HB-6500, As Passed House, November 13, 2008

SUBSTITUTE FOR

HOUSE BILL NO. 6500

A bill to amend 1965 PA 314, entitled

"Public employee retirement system investment act,"

by amending sections 12d, 13, 19, 20d, 20j, and 20k (MCL 38.1132d,

38.1133, 38.1139, 38.1140d, 38.1140j, and 38.1140k), sections 12d,

19, and 20d as amended by 2000 PA 307, section 13 as amended by

2008 PA 273, and sections 20j and 20k as added by 1996 PA 485, and

by adding section 19a; and to repeal acts and parts of acts.

THE PEOPLE OF THE STATE OF MICHIGAN ENACT:

Sec. 12d. (1) "National rating services" means Moody's

investors service, inc.; Standard & Poor's ratings group; Fitch

investors service inc.; Duff & Phelps credit rating corp.; or any

other nationally recognized statistical rating organization as

determined by the state treasurer.

(2) "Net earnings available for fixed charges" means net

income after deducting operating and maintenance expenses, taxes

other than federal and state income taxes, depreciation, and

depletion, but excluding extraordinary expenses appearing in the

regular financial statements of the system.

(3) "Obligations" means bonds, notes, collateral trust

certificates, convertible bonds, debentures, equipment trust

certificates, conditional sales agreements, guaranteed mortgage

certificates, pass-through certificates, participation

certificates, mortgages, trust deeds, general obligation bonds,

revenue bonds, or other similar interest bearing instruments of

debt. Obligations may be secured or unsecured and may be publicly

offered or privately placed.

(4) "Party in interest" means, as it relates to a system, any

of the following:

(a) An investment fiduciary, counsel, or employee of the

system.

(b) A person providing services to the system.

(d) An organization, any of whose members are covered by the

system.

(e) A spouse, ancestor, lineal descendant, or spouse of a

lineal descendant of an individual described in subdivision (a) or

(b).

(f) An entity controlled by an individual or organization

described in subdivisions (a) to (e).

(5) "Portfolio company" means an entity in which the

investment fiduciary has invested or has considered investing

system assets.

(6) "Private equity" means an asset class consisting of equity

or debt securities in entities that are not publicly traded, which

may include, but are not limited to, investments in leveraged

buyouts, venture capital, growth capital, distressed or special

situations, mezzanine capital, and secondary investments in equity

or debt interests.

Sec. 13. (1) The provisions of this act shall supersede any

investment authority previously granted to a system under any other

law of this state.

(2) The assets of a system may be invested, reinvested, held

in nominee form, and managed by an investment fiduciary subject to

the terms, conditions, and limitations provided in this act. An

investment fiduciary of a defined contribution plan may arrange for

1 or more investment options to be directed by the participants of

the defined contribution plan. The limitations on the percentage of

total assets for investments provided in this act do not apply to a

defined contribution plan in which a participant directs the

investment of the assets in his or her individual account, and that

participant is not considered an investment fiduciary under this

act.

(3) An investment fiduciary shall discharge his or her duties

solely in the interest of the participants and the beneficiaries,

and shall do all of the following:

(a) Act with the same care, skill, prudence, and diligence

under the circumstances then prevailing that a prudent person

acting in a similar capacity and familiar with those matters would

use in the conduct of a similar enterprise with similar aims.

(b) Act with due regard for the management, reputation, and

stability of the issuer and the character of the particular

investments being considered.

benefits to participants and participants' beneficiaries, and of

defraying reasonable expenses of investing the assets of the

system.

(d) Give appropriate consideration to those facts and

circumstances that the investment fiduciary knows or should know

are relevant to the particular investment or investment course of

action involved, including the role the investment or investment

course of action plays in that portion of the system's investments

for which the investment fiduciary has responsibility; and act

accordingly. For purposes of this subsection, "appropriate

consideration" includes, but is not limited to, a determination by

the investment fiduciary that a particular investment or investment

course of action is reasonably designed, as part of the investments

of the system, to further the purposes of the system, taking into

consideration the risk of loss and the opportunity for gain or

other return associated with the investment or investment course of

action; and consideration of the following factors as they relate

to the investment or investment course of action:

(i) The diversification of the investments of the system.

(ii) The liquidity and current return of the investments of the

system relative to the anticipated cash flow requirements of the

system.

(iii) The projected return of the investments of the system

relative to the funding objectives of the system.

(e) Give appropriate consideration to investments that would

enhance the general welfare of this state and its citizens if those

investments offer the safety and rate of return comparable to other

investments permitted under this act and available to the

investment fiduciary at the time the investment decision is made.

(f) Prepare and maintain written objectives, policies, and

strategies with clearly defined accountability and responsibility

for implementing and executing the system's investments.

(g) Monitor the investment of the system's assets with regard

to the limitations on those investments pursuant to this act. Upon

discovery that an investment causes the system to exceed a

limitation prescribed in this act, the investment fiduciary shall

reallocate assets in a prudent manner in order to comply with the

prescribed limitation.

(4) An investment fiduciary who is an investment fiduciary of

any of the following shall comply with the divestment from terror

act, 2008 PA 234, MCL 129.291 to 129.301, in making investments

under this act:

(a) The Tier 1 retirement plan available under the state

employees' retirement act, 1943 PA 240, MCL 38.1 to 38.69.

(b) The Tier 1 retirement plan available under the judges

retirement act of 1992, 1992 PA 234, MCL 38.2101 to 38.2670.

police retirement act of 1986, 1986 PA 182, MCL 38.1601 to 38.1648.

(d) The public school employees retirement system created

under the public school employees retirement act of 1979, 1980 PA

300, MCL 38.1301 to 38.1408.

(5) An investment fiduciary may use a portion of the income of

the system to defray the costs of investing, managing, and

protecting the assets of the system including providing

professional training and education; may retain investment and all

other services necessary for the conduct of the affairs of the

system; and may pay reasonable compensation for those services.

Subject to an annual appropriation by the legislature, a deduction

from the income of a state administered system resulting from the

payment of those costs shall be made.

(6) The system shall be a separate and distinct trust fund and

the assets of the system shall be for the exclusive benefit of the

participants and their beneficiaries and of defraying reasonable

expenses of investing the assets of the system. With respect to a

system, an investment fiduciary shall not cause the system to

engage in a transaction if he or she knows or should know that the

transaction is any of the following, either directly or indirectly:

(a) A sale or exchange or a leasing of any property from the

system to a party in interest for less than the fair market value,

or from a party in interest to the system for more than the fair

market value.

(b) A lending of money or other extension of credit from the

system to a party in interest without the receipt of adequate

security and a reasonable rate of interest, or from a party in

interest to the system with the provision of excessive security or

at an unreasonably high rate of interest.

political subdivision sponsoring the system of any assets of the

system for less than adequate consideration.

(d) The furnishing of goods, services, or facilities from the

system to a party in interest for less than adequate consideration,

or from a party in interest to the system for more than adequate

consideration.

(7) With respect to a system subject to this act, an

investment fiduciary shall not do any of the following:

(a) Deal with the assets of the system in his or her own

interest or for his or her own account.

(b) In his or her individual or any other capacity act in any

transaction involving the system on behalf of a party whose

interests are adverse to the interests of the system or the

interest of its participants or participants' beneficiaries.

account from any party dealing with the system in connection with a

transaction involving the assets of the system.

(8) This section does not prohibit an investment fiduciary

from doing any of the following:

(a) Receiving any benefit to which he or she may be entitled

as a participant or participant's beneficiary of the system.

(b) Receiving any reimbursement of expenses properly and

actually incurred in the performance of his or her duties for the

system.

officer, employee, agent, or other representative of the political

subdivision sponsoring the system.

(d) Receiving agreed upon compensation for services from the

system.

(9) Except for an employee of a system, this state, or the

political subdivision sponsoring a system, when acting in the

capacity as an investment fiduciary, an investment fiduciary who is

qualified under section 12c(1)(b) shall meet 1 of the following

requirements:

(a) Be a registered investment adviser under either the

investment advisers act of 1940, 15 USC 80b-1 to 80b-21, or the

uniform securities act, 1964 PA 265, MCL 451.501 to 451.818.

(b) Be a bank as defined under the investment advisers act of

1940, 15 USC 80b-1 to 80b-21.

(10) An investment fiduciary shall not invest in a debt

instrument issued by a foreign country that has been identified by

the United States state department as engaging in or sponsoring

terrorism.

(11) A system shall annually publish and make available to the

plan participants and beneficiaries a list of all expenses paid by

soft dollars.

Sec. 19. (1) An investment fiduciary may invest up to 5% 10%

of a system's assets in publicly or privately issued real estate

investment trusts or in real or personal property otherwise

qualified pursuant to section 15, 16, or 20c.

(2) In addition to investments authorized under subsection

(1), an investment fiduciary of a system having assets of more than

$100,000,000.00 may do any of the following:

(a) Invest in, buy, sell, hold, improve, lease, or acquire by

foreclosure or an agreement in lieu of foreclosure, real or

personal property or an interest in real or personal property.

(b) Develop, maintain, operate, or lease the real or personal

property referred to in subdivision (a).

corporations, limited liability companies, trusts, or other

organizational entities for which liability of an investor cannot

exceed the amount of the investment under the laws of the United

States or of any state, district, or territory of the United States

or foreign country. The limited partnership, corporation, limited

liability company, trust, or other organizational entity may invest

in, buy, sell, hold, develop, improve, lease, or operate real or

personal property, or originate a mortgage or invest in an annuity

separate account that invests in real or personal property to hold

title to, improve, lease, manage, develop, maintain, or operate

real or personal property whether currently held or acquired after

the effective date of the amendatory act that added this

subdivision. An entity formed ~~pursuant to~~ under this subdivision

has the right to exercise all powers granted to the entity by the

laws of the jurisdiction of formation, including, but not limited

to, the power to borrow money in order to provide additional

capital to benefit and increase the overall return on ~~property~~ the

investment held by the entity.

(d) Invest in investments otherwise qualified pursuant to

subsection (1).

(3) Except as otherwise provided in this section, the

aggregate investments made under subsection (2) shall not exceed 5%

10% of the assets of the system. The purchase price of an

investment made under this section shall not exceed the appraised

value of the real or personal property.

(4) If the investment fiduciary of a system is the state

treasurer, investments described in subsection (1) or (2) may

exceed 5% 10% of the assets of the system.

(5) An investment qualified under this section in which the

underlying asset is an interest in real or personal property

constitutes an investment under this section for the purpose of

meeting the asset limitations contained in this act. This

subsection applies even though the investment may be qualified

elsewhere in this act. Notwithstanding this subsection, an

investment fiduciary may designate a real estate investment trust

which satisfies the requirements of section 14(2) as an investment

qualified under this section or as an investment in stock under

section 14.

Sec. 19a. (1) An investment fiduciary of a system having

assets of less than $250,000,000.00 may invest not more than 5% of

the system's assets in private equity. However, if the system has

assets of less than $250,000,000.00, the investments shall be made

through a fund of funds vehicle.

(2) An investment fiduciary of a system having assets of

$250,000,000.00 or more may invest not more than 10% of the

system's assets in private equity.

(3) An investment fiduciary of a system having assets of

$1,000,000,000.00 or more may invest not more than 15% of the

system's assets in private equity.

(4) If the investment fiduciary is the state treasurer,

investments described in this section shall not be subject to a

percentage of the total assets limitation.

(5) As used in this section, "fund of funds" means an

investment fund that uses an investment strategy of holding a

portfolio of other investment funds rather than investing directly

in shares, bonds, or other securities.

Sec. 20d. (1) An investment fiduciary of a system having

assets of less than $250,000,000.00 may invest not more than 5% of

the system's assets in investments not otherwise qualified under

this act, whether the investments are similar or dissimilar to

those specified in this act.

(2) An investment fiduciary of a system having assets of

$250,000,000.00 or more may invest not more than 10% of the

system's assets in investments described in subsection (1).

(3) An investment fiduciary of a system having assets of

$1,000,000,000.00 or more may invest not more than 15% of the

system's assets in investments described in subsection (1).

(4) An investment fiduciary of a system who is the state

treasurer may invest not more than ~~20%~~ 25% of the system's assets

in investments described in subsection (1).

(5) If an investment described in subsection (1) is

subsequently determined to be permitted under another section of

this act, then the investment shall no longer be included under

this section.

(6) This section shall not be used to exceed a percentage of

total assets limitation for an investment provided in any other

section of this act.

Sec. 20j. (1) Subject to qualification elsewhere in this act,

an investment fiduciary may invest in any of the following:

(a) A derivative that hedges positions of a nonderivative

component of a portfolio that clearly reduces a defined risk.

(b) A derivative that replicates the risk/return profile of an

asset or asset class, provided the asset or asset class is

permitted in other sections of this act.

exposure of a portfolio.

(d) A derivative in which the investment fiduciary has

examined the price, yield, and duration characteristics in all

market environments both at the time of investment and on an

ongoing basis.

(e) A commingled or pooled investment fund that uses

derivatives, if the fund's use of derivatives is consistent with

the guidelines outlined in this section.

(f) Over-the-counter derivatives if, in the case of an over-

the-counter security, a minimum of 2 competing bids or offers are

obtained. All counter party risk in over-the-counter derivative

transactions shall be examined at the time of investment and on an

ongoing basis.

(2) The aggregate market value of the underlying security,

future, or other instrument or index made under this section shall

not exceed ~~15%~~ 30% of the assets of the system. For purposes of the

asset limitation in this section only, "derivatives" does not

include:

(a) Asset backed pools, mortgage backed pools, or

collateralized mortgage obligations that are otherwise qualified

under this act and are no more exposed to prepayment risk or

interest rate risk than the underlying collateral including planned

amortization classes and sequential-pay collateralized mortgage

obligations.

(b) Convertible bonds, convertible preferred stock, rights or

warrants to purchase stock or bonds or notes or partnership

interests, floating rate notes, zero coupon securities, stripped

principal securities, or stripped interest securities, which items

are otherwise qualified under this act.

settling in cash daily or having a limited and fully defined risk

profile at an identified, fixed cost, including futures contracts

and purchased options.

(d) Currency forwards trading on a daily basis and settling in

cash daily or having a limited and fully defined risk profile at an

identified, fixed cost.

(3) Notwithstanding any other provision of this act to the

contrary, an investment fiduciary shall not invest in derivatives

for the purpose of leveraging a portfolio or shorting securities as

a sole investment.

Sec. 20k. (1) Notwithstanding a percentage of total assets

limitation for an investment provided in any other section of this

act, an investment fiduciary may invest not more than 20% of a

system's assets in foreign securities. Except as otherwise provided

in this act, an investment fiduciary shall not do any of the

following:

(a) Invest in more than 5% of the outstanding foreign

securities of any 1 issuer.

(b) Invest more than 5% of a system's assets in the foreign

securities of any 1 issuer.

(2) Investments in foreign securities under this section shall

be made only by investment fiduciaries described in section 13(8)

who have demonstrated expertise in investments of that type.

(3) An investment fiduciary who is the state treasurer may

invest more than 20% of the system's assets in investments

described in subsection (1).

Enacting section 1. Section 13a of the public employee

retirement system investment act, 1965 PA 314, MCL 38.1133a, is

repealed.