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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 material 19
connection to the financial risk or financial return of an investment; 20
3. A "material connection" is established if there is a substantial likelihood 21
that a reasonable investor would consider it important in determining the 22
financial risk or the financial return of an investment; 23
4. "Nonpecuniary interest" includes but is not limited to an environmental, 24
social, political, or ideological interest which does not have a direct and 25
material connection to the financial risk or financial return of an 26
investment;[ and] 27 UNOFFICIAL COPY 25 RS BR 1546
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5. "Investment manager" shall have the same definition attributed to 1
"investment adviser" under the federal Investment Advisers Act of 1940, 2
15 U.S.C. sec. 80b-2; 3
6. "Shareholder-sponsored proposal" means a proposal by a shareholder 4
included in the proxy statement of an issuer of securities pursuant to 5
17 C.F.R. sec. 240.14a-8; and 6
7. "Economic analysis" means a written analysis of the economic impact 7
of a shareholder-sponsored proposal, which shall include, at a 8
minimum: 9
a. The subject matter of the shareholder-sponsored proposal; 10
b. Whether the board of directors of the issuer of securities opposes 11
the shareholder-sponsored proposal and the stated reasons for 12
the opposition; 13
c. Whether the shareholder-sponsored proposal is consistent with 14
the investment policy of the retirement system; 15
d. The economic benefits and costs of implementing the 16
shareholder-sponsored proposal, as written, in the long and 17
short term; 18
e. The quantifiable impact of the shareholder-sponsored proposal, 19
as written, on the investment returns of the funds of the 20
retirement system; and 21
f. An explanation of the modeling, procedures, and processes used 22
to complete the economic analysis. 23
(b) The board members, any investment manager or other fiduciary, or proxy 24
adviser shall discharge their duties with respect to the funds of the retirement 25
system solely in the interest of the members and beneficiaries and: 26
1. For the exclusive purposes of providing benefits to members and their 27 UNOFFICIAL COPY 25 RS BR 1546
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beneficiaries and defraying reasonable expenses of administering the 1
plan; 2
2. With the care, skill, prudence, and diligence under the circumstances 3
then prevailing that a prudent person acting in a like capacity and 4
familiar with such matters would use in the conduct of an enterprise of a 5
like character and with like aims; and 6
3. In accordance with the federal, state, and common laws, regulations and 7
other instruments governing the funds and fiduciaries. 8
(c) Evidence that a fiduciary has considered or acted on a nonpecuniary interest 9
shall include but is not limited to: 10
1. Statements, explanations, reports, or correspondence; 11
2. Communications with portfolio companies; 12
3. Statements of principles or policies, whether made individually or 13
jointly; 14
4. Votes of shares or proxies; or 15
5. Coalitions, initiatives, agreements, or commitments to which the 16
fiduciary is a participant, affiliate, or signatory. 17
(d) When exercising or recommending a vote on a shareholder-sponsored 18
proposal, a proxy adviser that has entered into an agreement or contracted 19
with the board of trustees of the retirement system acts solely in the interest 20
of the members and beneficiaries under this subsection if: 21
1. The proxy adviser's vote or recommendation is consistent with the 22
recommendation of the board of directors of the issuer of the shares, 23
provided: 24
a. The board of directors of the issuer of the shares is composed of 25
a majority of independent directors; and 26
b. The recommendation of the board of directors is not for the 27 UNOFFICIAL COPY 25 RS BR 1546
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purpose of furthering a nonpecuniary interest; or 1
2. The proxy adviser's vote or recommendation is inconsistent with the 2
recommendation of the board of directors of the issuer of the shares, 3
provided the proxy adviser conducts and documents an economic 4
analysis demonstrating that the vote or recommendation is solely in 5
the interest of the members and beneficiaries. 6
(3) Any accrual of benefits provided under this or any other applicable statute shall be 7
no less than the benefit adjustment provided for in KRS 21.405(4) from the date of 8
the last establishment of that benefit. 9
(4) The board shall establish ethics policies and procedures by promulgation of 10
administrative regulations in accordance with the provisions of KRS Chapter 13A. 11
The ethics policies shall include but not be limited to annual financial and conflict 12
of interest disclosure requirements which must be completed by all board members 13
and made available to the public upon request. 14
(5) In addition to the standards of conduct prescribed by subsection (2) of this section: 15
(a) Investment managers shall comply with all applicable provisions of the 16
Investment Advisers Act of 1940, as amended, and the rules and regulations 17
promulgated thereunder, and shall comply with all other applicable federal 18
securities statutes and related rules and regulations that apply to investment 19
managers; and 20
(b) Proxy advisers and proxy voting services shall comply with all applicable 21
provisions of the Investment Advisers Act of 1940, as amended, and the rules 22
and regulations promulgated thereunder, and shall comply with all other 23
federal statutes and related rules and regulations that apply to proxy advisers 24
and proxy voting services. 25
(6) No contract or agreement, whether made in writing or not, shall in any manner 26
waive, restrict, or limit a fiduciary's liability as to any of the duties imposed by this 27 UNOFFICIAL COPY 25 RS BR 1546
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section. Any agreement shall specify that it is made in the Commonwealth of 1
Kentucky and governed by the laws of the Commonwealth of Kentucky. 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 be 20
determined using only pecuniary factors and shall not include any 21
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 an 24
investment; 25
c. A "material connection" is established if there is a substantial 26
likelihood that a reasonable investor would consider it important in 27 UNOFFICIAL COPY 25 RS BR 1546
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determining the financial risk or the financial return of an 1
investment; 2
d. "Nonpecuniary interest" includes but is not limited to an 3
environmental, social, political, or ideological interest which does 4
not have a direct and material connection to the financial risk or 5
financial return of an investment;[ and] 6
e. "Investment manager" shall have the same definition attributed to 7
"investment adviser" under the federal Investment Advisers Act of 8
1940, 15 U.S.C. sec. 80b-2; 9
f. "Shareholder-sponsored proposal" means a proposal by a 10
shareholder included in the proxy statement of an issuer of 11
securities pursuant to 17 C.F.R. sec. 240.14a-8; and 12
g. "Economic analysis" means a written analysis of the economic 13
impact of a shareholder-sponsored proposal, which shall 14
include, at a minimum: 15
i. The subject matter of the shareholder-sponsored proposal; 16
ii. Whether the board of directors of the issuer of securities 17
opposes the shareholder-sponsored proposal and the stated 18
reasons for the opposition; 19
iii. Whether the shareholder-sponsored proposal is consistent 20
with the investment policy of the retirement systems; 21
iv. The economic benefits and costs of implementing the 22
shareholder-sponsored proposal, as written, in the long and 23
short term; 24
v. The quantifiable impact of the shareholder-sponsored 25
proposal, as written, on the investment returns of the funds 26
of the retirement systems; and 27 UNOFFICIAL COPY 25 RS BR 1546
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vi. An explanation of the modeling, procedures, and processes 1
used to complete the economic analysis. 2
2. A trustee, officer, employee, employee of the Kentucky Public Pensions 3
Authority, investment manager, or other fiduciary, or proxy adviser shall 4
discharge duties with respect to the retirement system: 5
a. Solely in the interest of the members and beneficiaries; 6
b. For the exclusive purpose of providing benefits to members and 7
beneficiaries and paying reasonable expenses of administering the 8
system; 9
c. With the care, skill, and caution under the circumstances then 10
prevailing that a prudent person acting in a like capacity and 11
familiar with those matters would use in the conduct of an activity 12
of like character and purpose; 13
d. Impartially, taking into account any differing interests of members 14
and beneficiaries; 15
e. Incurring any costs that are appropriate and reasonable; and 16
f. In accordance with a good-faith interpretation of the federal, state, 17
and common law governing the system and fiduciaries. 18
3. Evidence that a fiduciary has considered or acted on a nonpecuniary 19
interest shall include but is not limited to: 20
a. Statements, explanations, reports, or correspondence; 21
b. Communications with portfolio companies; 22
c. Statements of principles or policies, whether made individually or 23
jointly; 24
d. Votes of shares or proxies; or 25
e. Coalitions, initiatives, agreements, or commitments to which the 26
fiduciary is a participant, affiliate, or signatory. 27 UNOFFICIAL COPY 25 RS BR 1546
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4. When exercising or recommending a vote on a shareholder-sponsored 1
proposal, a proxy adviser that has entered into an agreement or 2
contracted with the board of trustees of the retirement system acts 3
solely in the interest of the members and beneficiaries under this 4
subsection if: 5
a. The proxy adviser's vote or recommendation is consistent with 6
the recommendation of the board of directors of the issuer of the 7
shares, provided: 8
i. The board of directors of the issuer of the shares is 9
composed of a majority of independent directors; and 10
ii. The recommendation of the board of directors is not for the 11
purpose of furthering a nonpecuniary interest; or 12
b. The proxy adviser's vote or recommendation is inconsistent with 13
the recommendation of the board of directors of the issuer of the 14
shares, provided the proxy adviser conducts and documents an 15
economic analysis demonstrating that the vote or 16
recommendation is solely in the interest of the members and 17
beneficiaries. 18
(d) In addition to the standards of conduct prescribed by paragraph (c) of this 19
subsection: 20
1. All internal investment staff of the Kentucky Public Pensions Authority, 21
and investment consultants shall adhere to the Code of Ethics and 22
Standards of Professional Conduct, and all board trustees shall adhere to 23
the Code of Conduct for Members of a Pension Scheme Governing 24
Body. All codes cited in this subparagraph are promulgated by the CFA 25
Institute; 26
2. Investment managers shall comply with all applicable provisions of the 27 UNOFFICIAL COPY 25 RS BR 1546
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federal Investment Advisers Act of 1940, as amended, and the rules and 1
regulations promulgated thereunder, and shall comply with all other 2
applicable federal securities statutes and related rules and regulations 3
that apply to investment managers; and 4
3. Proxy advisers and proxy voting services shall comply with all 5
applicable provisions of the Investment Advisers Act of 1940, as 6
amended, and the rules and regulations promulgated thereunder, and 7
shall comply with all other federal statutes and related rules and 8
regulations that apply to proxy advisers and proxy voting services. 9
(e) No contract or agreement, whether made in writing or not, shall in any 10
manner waive, restrict, or limit a fiduciary's liability as to any of the duties 11
imposed by this section. Any agreement shall specify that it is made in the 12
Commonwealth of Kentucky and governed by the laws of the Commonwealth 13
of Kentucky. 14
(2) The board, through adopted written policies, shall maintain ownership and control 15
over its assets held in its unitized managed custodial account. 16
(3) The board, in keeping with its responsibility as trustee and wherever consistent with 17
its fiduciary responsibilities, shall give priority to the investment of funds in 18
obligation calculated to improve the industrial development and enhance the 19
economic welfare of the Commonwealth. 20
(4) The contents of real estate appraisals, engineering or feasibility estimates, and 21
evaluations made by or for the system relative to the acquisition or disposition of 22
property, until such time as all of the property has been acquired or sold, shall be 23
excluded from the application of KRS 61.870 to 61.884 and shall be subject to 24
inspection only upon order of a court of competent jurisdiction. 25
(5) Based upon market value at the time of purchase, the board shall limit the amount 26
of assets managed by any one (1) active or passive investment manager to fifteen 27 UNOFFICIAL COPY 25 RS BR 1546
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percent (15%) of the assets in the pension and insurance funds. 1
(6) All contracts for the investment or management of assets of the systems shall not be 2
subject to KRS Chapters 45, 45A, 56, and 57. Instead, the board shall conduct the 3
following process to develop and adopt an investment procurement policy with 4
which all prospective contracts for the investment or management of assets of the 5
systems shall comply: 6
(a) On or before July 1, 2017, the board shall consult with the secretary of the 7
Finance and Administration Cabinet or his or her designee to develop an 8
investment procurement policy, which shall be written to meet best practices 9
in investment management procurement; 10
(b) Thirty (30) days prior to adoption, the board shall tender the preliminary 11
investment procurement policy to the secretary of the Finance and 12
Administration Cabinet or his or her designee for review and comment; 13
(c) Upon receipt of comments from the secretary of the Finance and 14
Administration Cabinet or his or her designee, the board shall choose to adopt 15
or not adopt any recommended changes; 16
(d) Upon adoption, the board shall tender the final investment procurement policy 17
to the secretary of the Finance and Administration Cabinet or his or her 18
designee; 19
(e) No later than thirty (30) days after receipt of the investment procurement 20
policy, the secretary or his or her designee shall certify whether the board's 21
investment procurement policy meets or does not meet best practices for 22
investment management procurement; and 23
(f) Any amendments to the investment procurement policy shall adhere to the 24
requirements set forth by paragraphs (b) to (e) of this subsection. 25
(7) (a) The board shall adopt written proxy voting guidelines which are consistent 26
with the fiduciary duties and other requirements of this section. 27 UNOFFICIAL COPY 25 RS BR 1546
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(b) The board shall not adopt the recommendations of a proxy adviser or proxy 1
voting service and shall not allow such proxy adviser or proxy voting service 2
to vote on behalf of the system, unless the proxy adviser or proxy voting 3
service acknowledges in writing and accepts under contract its duties under 4
this section and commits to follow the board-adopted proxy voting guidelines 5
when voting the system's shares in order to comply with the board's fiduciary 6
duties and other responsibilities under this section. 7
(c) All shares held by or on behalf of the system, and which the system is entitled 8
to vote under state, federal, or common laws, shall be voted according to the 9
proxy voting guidelines adopted by the board and subject to the fiduciary 10
duties and other requirements of this section by: 11
1. The board, the investment committee of the board, or an employee or 12
employees of the Authority who are fiduciaries under subsection (1) of 13
this section and are appointed or otherwise authorized by the board; or 14
2. A proxy adviser or proxy voting service that acknowledges in writing 15
and accepts under contract its duties under this section and commits to 16
follow the board-adopted proxy voting guidelines when voting the 17
system's shares in order to comply with the board's fiduciary duties and 18
other responsibilities under this section. 19
(d) All proxy votes shall be reported at least quarterly to the board. For each vote, 20
the report shall provide: 21
1. The vote caption; 22
2. The date of the vote; 23
3. The company's name; 24
4. The vote cast for the system; 25
5. The recommendation of the company's management; and 26
6. If applicable, the recommendation of the proxy adviser or proxy voting 27 UNOFFICIAL COPY 25 RS BR 1546
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service. 1
Section 3. KRS 78.790 is amended to read as follows: 2
(1) (a) The board shall be the trustee of funds pertaining to the County Employees 3
Retirement System created by KRS 78.510 to 78.852, and KRS 61.701, and 4
shall have full and exclusive power to invest and reinvest such assets in 5
accordance with federal law. 6
(b) 1. The board shall establish an investment committee that shall include 7
members of the board with investment experience, elected members, or 8
other members as determined by the board chair, and may also include 9
nonvoting members who have investment expertise. 10
2. The investment committee shall have authority to implement the 11
investment policies adopted by the board and act on behalf of the board 12
on all investment-related matters. 13
(c) 1. For the purposes of this paragraph: 14
a. "Solely in the interest of the members and beneficiaries" shall be 15
determined using only pecuniary factors and shall not include any 16
purpose to further a nonpecuniary interest; 17
b. "Pecuniary factor" means a consideration having a direct and 18
material connection to the financial risk or financial return of an 19
investment; 20
c. A "material connection" is established if there is a substantial 21
likelihood that a reasonable investor would consider it important in 22
determining the financial risk or the financial return of an 23
investment; 24
d. "Nonpecuniary interest" includes but is not limited to an 25
environmental, social, political, or ideological interest which does 26
not have a direct and material connection to the financial risk or 27 UNOFFICIAL COPY 25 RS BR 1546
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financial return of an investment;[ and] 1
e. "Investment manager" shall have the same definition attributed to 2
"investment adviser" under the federal Investment Advisers Act of 3
1940, 15 U.S.C. sec. 80b-2; 4
f. "Shareholder-sponsored proposal" means a proposal by a 5
shareholder included in the proxy statement of an issuer of 6
securities pursuant to 17 C.F.R. sec. 240.14a-8; and 7
g. "Economic analysis" means a written analysis of the economic 8
impact of a shareholder-sponsored proposal, which shall 9
include, at a minimum: 10
i. The subject matter of the shareholder-sponsored proposal; 11
ii. Whether the board of directors of the issuer of securities 12
opposes the shareholder-sponsored proposal and the stated 13
reasons for the opposition; 14
iii. Whether the shareholder-sponsored proposal is consistent 15
with the investment policy of the retirement system; 16
iv. The economic benefits and costs of implementing the 17
shareholder-sponsored proposal, as written, in the long and 18
short term; 19
v. The quantifiable impact of the shareholder-sponsored 20
proposal, as written, on the investment returns of the funds 21
of the retirement system; and 22
vi. An explanation of the modeling, procedures, and processes 23
used to complete the economic analysis. 24
2. A trustee, officer, employee, employee of the Kentucky Public Pensions 25
Authority, investment manager, or other fiduciary, or proxy adviser shall 26
discharge duties with respect to the system: 27 UNOFFICIAL COPY 25 RS BR 1546
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a. Solely in the interest of the members and beneficiaries; 1
b. For the exclusive purpose of providing benefits to members and 2
beneficiaries and paying reasonable expenses of administering the 3
system; 4
c. 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. Impartially, taking into account any differing interests of members 9
and beneficiaries; 10
e. Incurring any costs that are appropriate and reasonable; and 11
f. In accordance with a good-faith interpretation of the federal, state, 12
and common law governing the system and fiduciaries. 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 or 18
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
4. When exercising or recommending a vote on a shareholder-sponsored 23
proposal, a proxy adviser that has entered into an agreement or 24
contracted with the board of trustees of the retirement system acts 25
solely in the interest of the members and beneficiaries under this 26
subsection if: 27 UNOFFICIAL COPY 25 RS BR 1546
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a. The proxy adviser's vote or recommendation is consistent with 1
the recommendation of the board of directors of the issuer of the 2
shares, provided: 3
i. The board of directors of the issuer of the shares is 4
composed of a majority of independent directors; and 5
ii. The recommendation of the board of directors is not for the 6
purpose of furthering a nonpecuniary interest; or 7
b. The proxy adviser's vote or recommendation is inconsistent with 8
the recommendation of the board of directors of the issuer of the 9
shares, provided the proxy adviser conducts and documents an 10
economic analysis demonstrating that the vote or 11
recommendation is solely in the interest of the members and 12
beneficiaries. 13
(d) In addition to the standards of conduct prescribed by paragraph (c) of this 14
subsection: 15
1. All internal investment staff of the Kentucky Public Pensions Authority, 16
and investment consultants shall adhere to the Code of Ethics and 17
Standards of Professional Conduct, and all board trustees shall adhere to 18
the Code of Conduct for Members of a Pension Scheme Governing 19
Body. All codes cited in this subparagraph are promulgated by the CFA 20
Institute; 21
2. Investment managers shall comply with all applicable provisions of the 22
federal Investment Advisers Act of 1940, as amended, and the rules and 23
regulations promulgated thereunder, and shall comply with all other 24
applicable federal securities statutes and related rules and regulations 25
that apply to investment managers; and 26
3. Proxy advisers and proxy voting services shall comply with all 27 UNOFFICIAL COPY 25 RS BR 1546
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applicable provisions of the Investment Advisers Act of 1940, as 1
amended, and the rules and regulations promulgated thereunder, and 2
shall comply with all other federal statutes and related rules and 3
regulations that apply to proxy advisers and proxy voting services. 4
(e) No contract or agreement, whether made in writing or not, shall in any 5
manner waive, restrict, or limit a fiduciary's liability as to any of the duties 6
imposed by this section. Any agreement shall specify that it is made in the 7
Commonwealth and governed by the laws of the Commonwealth. 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 25 RS BR 1546
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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
(7) (a) The board shall adopt written proxy voting guidelines, which are consistent 20
with the fiduciary duties and other requirements of this section. 21
(b) The board shall not adopt the recommendations of a proxy adviser or proxy 22
voting service and shall not allow such proxy adviser or proxy voting service 23
to vote on behalf of the system, unless the proxy adviser or proxy voting 24
service acknowledges in writing and accepts under contract its duties under 25
this section and commits to follow the board-adopted proxy voting guidelines 26
when voting the system's shares in order to comply with the board's fiduciary 27 UNOFFICIAL COPY 25 RS BR 1546
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duties and other responsibilities under this section. 1
(c) All shares held by or on behalf of the system, and which the system is entitled 2
to vote under state, federal, or common laws, shall be voted according to the 3
proxy voting guidelines adopted by the board and subject to the fiduciary 4
duties and other requirements of this section by: 5
1. The board, the investment committee of the board, or an employee or 6
employees of the Authority who are fiduciaries under subsection (1) of 7
this section and are appointed or otherwise authorized by the board; or 8
2. A proxy adviser or proxy voting service that acknowledges in writing 9
and accepts under contract its duties under this section and commits to 10
follow the board-adopted proxy voting guidelines when voting the 11
system's shares in order to comply with the board's fiduciary duties and 12
other responsibilities under this section. 13
(d) All proxy votes shall be reported at least quarterly to the board. For each vote, 14
the report shall provide: 15
1. The vote caption; 16
2. The date of the vote; 17
3. The company's name; 18
4. The vote cast for the system; 19
5. The recommendation of the company's management; and 20
6. If applicable, the recommendation of the proxy adviser or proxy voting 21
service. 22
Section 4. KRS 161.430 is amended to read as follows: 23
(1) (a) The board of trustees shall be the trustee of the funds of the retirement system 24
and shall have full power and responsibility for the purchase, sale, exchange, 25
transfer, or other disposition of the investments and moneys of the retirement 26
system. The board shall, by administrative regulation, establish investment 27 UNOFFICIAL COPY 25 RS BR 1546
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policies and procedures to carry out their responsibilities. 1
(b) 1. The board shall contract with experienced competent investment 2
managers to invest and manage assets of the system. The board may also 3
employ qualified investment staff to advise it on investment matters and 4
to invest and manage assets of the system not to exceed fifty percent 5
(50%) of the system's assets. The board may contract with one (1) or 6
more general investment consultants, as well as specialized investment 7
consultants, to advise it on investment matters. 8
2. All internal investment staff and investment consultants shall adhere to 9
the Code of Ethics and Standards of Professional Conduct, and all board 10
trustees shall adhere to the Code of Conduct for Members of a Pension 11
Scheme Governing Body, promulgated by the CFA Institute. Investment 12
managers shall comply with the federal Investment Advisers Act of 13
1940, as amended, and the rules and regulations promulgated thereunder 14
and shall comply with all other applicable federal securities statutes and 15
related rules and regulations that apply to investment managers. 16
3. No investment manager shall manage more than forty percent (40%) of 17
the funds of the retirement system. 18
(c) The board may appoint an investment committee to act for the board in all 19
matters of investment, subject to the approval of the board of trustees. The 20
board of trustees, in keeping with their responsibilities as trustees and 21
wherever consistent with their fiduciary responsibilities, shall give priority to 22
the investment of funds in obligations calculated to improve the industrial 23
development and enhance the economic welfare of the Commonwealth. 24
Toward this end, the board shall develop procedures for informing the 25
business community of the potential for in-state investments by the retirement 26
fund, accepting and evaluating applications for the in-state investment of 27 UNOFFICIAL COPY 25 RS BR 1546
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funds, and working with members of the business community in executing in-1
state investments which are consistent with the board's fiduciary 2
responsibilities. The board shall include in the criteria it uses to evaluate in-3
state investments their potential for creating new employment opportunities 4
and adding to the total job pool in Kentucky. The board may cooperate with 5
the board of trustees of Kentucky Retirement Systems in developing its 6
program and procedures, and shall report to the Legislative Research 7
Commission annually on its progress in placing in-state investments. The first 8
report shall be submitted by October 1, 1991, and subsequent reports shall be 9
submitted by October 1 of each year thereafter. The report shall include the 10
number of applications for in-state investment received, the nature of the 11
investments proposed, the amount requested, the amount invested, and the 12
percentage of applications which resulted in investments. 13
(2) (a) For the purposes of this subsection: 14
1. "Solely in the interest of the members and annuitants[beneficiaries]" 15
shall be determined using only pecuniary factors and shall not include 16
any purpose to further a nonpecuniary interest; 17
2. "Pecuniary factor" means a consideration having a direct and material 18
connection to the financial risk or financial return of an investment; 19
3. A "material connection" is established if there is a substantial likelihood 20
that a reasonable investor would consider it important in determining the 21
financial risk or the financial return of an investment; 22
4. "Nonpecuniary interest" includes but is not limited to an environmental, 23
social, political, or ideological interest which does not have a direct and 24
material connection to the financial risk or financial return of an 25
investment;[ and] 26
5. "Investment manager" and "investment consultant" shall have the same 27 UNOFFICIAL COPY 25 RS BR 1546
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definition attributed to "investment adviser" under the federal 1
Investment Advisers Act of 1940, 15 U.S.C. sec. 80b-2; 2
6. Shareholder-sponsored proposal" means a proposal by a shareholder 3
included in the proxy statement of an issuer of securities pursuant to 4
17 C.F.R. sec. 240.14a-8; and 5
7. "Economic analysis" means a written analysis of the economic impact 6
of a shareholder-sponsored proposal, which shall include, at a 7
minimum: 8
a. The subject matter of the shareholder-sponsored proposal; 9
b. Whether the board of directors of the issuer of securities opposes 10
the shareholder-sponsored proposal and the stated reasons for 11
the opposition; 12
c. Whether the shareholder-sponsored proposal is consistent with 13
the investment policy of the retirement system; 14
d. The economic benefits and costs of implementing the 15
shareholder-sponsored proposal, as written, in the long and 16
short term; 17
e. The quantifiable impact of the shareholder-sponsored proposal, 18
as written, on the investment returns of the funds of the 19
retirement system; and 20
f. An explanation of the modeling, procedures, and processes used 21
to complete the economic analysis. 22
(b) The board members, investment managers, investment consultants, or other 23
fiduciaries, and proxy advisers shall discharge their duties with respect to the 24
assets of the system solely in the interests of the active contributing members 25
and annuitants and: 26
1. For the exclusive purpose of providing benefits to members and 27 UNOFFICIAL COPY 25 RS BR 1546
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annuitants and defraying reasonable expenses of administering the 1
system; 2
2. With the care, skill, prudence, and diligence under the circumstances 3
then prevailing that a prudent person acting in a like capacity and 4
familiar with these matters would use in the conduct of an enterprise of 5
a like character and with like aims; 6
3. By diversifying the investments of the plan so as to minimize the risk of 7
large losses, unless under the circumstances it is clearly prudent not to 8
do so; and 9
4. In accordance with the federal, state, and common laws, administrative 10
regulations, and other instruments governing the system and fiduciaries. 11
(c) Evidence that a fiduciary has considered or acted on a nonpecuniary interest 12
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
(d) When exercising or recommending a vote on a shareholder-sponsored 21
proposal, a proxy adviser that has entered into an agreement or contracted 22
with the board of trustees of the retirement system acts solely in the interest 23
of the members and annuitants under this subsection if: 24
1. The proxy adviser's vote or recommendation is consistent with the 25
recommendation of the board of directors of the issuer of the shares, 26
provided: 27 UNOFFICIAL COPY 25 RS BR 1546
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a. The board of directors of the issuer of the shares is composed of 1
a majority of independent directors; and 2
b. The recommendation of the board of directors is not for the 3
purpose of furthering a nonpecuniary interest; or 4
2. The proxy adviser's vote or recommendation is inconsistent with the 5
recommendation of the board of directors of the issuer of the shares, 6
provided the proxy adviser conducts and documents an economic 7
analysis demonstrating that the vote or recommendation is solely in 8
the interest of the members and annuitants. 9
(3) (a) In choosing and contracting for professional investment management and 10
consulting services, the board shall do so prudently and in the interest of the 11
members and annuitants. Any contract that the board makes with an 12
investment manager shall set forth policies and guidelines of the board with 13
reference to standard rating services and specific criteria for determining the 14
quality of investments. Expenses directly related to investment management 15
and consulting services shall be financed from the guarantee fund in amounts 16
approved by the board. 17
(b) An investment manager or consultant appointed under this section shall 18
acknowledge in writing his or her fiduciary responsibilities to the fund. To be 19
eligible for appointment, an investment manager, consultant, or an affiliate, 20
shall be: 21
1. Registered under the Federal Investment Advisers Act of 1940; or 22
2. A bank as defined by that Act; or 23
3. An insurance company qualified to perform investment services under 24
the laws of more than one (1) state. 25
(c) Proxy advisers and proxy voting services shall comply with all applicable 26
provisions of the Investment Advisers Act of 1940, as amended, and the rules 27 UNOFFICIAL COPY 25 RS BR 1546
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and regulations promulgated thereunder, and shall comply with all other 1
federal statutes and related rules and regulations that apply to proxy advisers 2
and proxy voting services. 3
(d) No contract or agreement, whether made in writing or not, shall in any 4
manner waive, restrict, or limit a fiduciary's liability as to any of the duties 5
imposed by this section. Any agreement shall specify that it is made in the 6
Commonwealth of Kentucky and governed by the laws of the Commonwealth 7
of Kentucky. 8
(4) No investment or disbursement of funds shall be made unless authorized by the 9
board of trustees, except that the board, in order to ensure timely market 10
transactions, shall establish investment guidelines and may permit its staff and 11
investment managers who are employed or under contract with the board pursuant 12
to this section to execute purchases and sales of investment instruments within 13
those guidelines without prior board approval. 14
(5) In discharging his or her administrative duties under this section, a trustee shall 15
strive to administer the retirement system in an efficient and cost-effective manner 16
for the taxpayers of the Commonwealth of Kentucky. 17
(6) Notwithstanding any other provision of KRS 161.220 to 161.716, no funds of the 18
Teachers' Retirement System, including fees and commissions paid to an 19
investment manager, private fund, or company issuing securities, who manages 20
systems assets, shall be used to pay fees and commissions to placement agents. For 21
purposes of this subsection, "placement agent" means a third-party individual, who 22
is not an employee, or firm, wholly or partially owned by the entity being hired, 23
who solicits investments on behalf of an investment manager, private fund, or 24
company issuing securities. 25
(7) All contracts for the investment or management of assets of the system shall not be 26
subject to KRS Chapters 45, 45A, 56, and 57. Instead, the board shall conduct the 27 UNOFFICIAL COPY 25 RS BR 1546
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following process to develop and adopt an investment procurement policy with 1
which all prospective contracts for the investment or management of assets of the 2
system shall comply: 3
(a) On or before July 1, 2017, the board shall consult with the secretary of the 4
Finance and Administration Cabinet or his or her designee to develop an 5
investment procurement policy, which shall be written to meet best practices 6
in investment management procurement; 7
(b) Thirty (30) days prior to adoption, the board shall tender the preliminary 8
investment procurement policy to the secretary of the Finance and 9
Administration Cabinet or his or her designee for review and comment; 10
(c) Upon receipt of comments from the secretary of the Finance and 11
Administration Cabinet or his or her designee, the board shall choose to adopt 12
or not adopt any recommended changes; 13
(d) Upon adoption, the board shall tender the final investment procurement policy 14
to the secretary of the Finance and Administration Cabinet or his or her 15
designee; 16
(e) No later than thirty (30) days after receipt of the investment procurement 17
policy, the secretary or his or her designee shall certify whether the board's 18
investment procurement policy meets or does not meet best practices for 19
investment management procurement; and 20
(f) Any amendments to the investment procurement policy shall adhere to the 21
requirements set forth by paragraphs (b) to (e) of this subsection. 22
(8) (a) The board shall adopt written proxy voting guidelines which are consistent 23
with the fiduciary duties and other requirements of this section. 24
(b) The board shall not adopt the recommendations of a proxy adviser or proxy 25
voting service and shall not allow such proxy adviser or proxy voting service 26
to vote on behalf of the system, unless the proxy adviser or proxy voting 27 UNOFFICIAL COPY 25 RS BR 1546
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service acknowledges in writing and accepts under contract its duties under 1
this section and commits to follow the board-adopted proxy voting guidelines 2
when voting the system's shares in order to comply with the board's fiduciary 3
duties and other responsibilities under this section. 4
(c) All shares held by or on behalf of the system, and which the system is entitled 5
to vote under state, federal, or common laws, shall be voted according to the 6
proxy voting guidelines adopted by the board and subject to the fiduciary 7
duties and other requirements of this section by: 8
1. The board, the investment committee of the board, or an employee or 9
employees of the system who are fiduciaries under this section and are 10
appointed or otherwise authorized by the board; or 11
2. A proxy adviser or proxy voting service that acknowledges in writing 12
and accepts under contract its duties under this section and commits to 13
follow the board-adopted proxy voting guidelines when voting the 14
system's shares in order to comply with the board's fiduciary duties and 15
other responsibilities under this section. 16
(d) All proxy votes shall be reported at least quarterly to the board. For each vote, 17
the report shall provide: 18
1. The vote caption; 19
2. The date of the vote; 20
3. The company's name; 21
4. The vote cast for the system; 22
5. The recommendation of the company's management; and 23
6. If applicable, the recommendation of the proxy adviser or proxy voting 24
service. 25