HB-5323, As Passed House, February 17, 2010

SUBSTITUTE FOR

HOUSE BILL NO. 5323

A bill to amend 1965 PA 314, entitled

"Public employee retirement system investment act,"

by amending sections 13, 15, 19, 20c, 20d, and 20k (MCL 38.1133,

38.1135, 38.1139, 38.1140c, 38.1140d, and 38.1140k), section 13 as

amended by 2009 PA 84, section 15 as amended and section 20k as

added by 1996 PA 485, sections 19 and 20d as amended by 2008 PA

425, and section 20c as amended by 2000 PA 307.

THE PEOPLE OF THE STATE OF MICHIGAN ENACT:

Sec. 13. (1) The provisions of this act shall supersede any

investment authority previously granted to a system under any other

law of this state.

(2) The assets of a system may be invested, reinvested, held

in nominee form, and managed by an investment fiduciary subject to

the terms, conditions, and limitations provided in this act. An

investment fiduciary of a defined contribution plan may arrange for

1 or more investment options to be directed by the participants of

the defined contribution plan. The limitations on the percentage of

total assets for investments provided in this act do not apply to a

defined contribution plan in which a participant directs the

investment of the assets in his or her individual account, and that

participant is not considered an investment fiduciary under this

act.

(3) An investment fiduciary shall discharge his or her duties

solely in the interest of the participants and the beneficiaries,

and shall do all of the following:

(a) Act with the same care, skill, prudence, and diligence

under the circumstances then prevailing that a prudent person

acting in a similar capacity and familiar with those matters would

use in the conduct of a similar enterprise with similar aims.

(b) Act with due regard for the management, reputation, and

stability of the issuer and the character of the particular

investments being considered.

benefits to participants and participants' beneficiaries, and of

defraying reasonable expenses of investing the assets of the

system.

(d) Give appropriate consideration to those facts and

circumstances that the investment fiduciary knows or should know

are relevant to the particular investment or investment course of

action involved, including the role the investment or investment

course of action plays in that portion of the system's investments

for which the investment fiduciary has responsibility; and act

accordingly. For purposes of this subsection, "appropriate

consideration" includes, but is not limited to, a determination by

the investment fiduciary that a particular investment or investment

course of action is reasonably designed, as part of the investments

of the system, to further the purposes of the system, taking into

consideration the risk of loss and the opportunity for gain or

other return associated with the investment or investment course of

action; and consideration of the following factors as they relate

to the investment or investment course of action:

(i) The diversification of the investments of the system.

(ii) The liquidity and current return of the investments of the

system relative to the anticipated cash flow requirements of the

system.

(iii) The projected return of the investments of the system

relative to the funding objectives of the system.

(e) Give appropriate consideration to investments that would

enhance the general welfare of this state and its citizens if those

investments offer the safety and rate of return comparable to other

investments permitted under this act and available to the

investment fiduciary at the time the investment decision is made.

(f) Prepare and maintain written objectives, policies, and

strategies with clearly defined accountability and responsibility

for implementing and executing the system's investments.

(g) Monitor the investment of the system's assets with regard

to the limitations on those investments pursuant to this act. Upon

discovery that an investment causes the system to exceed a

limitation prescribed in this act, the investment fiduciary shall

reallocate assets in a prudent manner in order to comply with the

prescribed limitation.

(4) An investment fiduciary who is an investment fiduciary of

any of the following shall comply with the divestment from terror

act, 2008 PA 234, MCL 129.291 to 129.301, in making investments

under this act:

(a) The Tier 1 retirement plan available under the state

employees' retirement act, 1943 PA 240, MCL 38.1 to 38.69.

(b) The Tier 1 retirement plan available under the judges

retirement act of 1992, 1992 PA 234, MCL 38.2101 to 38.2670.

police retirement act of 1986, 1986 PA 182, MCL 38.1601 to 38.1648.

(d) The public school employees retirement system created

under the public school employees retirement act of 1979, 1980 PA

300, MCL 38.1301 to 38.1408.

(5) An investment fiduciary may use a portion of the income of

the system to defray the costs of investing, managing, and

protecting the assets of the system, including providing

professional training and education; may retain investment and all

other services necessary for the conduct of the affairs of the

system, including investment advisors, consultants, custodians,

auditors, attorneys, actuaries, administrators, and physicians; and

may pay reasonable compensation for those services. Subject to an

annual appropriation by the legislature, a deduction from the

income of a state administered system resulting from the payment of

those costs shall be made.

(6) Before any investment services are provided, all

investment service providers shall provide the investment fiduciary

of the system with complete written disclosure of all fees or other

compensation associated with their relationship with the system.

After investment services are provided to the investment fiduciary

of the system, all investment service providers shall provide on an

annual basis written disclosure of all fees including, but not

limited to, commissions, 12b-1 and related fees, compensation paid

or to be paid to third parties, and any other compensation paid by

the system to the investment fiduciary of the system. As used in

this subsection, "investment service provider" means any

individual, third-party agent or consultant, or company which

receives direct or indirect compensation for consulting, managing,

brokerage, or custody of the system's assets. A retirement system

is not an investment service provider.

(7) ~~(6)~~ The system shall be a separate and distinct trust fund

and the assets of the system shall be for the exclusive benefit of

the participants and their beneficiaries and of defraying

reasonable expenses of investing the assets of the system. With

respect to a system, an investment fiduciary shall not cause the

system to engage in a transaction if he or she knows or should know

that the transaction is any of the following, either directly or

indirectly:

(a) A sale or exchange or a leasing of any property from the

system to a party in interest for less than the fair market value,

or from a party in interest to the system for more than the fair

market value.

(b) A lending of money or other extension of credit from the

system to a party in interest without the receipt of adequate

security and a reasonable rate of interest, or from a party in

interest to the system with the provision of excessive security or

at an unreasonably high rate of interest.

political subdivision sponsoring the system of any assets of the

system for less than adequate consideration.

(d) The furnishing of goods, services, or facilities from the

system to a party in interest for less than adequate consideration,

or from a party in interest to the system for more than adequate

consideration.

(8) ~~(7)~~ With respect to a system subject to this act, an

investment fiduciary shall not do any of the following:

(a) Deal with the assets of the system in his or her own

interest or for his or her own account.

(b) In his or her individual or any other capacity act in any

transaction involving the system on behalf of a party whose

interests are adverse to the interests of the system or the

interest of its participants or participants' beneficiaries.

account from any party dealing with the system in connection with a

transaction involving the assets of the system.

(9) ~~(8)~~ This section does not prohibit an investment fiduciary

from doing any of the following:

(a) Receiving any benefit to which he or she may be entitled

as a participant or participant's beneficiary of the system.

(b) Receiving any reimbursement of expenses properly and

actually incurred in the performance of his or her duties for the

system.

officer, employee, agent, or other representative of the political

subdivision sponsoring the system.

(d) Receiving agreed upon compensation for services from the

system.

(10) ~~(9)~~ Except for an employee of a system, this state, or

the political subdivision sponsoring a system, when acting in the

capacity as an investment fiduciary, an investment fiduciary who is

qualified under section 12c(1)(b) shall meet 1 of the following

requirements:

(a) Be a registered investment adviser under either the

investment advisers act of 1940, 15 USC 80b-1 to 80b-21, the

uniform securities act, 1964 PA 265, MCL 451.501 to 451.818, or the

uniform securities act (2002), 2008 PA 551, MCL 451.2101 to

451.2703.

(b) Be a bank as defined under the investment advisers act of

1940, 15 USC 80b-1 to 80b-21.

(11) ~~(10)~~ An investment fiduciary shall not invest in a debt

instrument issued by a foreign country that has been identified by

the United States state department as engaging in or sponsoring

terrorism.

(12) ~~(11)~~ A system shall annually publish and make available

to the plan participants and beneficiaries a list of all expenses

paid by soft dollars.

Sec. 15. An investment fiduciary may invest in investment

companies registered under the investment company act of 1940,

title I of chapter 686, 54 Stat. 789, 15 ~~U.S.C.~~ USC 80a-1 to 80a-

64. The management company of the investment company shall have

been in operation for at least 5 years and shall have assets under

management of more than $500,000,000.00. An investment company may

be established as a limited partnership, corporation, limited

liability company, trust, or other organizational entity for which

the liability of an investor does not exceed the amount of the

investment under the laws of the United States or the applicable

laws of the state, district, territory, or foreign country under

which the investment company was established. An investment in an

investment company shall be considered an investment in the

underlying assets for all purposes under this act.

Sec. 19. (1) An investment fiduciary may invest up to 5% 10%

of a system's assets in publicly or privately issued real estate

investment trusts or in real or personal property otherwise

qualified pursuant to section 15, 16, or 20c.

(2) In addition to investments authorized under subsection

(1), an investment fiduciary of a system having assets of more than

$100,000,000.00 may do any of the following:

(a) Invest in, buy, sell, hold, improve, lease, or acquire by

foreclosure or an agreement in lieu of foreclosure, real or

personal property or an interest in real or personal property.

(b) Develop, maintain, operate, or lease the real or personal

property referred to in subdivision (a).

corporations, limited liability companies, trusts, or other

organizational entities for which liability of an investor cannot

exceed the amount of the investment under the laws of the United

States or of any state, district, or territory of the United States

or foreign country. The limited partnership, corporation, limited

liability company, trust, or other organizational entity may invest

in, buy, sell, hold, develop, improve, lease, or operate real or

personal property, or originate a mortgage or invest in an annuity

separate account that invests in real or personal property to hold

title to, improve, lease, manage, develop, maintain, or operate

real or personal property whether currently held or acquired after

the effective date of the amendatory act that added this

subdivision. An entity formed under this subdivision has the right

to exercise all powers granted to the entity by the laws of the

jurisdiction of formation, including, but not limited to, the power

to borrow money in order to provide additional capital to benefit

and increase the overall return on the investment held by the

entity.

(d) Invest in investments otherwise qualified pursuant to

subsection (1).

(3) Except as otherwise provided in this section, the

aggregate investments made under subsection (2) shall not exceed 5%

10% of the assets of the system. The purchase price of an

investment made under this section shall not exceed the appraised

value of the real or personal property.

(4) If the investment fiduciary of a system is the state

treasurer, investments described in subsection (1) or (2) may

exceed 5% 10% of the assets of the system.

(5) An investment qualified under this section in which the

underlying asset is an interest in real or personal property

constitutes an investment under this section for the purpose of

meeting the asset limitations contained in this act. This

subsection applies even though the investment may be qualified

elsewhere in this act. Notwithstanding this subsection, an

investment fiduciary may designate a real estate investment trust

which satisfies the requirements of section 14(2) as an investment

qualified under this section or as an investment in stock under

section 14.

Sec. 20c. (1) ~~A financial institution, a trust company, a~~

~~management company qualified under section 15, or any affiliate of~~

~~a person described in this section if that affiliate qualifies as~~

~~an investment fiduciary under section 13(8)(a), retained to act as~~

an An investment fiduciary may invest the assets of a system in any

collective investment fund, common trust fund, or pooled fund that

is established and maintained for investment of those assets ~~by the~~

~~financial institution, trust company, or management company~~ under

federal or state statutes or rules or regulations or an applicable

foreign law. The investment fiduciary of the collective investment

fund, common trust fund, or pooled fund shall be a financial

institution, a trust company, a management company qualified under

section 13(10)(a), or an affiliate of 1 of these entities if that

affiliate qualifies as an investment fiduciary under section

13(10)(a). The collective investment fund, common trust fund, or

pooled fund may be established as a limited partnership,

corporation, limited liability company, trust, or other

organizational entity for which liability of any investor does not

exceed the amount of the investment under the laws of the United

States or the laws of the state, district, territory, or foreign

country that applied to the organization of the collective

investment fund, common trust fund, or pooled fund. A pool in which

the state treasurer has administrative or investment authority and

the investment pools of the municipal employees retirement system

and retirement board created under the municipal employees

retirement act of 1984, 1984 PA 427, MCL 38.1501 to 38.1558, are

not pooled funds for purposes of this section. An investment in a

collective investment fund, common trust fund, or pooled fund shall

be considered an investment in the underlying assets of that fund

for all purposes under this act.

(2) As used in this section, "financial institution" means a

state or nationally chartered bank or a state or federally

chartered savings and loan association, savings bank, or credit

union whose deposits are insured by an agency of the United States

government and which maintains a principal office or branch office

located in this state under the laws of this state or the United

States.

Sec. 20d. (1) An investment fiduciary of a system having

assets of less than $250,000,000.00 may invest not more than 5% 15%

of the system's assets in investments not otherwise qualified under

this act, except as qualified in section 19a, whether the

investments are similar or dissimilar to those specified in this

act.

(2) An investment fiduciary of a system having assets of

$250,000,000.00 or more but less than $1,000,000,000.00 may invest

not more than ~~10%~~ 20% of the system's assets in investments

described in subsection (1).

(3) An investment fiduciary of a system having assets of

$1,000,000,000.00 or more may invest not more than ~~15%~~ 25% of the

system's assets in investments described in subsection (1).

(4) An investment fiduciary of a system who is the state

treasurer may invest not more than ~~20%~~ 30% of the system's assets

in investments described in subsection (1).

(5) If an investment described in subsection (1) is

subsequently determined to be permitted under another section of

this act, then the investment shall no longer be included under

this section.

(6) This section shall not be used to exceed a percentage of

total assets limitation for an investment provided in any other

section of this act.

Sec. 20k. (1) Notwithstanding a percentage of total assets

limitation for an investment provided in any other section of this

act, an investment fiduciary may invest not more than 20% of a

system's assets in foreign securities. Except as otherwise provided

in this act, an investment fiduciary shall not do any of the

following:

(a) Invest in more than 5% of the outstanding foreign

securities of any 1 issuer.

(b) Invest more than 5% of a system's assets in the foreign