80R3380 MCK-F

By: Van Arsdale H.B. No. 667

A BILL TO BE ENTITLED

AN ACT

relating to prohibiting the investment of state funds in certain private business entities doing business in Sudan.

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

SECTION 1. LEGISLATIVE FINDINGS. (a) On July 23, 2004, the United States Congress declared that "the atrocities unfolding in Darfur, Sudan, are genocide."

(b) On September 9, 2004, Secretary of State Colin L. Powell told the United States Senate Foreign Relations Committee that "genocide has occurred and may still be occurring in Darfur" and "the Government of Sudan and the Janjaweed bear responsibility."

(c) On September 21, 2004, addressing the United Nations General Assembly, President George W. Bush affirmed the secretary of state's finding and stated, "At this hour, the world is witnessing terrible suffering and horrible crimes in the Darfur region of Sudan, crimes my government has concluded are genocide."

(d) On December 7, 2004, the United States Congress noted that the genocidal policy in Darfur has led to reports of "systematic rape of thousands of women and girls, the abduction of women and children, and the destruction of hundreds of ethnically African villages, including the poisoning of their wells and the plunder of their crops and cattle upon which the people of such villages sustain themselves."

(e) Also on December 7, 2004, the congress found that "the Government of Sudan has restricted access by humanitarian and human rights workers to the Darfur area through intimidation by military and security forces, and through bureaucratic and administrative obstruction, in an attempt to inflict the most devastating harm on those individuals displaced from their villages and homes without any means of sustenance or shelter."

(f) On September 25, 2006, the congress reaffirmed that "the genocide unfolding in the Darfur region of Sudan is characterized by acts of terrorism and atrocities directed against civilians, including mass murder, rape, and sexual violence committed by the Janjaweed and associated militias with the complicity and support of the National Congress Party-led faction of the Government of Sudan."

(g) On September 26, 2006, the United States House of Representatives stated that "an estimated 300,000 to 400,000 people have been killed by the Government of Sudan and its Janjaweed allies since the Darfur crisis began in 2003, more than 2,000,000 people have been displaced from their homes, and more than 250,000 people from Darfur remain in refugee camps in Chad."

(h) The Darfur crisis represents the first time the United States government has labeled ongoing atrocities a genocide.

(i) The United States government has imposed sanctions against the Government of Sudan since 1997. These sanctions are monitored through the United States Treasury Department's Office of Foreign Assets Control (OFAC).

(j) According to a former chair of the United States Securities and Exchange Commission, "the fact that a foreign company is doing material business with a country, government, or entity on OFAC's sanctions list is, in the SEC staff's view, substantially likely to be significant to a reasonable investor's decision about whether to invest in that company."

(k) Since 1993, the United States secretary of state has determined that Sudan is a country the government of which has repeatedly provided support for acts of international terrorism, thereby incurring restrictions of United States assistance, defense exports and sales, and financial and other transactions with the Government of Sudan.

(l) A 2006 United States House of Representatives report states that "a company's association with sponsors of terrorism and human rights abuses, no matter how large or small, can have a materially adverse result on a public company's operations, financial condition, earnings, and stock prices, all of which can negatively affect the value of an investment."

(m) In response to the financial risk posed by investments in companies doing business with a terrorist-sponsoring state, the Securities and Exchange Commission established its Office of Global Security Risk to provide for enhanced disclosure of material information regarding such companies.

(n) The current Sudan divestment movement encompasses nearly 100 universities, cities, states, and private pension plans.

(o) Companies facing such widespread divestment present further material risk to remaining investors.

(p) It is a fundamental responsibility of the state to decide where, how, and by whom financial resources in its control should be invested, taking into account numerous pertinent factors.

(q) It is the prerogative and desire of the state, in respect to investment resources in its control and to the extent reasonable, with due consideration for, among other things, return on investment, on behalf of itself and its investment beneficiaries, not to participate in an ownership or capital-providing capacity with entities that provide significant practical support for genocide, including certain non-United States companies presently doing business in Sudan.

(r) It is the judgment of the legislature that this Act should remain in effect only insofar as it continues to be consistent with, and does not unduly interfere with, the foreign policy of the United States as determined by the United States government.

(s) It is the judgment of the legislature that mandatory divestment of public funds from certain companies is a measure that should be employed sparingly and judiciously. A congressional and presidential declaration of genocide satisfies this high threshold.

SECTION 2. Subtitle F, Title 10, Government Code, is amended by adding Chapter 2264 to read as follows: CHAPTER 2264. PROHIBITION ON INVESTMENT IN SUDAN SUBCHAPTER A. GENERAL PROVISIONS

Sec. 2264.001. DEFINITIONS. In this chapter:

(1) "Active business operations" means all business operations that are not inactive business operations.

(2) "Business operations" means engaging in commerce in any form in Sudan, including by acquiring, developing, maintaining, owning, selling, possessing, leasing, or operating equipment, facilities, personnel, products, services, personal property, real property, or any other apparatus of business or commerce.

(3) "Company" means a sole proprietorship, organization, association, corporation, partnership, joint venture, limited partnership, limited liability partnership, limited liability company, or other entity or business association, including a wholly owned subsidiary, majority-owned subsidiary, parent company, or affiliate of such entities or business associations, that exists for profit-making purposes.

(4) "Complicit" means taking actions that have directly supported or promoted the genocidal campaign in Darfur, including:

(A) preventing members of Darfur's victimized population from communicating with each other;

(B) encouraging Sudanese citizens to speak out against an internationally approved security force for Darfur; or

(C) actively working to deny, cover up, or alter the record on human rights abuses in Darfur.

(5) "Direct holdings in a company" means all securities of that company held directly by the state in an account or fund in which the state owns all shares or interests.

(6) "Government of Sudan" means the government in Khartoum, Sudan, which is led by the National Congress Party (formerly known as the National Islamic Front) or any successor government formed on or after October 13, 2006 (including the coalition National Unity Government agreed upon in the Comprehensive Peace Agreement for Sudan). The term does not include the regional government of southern Sudan.

(7) "Inactive business operations" means the mere continued holding or renewal of rights to property previously operated for the purpose of generating revenues but not presently deployed for such purpose.

(8) "Indirect holdings in a company" means all securities of that company held in an account or fund, such as a mutual fund, managed by one or more persons not employed by a state governmental entity, in which the state governmental entity owns shares or interests together with other investors not subject to the provisions of this chapter.

(9) "Marginalized populations of Sudan" includes:

(A) the portion of the population in the Darfur region that has been genocidally victimized;

(B) the portion of the population of southern Sudan victimized by Sudan's North-South civil war;

(C) the Beja, Rashidiya, and other similarly underserved groups of eastern Sudan;

(D) the Nubian and other similarly underserved groups in Sudan's Abyei, Southern Blue Nile, and Nuba Mountain regions; and

(E) the Amri, Hamadab, Manasir, and other similarly underserved groups of northern Sudan.

(10) "Military equipment" means weapons, arms, military supplies, and equipment that readily may be used for military purposes, including radar systems or military-grade transport vehicles or supplies or services sold or provided directly or indirectly to any force actively participating in armed conflict in Sudan.

(11) "Mineral extraction activities" includes exploring, extracting, processing, transporting, or wholesale selling or trading of elemental minerals or associated metal alloys or oxides (ore), including gold, copper, chromium, chromite, diamonds, iron, iron ore, silver, tungsten, uranium, and zinc, as well as facilitating such activities, including by providing supplies or services in support of such activities.

(12) "Oil-related activities" includes:

(A) owning rights to oil blocks;

(B) exporting, extracting, producing, refining, processing, exploring for, transporting, selling, or trading of oil;

(C) constructing, maintaining, or operating a pipeline, refinery, or other oil-field infrastructure; or

(D) facilitating such activities, including by providing supplies or services in support of such activities, except that the mere retail sale of gasoline and related consumer products are not oil-related activities.

(13) "Power production activities" means any business operation that involves a project commissioned by the National Electricity Corporation of Sudan or another similar Government of Sudan entity whose purpose is to facilitate power generation and delivery, including establishing power-generating plants or hydroelectric dams, selling or installing components for the project, and providing service contracts related to the installation or maintenance of the project, as well as facilitating such activities, including by providing supplies or services in support of such activities.

(14) "Scrutinized company" means a company that:

(A) engages in scrutinized business operations described by Section 2264.002; or

(B) has been complicit in the Darfur genocide during any preceding 20-month period.

(15) "Social development company" means a company whose primary purpose in Sudan is to provide humanitarian goods or services, including medicine or medical equipment, agricultural supplies or infrastructure, educational opportunities, journalism-related activities, information or information materials, spiritual-related activities, services of a purely clerical or reporting nature, food, clothing, or general consumer goods that are unrelated to oil-related activities, mineral extraction activities, or power production activities.

(16) "Substantial action" means adopting, publicizing, and implementing a formal plan to cease scrutinized business operations within one year and to refrain from any such new business operations, undertaking significant humanitarian efforts on behalf of one or more marginalized populations of Sudan, or, through engagement with the Government of Sudan, materially improving conditions for the genocidally victimized population in Darfur.

Sec. 2264.002. SCRUTINIZED BUSINESS OPERATIONS. A company engages in scrutinized business operations if:

(1) the company has business operations that involve contracts with or providing supplies or services to the Government of Sudan, a company in which the Government of Sudan has any direct or indirect equity share, a Government of Sudan-commissioned consortium or project, or a company involved in a Government of Sudan-commissioned consortium or project, and:

(A) more than 10 percent of the company's revenues or assets linked to Sudan involve oil-related activities or mineral extraction activities, less than 75 percent of the company's revenues or assets linked to Sudan involve contracts with or provision of oil-related or mineral extracting products or services to the regional government of southern Sudan or a project or consortium created exclusively by that regional government, and the company has failed to take substantial action; or

(B) more than 10 percent of the company's revenues or assets linked to Sudan involve power production activities, less than 75 percent of the company's power production activities include projects whose intent is to provide power or electricity to the marginalized populations of Sudan, and the company has failed to take substantial action; or

(2) the company supplies military equipment within Sudan, unless:

(A) the company clearly shows that the military equipment cannot be used to facilitate offensive military actions in Sudan; or

(B) the company implements rigorous and verifiable safeguards to prevent use of that equipment by forces actively participating in armed conflict, including:

(i) using post-sale tracking of such equipment by the company;

(ii) certification from a reputable and objective third party that such equipment is not being used by a party participating in armed conflict in Sudan; or

(iii) selling such equipment solely to the regional government of southern Sudan or any internationally recognized peacekeeping force or humanitarian organization.

Sec. 2264.003. SOCIAL DEVELOPMENT COMPANY. Notwithstanding any other law, a social development company that is not complicit in the Darfur genocide may not be considered a scrutinized company.

Sec. 2264.004. EXCEPTION. Notwithstanding any other law, a company that the United States government affirmatively declares to be excluded from its federal sanctions regime relating to Sudan is not subject to divestment or investment prohibition under this chapter.

Sec. 2264.005. OTHER LEGAL OBLIGATIONS. With respect to actions taken in compliance with this chapter, including all good faith determinations regarding companies as required by this chapter, a state governmental entity is exempt from any conflicting statutory or common law obligations, including any obligations with respect to choice of asset managers, investment funds, or investments for the state governmental entity's securities portfolios. [Sections 2264.006-2264.050 reserved for expansion] SUBCHAPTER B. DUTIES REGARDING INVESTMENTS

Sec. 2264.051. LIST OF SCRUTINIZED COMPANIES. (a) In this section, "system" means the Employees Retirement System of Texas.

(b) The system shall maintain a list of all scrutinized companies. In preparing the list of scrutinized companies, the system shall:

(1) review and rely, as appropriate in the system's judgment, on publicly available information regarding companies with business operations in Sudan, including information provided by nonprofit organizations, research firms, international organizations, and governmental entities;

(2) contact asset managers under contract with the system or another state governmental entity that invests in companies with business operations in Sudan; and

(3) contact other institutional investors that have divested from or engaged with companies that have business operations in Sudan.

(c) The system shall update the scrutinized companies list on a quarterly basis based on evolving information from, among other sources, those listed in Subsection (b).

(d) Not later than the 30th day after the date the list of scrutinized companies is created or updated, the system shall file the list of scrutinized companies with the presiding officer of each house of the legislature and the attorney general.

Sec. 2264.052. IDENTIFICATION OF INVESTMENT IN SCRUTINIZED COMPANIES. Each state governmental entity shall immediately identify the companies on the list of scrutinized companies in which the state governmental entity owns direct or indirect holdings.

Sec. 2264.053. NOTICE TO SCRUTINIZED COMPANY ENGAGED IN INACTIVE BUSINESS OPERATIONS. For each company identified under Section 2264.052 that is engaged in only inactive scrutinized business operations, the state governmental entity shall send a written notice informing the company of this chapter and encouraging the company to continue to refrain from initiating active business operations in Sudan until it is able to avoid being considered a scrutinized company. The state governmental entity shall continue such correspondence on a semiannual basis.

Sec. 2264.054. ACTIONS RELATING TO SCRUTINIZED COMPANY ENGAGED IN ACTIVE BUSINESS OPERATIONS. (a) For each company identified under Section 2264.052 that is engaged in active scrutinized business operations, the state governmental entity shall send a written notice informing the company of its scrutinized company status and warning the company that it may become subject to divestment by the state governmental entity.

(b) The notice shall offer the company the opportunity to clarify its Sudan-related activities and shall encourage the company, not later than the 90th day after the date the company receives notice under this section, to either cease its scrutinized business operations or convert such operations to inactive business operations in order to avoid qualifying for divestment by the state governmental entity.

(c) If, during the time provided by Subsection (b), the company ceases scrutinized business operations, the state governmental entity shall remove the company from the scrutinized companies list and this chapter will no longer apply to the company unless it resumes scrutinized business operations.

(d) If, during the time provided by Subsection (b), the company converts its scrutinized active business operations to inactive business operations, the company is subject to all provisions of this chapter relating to inactive business operations.

(e) If, after the time provided by Subsection (b) expires, the company continues to have scrutinized active business operations, the state governmental entity shall sell, redeem, divest, or withdraw all publicly traded securities of the company, except securities described by Section 2264.057, according to the timetable provided by Section 2264.056.

Sec. 2264.055. ACTIONS RELATING TO SCRUTINIZED COMPANY COMPLICIT IN GENOCIDE. (a) For each company identified under Section 2264.052 that has been complicit, the state governmental entity shall send a written notice informing the company of its scrutinized company status and warning the company that it may become subject to divestment by the state governmental entity.

(b) The notice shall require the scrutinized company to refrain from taking any further action that would make it complicit.

(c) If, after receiving the notice under Subsection (a), the scrutinized company takes additional action that makes the company complicit, the state governmental entity shall sell, redeem, divest, or withdraw all publicly traded securities of the company, except securities described by Section 2264.057, according to the timetable provided by Section 2264.056.

Sec. 2264.056. DIVESTMENT OF ASSETS. (a) A state governmental entity required to sell, redeem, divest, or withdraw all publicly traded securities of a scrutinized company shall comply with the following schedule:

(1) at least 50 percent of those assets shall be removed from the state governmental entity's assets under management not later than the 270th day after the date the company receives notice under Section 2264.054 or 2264.055 or Subsection (b); and

(2) 100 percent of those assets shall be removed from the state governmental entity's assets under management not later than the 450th day after the date the company receives notice under Section 2264.054 or 2264.055 or Subsection (b).

(b) If a company that ceased scrutinized active business operations after receiving notice under Section 2264.054 resumes scrutinized active business operations, the state governmental entity shall send a written notice to the company informing it that the state governmental entity will sell, redeem, divest, or withdraw all publicly traded securities of the scrutinized company according to the schedule in Subsection (a).

Sec. 2264.057. INVESTMENTS EXEMPTED FROM DIVESTMENT. A state governmental entity is not required to divest from any indirect holdings in actively managed investment funds or private equity funds. The state governmental entity shall submit letters to the managers of investment funds containing scrutinized companies with scrutinized active business operations requesting that they consider removing those companies from the fund or create a similar actively managed fund with indirect holdings devoid of scrutinized companies. If the manager creates a similar fund, the state governmental entity shall replace all applicable investments with investments in the similar fund in an expedited time frame consistent with prudent investing standards.

Sec. 2264.058. AUTHORIZED INVESTMENT IN COMPANIES WITH SCRUTINIZED ACTIVE BUSINESS OPERATIONS. (a) A state governmental entity may cease divesting from or may reinvest in a scrutinized company if clear and convincing evidence shows that the value for all assets under management by the state governmental entity becomes equal to or less than 99.5 percent of the hypothetical value of all assets under management by the state governmental entity had the state governmental entity not divested from any scrutinized company under Section 2264.055.

(b) A state governmental entity may invest in a scrutinized company as provided by this section only to the extent necessary to ensure that the value of the assets managed by the state governmental entity does not fall below the value described by Subsection (a).

(c) Before a state governmental entity may invest in a scrutinized company under this section, the state governmental entity must provide a written report to the presiding officer of each house of the legislature and the attorney general setting forth the reason and justification, supported by clear and convincing evidence, for its decisions to cease divestment, to reinvest, or to remain invested in a company engaged in scrutinized active business operations.

(d) The state governmental entity shall update the report required by Subsection (c) semiannually, as applicable.

(e) This section does not apply to reinvestment in a company that has ceased to have scrutinized active business operations.

Sec. 2264.059. PROHIBITED INVESTMENTS. Except as provided by Sections 2264.004 and 2264.058, a state governmental entity may not acquire securities of a company on the list of scrutinized companies that has active scrutinized business operations. [Sections 2264.060-2264.100 reserved for expansion] SUBCHAPTER C. EXPIRATION; REPORT; ENFORCEMENT

Sec. 2264.101. EXPIRATION OF CHAPTER. This chapter expires on the earliest of:

(1) the date on which the United States Congress or the president of the United States declares that the Darfur genocide has been halted for at least 12 months;

(2) the date on which the United States revokes its sanctions against the Government of Sudan; or

(3) the date on which the United States Congress or the president of the United States, through legislation or executive order, declares that mandatory divestment of the type provided for in this chapter interferes with the conduct of United States foreign policy.

Sec. 2264.102. REPORT. Not later than December 31 of each year, each state governmental entity shall file a publicly available report with the presiding officer of each house of the legislature, the attorney general, and the United States presidential special envoy to Sudan that:

(1) summarizes the correspondence with scrutinized companies under Subchapter B;

(2) identifies all investments sold, redeemed, divested, or withdrawn in compliance with Section 2264.056;

(3) identifies all prohibited investments under Section 2264.059; and

(4) summarizes any changes made under Section 2264.057.

Sec. 2264.103. ENFORCEMENT. The attorney general may bring any action necessary to enforce this chapter.

SECTION 3. Not later than the 90th day after the effective date of this Act, the Employees Retirement System of Texas shall prepare the list of scrutinized companies required by Section 2264.051, Government Code, as added by this Act.

SECTION 4. 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, 2007.