SBW C.S.H.B. 2799 75(R)BILL ANALYSIS PENSIONS & INVESTMENTS C.S.H.B. 2799 By: Marchant 4-10-97 Committee Report (Substituted) BACKGROUND In 1995, HB 2459 passed the 74th Regular Session of the Texas Legislature, and was an attempt at imposing reporting and investment requirements on entities investing public funds and those persons selling investments. During the last interim, many groups from both the investing as well as those from the dealer side, have come forward with suggestions in an attempt to further refine the Public Funds Investment Act. Representative Marchant asked all the interested parties to meet at the beginning of this Legislative Session in an effort to come to a consensus on changes that would enhance the current law. CSHB 2799 is the result of these meetings and consultations. PURPOSE As proposed, CSHB 2799 would amend Chapter 2256 of the Government Code to improve its effectiveness and clarity for both investors and dealers of investments. RULEMAKING AUTHORITY Rulemaking authority is granted to the governing body of an investing entity in Section 2256.005(e), INVESTMENT POLICIES; INVESTMENT STRATEGIES; INVESTMENT OFFICER, Government Code. SECTION BY SECTION ANALYSIS SECTION 1. Amends Section 2256.002, Government Code by amending Subdivisions (2) and (8), adding Subdivision (10), and renumbering Subdivisions (10)-(12) as Subdivisions (11)-(13). (2) is amended by changing the definition of "book value" to include original acquisition cost plus or minus the accrued amortization or accretion. (8) is amended by changing the definition of "market value" to be the current value multiplied by the net selling price as quoted by a recognized source. (10) is added to create a new definition for "Qualified representative" for a business organization under a securities commission, a state or federal bank, savings bank, or a state or federal credit union, a member of a bank's (or branch of the bank's) loan committee, or a person authorized by resolution to act on behalf of the bank or institution. SECTION 2. Amends Section 2256.004, APPLICABILITY, Government Code by adding Subdivision (5) which excludes a deferred compensation plan that qualifies under either Section 401(k) or 457 of the Internal Revenue Code from this subchapter. SECTION 3. Amends Section 2256.005, Government Code. Sec. 2256.005. INVESTMENT POLICIES; INVESTMENT STRATEGIES; INVESTMENT OFFICER: (b)(4)(C) is amended to clarify the change to dollar-weighted average maturity. (b)(4)(D) is added to include methods to monitor the market price of investments acquired with public funds. (b)(4)(E) is added to specify that a requirement for settlement of all transactions, except investment pool and mutual funds, on a delivery versus payment basis be included into investment policies. (d) is amended to include the phrase, "group of funds" to those funds that should have a separate investment strategy. (e) is amended to require that the governing body adopt a written instrument that states it has reviewed the investment policy and investment strategies and that it will record any changes made to either. (f) adds language to state that in the duties of the investment officer, the prudent person standard is to be used. (h) is amended by excluding an officer or employee of a commission created under Chapter 391 of the Local Government Code to act as an investment officer for any investing entity other than that commission, as under Subsection (f). (i) is amended by striking the phrase "an entity seeking to sell an investment to" and replacing it with "a business organization offering to engage in an investment transaction with." Also adds language that defines what a personal business relationship is including: (1) an investment officer owning 10 percent or more of the voting stock or shares or owning more than $5,000 or more of the business fair market value, (2) funds received from the business organization by the investment officer exceed 10 percent of the officer's previous year's gross income, and (3) business organization investments acquired by the investment officer during the previous year with a value of $2,500 or more for their personal account. (k) is amended by defining who shall receive a written copy of the investment policy to be any person offering to engage in an investment transaction with an investing entity. Includes investment pools in this subsection. Adds language that expressly states that nothing in this subsection relieves the investing entity of the responsibility for monitoring their investments to ensure compliance with investment policy. Requires that the qualified representative execute a written instrument in a form acceptable to the investing entity and the business organization; (1) strikes the word "throughly," (2) adds the term "business" to modify organization and adds language to clarify that the investments are authorized by the entity's policy except when this authorization is dependent on the makeup of the entity's entire portfolio or required interpretation of subjective investment standards. (l) is amended to include that an entity may not acquire or obtain any authorized investment unless the entity has received the instrument required by subsection (k). SECTION 4. Amends Section 2256.007, Government Code by adding Subsection (d). (d) is added to require an investment officer to attend a training session once every two years and can receive the training from any independent source approved by the state agency governing body. Also requires the investment officer to prepare a report on this subchapter not later than the 180th day after the last day of each regular session of the legislature. SECTION 5. Amends Section 2256.008(a), Government Code (1) is amended by striking the term "chapter" and replaces it with "subchapter." (2) is added which requires an investment officer of a local government attend an investment training session not less than once in a two year period and receive not less than 10 hours of instruction from an independent source approved by the governing body. SECTION 6. Amends Section 2256.010, AUTHORIZED INVESTMENTS; CERTIFICATES OF DEPOSITS AND SHARE CERTIFICATES: Government Code by striking the reference to a savings and loan association and replacing it with savings bank. SECTION 7. Amends Section 2256.014(a), Government Code. (1) is amended to include that a mutual fund be registered with the Securities and Exchange Commission. (2) is amended to require the mutual fund to provide a prospectus and any other information required by the Securities Exchange Act or the Investment Company Act. (3) is amended by redesignating the previous (2) as (3). (4) is amended by redesignating the previous (3) as (4). SECTION 8. Amends Section 2256.015, Government Code by amending the heading to read AUTHORIZED INVESTMENTS FOR STATE AGENCIES: GUARANTEED INVESTMENT CONTRACTS. SECTION 9. Amends Section 2256.016, Government Code by adding Subsections (f), (g) and (h). (f) is added to require investment fund pools to mark its portfolio to market daily. (g) is added to state that public funds investment pool must have an advisory board to be eligible to receive funds and that the board be composed of; (1) equal participants in the pool and other persons who do not have a business relationship with the pool, and advise the pool by qualification, for a public funds investment pool created under Chapter 791 and managed by a state agency ; or (2) of participants in the pool and other persons who do not have a business relationship with the pool and are qualified to advise the pool. (h) is added to require that to receive funds from and invest funds on behalf of an entity under this chapter, an investment pool must be continuously rated no lower than AAA or AAA-m or the equivalent. SECTION 10. Amends Section 2256.017, EXISTING INVESTMENTS, Government Code by changing the title of the Section to Existing Investments and adds language that an entity is not required to liquidate investments that were authorized at the time they were purchased. SECTION 11. Amends Section 2256.023, Government Code by amending Subsection (b) and adding Subsection (d). (b) is amended to include that the report must be prepared in compliance with generally accepted accounting principles and include the fully accrued income for the reporting period. (d) is added to require that if an entity invests in something other than money market mutual funds, investment pools or accounts offered by its depository bank in the form of CD's, or money market or similar accounts, then the required reports under this subsection must be annually reviewed by an independent auditor and the results reported to the governing body. SECTION 12. Amends Subchapter A, Chapter 2256, Government Code by adding Sections 2256.025 and 2256.027. Sec. 2256.025. SELECTION OF AUTHORIZED BROKERS: is added to require that the entity, subject to this subchapter, at least annually review, revise, and adopt a list of qualified brokers authorized to engage in investment transactions with the entity. Sec. 2256.026. COLLATERALIZATION OF DEPOSITORY ACCOUNTS language is stricken. Sec 2256.027. STATUTORY COMPLIANCE: is added to require that all investments made by entities must comply with this subchapter and all federal, state, and local statutes, rules, or regulations. SECTION 13. Repeals Sections 2256.018 and 2256.019, Government Code. SECTION 14. Effective date is September 1, 1997, applying to government entity investment activities subject to Chapter 2256, Government Code which occur on or after that date. SECTION 15. Emergency Clause. COMPARISON OF ORIGINAL TO SUBSTITUTE SECTION 1: In subdivision 10(A), it changes the reference to "a dealer representative" to "person." SECTION 3: In subdivision (b)(4)(D) the language added in the original bill was completely changed in the substitute to state the methods to monitor the market price of investments acquired with public funds to the requirements for the investment policy. (f) the substitute bill strikes the language regarding authorized investments. Adds the prudent person rule to be used as the standard for investments. (k)(2) the substitute bill alters the conditions in this subdivision to state that the authorization is dependent on an analysis of the makeup of the entity's entire portfolio or requires an interpretation of subjective investment standards. The original bill said that the authorization is dependent on the portfolio over which the business organization had no knowledge or control. Changes in the numbering are made in this section of the substitute bill to accommodate subdivisions that were altered, deleted or reassigned. SECTION 12 : Section deleted.