88R4751 JCG-F

By: Hughes S.B. No. 1446

A BILL TO BE ENTITLED

AN ACT

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.

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

SECTION 1. Section 802.001, Government Code, is amended by adding Subdivisions (1-b), (2-b), (2-c), and (2-d) to read as follows:

(1-b) "Financial factor" means a factor taken into consideration when making investment decisions that a prudent investor would expect to have a material effect on the financial risk or return of an investment based on appropriate investment horizons and consistent with the objectives of any controlling investment plan.

(2-b) "Investment agent" means any person charged with managing or supervising the investments of a public retirement system as an investment manager or proxy advisor.

(2-c) "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 under Section 802.204.

(2-d) "Proxy advisor" means a person who for compensation provides corporate governance ratings, proxy research and analyses, 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.

SECTION 2. Section 802.002(a), Government Code, is amended to read as follows:

(a) Except as provided by Subsection (b), 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 Sections 802.101(a), 802.101(b), 802.101(d), 802.102, 802.103(a), 802.103(b), 802.2015, 802.2016, 802.202, [802.203,] 802.204, 802.205, 802.206, and 802.207. The Judicial Retirement System of Texas Plan One is exempt from all of Subchapters B and C except Sections 802.104 and 802.105. The optional retirement program governed by Chapter 830 is exempt from all of Subchapters B and C except Section 802.106.

SECTION 3. Section 802.203(a), Government Code, is amended to read as follows:

(a) In making and supervising investments of the reserve fund of a public retirement system, an investment agent [manager] or the governing body of a public retirement system shall 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) defraying reasonable expenses of administering the system;

(2) 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;

(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) in accordance with the documents and instruments governing the system to the extent that the documents and instruments are consistent with this subchapter.

SECTION 4. Subchapter C, Chapter 802, Government Code, is amended by adding Sections 802.2031 through 802.2037 to read as follows:

Sec. 802.2031. INVESTMENT STANDARDS: OBLIGATION TO DISCHARGE DUTY BASED SOLELY ON CERTAIN FINANCIAL INTERESTS. (a) For purposes of discharging its duties solely in the financial interest of participants and beneficiaries under Section 802.203(a) and except as provided by Chapters 808, 809, and 2270 and Chapter 2274, 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, the governing body of the public retirement system or an investment agent:

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

(2) may not take any action, or consider any factor, with a purpose of furthering social, political, or ideological interests.

(b) In accordance with this section and Section 802.203(a), all shares held directly or indirectly by or on behalf of a public retirement system or the system's participants and beneficiaries, as applicable, shall be voted solely based on financial factors.

(c) 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) To the extent of a conflict between this section and any other law, this section prevails.

Sec. 802.2032. CONDUCT CONSIDERED A VIOLATION OF FIDUCIARY DUTY; EVIDENCE. (a) The governing body of a public retirement system or an investment agent may 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) Evidence of a violation of Section 802.203(a) may 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) The assets of a public retirement system may not be 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) The governing body of a public retirement system may not grant 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) Subject to Subsection (b), the governing body of a public retirement system shall 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) A public retirement system shall 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) Not later than November 1 of each year, the governing body of a public retirement system shall 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. For each vote, the report must 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 investment agent. The State Pension Review Board shall post reports submitted under this subsection to the board's publicly accessible Internet website.

Sec. 802.2035. ANNUAL REPORT TO STATE PENSION REVIEW BOARD ON CERTAIN INVESTMENT RELATIONSHIPS. (a) Not later than November 1 of each year, the governing body of a public retirement system shall submit a report to the State Pension Review Board that details investment relationships maintained by the system. The report must 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) For purposes of Subsection (a)(1), the report must 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) For purposes of Subsection (a)(2), regarding each contract with an investment manager or consulting firm providing investment manager services, the report must 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) The State Pension Review Board shall post the report received under this section to the board's publicly accessible Internet website.

Sec. 802.2036. INVESTIGATION AND INJUNCTION BY ATTORNEY GENERAL. (a) 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, the attorney general may:

(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) The attorney general may 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) 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. If the term of the suspended trustee's office expires before the action is dismissed, the office is considered vacant as of the day the trustee's term expires.

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

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

(1) must 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) may not be a member or annuitant of the system on whose governing body the trustee will serve.

SECTION 5. Section 815.307, Government Code, is amended to read as follows:

Sec. 815.307. DUTY OF CARE. The assets of the retirement system shall be invested and reinvested without distinction as to their source in accordance with Section 67, Article XVI, Texas Constitution. [A determination of whether the board of trustees has exercised prudence with respect to an investment decision must 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. Section 840.303, Government Code, is amended to read as follows:

Sec. 840.303. DUTY OF CARE. The assets of the retirement system shall be invested and reinvested without distinction as to their source in accordance with Section 67, Article XVI, Texas Constitution. [A determination of whether the board of trustees has exercised prudence with respect to an investment decision must 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. Section 855.303, Government Code, is amended to read as follows:

Sec. 855.303. PRUDENCE REGARDING INVESTMENTS. [A determination of whether the board of trustees has exercised prudence in an investment decision must 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.] In making investments for the retirement system, the board of trustees shall exercise the judgment and care, under the circumstances, that persons of prudence, discretion, and intelligence exercise in the management of their own affairs, considering the probable income from the securities and probable safety of their capital.

SECTION 8. Section 865.008(b), Government Code, is amended to read as follows:

(b) The assets of the pension system shall be invested and reinvested in accordance with Section 67, Article XVI, Texas Constitution. [A determination of whether the state board has exercised prudence with respect to an investment decision must 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. Section 7.04(b), Chapter 824 (S.B. 817), Acts of the 73rd Legislature, Regular Session, 1993 (Article 6243o, Vernon's Texas Civil Statutes), is amended to read as follows:

(b) The board shall diversify the investment of the fund to minimize the risk of large losses unless under the circumstances it is clearly prudent not to do so. [In determining whether the board has exercised prudence concerning an investment decision, the investment of all assets of the fund, rather than the prudence of a single investment of the fund, shall be considered.]

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

(b) The board shall diversify the investment of the reserve funds to minimize the risk of large losses unless under the circumstances it is clearly prudent not to do so. [In determining whether the board has exercised prudence concerning an investment decision, the investment of all assets of the funds, rather than the prudence of a single investment of the funds, shall be considered.]

SECTION 11. Section 802.203(d), Government Code, is repealed.

SECTION 12. The changes in law made by this Act apply only to a contract entered into on or after the effective date of this Act. A contract entered into before the effective date of this Act 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.

SECTION 13. 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. This Act takes effect September 1, 2023.