By: Huffman S.B. No. 1246

(In the Senate - Filed February 27, 2023; March 9, 2023, read first time and referred to Committee on Finance; April 3, 2023, reported adversely, with favorable Committee Substitute by the following vote: Yeas 17, Nays 0; April 3, 2023, sent to printer.) Click here to see the committee vote

COMMITTEE SUBSTITUTE FOR S.B. No. 1246 By: Huffman

A BILL TO BE ENTITLED

AN ACT

relating to authorized investments of public money by certain governmental entities and the confidentiality of certain information related to those investments.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:

SECTION 1. Section 404.024, Government Code, is amended by amending Subsections (b) and (c) and adding Subsections (c-1), (c-2), and (c-3) to read as follows:

(b) Subject to Chapter 2270, state funds not deposited in state depositories shall be invested by the comptroller in:

(1) direct security repurchase agreements;

(2) reverse security repurchase agreements;

(3) direct obligations of or obligations the principal and interest of which are guaranteed by the United States;

(4) direct obligations of or obligations guaranteed by agencies or instrumentalities of the United States government;

(5) bankers' acceptances that:

(A) are eligible for purchase by the Federal Reserve System;

(B) do not exceed 270 days to maturity; and

(C) are issued by a bank whose other comparable short-term obligations are rated in the highest short-term rating category, within which there may be subcategories or gradations indicating relative standing, including such subcategories or gradations as "rating category" or "rated," by a nationally recognized statistical rating organization, as defined by 15 U.S.C. Section 78c;

(6) commercial paper that:

(A) does not exceed 365 [270] days to maturity; and

(B) except as provided by Subsection (i), is issued by an entity whose other comparable short-term obligations are rated in the highest short-term rating category by a nationally recognized statistical rating organization;

(7) contracts written by the treasury in which the treasury grants the purchaser the right to purchase securities in the treasury's marketable securities portfolio at a specified price over a specified period and for which the treasury is paid a fee and specifically prohibits naked-option or uncovered option trading;

(8) direct obligations of or obligations guaranteed by the Inter-American Development Bank, the International Bank for Reconstruction and Development (the World Bank), the African Development Bank, the Asian Development Bank, and the International Finance Corporation that have received the highest long-term rating categories for debt obligations by a nationally recognized statistical rating organization;

(9) bonds issued, assumed, or guaranteed by the State of Israel;

(10) obligations of a state or an agency, county, city, or other political subdivision of a state;

(11) mutual funds secured by obligations that are described by Subdivisions (1) through (6) or by obligations consistent with Rule 2a-7 (17 C.F.R. Section 270.2a-7), promulgated by the Securities and Exchange Commission, including pooled funds:

(A) established by the Texas Treasury Safekeeping Trust Company;

(B) operated like a mutual fund; and

(C) with portfolios consisting only of dollar-denominated securities;

(12) foreign currency for the sole purpose of facilitating investment by state agencies that have the authority to invest in foreign securities;

(13) asset-backed securities, as defined by the Securities and Exchange Commission in Rule 2a-7 (17 C.F.R. Section 270.2a-7), that are rated at least A or its equivalent by a nationally recognized statistical rating organization and that have a weighted-average maturity of five years or less; and

(14) corporate debt obligations that are rated at least A or its equivalent by a nationally recognized statistical rating organization and mature in five years or less from the date on which the obligations were "acquired," as defined by the Securities and Exchange Commission in Rule 2a-7 (17 C.F.R. Section 270.2a-7).

(c) Investments in direct security repurchase agreements and reverse security repurchase agreements may be:

(1) placed through financial institutions [made with state or national banks] doing business in this state or through [with] primary dealers as approved by the Federal Reserve System; or

(2) made directly with a state agency with the authority to invest in repurchase agreements.

(c-1) For purposes of this section, "agency of the state" or "state agency" means:

(1) an office, department, commission, board, or agency that is part of any branch of state government;

(2) an institution of higher education as defined by Section 61.003, Education Code; or

(3) a nonprofit corporation acting on behalf of an entity described by Subdivision (1) or (2).

(c-2) Notwithstanding any other law, the term of any reverse security repurchase agreement made by the comptroller may not exceed 90 days after the date the reverse security repurchase agreement is delivered. Money received by the comptroller under the terms of a reverse security repurchase agreement may be used to acquire additional authorized investments, but the term of the authorized investments acquired must mature not later than the expiration date stated in the reverse security repurchase agreement.

(c-3) A direct security repurchase agreement or reverse security repurchase agreement made by the comptroller under this section may be submitted for clearing and settlement to a covered clearing agency, as defined by the Securities and Exchange Commission in Rule 17Ad-22 (17 C.F.R. Section 240.17Ad-22).

SECTION 2. Section 825.103(d), Government Code, is amended to read as follows:

(d) Notwithstanding any other law, the retirement system has exclusive authority over the purchase of goods and services using money other than money appropriated from the general revenue fund, including specifically money from trusts under the administration of the retirement system, and Subtitles [Subtitle] D and F, Title 10, do [does] not apply to the retirement system with respect to that money. The retirement system shall acquire goods or services by procurement methods approved by the board of trustees or the board's designee. For purposes of this subsection, goods and services include all professional and consulting services and utilities as well as supplies, materials, equipment, skilled or unskilled labor, and insurance. The comptroller shall procure goods or services for the retirement system at the request of the retirement system, and the retirement system may use the services of the comptroller in procuring goods or services.

SECTION 3. Section 825.301(a), Government Code, is amended to read as follows:

(a) The board of trustees shall invest and reinvest assets of the retirement system without distinction as to their source in accordance with Section 67, Article XVI, Texas Constitution. For purposes of the investment authority of the board of trustees under Section 67, Article XVI, Texas Constitution, "securities" includes any investment instrument within the meaning of the term as defined by Section 4001.068, 15 U.S.C. Section 77b(a)(1), or 15 U.S.C. Section 78c(a)(10), any derivative instrument, and any other instrument commonly used by institutional investors to manage institutional investment portfolios. An interest in a limited partnership or investment contract is considered a security without regard to the number of investors or the control, access to information, or rights granted to or retained by the retirement system. Any instrument or contract intended to manage transaction or currency exchange risk in purchasing, selling, or holding securities is considered to be a security. Subject to Section 825.3013, an interest in a title-holding entity that is wholly owned, organized, and controlled by the retirement system is considered a security. Investment decisions are subject to the standard provided in the Texas Trust Code by Section 117.004(b), Property Code.

SECTION 4. Section 825.3012(b), Government Code, is amended to read as follows:

(b) Notwithstanding any provision of Section 825.301, the board of trustees shall determine the maximum percentage [not more than 10 percent] of the value of the total investment portfolio of the retirement system that may be invested in hedge funds.

SECTION 5. Subchapter D, Chapter 825, Government Code, is amended by adding Sections 825.3013 and 825.3014 to read as follows:

Sec. 825.3013. TITLE-HOLDING ENTITIES; INVESTMENTS IN REAL PROPERTY. (a) The retirement system may form a title-holding entity for the purpose of investing the retirement system's assets in real property. The title-holding entity must be:

(1) wholly owned, organized, and controlled by the system; and

(2) exempt from taxation under Section 501(a), Internal Revenue Code of 1986, as an organization described by Section 501(c) of that code.

(b) Subject to Subsection (a)(2), a title-holding entity formed under this section may hold title to real property jointly with another person.

(c) The board of trustees shall adopt policies for the governance, management, and reporting for a title-holding entity formed under this section.

(d) The following persons may not be employed by, receive compensation from, be a party to a contract with or a direct or indirect financial beneficiary of a contract with, or hold a direct or indirect interest in a title-holding entity formed by the retirement system under this section:

(1) a trustee or employee of the system; or

(2) a relative of a trustee or employee of the system within the second degree of consanguinity or affinity, as determined under Chapter 573.

(e) Chapter 551 and Subtitles D and F, Title 10, do not apply to a title-holding entity formed under this section.

Sec. 825.3014. CONFIDENTIALITY OF RECORDS RELATED TO TITLE-HOLDING ENTITIES. (a) Notwithstanding any other law other than this section, information that relates to a title-holding entity formed under Section 825.3013 is confidential and excepted from disclosure under Section 552.021, including information relating to:

(1) a pre-due diligence or post-due diligence review, audit, or investigation;

(2) the formation of a title-holding entity under Section 825.3013; or

(3) a potential purchase of real property by a title-holding entity, regardless of whether the purchase is completed.

(b) The following information as it relates to a title-holding entity formed under Section 825.3013 is public information under Chapter 552:

(1) the title-holding entity's certificate of formation or comparable instrument;

(2) the date or dates on which the title-holding entity purchased or sold an ownership interest in real property;

(3) information relating to the title-holding entity's qualification for the federal income tax exemption required under Section 825.3013(a)(2);

(4) the name and location, including the physical address, city, state, and country, of any real property in which the title-holding entity has an ownership interest;

(5) as shown in the meeting minutes of the board of trustees, each recusal by a member of the board in connection with a deliberation or action relating to the title-holding entity, any real property in which the entity has an ownership interest, or a lease or contract with the title-holding entity;

(6) the name of each business entity or employer owned wholly or partly by the relative of a member of the board of trustees or a retirement system employee, within the second degree of consanguinity or affinity under Chapter 573, that is a prospective party to a transaction or contract with the title-holding entity, including a contract that is:

(A) a real property purchase and sale agreement;

(B) for goods or services; or

(C) a lease agreement, including a ground lease agreement;

(7) the name of the business entity or employer described by Subdivision (6) as stated in the business entity's or employer's certificate of formation or comparable instrument;

(8) copies of income tax returns filed by the title-holding entity, except information in the returns relating to indebtedness, tax basis, and gains or losses realized on the sale or other disposition of real property by the title-holding entity;

(9) if the system or a state agency is a tenant of real property owned by the title-holding entity:

(A) the name of that tenant;

(B) the name and address of the property; and

(C) the financial returns to the system from investing in the property; and

(10) if applicable, the name of any joint owner of real property a title-holding entity has an ownership interest in and the percentage of the property owned by a joint owner.

(c) This section applies to information regardless of whether the title-holding entity disposes of the entity's interest in real property or an asset if the information is inextricably intertwined with another interest in real property or other assets owned by the title-holding entity.

(d) This section does not prohibit the retirement system or any person from asserting that any information described by this section is confidential or exempt from disclosure under Section 552.021 or other law. Notwithstanding any other law, if the retirement system discloses information described by Subsection (a) to a person, the disclosure does not:

(1) waive or affect the confidentiality of information relating to any other title-holding entity; or

(2) waive the retirement system's right to assert exceptions to disclosure of the information in the future.

SECTION 6. Section 2256.011, Government Code, is amended by amending Subsections (a) and (b) and adding Subsections (a-1), (f), and (g) to read as follows:

(a) A fully collateralized repurchase agreement is an authorized investment under this subchapter if the repurchase agreement:

(1) has a defined termination date;

(2) is secured by a combination of cash and obligations described by Section 2256.009(a)(1) or 2256.013 or, if applicable, Section 2256.0204;

(3) requires the securities being purchased by the entity or cash held by the entity to be pledged to the entity either directly or through a joint account approved by the entity, held in the entity's name either directly or through a joint account approved by the entity, and deposited at the time the investment is made with the entity or with a third party selected and approved by the entity; and

(4) is placed through a primary government securities dealer, as defined by the Federal Reserve, or a financial institution doing business in this state.

(a-1) A repurchase agreement made by an investing entity under this section may be submitted for clearing and settlement to a covered clearing agency, as defined by the Securities and Exchange Commission in Rule 17Ad-22 (17 C.F.R. Section 240.17Ad-22).

(b) In this section:

(1) "Joint account" means an account maintained by a custodian bank and established on behalf of two or more parties to engage in aggregate repurchase agreement transactions.

(2) "Repurchase[, "repurchase] agreement" means a simultaneous agreement to buy, hold for a specified time, and sell back at a future date obligations described by Section 2256.009(a)(1) or 2256.013 or, if applicable, Section 2256.0204, at a market value at the time the funds are disbursed of not less than the principal amount of the funds disbursed. The term includes a direct security repurchase agreement and a reverse security repurchase agreement.

(f) An investing entity that contracts with an investment management firm under Section 2256.003(b) may authorize the firm to invest the entity's public funds or other funds under the entity's control in repurchase agreements as provided by this section using a joint account.

(g) An investment management firm responsible for managing a repurchase agreement transaction using a joint account on behalf of an investing entity as authorized under Subsection (f) must ensure that:

(1) accounting and control procedures are implemented to document the investing entity's aggregate daily investment and pro rata share in the joint account;

(2) each party participating in the joint account retains the sole rights of ownership to the party's pro rata share of assets invested in the joint account, including investment earnings on those assets; and

(3) policies and procedures are implemented to prevent a party participating in the joint account from using any part of a balance of the joint account that is credited to another party.

SECTION 7. This Act takes effect immediately if it receives a vote of two-thirds of all the members elected to each house, as provided by Section 39, Article III, Texas Constitution. If this Act does not receive the vote necessary for immediate effect, this Act takes effect September 1, 2023.

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