Bill not drafted by TLC or Senate E&E. Line and page numbers may not match official copy. By Tillery H.B. No. 3068 A BILL TO BE ENTITLED 1-1 AN ACT 1-2 relating to the investment and management of assets for public 1-3 pension plans organized and governed under the laws of the State of 1-4 Texas. 1-5 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: 1-6 SECTION 1. PURPOSE AND DEFINITIONS. (a) The purpose of 1-7 this Act is to establish a uniform standard for the investment and 1-8 management of assets for public pension plans organized and 1-9 governed under the laws of the State of Texas. 1-10 (b) DEFINITIONS. 1-11 (1) The term "manager" means a person who invests and 1-12 manages assets for a public pension plan organized and governed 1-13 under the laws of the State of Texas. 1-14 (2) The term "plan" means a public pension plan 1-15 organized and governed under the laws of the State of Texas. 1-16 SECTION 2. PRUDENT INVESTOR RULE. (a) Except as otherwise 1-17 provided in subsection (b), a manager who invests and manages plan 1-18 assets owes a duty to the beneficiaries of the plan to comply with 1-19 the prudent investor rule set forth in this Act. 1-20 (b) The prudent investor rule, a default rule, may be 1-21 expanded, restricted, eliminated, or otherwise altered by the 1-22 provisions of a plan. A manager is not liable to a beneficiary to 1-23 the extent that the manager acted in reasonable reliance on the 1-24 provisions of the plan. 2-1 SECTION 3. STANDARD OF CARE; PORTFOLIO STRATEGY; RISK AND 2-2 RETURN OBJECTIVES. (a) A manager shall invest and manage plan 2-3 assets as a prudent investor would, by considering the purposes, 2-4 terms, distribution requirements, and other circumstances of the 2-5 plan. In satisfying this standard, the manager shall exercise 2-6 reasonable care, skill, and caution. 2-7 (b) A manager's investment and management decisions 2-8 respecting individual assets must be evaluated not in isolation but 2-9 in the context of the plan portfolio as a whole and as a part of an 2-10 overall investment strategy having risk and return objectives 2-11 reasonably suited to the plan. 2-12 (c) Among circumstances that a manager shall consider in 2-13 investing and managing plan assets are such of the following as are 2-14 relevant to the plan or its beneficiaries: 2-15 (1) general economic conditions; 2-16 (2) the possible effect of inflation or deflation; 2-17 (3) the expected tax consequences of investment 2-18 decisions or strategies; 2-19 (4) the role that each investment or course of action 2-20 plays within the overall plan portfolio, which may include 2-21 financial assets, interests in closely held enterprises, tangible 2-22 and intangible personal property, and real property; 2-23 (5) the expected total return from income and the 2-24 appreciation of capital; 2-25 (6) other resources of the beneficiaries; 2-26 (7) needs for liquidity, regularity of income, and 2-27 preservation or appreciation of capital; and 2-28 (8) an asset's special relationship or special value, 2-29 if any, to the purposes of the plan or to one or more of the 2-30 beneficiaries. 3-1 (d) A manager shall make a reasonable effort to verify facts 3-2 relevant to the investment and management of plan assets. 3-3 (e) A manager may invest in any kind of property or type of 3-4 investment consistent with the standards of this Act. 3-5 (f) A manager who has special skills or expertise, or is 3-6 named manager in reliance upon the manager's representation that 3-7 the manager has special skills or expertise, has a duty to use 3-8 those special skills or expertise. 3-9 SECTION 4. DIVERSIFICATION. A manager shall diversify the 3-10 investments of the plan unless the manager reasonably determines 3-11 that, because of special circumstances, the purposes of the plan 3-12 are better served without diversifying. 3-13 SECTION 5. DUTIES AT INCEPTION OF MANAGEMENT. Within a 3-14 reasonable time after accepting management or receiving plan 3-15 assets, a manager shall review the plan assets and make and 3-16 implement decisions concerning the retention and disposition of 3-17 assets, in order to bring the plan portfolio into compliance with 3-18 the purposes, terms, distribution requirements, and other 3-19 circumstances of the plan, and with the requirements of this Act. 3-20 SECTION 6. LOYALTY. A manager shall invest and manage the 3-21 plan assets solely in the interest of the beneficiaries. 3-22 SECTION 7. IMPARTIALITY. If a plan has two or more 3-23 beneficiaries, the manager shall act impartially in investing and 3-24 managing the plan assets, taking into account any differing 3-25 interests of the beneficiaries. 3-26 SECTION 8. INVESTMENT COSTS. In investing and managing plan 3-27 assets, a manager may only incur costs that are appropriate and 3-28 reasonable in relation to the assets, the purposes of the plan, and 3-29 the skills of the manager. 3-30 SECTION 9. REVIEWING COMPLIANCE. Compliance with the 4-1 prudent investor rule is determined in light of the facts and 4-2 circumstances existing at the time of a manager's decision or 4-3 action and not by hindsight. 4-4 SECTION 10. DELEGATION OF INVESTMENT AND MANAGEMENT 4-5 FUNCTIONS. (a) A manager may delegate investment and management 4-6 functions that a prudent manager of comparable skills could 4-7 properly delegate under the circumstances. The manager shall 4-8 exercise reasonable care, skill, and caution in: 4-9 (1) selecting an agent; 4-10 (2) establishing the scope and terms of the 4-11 delegation, consistent with the purposes and terms of the plan; and 4-12 (3) periodically reviewing the agent's actions in 4-13 order to monitor the agent's performance and compliance with the 4-14 terms of the delegation. 4-15 (b) In performing a delegated function, an agent owes a duty 4-16 to the plan to exercise reasonable care to comply with the terms of 4-17 the delegation. 4-18 (c) A manager who complies with the requirements of 4-19 subsection (a) is not liable to the beneficiaries or to the plan 4-20 for the decisions or actions of the agent to whom the function was 4-21 delegated. 4-22 (d) By accepting the delegation of a management function 4-23 from the manager of a plan that is subject to the law of this 4-24 State, an agent submits to the jurisdiction of the courts of this 4-25 State. 4-26 SECTION 11. LANGUAGE INVOKING STANDARD OF ACT. The 4-27 following terms or comparable language in the provisions of a plan, 4-28 unless otherwise limited or modified, authorizes any investment or 4-29 strategy permitted under this Act: "investments permissible by law 4-30 for investment of plan funds," "legal investments," "authorized 5-1 investments," "using the judgment and care under the circumstances 5-2 then prevailing that persons of prudence, discretion, and 5-3 intelligence exercise in the management of their own affairs, not 5-4 in regard to speculation but in regard to the permanent disposition 5-5 of their funds, considering the probable income as well as the 5-6 probable safety of their capital," "prudent man rule," "prudent 5-7 manager rule," "prudent person rule," and "prudent investor rule." 5-8 SECTION 12. APPLICATION TO EXISTING PLANS. This Act applies 5-9 to plans existing on and created after its effective date. As 5-10 applied to plans existing on its effective date, this Act governs 5-11 only decisions or actions occurring after that date. 5-12 SECTION 13. SHORT TITLE. This Act may be cited as the 5-13 "Texas Uniform Prudent Pension Investor Act." 5-14 SECTION 14. SEVERABILITY. If any provision of this Act or 5-15 its application to any person or circumstance is held invalid, the 5-16 invalidity does not affect other provisions or applications of this 5-17 Act which can be given effect without the invalid provision or 5-18 application, and to this end the provisions of this Act are 5-19 severable. 5-20 SECTION 15. This Act takes effect on January 1, 1998. 5-21 SECTION 16. The importance of this legislation and the 5-22 crowded condition of the calendars in both houses create an 5-23 emergency and an imperative public necessity that the 5-24 constitutional rule requiring bills to be read on three several 5-25 days in each house be suspended, and this rule is hereby suspended.