BILL ANALYSIS

 

 

Senate Research Center	S.B. 1446
88R4751 JCG-F	By: Hughes
	State Affairs
	3/24/2023
	As Filed

 

 

 

AUTHOR'S / SPONSOR'S STATEMENT OF INTENT

 

Texas public pension systems collectively manage and invest approximately $400 billion in assets. This money is invested in many different ways, but investments are often made by investment managers who contract with the pension systems.

 

Many businesses, including investment managers, have come under pressure in recent years to be increasingly outspoken on political issues. As this social pressure mounts, many of the largest banks and investment managers have joined global initiatives and otherwise committed to actions that focus on objectives other than maximizing returns for pensioners.

 

S.B. 1446 seeks to limit the investment of Texas pension assets to maximize profit rather than be used by investment managers to further social or political agendas.

 

The bill requires that any investment agent act exclusively based on financial factors. It also requires that asset managers and proxy advisory firms vote the shares owned or held by public pension systems in a way that focuses on financial returns.

 

The bill also requires additional reporting of these investments and votes so that Texans know how the shares they own through their pension systems are being used to make corporate decisions.

 

As proposed, S.B. 1446 amends current law relating to the fiduciary responsibility of the governing body of the public retirement systems in this state and the investment agents acting on behalf of those systems.

 

RULEMAKING AUTHORITY

 

This bill does not expressly grant any additional rulemaking authority to a state officer, institution, or agency.

 

SECTION BY SECTION ANALYSIS

 

SECTION 1. Amends Section 802.001, Government Code, by adding Subdivisions (1-b), (2-b), (2-c), and (2-d), to define "financial factor," "investment agent," "investment manager," and "proxy advisor."

 

SECTION 2. Amends Section 802.002(a), Government Code, as follows:

 

(a) Deletes existing text providing that 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 are exempt from Section 802.203 (Fiduciary Responsibility), except as provided by Subsection (b) (relating to requiring a public retirement system or program that is exempt under Subsection (a) by law to make an actuarial valuation of the assets of the system or program and publish actuarial information about the system).

 

SECTION 3. Amends Section 802.203(a), Government Code, as follows:

 

(a) Requires an investment agent, rather than investment manager, or the governing body of a public retirement system, in making and supervising investments of the reserve fund of a public retirement system, to discharge its duties solely in the financial interest of the participants and beneficiaries:

 

(1) for the exclusive purposes of:

 

(A) providing financial benefits to participants and their beneficiaries; and

 

(B) makes no changes to this paragraph;

 

(2) makes no changes to this subdivision;

 

(3) 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

 

(4) makes no changes to this subdivision.

 

SECTION 4. Amends Subchapter C, Chapter 802, Government Code, by adding Sections 802.2031 through 802.2037, as follows:

 

Sec. 802.2031. INVESTMENT STANDARDS: OBLIGATION TO DISCHARGE DUTY BASED SOLELY ON CERTAIN FINANCIAL INTERESTS. (a) Requires that the governing body of the public retirement system or an investment agent, for the purposes of discharging its duties solely in the financial interest of participants and beneficiaries under Section 802.203(a) (relating to requiring an investment manager or the governing body to discharge its duties solely in the interest of the participants and beneficiaries in making and supervising investments of the reserve fund of a public retirement system) and except as provided by Chapters 808 (Prohibition on Investment in Companies that Boycott Israel), 809 (Prohibition on Investment in Financial Companies that Boycott Certain Energy Companies), and 2270 (Prohibition on Investing Public Money in Certain Investments) and Chapter 2274 (Prohibitions on Contracts with Certain Foreign-Owned Companies in Connection with Critical Infrastructure), as added by Chapters 529 (S.B. 13), 530 (S.B. 19), 833 (S.B. 4), and 975 (S.B. 2116), Acts of the 87th Legislature, Regular Session, 2021:

 

(1) is required to take into account only financial factors when discharging its duties with respect to a plan administered by the system; and

 

(2) is prohibited from taking any action, or considering any factor with a purpose of furthering social, political, or ideological interests.

 

(b) Requires that all shares held directly or indirectly by or on behalf of a public retirement system or the system's participants and beneficiaries, as applicable, in accordance with this section and Section 803.203(a), be voted solely based on financial factors.

 

(c) Provides that this section does not prohibit an investment agent from furthering any social, political, or ideological interest when managing the assets of a person who is not a public retirement system of the state or a political subdivision, or of an agency or instrumentality of the state or political subdivision.

 

(d) Provides that this section prevails to the extent of a conflict between this section and any other law.

 

Sec. 802.2032. CONDUCT CONSIDERED A VIOLATION OF FIDUCIARY DUTY; EVIDENCE. (a) Authorizes the governing body of a public retirement system or an investment agent to reasonably be determined to have violated Section 802.203(a) if the governing body or investment agent takes an action or considers a factor in managing assets of a public retirement system that furthers, through company engagement, board or shareholder votes, or otherwise, any social, political, or ideological interest beyond what federal or state law requires.

 

(b) Authorizes evidence of violation of Section 802.203(a) to include any of the following actions taken or work product produced by the governing body of a public retirement system or investment agent in the scope of managing assets on behalf of a public retirement system:

 

(1) branding, advertising, statements, explanations, reports, letters to clients, communications with portfolio companies, statements of principles, or commitments; or

 

(2) participation in, affiliation with, or status as a signatory to any coalition, initiative, joint statement of principles, or agreement.

 

Sec. 802.2033. QUALIFICATIONS OF INVESTMENT AGENT; COMMITMENT IN WRITING REQUIRED. (a) Prohibits the assets of a public retirement system from being entrusted to an investment agent unless that agent has a demonstrated practice of following, and commits in writing to follow, guidelines when engaging with portfolio companies and voting shares or proxies that match its and the governing body's fiduciary responsibility under Section 802.203, including the duty under Section 802.2031 to take into account only financial factors when discharging its duties with respect to the system's plan.

 

(b) Prohibits the governing body of a public retirement system from granting proxy voting authority to an investment agent unless:

 

(1) the investment agent offers a benchmark policy for proxy voting advice the sole goal of which is to maximize financial return and the grant of proxy voting authority requires the investment agent to follow that benchmark policy; or

 

(2) the governing body develops a publicly available policy on granting proxy voting authority and the grant of authority requires the investment agent to follow that policy.

 

Sec. 802.2034. PROXY VOTING: PUBLIC NOTICE AND ANNUAL REPORT. (a) Requires the governing body of a public retirement system, subject to Subsection (b), to post on the system's publicly available Internet website how a proxy advisor or other investment agent 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:

 

(1) the seventh day before the date a proxy vote is to be cast; or

 

(2) 48 hours after receiving a vote recommendation from the proxy advisor or investment agent on the proxy vote.

 

(b) Requires a public retirement system to post on the system's publicly available internet website how a proxy advisor or other investment agent 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.

 

(c) Requires the governing body of a public retirement system to tabulate all proxy votes made on behalf of the system during the preceding state fiscal year and report the votes to the State Pension Review Board (PRB) not later than November 1 of each year. Requires that the report contain, for each vote, a vote caption, the system's vote, the recommendation, if any, of the company holding the election, and, as applicable, the recommendation of the investment agent. Requires PRB to post reports submitted under this subsection to PRB's publicly accessible Internet website.

 

Sec. 802.2035. ANNUAL REPORT TO STATE PENSION REVIEW BOARD ON CERTAIN INVESTMENT RELATIONSHIPS. (a) Requires the governing body of a public retirement system to submit a report to the PRB that details investment relationships maintained by the system not later than November 1 of each year. Requires that the report include information regarding each:

 

(1) subject to Subsection (b), limited partnership with which the system is affiliated; and

 

(2) subject to Subsection (c), investment manager or consulting firm with which the system contracts to provide investment management services.

 

(b) Requires that the report, for the purposes of Subsection (a)(1), contain:

 

(1) the name of each limited partnership;

 

(2) the date on which the retirement system became affiliated with the limited partnership;

 

(3) the amount of capital:

 

(A) committed and actually contributed to the limited partnership; and

 

(B) distributed from the limited partnership;

 

(4) any costs or fees paid or owed to the limited partnership during the period of affiliation, categorized by state fiscal year; and

 

(5) the annualized rate of return on capital invested in the limited partnership.

 

(c) Requires that the report, for the purposes of Subsection (a)(2), regarding each contract with an investment manager or consulting firm providing investment manager services, contain:

 

(1) the net value of the assets being managed under the contract;

 

(2) the nature of the services provided;

 

(3) the performance of the investment manager or consulting firm, categorized by state fiscal year; and

 

(4) any costs or fees charged under the contract, categorized by state fiscal year.

 

(d) Requires PRB to post the report received under this section to PRB's publicly accessible Internet website.

 

Sec. 802.2036. INVESTIGATION AND INJUNCTION BY ATTORNEY GENERAL. (a) Authorizes the attorney general, if the attorney general has reason to believe that a person engaged in or is engaging in an act that violates Section 802.203(a), including an act described by Section 802.2032, or Section 802.2033, 802.2034, or 802.2035, to:

 

(1) require the person to file, in a form and manner prescribed by the attorney general, a statement or report in writing, under oath, as to:

 

(A) all the facts and circumstances concerning the violation; or

 

(B) any other relevant information the attorney general considers necessary;

 

(2) examine any person under oath in connection with the violation;

 

(3) examine any record, book, document, account, paper, sample, or other material in connection with the violation; or

 

(4) apply to a district court to issue a subpoena for any record, book, document, account, paper, sample, or other material in connection with the violation and retain the material until the completion of all related proceedings taken under this section.

 

(b) Authorizes the attorney general to bring an action in the name of the state in district court to restrain or enjoin a person from violating Section 802.203(a), 802.2033, 802.2034, or 802.2035.

 

Sec. 802.2037. SUSPENSION OF TRUSTEE; INTERIM APPOINTMENT. (a) Provides that any trustee of a governing body of a public retirement system against whom an action is pending under Section 802.003 or 802.2036 for a violation of Section 802.203(a), 802.2033, or 802.2035 is suspended from the governing body until either the trustee's term of office expires or the action is dismissed without a finding that the trustee violated the relevant section. Provides that the office is considered vacant as of the day the trustee's term expires if the term of the suspended trustee's office expires before the action is dismissed.

 

(b) Provides that the trustee's position on the body is considered vacated during the period a trustee is suspended from the governing body of a public retirement system under Subsection (a). Authorizes an interim trustee to be appointed or otherwise selected to serve in the vacated position, subject to Subsection (c).

 

(c) Requires an interim trustee to comply with any qualifications required by the governing law of the public retirement system applicable to the trustee position suspended and to be selected in the manner prescribed by that law for filling a vacancy. Provides that if the governing law does not specify any qualifications, to be eligible for appointment as an interim trustee, a person:

 

(1) is required to demonstrate financial expertise and have substantial employment experience in private business or industry with broad investment management experience, preferably in the investment of public funds; and

 

(2) is prohibited from being a member or annuitant of the system on whose governing body the trustee will serve.

 

SECTION 5. Amends Section 815.307, Government Code, as follows:

 

Sec. 815.307. DUTY OF CARE. Deletes existing text requiring that a determination of whether the board of trustees has exercised prudence with respect to an investment decision be made taking into consideration the investment of all assets of the trust or all assets of the collective investment vehicle, as applicable, over which the board has management and control, rather than considering the prudence of a single investment of the trust or the collective investment vehicle, as applicable.

 

SECTION 6. Amends Section 840.303, Government Code, as follows:

 

Sec. 840.303. DUTY OF CARE. Deletes existing text requiring that a determination of whether the board of trustees has exercised prudence with respect to an investment decision be made taking into consideration the investment of all assets of the trust or all assets of the collective investment vehicle, as applicable, over which the board has management and control, rather than considering the prudence of a single investment of the trust or the collective investment vehicle, as applicable.

 

SECTION 7. Amends Section 855.303, Government Code, as follows:

 

Sec. 855.303. PRUDENCE REGARDING INVESTMENTS. Deletes existing text requiring that a determination of whether the board of trustees has exercised prudence in an investment decision be made by considering the investment of all of the assets of the trust over which the board has management and control, rather than by considering the prudence of a single investment.

 

SECTION 8. Amends Section 865.008(b), Government Code, as follows:

 

(b) Deletes existing text requiring that a determination of whether the state board of trustees has exercised prudence with respect to an investment decision be made, taking into consideration the investment of all assets of the trust over which the state board has management and control rather than considering the prudence of a single investment.

 

SECTION 9. Amends Section 7.04(b), Chapter 824 (S.B. 817), Acts of the 73rd Legislature, Regular Session, 1993 (Article 6243o, Vernon's Texas Civil Statutes), as follows:

 

(b) Deletes existing text requiring that the investment of all assets of the fund, rather than the prudence of a single investment of the fund, be considered in determining whether the board has exercised prudence concerning an investment decision

 

SECTION 10. Amends Section 6.04(b), Chapter 1332 (S.B. 1568), Acts of the 75th Legislature, Regular Session, 1997 (Article 6243q, Vernon's Texas Civil Statutes), as follows:

 

(b) Deletes existing text requiring that the investment of all assets of the funds, rather than the prudence of a single investment of the funds, be considered in determining whether the board has exercised prudence concerning an investment decision.

 

SECTION 11. Repealer: Section 802.203(d) (relating to requiring an investment manager appointed under Section 802.204 (Investment Manager) to acknowledge in writing the manager's fiduciary responsibilities to the fund the manager is appointed to serve), Government Code.

 

SECTION 12. Makes application of this Act prospective.

 

SECTION 13. Provides that it is the intent of the 88th Legislature, Regular Session, 2023, that the amendments made by this Act be harmonized with another Act of the 88th Legislature, Regular Session, 2023, relating to nonsubstantive additions to and corrections in enacted codes.

 

SECTION 14. Effective date: September 1, 2023.

 

 

 

 

 

 

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