SESSION OF 2024
SUPPLEMENTAL NOTE ON HOUSE SUBSTITUTE FOR
SENATE BILL NO. 37
As Recommended by House Committee on
Financial Institutions and Pensions
Brief*
House Sub. for SB 37 would create the Countries of
Concern Divestment and Procurement Protection Act. The
Act would require state-managed funds’ divestment from
investments with countries of concern and prohibit
investments and deposits with a bank or company domiciled
in a country of concern, prohibit state agencies from
procuring final or finished goods or services from a foreign
principal, and indemnify state-managed funds with respect to
actions taken in compliance with the Act.
The provisions of this act would expire on July 1, 2029.
Designation of Act and Definitions (Sections 1-2)
The bill would establish several definitions under the Act,
including:
●“Company” would mean any:
○For-profit corporation, partnership, limited
partnership, limited liability partnership, limited
liability company, joint venture, trust,
association, sole proprietorship, or other
organization, including any:
____________________
*Supplemental notes are prepared by the Legislative Research
Department and do not express legislative intent. The supplemental
note and fiscal note for this bill may be accessed on the Internet at
http://www.kslegislature.org - Subsidiary of such company, a majority
ownership interest of which is held by
such company;
- Parent company that holds a majority
ownership of such company; and
- Other affiliate or business association of
such company whose primary purpose is
to make a profit; or
○Nonprofit organization;
●“Country of concern” would mean the following:
○People’s Republic of China, including the
Hong Kong special administrative region;
○Republic of Cuba;
○Islamic Republic of Iran;
○Democratic People’s Republic of Korea;
○Russian Federation; and
○Bolivarian Republic of Venezuela.
The bill would specify that “country of concern”
does not include the Republic of China (Taiwan).
●“Covered transaction” would be defined the same
as in 31 C.F.R. § 800.213, as in effect on July 1,
2024 [Note: 31 C.F.R. Part 800 includes
regulations pertaining to certain investments in the
United States by foreign persons; it was
promulgated by the U.S. Department of the
Treasury, Office of Investment Security.]
○“Covered transaction” as defined in the
federal Code means:
- A covered control transaction;
- A covered investment;
- A change in the rights that a foreign person
has with respect to a U.S. business in
which the foreign person has an
2- 37 investment, if that change could result in
a covered control transaction or a
covered investment; or
- Any other transaction, transfer, agreement,
or arrangement, the structure of which is
designed or intended to evade or
circumvent the application of Section
721 of Title VII of the Defense
Production Act of 1950, 50 U.S.C. 4565.
[Note: According to summary information
published in the Federal Register, the final
rule (31 C.F.R. Part 802; 85 FR 3112)
established regulations to implement the
provisions relating to real estate transactions
in Section 721 of the Defense Production Act
of 1950, as amended by the Foreign
Investment Risk Review Modernization Act
(FIRRMA) of 2018. This rule sets forth the
scope of, and process and procedures
relating to, the national security review by the
Committee on Foreign Investment in the
United States (CFIUS) of certain transactions
involving the purchase or lease by, or
concession to, a foreign person of certain real
estate in the United States. FIRRMA also
broadened authorities of the President and
CFIUS to address national security concerns
arising from certain non-controlling
investments, including the review of certain
transactions.]
●“Covered control transaction” would be defined the
same as in 31 C.F.R. § 800.210, as in effect on
July 1, 2024;
○“Covered control transaction” as defined in
the Code of Federal Regulations means any
transaction that is proposed or pending after
August 23, 1988, by or with any foreign
person that could result in foreign control of
3- 37 any U.S. business, including such a
transaction carried out through a joint venture;
●“Domicile” would mean the country where:
○A company is organized;
○A company completes a substantial portion of
its business; or
○A majority of a company’s ownership interest
is held;
●“Foreign principal” would mean:
○The government or any official of the
government of a country of concern;
○Any political party, subdivision thereof, or any
member of a political party of a country of
concern;
○Any corporation, partnership, association,
organization, or other combination of persons
organized under the laws of or having its
principal place of business in a country of
concern. “Foreign principal” includes any
subsidiary owned or wholly controlled by any
such entity;
○Any agent of or any entity otherwise under the
control of a country of concern;
○Any individual whose residence is in a country
of concern and who is not a citizen or lawful
permanent resident of the United States; or
○Any individual, entity, or combination thereof
described in the prior provisions within this
definition that has a controlling interest in any
company formed for the purpose of holding
any interest in real property;
●“Person” would mean an individual;
4- 37 ●“Person owned or controlled by or subject to the
jurisdiction or direction of a country of concern”
would mean any:
○Person, wherever located, who is a citizen of
a nation-state controlled by a country of
concern, unless such person is a lawful
permanent resident of the United States; or
○Corporation, partnership, association, or other
organization organized under the laws of a
nation-state controlled by a country of
concern;
●“State agency” would mean any department,
authority, bureau, division, office, or other
governmental agency of this state; and
●“State-managed fund” would mean:
○The Kansas Public Employees Retirement
Fund managed by the Board of Trustees of
the Kansas Public Employees Retirement
System (KPERS) in accordance with
provisions governing the management and
investment of the fund; and
○The Pooled Money Investment Portfolio
managed by the Pooled Money Investment
Board in accordance with Article 42 of
Chapter 75 of the Kansas Statutes Annotated
(addresses state moneys); and
○Any other fund that is sponsored or managed
by a state agency.
State-managed Fund—Sale, Redemption, Divestment, or
Withdrawal of Publicly Traded Securities (Section 3)
The bill would require, notwithstanding the provisions of
law governing the Kansas Public Employees Retirement
Fund and management and investment of this Trust Fund
designated to the KPERS Board of Trustees (KSA 74-4921)
5- 37 or any other statute to the contrary, a state-managed fund to
sell, redeem, divest, or withdraw all publicly traded securities
of any country of concern or person owned or controlled by or
subject to the jurisdiction or direction of a country of concern
in accordance with this schedule:
●At least 50 percent of such assets must be
removed from the state-managed fund’s assets
under management not later than July 1, 2025, or
one year from the date the definition of “country of
concern” is amended to include such country of
concern if amended after July 1, 2024, unless the
state-managed fund determines that a later date is
more prudent based on a good faith exercise of the
state-managed fund’s fiduciary discretion and
subject to the requirements created pursuant to the
January 1, 2026, deadline (described below); and
●100 percent of such assets must be removed from
the state-managed fund’s assets under
management not later than January 1, 2026, or
one year from the date the definition section of the
Act is amended to include such country of country
if amended after July 1, 2024.
Removal of Assets with Prohibition; Prohibited Acquiring of
Securities and Investing or Making a Deposit in a Bank
If a country of concern takes action to prohibit or restrict
the selling, redeeming, divesting, or withdrawing of publicly
traded securities of any country of concern or person owned
or controlled by or subject to the jurisdiction or direction of a
country of concern beyond the scheduled removal dates
provided in the bill, the bill would require the state-managed
fund to remove 100 percent of those assets from the state-
managed fund’s assets not later than one year from the date
that such action is ended by such country of concern.
The bill would prohibit a state-managed fund from
knowingly acquiring securities of any country of concern or
6- 37 person owned or controlled by or subject to the jurisdiction or
direction of a country of concern. State-managed funds would
also be prohibited from investing or making a deposit in any
bank that is domiciled in a country of concern.
State-managed Fund—Divestiture (Section 4)
The bill would require, notwithstanding the provisions of
law governing KPERS and directing management and
investment of this Trust Fund by the KPERS Board of
Trustees or any other statute to the contrary, state-managed
funds to divest from any indirect holdings in actively or
passively managed investment funds containing publicly
traded securities of any country of concern or person owned
or controlled by or subject to the jurisdiction of a country of
concern. The state-managed fund would be permitted to
submit letters to the managers of each investment fund
containing publicly traded securities of any country of concern
requesting that they remove such publicly traded securities
from the fund or create a similar actively or passively
managed fund with indirect holding devoid of any such
publicly traded securities. If a manager creates a similar fund
with substantially the same management fees and same level
of investment risk and anticipated return, the bill would
authorize the state-managed fund to replace all applicable
investments with investments in the similar fund in a time
frame consistent with prudent fiduciary standards but not later
than the 450th day after the fund is created. If a manager
does not create a similar fund, the bill would require the state-
managed fund to divest from its indirect holding in actively or
passively managed investment funds.
Exception and Prohibition, Real Estate or Private Equity
Investment Commitments
The bill would state that the provisions of this act do not
apply to any real estate or private equity investment
commitment made by a state-managed fund prior to July 1,
2024, or to a real estate or private equity investment
7- 37 commitment made by a state-managed fund prior to the date
either established by the bill or later amended to include a
country of concern. The bill would also prohibit, on and after
July 1, 2024, a state-managed fund from making any new
real estate or private equity investment commitment in a
person owned or controlled by or subject to the jurisdiction of
a country of concern.
Reporting to the Legislature, KPERS, Joint Committee
(Section 5)
The bill would require, no later than the first day of the
regular session of the Legislature, each state-managed fund
to file an annual report with the Legislature. KPERS would
also be required to file a report with the Joint Committee on
Pensions, Investments and Benefits that:
●Identifies all securities sold, redeemed, divested, or
withdrawn in compliance with requirements of the
bill;
●Identifies amendments to the definitions section
created under this bill to add or remove a country
of concern after the later of July 1, 2024, or the last
date such information was reported; and
●Summarizes any changes made under provisions
pertaining to state-managed fund divestiture from
any direct or indirect holdings in actively or
passively managed funds containing publicly
traded securities of any country of concern (as
provided in section 4).
Procurement of Goods and Services (Section 6)
The bill would prohibit state agencies from entering into
a contract or agreement to procure final or finished goods or
services from a foreign principal except as described below.
8- 37 The bill would permit a state agency to enter into a
contract or agreement to procure final or finished goods or
services from a foreign principal if such foreign principal:
●Previously received a determination that there are
no unresolved national security concerns and
action under 50 U.S.C. § 4565, as in effect on July
1, 2024, has concluded with respect to a covered
transaction, provided that such foreign principal
has not undergone a change in control constituting
a covered control transaction, since such
determination to conclude action; or
●Has a national security agreement in effect on July
1, 2024, with CFIUS, or the U.S. Department of
Defense, under 50 U.S.C. § 4565, as in effect on
July 1, 2024, and maintains such national security
agreement.
The bill would specify this prohibition would not apply to
any contract or agreement entered into prior to July 1, 2024.
Cause of Action (Section 7)
The bill would provide that in a cause of action based on
action, inaction, decision, divestment, report, or other
determination made or taken in compliance with the Act,
without regard to whether the person performed services for
compensation, the State shall:
●Indemnify and hold harmless for actual damages,
court costs, and attorney fees adjudged against
members of a state-managed fund or any other of
its officers related to the act or omission on which
the damages are based; and
●Defend the state-managed fund and any of its
current and former employees.
9- 37 Expiration of the Act (Section 8)
The provisions of the Act would expire on July 1, 2029.
On or after July 1, 2028, but prior to July 15, 2028,
KPERS would be required to notify the Speaker of the House
of Representatives, the President of the Senate, and the
chairperson of the Joint Committee on Pensions, Investments
and Benefits that this act is scheduled to expire on July 1,
2029.
Background
The House Committee on Financial Institutions and
Pensions recommended a substitute bill incorporating
provisions that would create the Countries of Concern
Divestment and Procurement Protection Act (HB 2739). The
House Committee removed the contents of SB 37, pertaining
to amendments to the Kansas Housing Investor Tax Credit
Act and expansion of the transferability of tax credits issued
under that act. [Note: The original contents of SB 37, as
amended by the Senate Committee on Financial Institutions
and Insurance, were included in SB 34, as amended by the
House Committee on Financial Institutions and Pensions. The
contents of SB 34, as amended by House Committee and
modified by the Conference Committee, were enacted in the
2023 Conference Committee Report for SB 17.]
HB 2739 (Countries of Concern Divestment and
Procurement Protection Act)
HB 2739 was introduced by the House Committee on
Financial Institutions and Pensions at the request of
Representative Hoheisel.
On February 14, 2024, the bill was withdrawn from the
House Committee on Financial Institutions and Pensions and
referred to the House Committee on Appropriations. On
10- 37 February 15, 2024, the bill was then withdrawn from the
House Committee on Appropriations and re-referred to the
House Committee on Financial Institutions and Pensions.
House Committee on Financial Institutions and Pensions
In the House Committee hearing on March 4, 2024,
representatives of American Global Strategies, LLC, and
State Armor Action provided proponent testimony, generally
stating the bill would protect Kansas’ and America’s security
interests by divesting state funds and stopping new
procurements by state agencies from countries of concern.
The proponents outlined concerns with the countries
identified in the bill and the interconnected global economy
and threats seen in emerging technologies. Prior to the
hearing, Representative Hoheisel commented on the
intentions of the bill, indicating the sole policy question is
whether it is appropriate to invest the State’s financial
resources in countries of concern and entities linked to those
ruling regimes.
Written-only neutral testimony was submitted by
representatives of the American Council of Engineering
Companies of Kansas and the Kansas Chamber. Both
representatives requested consideration of removal of
language pertaining to a “principal place of business” in
provisions pertaining to procurement of goods or services.
The Executive Director of KPERS provided opponent
testimony on behalf of the KPERS Board of Trustees, stating
that the Board and its investment members are fiduciaries to
its members and all investment decisions are made for the
sole purpose of providing promised benefits. The conferee
indicated adding statutory restrictions to investments impedes
the Board’s ability to make investment decisions and manage
risk with the sole purpose of funding benefits. The constraints
on KPERS investments could also negatively impact the
ultimate rate of return. The conferee noted the Board and its
managers follow all federal laws regarding international
11- 37 investments and provided information regarding current
holdings in counties of concern (only China, including Hong
Kong).
The KPERS Board conferee requested consideration of
an amendment to replace reference to “companies affiliated
with a country of concern” with “a person owned or controlled
by, or subject to the jurisdiction or direction of a country of
concern.”
The House Committee amended the bill to:
●Add definitions for the terms “covered transaction,”
“covered control transaction,” and “foreign
principal”;
●Provide the sale, redemption, divestiture, or
withdrawal requirements placed on state-managed
funds (both publicly traded securities and indirect
holdings in actively or passively managed fund
containing such securities) would be subject to the
law governing the Kansas Public Employees
Retirement Fund (KPERS) and management and
investment of this Trust Fund designated to the
KPERS Board of Trustees (KSA 74-4921) or any
other statute to the contrary;
●Remove reference to the principal place of
business in provisions pertaining to an investment
or deposit prohibition for state-managed funds;
●Remove reference to companies affiliated with a
country of concern in an real estate or private
equity investment prohibition provision to instead
reference a person owned or controlled by or
subject to the jurisdiction of a country of concern;
●Clarify the prohibition on state agencies contracting
or agreeing to procure good or services to include
final or finished goods or services and reference a
12- 37 foreign principal instead of a company domiciled or
with a principal place of business in a country of
concern; and
●Allow a state agency to enter into a contract or
agreement with foreign principals that meet
specified criteria regarding national security
concerns or agreements.
Fiscal Information
According to the fiscal note prepared by the Division of
the Budget on HB 2739, as introduced, the Pooled Money
Investment Board (PMIB) reports that the enactment of the
bill would not have a fiscal impact as the PMIB does not have
any investments outlined in the bill. The Office of
Procurement and Contracts in the Department of
Administration indicates that the enactment of the bill would
have no fiscal effect.
The State Treasurer reports that any costs associated
with the enactment of the bill would be negligible and could
be accomplished within the agency’s existing budget
resources. The agency assumes the bill would not affect the
various consumer investment programs sponsored by the
agency, including the Kansas 529 Education Plan and
Kansas ABLE Savings Plan.
KPERS reports that the enactment of the bill would
require the divestment of holdings in China, including Hong
Kong, over a two-year period. As of December 31, 2023,
KPERS has approximately $256.0 million in public market
securities in China, which represents less than 1.0 percent of
the total KPERS assets. The agency state the provisions of
the bill that would permit a two-year period of divestiture
would allow the KPERS Board of Trustees to manage any
associated divestiture risks; however, there would be trading
costs to liquidate these holdings and reinvestment in other
public market securities. The agency estimates these trading
13- 37 costs to be approximately $680,000 over the two-year period
of divestiture. KPERS notes that the bill would not be
expected to affect the long-term investment return
assumptions currently used by the actuary.
Any fiscal effect associated with enactment of the bill is
not reflected in The FY 2025 Governor’s Budget Report.
Retirement; state agencies; country of concern; investments; divestment;
procurement; state moneys; foreign principal; national security agreement; Countries
of Concern Divestment and Procurement Protection Act
14- 37