify and notify any company that may
be subject to divestment. If the company fails to take
corrective measures within one year, as specified, then the
board shall not make any new or additional investments in that
company and, thereafter, shall liquidate existing investments
within 18 months. (Government Code Section 7513.7 (c)-(h).)
AB 1151
Page 4
3)Requires that the board shall file an annual report with the
Legislature detailing relevant investments in companies
subject to divestment, any actions that the board has taken to
reduce investments or transfer funds in compliance with the
above provisions, and a calculation of any costs or losses
associated with compliance. (Government Code Section 7513.7
(i)-(j).)
4)Specifies that the above provisions do not require the board
to take a divestment action unless the board determines, in
good faith, that the action is consistent with its fiduciary
responsibilities, as described in the state constitution.
(Government Code Section 7513.7 (k).)
5)Exempts from the above provisions companies that are engaged
in certain humanitarian, educational, religious, journalistic,
or welfare activities. (Government Code Section 7513.7 (l).)
6)Provides that the above provisions shall cease to be operative
if Iran is removed from the United States Department of
State's list of countries that have been determined to support
international terrorism AND the President of United States, as
provided by federal law, determines that Iran has ceased its
efforts to design, develop, manufacture, or acquire a nuclear
explosive device or related materials or technology.
(Government Code Section 7513.7 (m).)
7)Provides that the board of a public pension fund shall have
sole and exclusive fiduciary responsibility over the assets of
the public pension fund and that the members of the board
shall discharge their duties solely in the interest of
providing benefits to participants and their beneficiaries.
However, the Legislature may by statute prohibit certain
investments where it is in the public interest to do so, and
provided that any prohibition satisfies the standards of
fiduciary care, as specified. (Section 17 of Article XVI of
the California Constitution.)
COMMENTS : Existing law prohibits the boards of CalPERS and
CalSTRS (boards) from making new investments in companies that
do business in Iran's energy sector and generally requires the
boards to liquidate existing investments in such companies.
This bill seeks to clarify that these actions are required
unless doing so would constitute a breach of the boards'
AB 1151
Page 5
constitutionally-mandated fiduciary responsibilities. In
addition, this bill would require that certain board
determinations be adopted by a rollcall vote at a noticed public
hearing.
Federal Law Background : For more than a decade the United
States government has condemned the government of Iran for its
support of international terrorism, human rights violations, and
efforts to develop nuclear weapons in defiance of the
international community. Although federal law has for some time
prohibited American companies from engaging in specified
business practices with Iran, it has no similar power to ban the
actions of foreign companies. However, the United States does
have the power to penalize foreign companies by denying them
certain advantages of U.S. law. As such, the key provisions of
the Iran Sanctions Act require the President to impose two of
seven possible sanctions on foreign persons or companies that
make an investment of more than $20 million in Iran's energy
sector. Sanctions primarily include denial of access to certain
forms of credit, denial of licenses for the export of certain
U.S. military technologies, and various prohibitions relating to
dealing in U.S. bonds, acting as a repository of U.S. funds, or
securing certain government procurements. More recently, the
Iran Refined Petroleum Act amended the ISA to direct the
President to impose sanctions on any person, entity, business,
or corporation that has knowingly made an investment of $20
million or more that directly or significantly contributes to
Iran's ability to develop its petroleum resources. Persons or
companies could also face sanctions for providing refined
products or goods, services, technology or information worth
$200,000 or more.
Background: the California Public Divest from Iran Act of 2007 .
AB 221 (Anderson, Chapter 671, Statutes of 2007) enacted the
California Public Divest from Iran Act. This legislation
prohibits the boards of CalPERS and CalSTRS from investing
public employee retirement funds in companies that have
specified energy- or defense-related operations in Iran. In
addition, AB 221 required the boards to independently review
publicly available information regarding companies with business
operations in Iran and, based on that review, to notify such
companies that they must take "substantial action" to reduce or
eliminate investments in Iran or face the prospect of withdrawal
of public pension funds. If the company fails to satisfactorily
take substantial action within a year, then the boards of
AB 1151
Page 6
CalPERS and CalSTRS are required to liquidate investments in
that company within 18 months.
Existing law, however, contains a significant loophole: it
specifies that CalPERS and CalSTRS are only required to divest
funds to the extent that it is "consistent" with their fiduciary
responsibilities. The authors of the present bill point to
recent legislative oversight hearings which found that CalPERS
has "increased investments in several energy companies doing
business in Iran, while decreasing investments in other energy
companies which do not do business in Iran." Arguably, one of
the reasons that CalPERS and CalSTRS have not been as successful
in achieving divestment as one might hope is a byproduct of the
somewhat vague standard that requires divestment only if doing
so is "consistent" with a board's fiduciary responsibilities.
It is not quite clear what "consistent" means in this context,
and the word "consistent" has no meaning in the case law
defining the scope of fiduciary duties. For example, would an
action be "inconsistent" with fiduciary responsibilities only if
it rose to the level to a "breach" of fiduciary responsibility,
or could something less than a legal breach still be
"inconsistent" with that responsibility?
In order to clarify this issue, this bill would clearly state
that a board is required to take a divestment action unless to
do so would create a "breach of fiduciary responsibility," a
term which has a more definite legal meaning. For example,
while the implications of an action that is "consistent" with
fiduciary duty is not clear, a "breach" of fiduciary duty means
that the fiduciary is liable to the beneficiaries for any
damages caused by the action.
In addition, this bill seeks to increase greater accountability
and transparency by requiring that certain board findings and
determinations be adopted at a noticed public hearing.
Specifically, existing law requires the boards to request that a
notified company take "substantial action," as specified, toward
curtailing business in Iran and requires the boards to determine
a company's compliance at 90-day intervals. This bill would
require that the determinations be based on credible information
available to the public and be adopted by a rollcall vote at a
properly noticed public hearing of the full board. In addition,
this bill would require that any determination that an action
would be a breach of fiduciary duty similarly be adopted by a
rollcall of the full board following a presentation and
AB 1151
Page 7
discussion of findings in an open session, during a properly
noticed public hearing.
Constitutional Requirements . Section 17 of Article XVI of the
California Constitution, as amended by Proposition 162 in 1992,
provides that the boards of California's public retirement
systems have "plenary authority and fiduciary responsibility for
investment of monies and administration of the system". This
section also states that the "members of the retirement board of
a public pension or retirement system shall discharge their
duties with respect to the system solely in the interest of, and
for the exclusive purposes of providing benefits to,
participants and their beneficiaries." However, this section is
equally clear that the Legislature retains its authority to
"prohibit certain investments by a retirement board where it is
in the public interest to do so, and provided that the
prohibition satisfies the standards of fiduciary care and
loyalty required of a retirement board." The authors and
supporters of this bill contend that it is certainly in the
public interest of Californians to ensure that public funds are
not used to sponsor international terrorism or support a regime
that violates human rights and pursues nuclear weapons in
defiance of the international community. Consistent with the
California Constitution, the bill expressly states that its
prohibitions only apply to the extent that they permit the
members of the boards to meet their constitutionally mandated
standards of fiduciary care and loyalty to beneficiaries.
ARGUMENTS IN SUPPORT : According to the authors, even though
existing law requires California public pension funds to divest
from companies doing business with Iran, "CalPERS continues to
invest in companies with interests in Iran and has failed to
satisfactorily comply with statutorily mandated reporting
requirements to the Legislature." In support of this position,
the authors point to a 2010 legislative oversight hearing
showing that CalPERS has "increased investments in several
energy companies doing business in Iran, while decreasing
investments in other energy companies that do not do business
with Iran." In addition, the authors contend that CalPERS
required report to the Legislature failed to adequately explain
why CalPERS continues to invest in companies that do business
with Iran. (Citing Implementation of the California Public
Divest from Iran Act, Assembly Bill 221 (Anderson), Chapter 671,
Statutes of 2007. Joint Informational Hearing of the Assembly
Public Employees, Retirement, and Social Security Committee and
AB 1151
Page 8
the Senate Public Employment and Retirement Committee.
Wednesday, February 24, 2010.)
The bill is supported by several human rights organizations.
For example, the Simon Wiesenthal Center argues that this bill
"would increase accountability by requiring that any
determination that an action would breach a fiduciary duty be
done by a roll call vote of the board, following a presentation
and discussion of the findings in open session, during a
properly noticed public hearing of the full board." In
addition, the Simon Wiesenthal Center argues that this bill,
coming from a key American state, "will send a message to the
long-suffering people of Iran that Californians stand with their
quest for freedom and will not, under any circumstances, help to
prop up an evil regime that threats the region and oppresses its
own people."
The Center for the Promotion of Democracy and Human Rights
argues that this bill will "continue California's long-standing
leadership" in this area and will address the instances of
non-compliance that were revealed in the 2010 legislative
oversight hearing.
REGISTERED SUPPORT / OPPOSITION :
Support
30 Years After
American Jewish Committee
Anti-Defamation League
City of Beverly Hills
Jewish Labor Committee, Western Region
Jewish Public Affairs Committee
Simon Wiesenthal Center
United Against Nuclear Iran
Opposition
California State Teacher's Retirement System (CalSTRS)
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334
AB 1151
Page 9