BILL ANALYSIS �
SB 903
Page 1
Date of Hearing: June 28, 2011
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 903 (Anderson) - As Introduced: February 18, 2011
SENATE VOTE : 39-0
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 BE A breach of the board's
fiduciary responsibility?
2)Should board determinations of fiduciary duty be made in a
public hearing that provides AN opportunity for public
comment?
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." 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
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that only requires divestment to be "consistent with fiduciary
responsibility.") In addition, this bill would require that a
determination of fiduciary responsibility be made in a public
hearing of the full board after proper public notice and an
opportunity to be heard. Although this bill contains nearly
identical provisions to AB 1151, which this Committee heard in
April and which is now in the Senate, AB 1151 also modified the
type of a company that fell within the scope of the Act and
provided more detail on the requirements for a public hearing.
This bill is supported by several civil rights and labor
organizations. There is no known opposition. The bill passed
off the Senate Floor with a 39-0 vote and last week passed out
of the Assembly Public Employees, Retirement, and Social
Security Committee on a 6-0 vote.
SUMMARY : Amends the California Public Divest from Iran Act to
specify that nothing in the Act requires the board of a public
pension fund to take any action that the board determines, in
good faith, would breach a fiduciary responsibility and requires
that any determination that an action would breach a fiduciary
duty to be made in a public hearing. Specifically, this bill :
1)Provides that nothing in the provisions of the California
Public Divest from Iran Act (Act) would require boards of
CalPERS or CalSTRS to take an action if the board determines,
in good faith, that the action would be a breach of fiduciary
responsibilities of the board as described in Section 17 of
Article XVI of the California Constitution.
2)Requires that any determination that an action required under
the Act would breach a fiduciary duty shall be made in a
public hearing of the full board after proper public notice
and an opportunity for public comment.
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
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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).)
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
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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 any 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'
fiduciary responsibilities. In addition, this bill would
require the determination of fiduciary duty to be made at a
public hearing that is properly noticed and that provides an
opportunity for public comment.
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
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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
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 has 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 is
something less than a legal breach "inconsistent" with that
responsibility? This bill would clarify that the action would
need to breach a fiduciary duty in order to be exempted from the
divestment requirement; and it would require the determination
on fiduciary duty be made at a noticed public hearing that
provides an opportunity for public comment.
Related Pending Legislation : AB 1151 similarly but more
comprehensively 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. AB 1151 also requires that determinations of
fiduciary duty be made at a public hearing, but sets forth more
specific requirements on how that hearing shall be noticed and
conducted. Finally, unlike the measure before the Committee, AB
1151 also amended the Act to modify the types of companies that
fall within the scope of the Act. AB 1151 passed off the
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Assembly Floor on a 79-0 vote and, at the time of this writing,
is awaiting a hearing in the Senate Judiciary Committee.
Possible Committee Amendment : Because, as noted above, this
Committee passed a more comprehensive measure on this issue in
AB 1151, the Committee may wish to amend this measure, as it
typically does in such circumstances, with contingent enactment
language, to ensure that the more comprehensive measure that it
supports is enacted, should this one become enacted as well.
ARGUMENTS IN SUPPORT : According to the author, "Senate Bill 903
is a transparency measure to assist the Public Employees'
Retirement System and the State Teachers' Retirement System �in
fulfilling] their statutory commitment to divest their
prohibited investments from the Islamic Republic of Iran." The
author asserts that by "the pension funds' own admission in the
data they are required to report annually to the Legislature,
and in subsequent oversight hearings, PERS and STRS have
repeatedly resisted the Legislature's clear and firm call to get
their funds out of Iran." This measure, the author believes,
will clarify that divestment can only be avoided if to do so
would breach the funds' constitutionally-mandated fiduciary
duty, and that transparency requires that "any determination
that an action would be a breach of fiduciary duty shall be made
in a public hearing of the full board after proper public notice
and an opportunity for public comment."
The Anti-Defamation League (ADL) supports this bill because it
"is clear from both legislative oversight hearings and the
reports issued by these agencies that they are contravening the
intent of the Legislature and have not divested." ADL believes
that SB 903 will clarify that the agencies should have "the
burden of demonstrating why the fiduciary duty requires action
inconsistent with Legislative intent," and it will
simultaneously "establish a transparent and public process for
such a determination." Finally, ADL believes that such
divestments are particularly justified in the case of Iran,
given that nation's well-documented "nuclear weapons program,
extremism, and state-sponsored terrorism." Several other
organizations support this bill for substantially similar
reasons.
ARGUMENTS IN OPPOSITION : The analysis of the Assembly Public
Employees, Retirement, and Social Security Committee (PER&SS),
which heard this bill last week, indicates that this bill is
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opposed by CalPERS and CalSTRS. According to the PER&SS
Committee, CalPERS insists that it has fully implemented the Act
since the time it became effective on January 1, 2008. CalPERS
primarily opposes the provision requiring determinations be made
in a public hearing, claiming that it "must protect its right to
discuss investment decisions in closed session." CalSTRS
opposes the bill for substantially similar reasons.
REGISTERED SUPPORT / OPPOSITION :
Support
AMVETS - Department of California
Anti-Defamation League
California Conference of Machinists
California State Commanders Veterans Council
California Teamsters Public Affairs Council
Jewish Public Affairs Council
Military Officers Association of America, California Council of
Chapters
Opposition
CalPERS Board of Administration
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334