November 5, 2008, Introduced by Senators JANSEN and CLARKE and referred to the Committee on Appropriations.
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,
13, 19, and 20d as amended by 2000 PA 307 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.
(c) The political subdivision sponsoring 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.
(c) Make investments for the exclusive purposes of providing
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 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.
(5) 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.
(c) A transfer to, or use by or for the benefit of, the
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.
(6) 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.
(c) Receive any consideration for his or her own personal
account from any party dealing with the system in connection with a
transaction involving the assets of the system.
(7) 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.
(c) Serving as an investment fiduciary in addition to being an
officer, employee, agent, or other representative of the political
subdivision sponsoring the system.
(d) Receiving agreed upon compensation for services from the
system.
(8) 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, title II of chapter 686, 54 Stat.
847,
15 U.S.C. 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.
(c) Be an insurance company qualified under section 16(3).
(9) 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.
(10) 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).
(c) Form or invest in 1 or more limited partnerships,
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.
(c) A derivative that rebalances the country or asset class
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.
(c) Exchange-listed derivatives trading on a daily basis and
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.