88R4751 JCG-F
By: Hughes S.B. No. 1446
A BILL TO BE ENTITLED
AN ACT
relating to the fiduciary responsibility of the governing body of
the public retirement systems in this state and the investment
agents acting on behalf of those systems.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
SECTION 1. Section 802.001, Government Code, is amended by
adding Subdivisions (1-b), (2-b), (2-c), and (2-d) to read as
follows:
(1-b) "Financial factor" means a factor taken into
consideration when making investment decisions that a prudent
investor would expect to have a material effect on the financial
risk or return of an investment based on appropriate investment
horizons and consistent with the objectives of any controlling
investment plan.
(2-b) "Investment agent" means any person charged with
managing or supervising the investments of a public retirement
system as an investment manager or proxy advisor.
(2-c) "Investment manager" means a person who for
compensation provides professional investment management services
and may include a person eligible for appointment as an investment
manager under Section 802.204.
(2-d) "Proxy advisor" means a person who for
compensation provides corporate governance ratings, proxy research
and analyses, or other similar services to the shareholders of a
publicly traded entity, or other interested parties, for the
purpose of advising a shareholder on how to vote on measures under
consideration by shareholders.
SECTION 2. Section 802.002(a), Government Code, is amended
to read as follows:
(a) Except as provided by Subsection (b), the Employees
Retirement System of Texas, the Teacher Retirement System of Texas,
the Texas County and District Retirement System, the Texas
Municipal Retirement System, and the Judicial Retirement System of
Texas Plan Two are exempt from Sections 802.101(a), 802.101(b),
802.101(d), 802.102, 802.103(a), 802.103(b), 802.2015, 802.2016,
802.202, [802.203,] 802.204, 802.205, 802.206, and 802.207. The
Judicial Retirement System of Texas Plan One is exempt from all of
Subchapters B and C except Sections 802.104 and 802.105. The
optional retirement program governed by Chapter 830 is exempt from
all of Subchapters B and C except Section 802.106.
SECTION 3. Section 802.203(a), Government Code, is amended
to read as follows:
(a) In making and supervising investments of the reserve
fund of a public retirement system, an investment agent [manager]
or the governing body of a public retirement system shall discharge
its duties solely in the financial interest of the participants and
beneficiaries:
(1) for the exclusive purposes of:
(A) providing financial benefits to participants
and their beneficiaries; and
(B) defraying reasonable expenses of
administering the system;
(2) with the care, skill, prudence, and diligence
under the prevailing circumstances that a prudent person acting in
a like capacity and familiar with matters of the type would use in
the conduct of an enterprise with a like character and like aims;
(3) by diversifying the investments of the system to
minimize the risk of large financial losses, unless under the
circumstances it is clearly prudent not to do so; and
(4) in accordance with the documents and instruments
governing the system to the extent that the documents and
instruments are consistent with this subchapter.
SECTION 4. Subchapter C, Chapter 802, Government Code, is
amended by adding Sections 802.2031 through 802.2037 to read as
follows:
Sec. 802.2031. INVESTMENT STANDARDS: OBLIGATION TO
DISCHARGE DUTY BASED SOLELY ON CERTAIN FINANCIAL INTERESTS. (a)
For purposes of discharging its duties solely in the financial
interest of participants and beneficiaries under Section
802.203(a) and except as provided by Chapters 808, 809, and 2270 and
Chapter 2274, as added by Chapters 529 (S.B. 13), 530 (S.B. 19), 833
(S.B. 4), and 975 (S.B. 2116), Acts of the 87th Legislature, Regular
Session, 2021, the governing body of the public retirement system
or an investment agent:
(1) shall take into account only financial factors
when discharging its duties with respect to a plan administered by
the system; and
(2) may not take any action, or consider any factor,
with a purpose of furthering social, political, or ideological
interests.
(b) In accordance with this section and Section 802.203(a),
all shares held directly or indirectly by or on behalf of a public
retirement system or the system's participants and beneficiaries,
as applicable, shall be voted solely based on financial factors.
(c) This section does not prohibit an investment agent from
furthering any social, political, or ideological interest when
managing the assets of a person who is not a public retirement
system of the state or a political subdivision, or of an agency or
instrumentality of the state or political subdivision.
(d) To the extent of a conflict between this section and any
other law, this section prevails.
Sec. 802.2032. CONDUCT CONSIDERED A VIOLATION OF FIDUCIARY
DUTY; EVIDENCE. (a) The governing body of a public retirement
system or an investment agent may reasonably be determined to have
violated Section 802.203(a) if the governing body or investment
agent takes an action or considers a factor in managing assets of a
public retirement system that furthers, through company
engagement, board or shareholder votes, or otherwise, any social,
political, or ideological interest beyond what federal or state law
requires.
(b) Evidence of a violation of Section 802.203(a) may
include any of the following actions taken or work product produced
by the governing body of a public retirement system or investment
agent in the scope of managing assets on behalf of a public
retirement system:
(1) branding, advertising, statements, explanations,
reports, letters to clients, communications with portfolio
companies, statements of principles, or commitments; or
(2) participation in, affiliation with, or status as a
signatory to any coalition, initiative, joint statement of
principles, or agreement.
Sec. 802.2033. QUALIFICATIONS OF INVESTMENT AGENT;
COMMITMENT IN WRITING REQUIRED. (a) The assets of a public
retirement system may not be entrusted to an investment agent
unless that agent has a demonstrated practice of following, and
commits in writing to follow, guidelines when engaging with
portfolio companies and voting shares or proxies that match its and
the governing body's fiduciary responsibility under Section
802.203, including the duty under Section 802.2031 to take into
account only financial factors when discharging its duties with
respect to the system's plan.
(b) The governing body of a public retirement system may not
grant proxy voting authority to an investment agent unless:
(1) the investment agent offers a benchmark policy for
proxy voting advice the sole goal of which is to maximize financial
return and the grant of proxy voting authority requires the
investment agent to follow that benchmark policy; or
(2) the governing body develops a publicly available
policy on granting proxy voting authority and the grant of
authority requires the investment agent to follow that policy.
Sec. 802.2034. PROXY VOTING: PUBLIC NOTICE AND ANNUAL
REPORT. (a) Subject to Subsection (b), the governing body of a
public retirement system shall post on the system's publicly
available Internet website how a proxy advisor or other investment
agent will cast a proxy vote made on behalf of the system or the
system's participants and beneficiaries, if possible, not later
than the earlier of:
(1) the seventh day before the date a proxy vote is to
be cast; or
(2) 48 hours after receiving a vote recommendation
from the proxy advisor or investment agent on the proxy vote.
(b) A public retirement system shall post on the system's
publicly available Internet website how a proxy advisor or other
investment agent will cast a proxy vote made on behalf of the system
or the system's participants and beneficiaries not later than 24
hours before the proxy vote is to be cast.
(c) Not later than November 1 of each year, the governing
body of a public retirement system shall tabulate all proxy votes
made on behalf of the system during the preceding state fiscal year
and report the votes to the State Pension Review Board. For each
vote, the report must contain a vote caption, the system's vote, the
recommendation, if any, of the company holding the election, and,
as applicable, the recommendation of the investment agent. The
State Pension Review Board shall post reports submitted under this
subsection to the board's publicly accessible Internet website.
Sec. 802.2035. ANNUAL REPORT TO STATE PENSION REVIEW BOARD
ON CERTAIN INVESTMENT RELATIONSHIPS. (a) Not later than November 1
of each year, the governing body of a public retirement system shall
submit a report to the State Pension Review Board that details
investment relationships maintained by the system. The report must
include information regarding each:
(1) subject to Subsection (b), limited partnership
with which the system is affiliated; and
(2) subject to Subsection (c), investment manager or
consulting firm with which the system contracts to provide
investment management services.
(b) For purposes of Subsection (a)(1), the report must
contain:
(1) the name of each limited partnership;
(2) the date on which the retirement system became
affiliated with the limited partnership;
(3) the amount of capital:
(A) committed and actually contributed to the
limited partnership; and
(B) distributed from the limited partnership;
(4) any costs or fees paid or owed to the limited
partnership during the period of affiliation, categorized by state
fiscal year; and
(5) the annualized rate of return on capital invested
in the limited partnership.
(c) For purposes of Subsection (a)(2), regarding each
contract with an investment manager or consulting firm providing
investment manager services, the report must contain:
(1) the net value of the assets being managed under the
contract;
(2) the nature of the services provided;
(3) the performance of the investment manager or
consulting firm, categorized by state fiscal year; and
(4) any costs or fees charged under the contract,
categorized by state fiscal year.
(d) The State Pension Review Board shall post the report
received under this section to the board's publicly accessible
Internet website.
Sec. 802.2036. INVESTIGATION AND INJUNCTION BY ATTORNEY
GENERAL. (a) If the attorney general has reason to believe that a
person engaged in or is engaging in an act that violates Section
802.203(a), including an act described by Section 802.2032, or
Section 802.2033, 802.2034, or 802.2035, the attorney general may:
(1) require the person to file, in a form and manner
prescribed by the attorney general, a statement or report in
writing, under oath, as to:
(A) all the facts and circumstances concerning
the violation; or
(B) any other relevant information the attorney
general considers necessary;
(2) examine any person under oath in connection with
the violation;
(3) examine any record, book, document, account,
paper, sample, or other material in connection with the violation;
or
(4) apply to a district court to issue a subpoena for
any record, book, document, account, paper, sample, or other
material in connection with the violation and retain the material
until the completion of all related proceedings taken under this
section.
(b) The attorney general may bring an action in the name of
the state in district court to restrain or enjoin a person from
violating Section 802.203(a), 802.2033, 802.2034, or 802.2035.
Sec. 802.2037. SUSPENSION OF TRUSTEE; INTERIM APPOINTMENT.
(a) Any trustee of a governing body of a public retirement system
against whom an action is pending under Section 802.003 or 802.2036
for a violation of Section 802.203(a), 802.2033, or 802.2035 is
suspended from the governing body until either the trustee's term
of office expires or the action is dismissed without a finding that
the trustee violated the relevant section. If the term of the
suspended trustee's office expires before the action is dismissed,
the office is considered vacant as of the day the trustee's term
expires.
(b) During the period a trustee is suspended from the
governing body of a public retirement system under Subsection (a),
the trustee's position on the body is considered vacated. Subject
to Subsection (c), an interim trustee may be appointed or otherwise
selected to serve in the vacated position.
(c) An interim trustee must comply with any qualifications
required by the governing law of the public retirement system
applicable to the trustee position suspended and must be selected
in the manner prescribed by that law for filling a vacancy. If the
governing law does not specify any qualifications, to be eligible
for appointment as an interim trustee a person:
(1) must demonstrate financial expertise and have
substantial employment experience in private business or industry
with broad investment management experience, preferably in the
investment of public funds; and
(2) may not be a member or annuitant of the system on
whose governing body the trustee will serve.
SECTION 5. Section 815.307, Government Code, is amended to
read as follows:
Sec. 815.307. DUTY OF CARE. The assets of the retirement
system shall be invested and reinvested without distinction as to
their source in accordance with Section 67, Article XVI, Texas
Constitution. [A determination of whether the board of trustees
has exercised prudence with respect to an investment decision must
be made taking into consideration the investment of all assets of
the trust or all assets of the collective investment vehicle, as
applicable, over which the board has management and control, rather
than considering the prudence of a single investment of the trust or
the collective investment vehicle, as applicable.]
SECTION 6. Section 840.303, Government Code, is amended to
read as follows:
Sec. 840.303. DUTY OF CARE. The assets of the retirement
system shall be invested and reinvested without distinction as to
their source in accordance with Section 67, Article XVI, Texas
Constitution. [A determination of whether the board of trustees
has exercised prudence with respect to an investment decision must
be made taking into consideration the investment of all assets of
the trust or all assets of the collective investment vehicle, as
applicable, over which the board has management and control, rather
than considering the prudence of a single investment of the trust or
the collective investment vehicle, as applicable.]
SECTION 7. Section 855.303, Government Code, is amended to
read as follows:
Sec. 855.303. PRUDENCE REGARDING INVESTMENTS. [A
determination of whether the board of trustees has exercised
prudence in an investment decision must be made by considering the
investment of all of the assets of the trust over which the board
has management and control, rather than by considering the prudence
of a single investment.] In making investments for the retirement
system, the board of trustees shall exercise the judgment and care,
under the circumstances, that persons of prudence, discretion, and
intelligence exercise in the management of their own affairs,
considering the probable income from the securities and probable
safety of their capital.
SECTION 8. Section 865.008(b), Government Code, is amended
to read as follows:
(b) The assets of the pension system shall be invested and
reinvested in accordance with Section 67, Article XVI, Texas
Constitution. [A determination of whether the state board has
exercised prudence with respect to an investment decision must be
made, taking into consideration the investment of all assets of the
trust over which the state board has management and control rather
than considering the prudence of a single investment.]
SECTION 9. Section 7.04(b), Chapter 824 (S.B. 817), Acts of
the 73rd Legislature, Regular Session, 1993 (Article 6243o,
Vernon's Texas Civil Statutes), is amended to read as follows:
(b) The board shall diversify the investment of the fund to
minimize the risk of large losses unless under the circumstances it
is clearly prudent not to do so. [In determining whether the board
has exercised prudence concerning an investment decision, the
investment of all assets of the fund, rather than the prudence of a
single investment of the fund, shall be considered.]
SECTION 10. Section 6.04(b), Chapter 1332 (S.B. 1568), Acts
of the 75th Legislature, Regular Session, 1997 (Article 6243q,
Vernon's Texas Civil Statutes), is amended to read as follows:
(b) The board shall diversify the investment of the reserve
funds to minimize the risk of large losses unless under the
circumstances it is clearly prudent not to do so. [In determining
whether the board has exercised prudence concerning an investment
decision, the investment of all assets of the funds, rather than the
prudence of a single investment of the funds, shall be considered.]
SECTION 11. Section 802.203(d), Government Code, is
repealed.
SECTION 12. The changes in law made by this Act apply only
to a contract entered into on or after the effective date of this
Act. A contract entered into before the effective date of this Act
is governed by the law in effect on the date the contract was
entered into, and the former law is continued in effect for that
purpose.
SECTION 13. It is the intent of the 88th Legislature,
Regular Session, 2023, that the amendments made by this Act be
harmonized with another Act of the 88th Legislature, Regular
Session, 2023, relating to nonsubstantive additions to and
corrections in enacted codes.
SECTION 14. This Act takes effect September 1, 2023.