BILL ANALYSIS

C.S.S.B. 1446

By: Hughes

Pensions, Investments & Financial Services

Committee Report (Substituted)

BACKGROUND AND PURPOSE

According to the State Pension Review Board's (PRB) March 2023 Guide to Public Retirement Systems in Texas, 100 actuarially funded defined benefit public retirement systems in Texas had, as of recent reports on file with the PRB, approximately $394 billion in total net assets. Investments of assets are made by public retirement systems to help fund the benefits to members and the expenses for maintaining the systems. C.S.S.B. 1446 seeks to ensure that the investment of public retirement system assets is based solely on financial factors and that such assets are not used to further social, political, or ideological interests. The bill also provides for public notice with respect to how a proxy advisor will cast a vote on behalf of a public retirement system and provides for the reporting of certain public retirement system investment relationships and votes so that system members know how the shares of the pension systems are being used to make corporate decisions.

CRIMINAL JUSTICE IMPACT

It is the committee's opinion that this bill does not expressly create a criminal offense, increase the punishment for an existing criminal offense or category of offenses, or change the eligibility of a person for community supervision, parole, or mandatory supervision.

RULEMAKING AUTHORITY

It is the committee's opinion that rulemaking authority is expressly granted to the State Pension Review Board in SECTION 4 of this bill.

ANALYSIS

C.S.S.B. 1446 amends the Government Code to revise the fiduciary responsibility of an investment manager or governing body in making and supervising investments of a public retirement system's reserve fund in the following ways:

· clarifies that an investment manager or governing body to whom the fiduciary responsibility applies is an investment manager or the governing body of a public retirement system;

· replaces the requirement for the investment manager or governing body to discharge its duties solely in the interest of the participants and beneficiaries with a requirement to discharge duties solely in the participants' and beneficiaries' financial interest;

· includes managing risk among the exclusive purposes for which the investment manager or governing body must discharge its duties and, with respect to the purpose of providing benefits to participants and their beneficiaries, specifies that the applicable benefits are financial benefits; and

· clarifies that the risk of large losses to be minimized by diversification of system investments is the risk of large financial losses.

C.S.S.B. 1446 removes the exemption for the Employees Retirement System of Texas, the Teacher Retirement System of Texas, the Texas County and District Retirement System, the Texas Municipal Retirement System, and the Judicial Retirement System of Texas Plan Two from the following provisions:

· the provision prescribing the fiduciary responsibility, as revised by the bill, that requires a public retirement system's investment manager or governing body, in making and supervising investments of the system's reserve fund, to discharge its duties solely in the financial interest of the participants and beneficiaries:

o for the exclusive purposes of managing risk and providing financial benefits to participants and their beneficiaries and of defraying reasonable expenses of administering the system;

o with the care, skill, prudence, and diligence under the prevailing circumstances that a prudent person acting in a like capacity and familiar with matters of the type would use in the conduct of an enterprise with a like character and like aims;

o by diversifying the investments of the system to minimize the risk of large financial losses, unless under the circumstances it is clearly prudent not to do so; and

o in accordance with the documents and instruments governing the system to the extent that the documents and instruments are consistent with provisions regarding the administration of public retirement system assets; and

· the provision requiring the system's governing body to act prudently in the interest of participants and beneficiaries in choosing and contracting for professional investment management services and in continuing the use of an investment manager.

C.S.S.B. 1446 sets out the following investment standards for the governing body of a public retirement system or an investment manager for purposes of discharging the governing body's or investment manager's duties solely in the financial interest of system participants and beneficiaries under provisions relating to the fiduciary responsibility of an investment manager or the governing body in making and supervising investments of a public retirement system's reserve fund:

· the governing body or investment manager must make all investments prudently and in accordance with applicable fiduciary and ethical standards and take into account only financial factors when discharging its duties with respect to a plan administered by the system; and

· the governing body or investment manager may not use the system's assets to take any action with the purpose of furthering social, political, or ideological interests.

The bill provides for exceptions to those investment standards with respect to existing statutory provisions relating to a prohibition on investment in companies that boycott Israel, a prohibition on investment in financial companies that boycott certain energy companies, a prohibition on investing public money in certain investments, a prohibition on contracts with companies boycotting certain energy companies, a prohibition on contracts with companies that discriminate against firearm and ammunition industries, required provisions in agreements with professional sports teams relating to the national anthem, and a prohibition on contracts with certain foreign-owned companies in connection with critical infrastructure. The bill requires, in accordance with these provisions regarding investment standards and provisions relating to the fiduciary responsibility of an investment manager or the governing body in making and supervising investments of a public retirement system's reserve fund, all shares held by or on behalf of a public retirement system or the system's participants and beneficiaries, as applicable, if voted, to be voted solely based on financial factors. The bill defines "financial factor" and "investment manager" for purposes of the bill's provisions and, as applicable, other provisions providing administrative requirements generally applicable to public retirement systems as follows:

· "financial factor" means a factor taken into consideration when making investment decisions that a prudent investor would expect to have a material effect on controlling risk and achieving a rate of return for an investment based on appropriate investment horizons and consistent with the objectives of any controlling investment plan; and

· "investment manager" means a person who for compensation provides professional investment management services and may include a person eligible for appointment as an investment manager by a public retirement system's governing body under statutory provisions authorizing such an appointment through a contract with one or more organizations that are in the business of managing investments, but the term expressly does not include an employee or member of an advisory committee of a public retirement system or a seller of security interests.

C.S.S.B. 1446 prohibits the governing body of a public retirement system from entering into a contract with an investment manager or a proxy advisor relating to investing the system's assets or voting, or advising on voting, shares held by the system unless the contract contains a requirement that the manager or advisor, as applicable:

· take into account only financial factors when discharging the manager's or advisor's duties under the contract, with respect to investing the system's assets and voting, or advising on voting, shares held by the system; and

· not take any action under the contract with the purpose of furthering social, political, or ideological interests, including an action with respect to investing the system's assets or voting, or advising on voting, shares held by the system.

The bill prohibits the list prepared and maintained by the comptroller of public accounts of all financial companies that boycott energy companies from containing an investment manager, proxy advisor, or other financial company who enters into a contract under these investment contract provisions of the bill for the period during which the contract is in effect. The bill defines "proxy advisor" as a person who for compensation provides corporate governance ratings, proxy research and analyses, proxy voting, or other similar services to the shareholders of a publicly traded entity, or other interested parties, for the purpose of advising a shareholder on how to vote on measures under consideration by shareholders or proxy voting on behalf of a shareholder.

C.S.S.B. 1446 prohibits the governing body of a public retirement system from granting proxy voting authority to a proxy advisor unless the following conditions are satisfied:

· the proxy advisor offers a policy for proxy voting advice that is consistent with the bill's requirement for all shares held by or on behalf of the system or its participants and beneficiaries, if voted, to be voted solely based on financial factors, and the sole goal of the policy is to maximize financial return and control associated levels of risk; and

· the grant of proxy voting authority requires the proxy advisor to follow that policy.

The bill authorizes the policy to include additions or customizations only if those additions or customizations are consistent with that sole goal of the policy. The bill requires the governing body of a public retirement system that grants proxy voting authority to provide the State Pension Review Board (PRB) a copy of the proxy voting policy.

C.S.S.B. 1446 sets out the following provisions with respect to a public retirement system that holds shares that the system is entitled to vote by proxy:

· requires the system's governing body to post on the system's publicly accessible website how a proxy advisor will cast a proxy vote made on behalf of the system or the system's participants and beneficiaries, if possible, not later than the earlier of the seventh day before the date a proxy vote is to be cast or 48 hours after receiving a vote recommendation from the proxy advisor on the proxy vote;

· requires the system to post on the system's publicly accessible website how a proxy advisor will cast a proxy vote made on behalf of the system or the system's participants and beneficiaries not later than 24 hours before the proxy vote is to be cast;

· requires the system's governing body, not later than the 180th day after the last day of the system's fiscal year, to tabulate all proxy votes made on behalf of the system by proxy advisors during the preceding fiscal year of the system and report the votes to the PRB;

· requires the report, for each vote, to contain a vote caption, the system's vote, the recommendation, if any, of the company holding the election, and, as applicable, the recommendation of the proxy advisor;

· requires the PRB to post submitted proxy vote reports to its publicly accessible website;

· authorizes the system's governing board, in lieu of submitting such a proxy vote report to the PRB, to provide the PRB the location of a report posted to the system's publicly accessible website that contains the information required by the bill for the report;

· if the system's governing body grants proxy voting authority to an investment manager that manages $50 million or more of the system's assets, requires the investment manager to submit a report to the system, and the system to submit a report to the PRB, that tabulates all proxy votes cast by the investment manager on behalf of the system for each 12-month period the investment manager is managing any assets of the system; and

· requires the PRB to post such reports submitted by the investment manager and system to the PRB's publicly accessible website.

C.S.S.B. 1446, with respect to a public retirement system with more than $100 million in assets, requires the system's governing body to annually submit a report to the PRB that details investment relationships maintained by the system and, if applicable, consolidate the report with any annual comprehensive financial report required of the system under other law. The governing body of a system subject to this report requirement must provide the PRB a copy of the proxy voting policy required by the bill, if applicable, at the same time it provides the PRB with the report. The bill requires the PRB to post the annual report on investment relationships to the PRB's publicly accessible website and requires the report to include the following information:

· information regarding each fund or investment entity the system is invested in or has invested in during the preceding 12-month period that contains:

o the name of the fund or investment entity;

o the date on which the fund or investment entity was established and each date during the applicable 12-month period the system invested in the fund or entity;

o with respect to a fund or investment entity, the amount of money, expressed in dollars, the system committed to the fund or entity, is invested in or has invested in the fund or entity during the applicable 12-month period, and received from any fund or investment entity during the applicable 12-month period;

o the total amount of fees, including expenses, charges, and other compensation, assessed against the system by, or paid by the system to, any fund or investment entity in which the system is invested in or has invested in during the applicable 12-month period; and

o the internal rate of return, or other standard of investment return, on money invested in each fund or investment entity, and the date on which the return was calculated; and

· information regarding each investment manager with which the system contracts to provide investment management services that contains:

o the net value of the assets being managed under the contract; and

C.S.S.B. 1446 authorizes a public retirement system to bring an action in district court to restrain or enjoin an investment manager or proxy advisor from breaching a contract provision required by the bill or from violating provisions providing for the fiduciary responsibility of a system's investment manager or governing body in making and supervising investments of a public retirement system's reserve fund. The bill authorizes a court to award court costs and reasonable attorney's fees to a party who prevails in such an action. The bill requires the court in which the action is brought to give precedence to proceedings in the same manner as provided for an election contest under statutory provisions relating to primary priorities in setting hearings and trials.

C.S.S.B. 1446 establishes that a public retirement system is not subject to a requirement of any of the following provisions if the system determines that the requirement would be inconsistent with its fiduciary responsibility with respect to the investment of system assets or other duties imposed by law relating to the investment of system assets, including the duty of care established under the Texas Constitution provision relating to state and local retirement systems:

· provisions relating to the fiduciary responsibility of a system's investment manager or governing body, as amended by the bill; and

· the bill's provisions relating to the following:

o investment standards and the obligation to discharge duties based solely on certain financial interests;

o required investment contract provisions and the effect of certain other law;

o proxy voting authority;

o public notice of and an annual report on proxy voting; and

o an annual report to the PRB on certain investment relationships.

The bill requires a system that makes such a determination in a specific case to notify the PRB in writing of that determination and requires the PRB to post the determination on the PRB's publicly accessible website. The bill authorizes the PRB to adopt rules to implement those specified provisions and the bill's provisions relating to the inapplicability of requirements inconsistent with fiduciary responsibilities and related duties.

C.S.S.B. 1446 establishes that the PRB is not required in a state fiscal year to implement a provision found in the bill that is drafted as a mandatory provision imposing a duty on the PRB to take an action unless money is specifically appropriated to the PRB for that fiscal year to carry out that duty. The bill authorizes the PRB to implement the provision in that fiscal year to the extent other funding is available to the PRB to do so. The bill requires the PRB, if it does not implement a mandatory provision in a state fiscal year, to certify that fact to the Legislative Budget Board in its legislative budget request for the next state fiscal biennium and include a written estimate of the costs of implementing the provision in each year of that next state fiscal biennium. These provisions expire September 1, 2027, and any duty suspended under these provisions becomes mandatory on that date.

C.S.S.B. 1446 applies only to a contract entered into on or after the bill's effective date. A contract entered into before the bill's effective date is governed by the law in effect on the date the contract was entered into, and the former law is continued in effect for that purpose.

C.S.S.B. 1446 establishes that it is the intent of the 88th Legislature, Regular Session, 2023, that its provisions be harmonized with another act of the 88th Legislature, Regular Session, 2023, relating to nonsubstantive additions to and corrections in enacted codes.

EFFECTIVE DATE

September 1, 2023.

COMPARISON OF SENATE ENGROSSED AND SUBSTITUTE

While C.S.S.B. 1446 may differ from the engrossed in minor or nonsubstantive ways, the following summarizes the substantial differences between the engrossed and committee substitute versions of the bill.

Whereas the engrossed prohibited the governing body of a public retirement system or an investment manager from using the system's assets to take any action with a purpose of furthering social, political, or ideological interests, the substitute prohibits the governing body of a public retirement system or an investment manager from using the system's assets to take any action with the purpose of furthering social, political, or ideological interests.

Whereas the engrossed prohibited the governing body of a public retirement system from entering into a contract with an investment manager or a proxy advisor relating to investing the system's assets or voting, or advising on voting, shares held by the system unless the contract contains a requirement that the manager or advisor, as applicable, not take any action under the contract with a purpose of furthering social, political, or ideological interests, including an action with respect to investing the system's assets or voting, or advising on voting, shares held by the system, the substitute prohibits the governing body of a public retirement system from entering into such a contract unless the contract contains a requirement that the manager or advisor, as applicable, not take any action under the contract with the purpose of furthering social, political, or ideological interests, including an action with respect to investing the system's assets or voting, or advising on voting, shares held by the system.

The substitute includes provisions that were not in the engrossed that do the following:

· prohibit the list prepared and maintained by the comptroller of all financial companies that boycott energy companies from containing an investment manager, proxy advisor, or other financial company who enters into a contract under the bill's investment contract provisions for the period during which the contract is in effect; and

· require the governing body of a public retirement system that grants proxy voting authority in accordance with the bill to provide the PRB a copy of the requisite proxy voting policy and, if the system has more than $100 million in assets, to provide a copy of the policy to the PRB at the same time the governing body provides the PRB with an annual report on certain investment relationships as required by the bill.

Both the engrossed and the substitute establish that a public retirement system is not subject to a requirement of certain provisions amended or established by the bill if the system determines that the requirement would be inconsistent with its fiduciary responsibility with respect to the investment of system assets or other duties imposed by law relating to the investment of system assets, including the duty of care established under the Texas Constitution provision relating to state and local retirement systems. However, the substitute includes the bill's requirements relating to investment contract provisions among the requirements for which such a determination may be made, whereas the engrossed did not.