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AN ACT relating to the fiduciary duties owed to the state-administered retirement 1
systems. 2
Be it enacted by the General Assembly of the Commonwealth of Kentucky: 3
Section 1. KRS 21.450 is amended to read as follows: 4
(1) The benefits provided by KRS 21.350 to 21.510 to be paid shall be funded through 5
contract with a reputable life insurance company authorized to do business in this 6
state, or through investment and reinvestment of funds in securities which, at the 7
time of making the investment, are by law permitted for the investment of funds by 8
fiduciaries in this state, or through a combination of such methods. To the extent 9
that funding is provided through insurance contract, no contributions, payments or 10
premiums shall be subject to any tax on insurance premiums or annuity 11
considerations. The investment committee for the judicial retirement fund shall be 12
trustee of any and all funds contributed or appropriated to the retirement system, 13
and shall have sole authority to make insurance contracts or investments. 14
(2) (a) For the purposes of this subsection: 15
1. "Solely in the interest of the members and beneficiaries" shall be 16
determined using only pecuniary factors and shall not include any 17
purpose to further a nonpecuniary interest; 18
2. "Pecuniary factor" means a consideration having a direct and 19
material connection to the financial risk or financial return of an 20
investment; 21
3. A "material connection" is established if there is a substantial 22
likelihood that a reasonable investor would consider it important in 23
determining the financial risk or the financial return of an 24
investment; and 25
4. "Nonpecuniary interest" includes an environmental, social, political, 26
or ideological interest. 27 UNOFFICIAL COPY 23 RS BR 1181
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(b) The board members,[ or] any investment manager, adviser, or consultant 1
shall discharge their duties with respect to the funds of the retirement system 2
solely in the interest of the members and beneficiaries and: 3
1.[(a)] For the exclusive purposes of providing benefits to members and 4
their beneficiaries and defraying reasonable expenses of administering 5
the plan; 6
2.[(b)] With the care, skill, prudence, and diligence under the 7
circumstances then prevailing that a prudent person[man] acting in a 8
like capacity and familiar with such matters would use in the conduct of 9
an enterprise of a like character and with like aims; and 10
3.[(c)] In accordance with the laws, regulations and other instruments 11
governing the funds. 12
(c) Evidence that a fiduciary has considered or acted on a nonpecuniary 13
interest shall include but is not limited to: 14
1. Statements, explanations, reports, or correspondence; 15
2. Communications with portfolio companies; 16
3. Statements of principles or policies, whether made individually or 17
jointly; 18
4. Votes of shares or proxies; or 19
5. Coalitions, initiatives, agreements, or commitments to which the 20
fiduciary is a participant, affiliate, or signatory. 21
(3) Any accrual of benefits provided under this or any other applicable statute shall be 22
no less than the benefit adjustment provided for in KRS 21.405(4) from the date of 23
the last establishment of that benefit. 24
(4) The board shall establish ethics policies and procedures by promulgation of 25
administrative regulations in accordance with the provisions of KRS Chapter 13A. 26
The ethics policies shall include but not be limited to annual financial and conflict 27 UNOFFICIAL COPY 23 RS BR 1181
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of interest disclosure requirements which must be completed by all board members 1
and made available to the public upon request. 2
Section 2. KRS 61.650 is amended to read as follows: 3
(1) (a) The board shall be the trustee of funds created by KRS 16.510, 61.515, and 4
61.701 pertaining to the accounts for the Kentucky Employees Retirement 5
System or State Police Retirement System, notwithstanding the provisions of 6
any other statute to the contrary, and shall have exclusive power to invest and 7
reinvest such assets in accordance with federal law. 8
(b) 1. The board shall establish an investment committee whose membership 9
shall be composed of the following: 10
a. The three (3) trustees of the Kentucky Retirement Systems board 11
appointed by the Governor pursuant to KRS 61.645 who have 12
investment experience; and 13
b. Additional trustees appointed by the board chair. 14
2. The investment committee shall have authority to implement the 15
investment policies adopted by the board and act on behalf of the board 16
on all investment-related matters and to acquire, sell, safeguard, 17
monitor, and manage the assets and securities of the several funds. 18
(c) 1. For the purposes of this paragraph: 19
a. "Solely in the interest of the members and beneficiaries" shall 20
be determined using only pecuniary factors and shall not include 21
any purpose to further a nonpecuniary interest; 22
b. "Pecuniary factor" means a consideration having a direct and 23
material connection to the financial risk or financial return of 24
an investment; 25
c. A "material connection" is established if there is a substantial 26
likelihood that a reasonable investor would consider it important 27 UNOFFICIAL COPY 23 RS BR 1181
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in determining the financial risk or the financial return of an 1
investment; and 2
d. "Nonpecuniary interest" includes an environmental, social, 3
political, or ideological interest. 4
2. A trustee, officer, employee, employee of the Kentucky Public Pensions 5
Authority, investment manager, adviser, or consultant, or other 6
fiduciary shall discharge duties with respect to the retirement system: 7
a[1]. Solely in the interest of the members and beneficiaries; 8
b[2]. For the exclusive purpose of providing benefits to members and 9
beneficiaries and paying reasonable expenses of administering the 10
system; 11
c[3]. With the care, skill, and caution under the circumstances then 12
prevailing that a prudent person acting in a like capacity and 13
familiar with those matters would use in the conduct of an activity 14
of like character and purpose; 15
d[4]. Impartially, taking into account any differing interests of members 16
and beneficiaries; 17
e[5]. Incurring any costs that are appropriate and reasonable; and 18
f[6]. In accordance with a good-faith interpretation of the law 19
governing the retirement system. 20
3. Evidence that a fiduciary has considered or acted on a nonpecuniary 21
interest shall include but is not limited to: 22
a. Statements, explanations, reports, or correspondence; 23
b. Communications with portfolio companies; 24
c. Statements of principles or policies, whether made individually 25
or jointly; 26
d. Votes of shares or proxies; or 27 UNOFFICIAL COPY 23 RS BR 1181
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e. Coalitions, initiatives, agreements, or commitments to which the 1
fiduciary is a participant, affiliate, or signatory. 2
(d) In addition to the standards of conduct prescribed by paragraph (c) of this 3
subsection: 4
1. All internal investment staff of the Kentucky Public Pensions Authority, 5
and investment consultants shall adhere to the Code of Ethics and 6
Standards of Professional Conduct, and all board trustees shall adhere to 7
the Code of Conduct for Members of a Pension Scheme Governing 8
Body. All codes cited in this subparagraph are promulgated by the CFA 9
Institute; and 10
2. Investment managers shall comply with all applicable provisions of the 11
federal Investment Advisers Act of 1940, as amended, and the rules and 12
regulations promulgated thereunder, and shall comply with all other 13
applicable federal securities statutes and related rules and regulations 14
that apply to investment managers. 15
(2) The board, through adopted written policies, shall maintain ownership and control 16
over its assets held in its unitized managed custodial account. 17
(3) The board, in keeping with its responsibility as trustee and wherever consistent with 18
its fiduciary responsibilities, shall give priority to the investment of funds in 19
obligation calculated to improve the industrial development and enhance the 20
economic welfare of the Commonwealth. 21
(4) The contents of real estate appraisals, engineering or feasibility estimates, and 22
evaluations made by or for the system relative to the acquisition or disposition of 23
property, until such time as all of the property has been acquired or sold, shall be 24
excluded from the application of KRS 61.870 to 61.884 and shall be subject to 25
inspection only upon order of a court of competent jurisdiction. 26
(5) Based upon market value at the time of purchase, the board shall limit the amount 27 UNOFFICIAL COPY 23 RS BR 1181
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of assets managed by any one (1) active or passive investment manager to fifteen 1
percent (15%) of the assets in the pension and insurance funds. 2
(6) All contracts for the investment or management of assets of the systems shall not be 3
subject to KRS Chapters 45, 45A, 56, and 57. Instead, the board shall conduct the 4
following process to develop and adopt an investment procurement policy with 5
which all prospective contracts for the investment or management of assets of the 6
systems shall comply: 7
(a) On or before July 1, 2017, the board shall consult with the secretary of the 8
Finance and Administration Cabinet or his or her designee to develop an 9
investment procurement policy, which shall be written to meet best practices 10
in investment management procurement; 11
(b) Thirty (30) days prior to adoption, the board shall tender the preliminary 12
investment procurement policy to the secretary of the Finance and 13
Administration Cabinet or his or her designee for review and comment; 14
(c) Upon receipt of comments from the secretary of the Finance and 15
Administration Cabinet or his or her designee, the board shall choose to adopt 16
or not adopt any recommended changes; 17
(d) Upon adoption, the board shall tender the final investment procurement policy 18
to the secretary of the Finance and Administration Cabinet or his or her 19
designee; 20
(e) No later than thirty (30) days after receipt of the investment procurement 21
policy, the secretary or his or her designee shall certify whether the board's 22
investment procurement policy meets or does not meet best practices for 23
investment management procurement; and 24
(f) Any amendments to the investment procurement policy shall adhere to the 25
requirements set forth by paragraphs (b) to (e) of this subsection. 26
Section 3. KRS 78.790 is amended to read as follows: 27 UNOFFICIAL COPY 23 RS BR 1181
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(1) (a) The board shall be the trustee of funds pertaining to the County Employees 1
Retirement System created by KRS 78.510 to 78.852, and KRS 61.701, and 2
shall have full and exclusive power to invest and reinvest such assets in 3
accordance with federal law. 4
(b) 1. The board shall establish an investment committee that shall include 5
members of the board with investment experience, elected members, or 6
other members as determined by the board chair, and may also include 7
nonvoting members who have investment expertise. 8
2. The investment committee shall have authority to implement the 9
investment policies adopted by the board and act on behalf of the board 10
on all investment-related matters. 11
(c) 1. For the purposes of this paragraph: 12
a. "Solely in the interest of the members and beneficiaries" shall 13
be determined using only pecuniary factors and shall not include 14
any purpose to further a nonpecuniary interest; 15
b. "Pecuniary factor" means a consideration having a direct and 16
material connection to the financial risk or financial return of 17
an investment; 18
c. A "material connection" is established if there is a substantial 19
likelihood that a reasonable investor would consider it important 20
in determining the financial risk or the financial return of an 21
investment; and 22
d. "Nonpecuniary interest" includes an environmental, social, 23
political, or ideological interest. 24
2. A trustee, officer, employee, employee of the Kentucky Public Pensions 25
Authority, investment manager, adviser, consultant, or other fiduciary 26
shall discharge duties with respect to the system: 27 UNOFFICIAL COPY 23 RS BR 1181
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a[1]. Solely in the interest of the members and beneficiaries; 1
b[2]. For the exclusive purpose of providing benefits to members and 2
beneficiaries and paying reasonable expenses of administering the 3
system; 4
c[3]. With the care, skill, and caution under the circumstances then 5
prevailing that a prudent person acting in a like capacity and 6
familiar with those matters would use in the conduct of an activity 7
of like character and purpose; 8
d[4]. Impartially, taking into account any differing interests of members 9
and beneficiaries; 10
e[5]. Incurring any costs that are appropriate and reasonable; and 11
f[6]. In accordance with a good-faith interpretation of the and common 12
law governing the system. 13
3. Evidence that a fiduciary has considered or acted on a nonpecuniary 14
interest shall include but is not limited to: 15
a. Statements, explanations, reports, or correspondence; 16
b. Communications with portfolio companies; 17
c. Statements of principles or policies, whether made individually 18
or jointly; 19
d. Votes of shares or proxies; or 20
e. Coalitions, initiatives, agreements, or commitments to which the 21
fiduciary is a participant, affiliate, or signatory. 22
(d) In addition to the standards of conduct prescribed by paragraph (c) of this 23
subsection: 24
1. All internal investment staff of the Kentucky Public Pensions Authority, 25
and investment consultants shall adhere to the Code of Ethics and 26
Standards of Professional Conduct, and all board trustees shall adhere to 27 UNOFFICIAL COPY 23 RS BR 1181
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the Code of Conduct for Members of a Pension Scheme Governing 1
Body. All codes cited in this subparagraph are promulgated by the CFA 2
Institute; and 3
2. Investment managers shall comply with all applicable provisions of the 4
federal Investment Advisers Act of 1940, as amended, and the rules and 5
regulations promulgated thereunder, and shall comply with all other 6
applicable federal securities statutes and related rules and regulations 7
that apply to investment managers. 8
(2) The board, through adopted written policies, shall maintain ownership and control 9
over its assets held in its unitized managed custodial account. 10
(3) The board, in keeping with its responsibility as the trustee and wherever feasible, 11
shall give priority to the investment of funds in obligations calculated to improve 12
the industrial development and enhance the economic welfare of the 13
Commonwealth. 14
(4) The contents of real estate appraisals, engineering or feasibility estimates, and 15
evaluations made by or for the system relative to the acquisition or disposition of 16
property, until such time as all of the property has been acquired or sold, shall be 17
excluded from the application of KRS 61.870 to 61.884 and shall be subject to 18
inspection only upon order of a court of competent jurisdiction. 19
(5) Based upon market value at the time of purchase, the board shall limit the amount 20
of assets managed by any one (1) active or passive investment manager to fifteen 21
percent (15%) of the assets in the pension and insurance funds. 22
(6) All contracts for the investment or management of assets of the system shall not be 23
subject to KRS Chapters 45, 45A, 56, and 57. Instead, the board shall conduct the 24
following process to develop and adopt an investment procurement policy with 25
which all prospective contracts for the investment or management of assets of the 26
system shall comply: 27 UNOFFICIAL COPY 23 RS BR 1181
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(a) The board shall consult with the secretary of the Finance and Administration 1
Cabinet or his or her designee to develop an investment procurement policy, 2
which shall be written to meet best practices in investment management 3
procurement; 4
(b) Thirty (30) days prior to adoption, the board shall tender the preliminary 5
investment procurement policy to the secretary of the Finance and 6
Administration Cabinet or his or her designee for review and comment; 7
(c) Upon receipt of comments from the secretary of the Finance and 8
Administration Cabinet or his or her designee, the board shall choose to adopt 9
or not adopt any recommended changes; 10
(d) Upon adoption, the board shall tender the final investment procurement policy 11
to the secretary of the Finance and Administration Cabinet or his or her 12
designee; 13
(e) No later than thirty (30) days after receipt of the investment procurement 14
policy, the secretary or his or her designee shall certify whether the board's 15
investment procurement policy meets or does not meet best practices for 16
investment management procurement; and 17
(f) Any amendments to the investment procurement policy shall adhere to the 18
requirements set forth by paragraphs (b) to (e) of this subsection. 19
Section 4. KRS 161.430 is amended to read as follows: 20
(1) (a) The board of trustees shall be the trustee of the funds of the retirement system 21
and shall have full power and responsibility for the purchase, sale, exchange, 22
transfer, or other disposition of the investments and moneys of the retirement 23
system. The board shall, by administrative regulation, establish investment 24
policies and procedures to carry out their responsibilities. 25
(b) 1. The board shall contract with experienced competent investment 26
managers to invest and manage assets of the system. The board may also 27 UNOFFICIAL COPY 23 RS BR 1181
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employ qualified investment staff to advise it on investment matters and 1
to invest and manage assets of the system not to exceed fifty percent 2
(50%) of the system's assets. The board may contract with one (1) or 3
more general investment consultants, as well as specialized investment 4
consultants, to advise it on investment matters. 5
2. All internal investment staff and investment consultants shall adhere to 6
the Code of Ethics and Standards of Professional Conduct, and all board 7
trustees shall adhere to the Code of Conduct for Members of a Pension 8
Scheme Governing Body, promulgated by the CFA Institute. Investment 9
managers shall comply with the federal Investment Advisers Act of 10
1940, as amended, and the rules and regulations promulgated thereunder 11
and shall comply with all other applicable federal securities statutes and 12
related rules and regulations that apply to investment managers. 13
3. No investment manager shall manage more than forty percent (40%) of 14
the funds of the retirement system. 15
(c) The board may appoint an investment committee to act for the board in all 16
matters of investment, subject to the approval of the board of trustees. The 17
board of trustees, in keeping with their responsibilities as trustees and 18
wherever consistent with their fiduciary responsibilities, shall give priority to 19
the investment of funds in obligations calculated to improve the industrial 20
development and enhance the economic welfare of the Commonwealth. 21
Toward this end, the board shall develop procedures for informing the 22
business community of the potential for in-state investments by the retirement 23
fund, accepting and evaluating applications for the in-state investment of 24
funds, and working with members of the business community in executing in-25
state investments which are consistent with the board's fiduciary 26
responsibilities. The board shall include in the criteria it uses to evaluate in-27 UNOFFICIAL COPY 23 RS BR 1181
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state investments their potential for creating new employment opportunities 1
and adding to the total job pool in Kentucky. The board may cooperate with 2
the board of trustees of Kentucky Retirement Systems in developing its 3
program and procedures, and shall report to the Legislative Research 4
Commission annually on its progress in placing in-state investments. The first 5
report shall be submitted by October 1, 1991, and subsequent reports shall be 6
submitted by October 1 of each year thereafter. The report shall include the 7
number of applications for in-state investment received, the nature of the 8
investments proposed, the amount requested, the amount invested, and the 9
percentage of applications which resulted in investments. 10
(2) (a) For the purposes of this subsection: 11
1. "Solely in the interest of the members and beneficiaries" shall be 12
determined using only pecuniary factors and shall not include any 13
purpose to further a nonpecuniary interest; 14
2. "Pecuniary factor" means a consideration having a direct and 15
material connection to the financial risk or financial return of an 16
investment; 17
3. A "material connection" is established if there is a substantial 18
likelihood that a reasonable investor would consider it important in 19
determining the financial risk or the financial return of an 20
investment; and 21
4. "Nonpecuniary interest" incudes an environmental, social, political, 22
or ideological interest. 23
(b) The board members,[ and] investment managers, advisers, or consultants 24
shall discharge their duties with respect to the assets of the system solely in 25
the interests of the active contributing members and annuitants and: 26
1.[(a)] For the exclusive purpose of providing benefits to members and 27 UNOFFICIAL COPY 23 RS BR 1181
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annuitants and defraying reasonable expenses of administering the 1
system; 2
2.[(b)] With the care, skill, prudence, and diligence under the 3
circumstances then prevailing that a prudent person acting in a like 4
capacity and familiar with these matters would use in the conduct of an 5
enterprise of a like character and with like aims; 6
3.[(c)] By diversifying the investments of the plan so as to minimize the 7
risk of large losses, unless under the circumstances it is clearly prudent 8
not to do so; and 9
4.[(d)] In accordance with the laws, administrative regulations, and other 10
instruments governing the system. 11
(c) Evidence that a fiduciary has considered or acted on a nonpecuniary 12
interest shall include but is not limited to: 13
1. Statements, explanations, reports, or correspondence; 14
2. Communications with portfolio companies; 15
3. Statements of principles or policies, whether made individually or 16
jointly; 17
4. Votes of shares or proxies; or 18
5. Coalitions, initiatives, agreements, or commitments to which the 19
fiduciary is a participant, affiliate, or signatory. 20
(3) (a) In choosing and contracting for professional investment management and 21
consulting services, the board shall do so prudently and in the interest of the 22
members and annuitants. Any contract that the board makes with an 23
investment manager shall set forth policies and guidelines of the board with 24
reference to standard rating services and specific criteria for determining the 25
quality of investments. Expenses directly related to investment management 26
and consulting services shall be financed from the guarantee fund in amounts 27 UNOFFICIAL COPY 23 RS BR 1181
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approved by the board. 1
(b) An investment manager or consultant appointed under this section shall 2
acknowledge in writing his or her fiduciary responsibilities to the fund. To be 3
eligible for appointment, an investment manager, consultant, or an affiliate, 4
shall be: 5
1. Registered under the Federal Investment Advisers Act of 1940; or 6
2. A bank as defined by that Act; or 7
3. An insurance company qualified to perform investment services under 8
the laws of more than one (1) state. 9
(4) No investment or disbursement of funds shall be made unless authorized by the 10
board of trustees, except that the board, in order to ensure timely market 11
transactions, shall establish investment guidelines and may permit its staff and 12
investment managers who are employed or under contract with the board pursuant 13
to this section to execute purchases and sales of investment instruments within 14
those guidelines without prior board approval. 15
(5) In discharging his or her administrative duties under this section, a trustee shall 16
strive to administer the retirement system in an efficient and cost-effective manner 17
for the taxpayers of the Commonwealth of Kentucky. 18
(6) Notwithstanding any other provision of KRS 161.220 to 161.716, no funds of the 19
Teachers' Retirement System, including fees and commissions paid to an 20
investment manager, private fund, or company issuing securities, who manages 21
systems assets, shall be used to pay fees and commissions to placement agents. For 22
purposes of this subsection, "placement agent" means a third-party individual, who 23
is not an employee, or firm, wholly or partially owned by the entity being hired, 24
who solicits investments on behalf of an investment manager, private fund, or 25
company issuing securities. 26
(7) All contracts for the investment or management of assets of the system shall not be 27 UNOFFICIAL COPY 23 RS BR 1181
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subject to KRS Chapters 45, 45A, 56, and 57. Instead, the board shall conduct the 1
following process to develop and adopt an investment procurement policy with 2
which all prospective contracts for the investment or management of assets of the 3
system shall comply: 4
(a) On or before July 1, 2017, the board shall consult with the secretary of the 5
Finance and Administration Cabinet or his or her designee to develop an 6
investment procurement policy, which shall be written to meet best practices 7
in investment management procurement; 8
(b) Thirty (30) days prior to adoption, the board shall tender the preliminary 9
investment procurement policy to the secretary of the Finance and 10
Administration Cabinet or his or her designee for review and comment; 11
(c) Upon receipt of comments from the secretary of the Finance and 12
Administration Cabinet or his or her designee, the board shall choose to adopt 13
or not adopt any recommended changes; 14
(d) Upon adoption, the board shall tender the final investment procurement policy 15
to the secretary of the Finance and Administration Cabinet or his or her 16
designee; 17
(e) No later than thirty (30) days after receipt of the investment procurement 18
policy, the secretary or his or her designee shall certify whether the board's 19
investment procurement policy meets or does not meet best practices for 20
investment management procurement; and 21
(f) Any amendments to the investment procurement policy shall adhere to the 22
requirements set forth by paragraphs (b) to (e) of this subsection. 23