81R1679 BEF-F

By: Patrick, Dan S.B. No. 450

A BILL TO BE ENTITLED

AN ACT

relating to prohibiting the investment of retirement system funds in certain private business entities doing business in Iran.

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

SECTION 1. The legislature finds that:

(1) Iran is a leading sponsor of international terrorism;

(2) United Nations Security Council Resolution 1737 imposes sanctions on Iran for its failure to suspend uranium-enrichment activities;

(3) foreign entities have active business operations involving the government of Iran despite Iran's support of international terrorism and clandestine nuclear program, affording Iran a free pass while many United States entities have unknowingly invested in those same foreign entities;

(4) all United States and foreign entities that have invested more than $20 million in Iran's energy sector since August 5, 1996, are subject to sanctions under United States law pursuant to the Iran and Libya Sanctions Act of 1996, renewed in 2001, and renewed in 2006 as the Iran Freedom Support Act;

(5) investors from Texas can have considerable influence over the commercial decisions of the foreign entities in which they invest;

(6) support for terrorism and the acquisition of weapons of mass destruction represent a grave threat to the security of the United States and to the residents of the State of Texas;

(7) the State of Texas is deeply concerned about investments in publicly traded companies that have active business operations involving the government of Iran as both a global security and a financial risk to the shareholders;

(8) the Securities and Exchange Commission has determined that companies having business operations in terrorist-sponsoring states are exposed to a special risk category known as "global security risk," which is the risk to stock value and corporate reputation stemming from the intersection of a publicly traded company's international business activities and security-related concerns, such as terrorism and weapons proliferation;

(9) by investing in publicly traded companies having active business operations involving the government of Iran, the State of Texas is putting the pensions of its current and former public employees and teachers at risk;

(10) 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;

(11) to protect Texas' public assets, it is in the best interest of the state to enact a statutory prohibition against the investment of public employee retirement funds in companies having active business operations involving the government of Iran;

(12) this Act should remain in effect only as long 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;

(13) this Act is not intended to interfere with the performance of the fiduciary duties of a manager of funds subject to this Act; and

(14) mandatory divestment of public funds from certain companies is a measure that should be employed sparingly and judiciously and a congressional and presidential declaration that Iran poses a serious threat to the national security of the United States satisfies this high threshold.

SECTION 2. Subtitle A, Title 8, Government Code, is amended by adding Chapter 807 to read as follows:

CHAPTER 807. PROHIBITION ON INVESTMENT IN IRAN

SUBCHAPTER A. GENERAL PROVISIONS

Sec. 807.001. 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 Iran, 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 whose securities are publicly traded, including a wholly owned subsidiary, majority-owned subsidiary, parent company, or affiliate of those entities or business associations, that exists to make a profit.

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

(5) "Inactive business operations" means the mere continued holding or renewal of rights to property previously operated to generate revenue but not presently deployed to generate revenue.

(6) "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. The term does not include money invested under a plan described by Section 401(k) or 457 of the Internal Revenue Code of 1986.

(7) "Listed company" means a company listed by the comptroller under Section 807.051.

(8) "Military equipment" means weapons, arms, military supplies, and equipment that readily may be used for military purposes, including radar systems and military-grade transport vehicles.

(9) "Scrutinized company" means a company that engages in scrutinized business operations described by Section 807.002.

(10) "State governmental entity" means the Employees Retirement System of Texas or the Teacher Retirement System of Texas.

Sec. 807.002. 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 Iran, a company in which the government of Iran has any direct or indirect equity share, a consortium or project commissioned by the government of Iran, or a company involved in a consortium or project commissioned by the government of Iran; or

(2) the company supplies military equipment to Iran.

Sec. 807.003. EXCEPTION. Notwithstanding any provision of this chapter, a company that the United States government affirmatively declares to be excluded from its federal sanctions regime relating to Iran is not subject to divestment or investment prohibition under this chapter.

Sec. 807.004. 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 making investments, divesting from any investment, preparing or maintaining any list of companies, or choosing asset managers, investment funds, or investments for the state governmental entity's securities portfolios.

Sec. 807.005. INDEMNIFICATION OF STATE GOVERNMENTAL ENTITIES, EMPLOYEES, AND OTHERS. In a cause of action based on an action, inaction, decision, divestment, investment, company communication, report, or other determination made or taken in connection with this chapter, the state shall, without regard to whether the person performed services for compensation, indemnify and hold harmless for actual damages, court costs, and attorney's fees adjudged against, and defend:

(1) an employee, a member of the governing body, or any other officer of a state governmental entity;

(2) a contractor of a state governmental entity;

(3) a former employee, a former member of the governing body, or any other former officer of a state governmental entity who was an employee or officer when the act or omission on which the damages are based occurred; and

(4) a former contractor of a state governmental entity who was a contractor when the act or omission on which the damages are based occurred.

Sec. 807.006. NO PRIVATE CAUSE OF ACTION. (a) A person, including a member, retiree, and beneficiary of a retirement system to which this chapter applies, an association, a research firm, a company, or any other person may not sue or pursue a private cause of action against the state, a state governmental entity, an employee, a member of the governing body, or any other officer of a state governmental entity, or a contractor of a state governmental entity, for any claim or cause of action, including breach of fiduciary duty, or for violation of any constitutional, statutory, or regulatory requirement in connection with any action, inaction, decision, divestment, investment, company communication, report, or other determination made or taken in connection with this chapter.

(b) A person who files suit against the state, a state governmental entity, an employee, a member of the governing body, or any other officer of a state governmental entity, or a contractor of a state governmental entity, is liable for paying the costs and attorney's fees of a person sued in violation of this section.

[Sections 807.007-807.050 reserved for expansion]

SUBCHAPTER B. DUTIES REGARDING INVESTMENTS

Sec. 807.051. LISTED COMPANIES. (a) The comptroller shall prepare and maintain, and provide to each state governmental entity, a list of all scrutinized companies. In maintaining the list, the comptroller may review and rely, as appropriate in the comptroller's judgment, on publicly available information regarding companies with business operations in Iran, including information provided by the state, nonprofit organizations, research firms, international organizations, and governmental entities.

(b) The comptroller shall update the list annually or more often as the comptroller considers necessary, but not more often than quarterly, based on information from, among other sources, those listed in Subsection (a).

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

Sec. 807.052. IDENTIFICATION OF INVESTMENT IN LISTED COMPANIES. Not later than the 14th day after the date a state governmental entity receives the list provided under Section 807.051, the state governmental entity shall notify the comptroller of the listed companies in which the state governmental entity owns direct or indirect holdings.

Sec. 807.053. NOTICE TO LISTED COMPANY ENGAGED IN INACTIVE BUSINESS OPERATIONS. For each listed company identified under Section 807.052 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 Iran until it is able to avoid being considered a listed company. The state governmental entity shall continue the correspondence as the entity considers necessary, but is not required to initiate correspondence more often than semiannually.

Sec. 807.054. ACTIONS RELATING TO LISTED COMPANY ENGAGED IN ACTIVE BUSINESS OPERATIONS. (a) For each listed company identified under Section 807.052 that is engaged in scrutinized active business operations, the state governmental entity shall send a written notice informing the company of its listed company status and warning the company that it may become subject to divestment by state governmental entities.

(b) The notice shall offer the company the opportunity to clarify its Iran-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 state governmental entities.

(c) If, during the time provided by Subsection (b), the company ceases scrutinized business operations, the comptroller shall remove the company from the list maintained under Section 807.051 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 807.056, according to the schedule provided by Section 807.055.

Sec. 807.055. DIVESTMENT OF ASSETS. (a) A state governmental entity required to sell, redeem, divest, or withdraw all publicly traded securities of a listed 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 807.054 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 807.054 or Subsection (b).

(b) If a company that ceased scrutinized active business operations after receiving notice under Section 807.054 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).

(c) A state governmental entity may delay the schedule for divestment under Subsection (a) only to the extent that the state governmental entity determines, in the state governmental entity's good faith judgment, that divestment from listed companies will likely result in a loss in value described by Section 807.057(a). If a state governmental entity delays the schedule for divestment, the state governmental entity shall submit a report to the presiding officer of each house of the legislature and the attorney general stating the reasons and justification for the state governmental entity's delay in divestment from listed companies. The report must include documentation supporting its determination that the divestment would result in a loss in value described by Section 807.057(a), including objective numerical estimates. The state governmental entity shall update the report every six months.

Sec. 807.056. 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 listed companies requesting that they consider removing those companies from the fund or create a similar actively managed fund with indirect holdings devoid of listed companies. If the manager creates a similar fund with substantially the same management fees and same level of investment risk, the state governmental entity shall replace all applicable investments with investments in the similar fund in an expedited time frame consistent with prudent fiduciary standards.

Sec. 807.057. AUTHORIZED INVESTMENT IN LISTED COMPANIES. (a) A state governmental entity may cease divesting from or may reinvest in one or more listed companies 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 99.7 percent of the hypothetical value of all assets under management by the state governmental entity had the state governmental entity not divested from listed companies under this chapter.

(b) A state governmental entity may cease divesting from or may reinvest in a listed 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 cease divesting from or may reinvest in a listed 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 listed company.

(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 is no longer a listed company.

Sec. 807.058. PROHIBITED INVESTMENTS. Except as provided by Sections 807.003 and 807.057, a state governmental entity may not acquire securities of a listed company.

[Sections 807.059-807.100 reserved for expansion]

SUBCHAPTER C. EXPIRATION; REPORT; ENFORCEMENT

Sec. 807.101. EXPIRATION OF CHAPTER. This chapter expires on the earlier of:

(1) the date the United States revokes its sanctions against the government of Iran; or

(2) the date 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. 807.102. 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 and the attorney general, that:

(1) identifies all securities sold, redeemed, divested, or withdrawn in compliance with Section 807.055;

(2) identifies all prohibited investments under Section 807.058; and

(3) summarizes any changes made under Section 807.056.

Sec. 807.103. ENFORCEMENT. The attorney general may bring any action necessary to enforce this chapter.

SECTION 3. Not later than January 1, 2010, the comptroller of public accounts shall prepare and provide to each state governmental entity, as defined by Section 807.001, Government Code, as added by this Act, the list of scrutinized companies required by Section 807.051, Government Code, as added by this Act.

SECTION 4. This Act takes effect January 1, 2010.