BILL ANALYSIS

 

 

Senate Research Center	C.S.S.B. 1446
88R20359 JCG-F	By: Hughes
	State Affairs
	4/12/2023
	Committee Report (Substituted)

 

 

 

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.

 

(Original Author's/Sponsor's Statement of Intent)

 

C.S.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-a), and (2-b) to define "financial factor," "investment manager," and "proxy advisor."

 

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

 

(a) Provides 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 certain sections, including Sections 802.203(c), (d), and (e), 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). 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).

 

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

 

(a) Requires an 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) managing risk and 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 802.2039, as follows:�

 

Sec. 802.2031. INVESTMENT STANDARDS: OBLIGATION TO DISCHARGE DUTY BASED SOLELY ON CERTAIN FINANCIAL INTERESTS. (a) Provides that the governing body of the public retirement system or an investment manager, 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 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 802.203(a), be voted:

 

(1) solely based on financial factors; and

 

(2) except as provided by Subsection (c) or (d), consistent with the recommendation adopted by the company's board of directors if the number of independent directors serving on the board constitutes a majority of that board at the time the recommendation was adopted.

 

(c) Provides that Subsection (b)(2) does not apply to a company-sponsored proposal.

 

(d) Authorizes a share to be voted in a manner inconsistent with the recommendation of a board of directors described by Subsection (b)(2) if:

 

(1) the public retirement system or an investment manager or proxy advisor for the system prepares a financial analysis on the impact of the proposal; and

 

(2) the financial analysis prepared under Subdivision (1) demonstrates that voting against the recommendation of the board of directors is in the best financial interest of the system and the system's participants and beneficiaries.

 

(e) Provides that this section does not prohibit an investment manager from furthering any social, political, or ideological interest when managing the assets if a person who is not a public retirement system.

 

(f) Defines "company" and "proposal."

 

Sec. 802.2032. CONDUCT CONSIDERED A VIOLATION OF FIDUCIARY DUTY; EVIDENCE. (a) Authorizes the governing body of a public retirement system or an investment manager to reasonably be determined to have violated Section 802.203(a) if the governing body or investment manager takes an action 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 manager 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 socially, politically, or ideological purposed coalition, initiative, joint statement of principles, or agreement.

 

Sec. 802.2033. PROXY ADVISORS. (a) Defines "company" and "proposal."

 

(b) Prohibits the governing body or a public retirement system from granting proxy voting authority to a proxy advisor unless:

 

(1) the proxy advisor offers a policy for proxy voting advice:

 

(A) that is consistent with the requirements for voting shares imposed on the system under this section and Sections 802.203 (b), (c), and (d); and

 

(B) the sole goal of which is to maximize financial return; and

 

(2) the grant or proxy voting authority requires the proxy advisor to follow that policy.

 

(c) Authorizes the policy to include additions or customizations only if those additions or customizations are consistent with the sole goal of the policy as described by Subsection (b).

 

(d) Authorizes a proxy advisor for a public retirement system, except as provided by Subsection (e), to recommend a vote or, if granted proxy voting authority by the system's board of trustees, vote in a manner that is not consistent with the recommendation adopted by a board of directors described by Section 802.2031(b)(2) only if:

 

(1) the proxy advisor prepares a financial analysis on the impact of the proposal; and

 

(2) the financial analysis prepared under Subdivision (1) demonstrates that voting in a manner consistent with the proxy advisor's recommendation is in the best financial interest of the system and the system's participants and beneficiaries.

 

(e) Provides that Subsection (d) does not apply to a company-sponsored proposal.

 

Sec. 802.2034. PROXY VOTING: PUBLIC NOTICE AND ANNUAL REPORT. (a) Provides that this section applies only to a public retirement system that holds shares entitled to vote by proxy.

 

(b) Requires the governing body of a public retirement system, subject to Subsection (c), to post on the system's publicly accessible Internet 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:

 

(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 on the proxy vote.

 

(c) Requires a public retirement system to post on the system's publicly accessible Internet 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.

 

(d) Requires the governing body of a public retirement system to tabulate all proxy votes made on behalf of the system by proxy advisors 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, except as provided by Subsection (e). 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, any financial analysis described by Section 802.2031(d) or 202.2033(d), and, as applicable, the recommendation of the proxy advisor. Requires PRB to post reports under this subsection to PRB's� publicly accessible Internet website.

 

�(e) Authorizes the governing body of a public retirement system to provide to PRB the location of a report posted to the system's publicly accessible Internet website that contains the information required by Subsection (d) in lieu of submitting a report under that subsection.

 

(f) Requires the investment manager to submit a report to 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 if the governing body of a public retirement system grants proxy voting authority to an investment manager, except as provided by Subsection (g). Requires PRB to post the reports submitted under this subsection to PRB's publicly accessible Internet website.

 

(g) Provides that Subsection (f) does not apply to an investment manager that manages less than $50 million of a public retirement system's assets.

 

Sec. 802.2035. ANNUAL REPORT TO STATE PENSION REVIEW BOARD ON CERTAIN INVESTMENT RELATIONSHIPS. (a) Provides that this section applies only to a public retirement system with more than $100 million in assets.

 

(b) Requires the governing body of a system to submit a report to PRB that details investment relationships maintained by the system not later than the 30th day after the last day of a public retirement system's fiscal year. Requires that the report include information regarding each:

 

(1) subject to Subsection (c), fund or investment entity the system is invested in or has invested in during the preceding 12-month period; and

 

(2) subject to Subsection (d), investment manager with which the system contracts to provide investment management services.

 

(c) Requires that the report regarding each fund or investment entity described by Subsection (b)(1), for the purposes of that subsection, contain:

 

(1) the name of the fund or investment entity;

 

(2) the date on which the fund or investment entity described by Subdivision (1) was established and each date during the applicable 12-month period the system invested in the fund or entity;

 

(3) with respect to a fund or investment entity, the amount of money, expressed in dollars, the system:

 

(A) committed to the fund or entity described by Subdivision (1);

 

(B) is invested in or has invested in the fund or entity during the applicable 12-month period under Subsection (b)(1); and

 

(C) earned from investing in the fund or investment entity during the applicable 12-month period;

 

(4) the total amount of fees, including expenses, charges, and other compensation, paid or owed by the system in connection with an investment in the fund or investment entity during the applicable 12-month period; and

 

(5) the internal rate of return, or other standard of investment return, on money invested in each fund or investment entity, and the date by which the return was calculated.

 

(d) Requires that the report regarding each contract with an investment manager providing investment manager services, for the purposes of Subsection (b)(2), to contain:

 

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

 

(2) the total amount of fees, including expenses, charges, and other compensation, paid or owed by a public retirement system in connection with an investment in a fund or investment entity during the preceding 12-month period.

 

(e) 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) Requires the attorney general to provide notice to the public retirement system that is affected by the investigation of a person who is required to file a statement or report under Subsection (a)(1).

 

(c) 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), including an act described by Section 802.2032, 802.2033, 802.2034, or 802.2035.

 

Sec. 802.2037. INJUNCTION BY CERTAIN PERSONS. (a) Authorizes a participant or beneficiary of a public retirement system, or the system, in addition to the action for mandamus authorized by Section 802.003 (Writ of Mandamus), to bring an action in district court to restrain or enjoin a person from violating Section 802.203(a), including an act described by Section 802.2032 or 802.2033.

 

(b) Authorizes the court to award court costs and reasonable attorney's fees to a party who prevails in an action brought under this section.

 

(c) 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 Section 23.101 (Primary Priorities).

 

Sec. 802.2038. 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), including an act described by Section 802.2032, 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 a person, if the governing law does not specify any qualifications, to be eligible for appointment as an interim trustee:

 

(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.

 

Sec. 802.2039. INAPPLICABILITY OF REQUIREMENTS INCONSISTENT WITH FIDUCIARY RESPONSIBILITIES AND RELATED DUTIES. (a) Provides that a public retirement system is not subject to a requirement of Sections 802.203 through 802.2035 if the system determines that this 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 Section 67 (State and Local Retirement Systems), Article XVI (General Provisions), Texas Constitution.

 

(b) Requires a public retirement system to notify in writing PRB of the determination and requires PRB to post the determination on PRB publicly accessible internet website if a public retirement system determines that complying with the requirements in a specific case is inconsistent with its fiduciary responsibility as described by Subsection (a).

 

SECTION 5. Makes application of this Act prospective.

 

SECTION 6. 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 7. Effective date: September 1, 2023.

 

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