September 9, 2009, Introduced by Reps. Hammel, Mayes, Roy Schmidt, Robert Jones, Clemente, Geiss, Neumann, Walsh, Marleau, Valentine, LeBlanc, Constan, Bettie Scott, Gregory, Gonzales, Liss, Switalski, Dean, Haugh, Scripps, Meadows and Kowall and referred to the Committee on Banking and Financial Services.
A bill to amend 1965 PA 314, entitled
"Public employee retirement system investment act,"
by amending sections 13, 15, 17, 19, 19a, 20c, 20d, and 20j (MCL
38.1133, 38.1135, 38.1137, 38.1139, 38.1139a, 38.1140c, 38.1140d,
and 38.1140j), sections 13, 19, and 20d as amended and section 19a
as added by 2008 PA 425, section 15 as amended and section 20j as
added by 1996 PA 485, and sections 17 and 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.
(c) Make investments for the exclusive purposes of providing
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.
(c) The state police retirement system created under the state
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. All investment service providers shall
provide the investment fiduciary of the system with complete
written disclosure of all fees associated with their relationship
with the system and their provision of services to the system
before any services are provided. After services are provided, all
investment service providers shall provide written disclosures to
the investment fiduciary of the system on an annual basis.
(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.
(c) A transfer to, or use by or for the benefit of, the
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.
(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.
(c) Receive any consideration for his or her own personal
account from any party dealing with the system in connection with a
transaction involving the assets of the system.
(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.
(c) Serving as an investment fiduciary in addition to being an
officer, employee, agent, or other representative of the political
subdivision sponsoring the system.
(d) Receiving agreed upon compensation for services from the
system.
(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, or the
uniform securities act, 1964 PA 265, MCL 451.501 to 451.818.
(b) Be a bank as defined under the investment advisers act of
1940, 15 USC 80b-1 to 80b-21.
(c) Be an insurance company qualified under section 16(3).
(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.
(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. 17. (1) An investment fiduciary may invest in any of the
following:
(a) Obligations issued, assumed, or guaranteed by a solvent
entity created or existing under the laws of the United States or
of any state, district, or territory of the United States, which
are not in default as to principal or interest, including, but not
limited to, the following:
(i) Obligations secured by the mortgage of real property or the
pledge of adequate collateral if, during any 3, including 1 of the
last 2, of the 5 fiscal years immediately preceding the time of
investment, the net earnings of the issuing, assuming, or
guaranteeing entity available for fixed charges, as determined in
accordance with standard accounting practice, shall have been not
less than the total of its fixed charges for the year on an overall
basis, nor less than 1-1/2 times its fixed charges for the year on
a priority basis after excluding interest requirements on
obligations subordinate to the issue as to security.
(ii) Equipment trust certificates of railroad companies
organized under the laws of any state of the United States or of
Canada or any of its provinces, payable within 20 years from their
date of issue, in annual or semiannual installments, beginning not
later than the fifth year after the date of issue, which
certificates are a first lien on the specific equipment pledged as
security for the payment of the certificates, and which
certificates are either the direct obligations of the railroad
companies or are guaranteed by the railroad companies, or are
executed by trustees holding title to the equipment.
(iii) Obligations other than those described in subparagraphs
(i) and (ii), if the net earnings of the issuing, assuming, or
guaranteeing entity available for fixed charges during each of any
3, including 1 of the last 2, of the 5 fiscal years immediately
preceding the time of investment, shall have been not less than 1-
1/2 times the total of the entity's fixed charges for such year, or
if the obligations are of investment grade.
(iv) Obligations other than those described in subparagraphs
(i), (ii), and (iii), which are not rated or of investment grade. The
aggregate investments made under this subparagraph shall not exceed
10% of the investments of the system.
(b) Obligations secured by a security interest in real or
personal property and a lease obligation given by a solvent entity
whose obligations would be qualified investments under the
provisions of this act, if the investment does not exceed 100% of
the appraised value of the property subject to the lease, and if
all of the following requirements are met:
(i) The lease has an unexpired term equal to or exceeding the
remaining term of the investment.
(ii) The lease is noncancelable unless the lessee first pays
the sum of all unpaid rents due or to become due during the
remaining lease term.
(iii) The lease provides for net rental payments equal to or
exceeding the periodic payments on the investment.
(iv) The lease provides that the net rental payments are to be
made without abatement or offset during the full term of the lease.
(v) The lease and the lease payments are assigned to the
system, an agent of the system, or an independent trustee.
(c) Obligations issued, assumed, or guaranteed by the United
States, its agencies, or United States government-sponsored
enterprises.
(d) Obligations of a possession, territory, or public
instrumentality of the United States, or of any state, city,
county, township, village, school district, authority, or any other
governmental unit having the power to levy taxes, or in obligations
of other similar political units of the United States. These
investments shall be of investment grade. These investments shall
not be permitted if in the 3 preceding years the governmental unit
has failed to pay its debt or any part of its debt or the interest
on the debt. The aggregate investments made under this subdivision
shall not exceed 5% of the system's total assets.
(e) Banker's acceptances, commercial accounts, certificates of
deposit, or depository receipts issued by a bank, trust company,
savings and loan association, or a credit union.
(f) Commercial paper rated at the time of purchase within the
2 highest classifications established by not less than 2 national
rating services, and which matures within 270 days after the date
of issue.
(g) Repurchase agreements for the purchase of securities
issued by the United States government or its agencies and executed
by a bank or trust company or by members of the association of
primary dealers or other recognized dealers in United States
government securities.
(h) Reverse repurchase agreements for the sale of securities
issued by the United States government or its agencies and executed
with a bank or trust company or with members of the association of
primary dealers or other recognized dealers in United States
government securities.
(i) Any investment otherwise permitted by this section in
which the interest rate varies from time to time. Notwithstanding a
provision of any other act to the contrary, a loan shall not be
considered to be in violation of the usury statutes of this state
by virtue of the fact that the loan is made on a variable interest
rate basis.
(j) Obligations secured by any of the obligations described in
subdivision (a) or (c).
(k) Dollar denominated obligations issued in the United States
by foreign governments, supranationals, banks, or corporations.
These investments shall be of investment grade.
(2) Except as otherwise provided in this act and except for
obligations described in subsection (1)(c), an investment fiduciary
shall not do any of the following:
(a) Invest in more than 5% of the outstanding obligations of
any 1 issuer.
(b) Invest more than 5% of a system's assets in the
obligations of any 1 issuer.
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).
(c) Form or invest in 1 or more limited partnerships,
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. 19a. If the investment fiduciary is the
state treasurer,
investments
in private equity shall not be more than 30% of the
total
assets.
(1) An investment fiduciary of a system having assets of less
than $500,000,000.00 may invest not more than 10% of the system's
assets in private equity. However, if the system has assets of less
than $100,000,000.00, the investments shall be made through a fund
of funds vehicle.
(2) An investment fiduciary of a system having assets of
$500,000,000.00 or more but less than $1,000,000,000.00 may invest
not more than 15% of the system's assets in private equity.
(3) An investment fiduciary of a system having assets of
$1,000,000,000.00 or more may invest not more than 20% of the
system's assets in private equity.
(4) If the investment fiduciary is the state treasurer,
investments in private equity shall not be more than 30% of the
total assets.
(5) As used in this section, "fund of funds" means an
investment fund that uses an investment strategy of holding a
portfolio of other investment funds rather than investing directly
in shares, bonds, or other securities.
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
An investment fiduciary under section 13(8)(a),
retained to act
as 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. The investment
fiduciary of the collective investment fund, common trust fund, or
pooled fund must be a financial institution, a trust company, a
management company qualified under section 15, or an affiliate of 1
of these entities if that affiliate qualifies as an investment
fiduciary under section 13(9)(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. 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 $500,000,000.00
may invest not
more
than 5% 10% 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
$500,000,000.00 or more but
less than
$1,000,000,000.00
may invest not more than 10% 15% 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% 20% 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% 25%
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. 20j. (1) Subject to qualification elsewhere in this act,
an investment fiduciary may invest in any of the following:
(a) A derivative that hedges positions of a nonderivative
component of a portfolio that clearly reduces a defined risk.
(b) A derivative that replicates the risk/return profile of an
asset or asset class, provided the asset or asset class is
permitted in other sections of this act.
(c) A derivative that rebalances the country or asset class
exposure of a portfolio.
(d) A derivative in which the investment fiduciary has
examined the price, yield, and duration characteristics in all
market environments both at the time of investment and on an
ongoing basis.
(e) A commingled or pooled investment fund that uses
derivatives, if the fund's use of derivatives is consistent with
the guidelines outlined in this section.
(f) Over-the-counter derivatives if, in the case of an over-
the-counter security, a minimum of 2 competing bids or offers are
obtained. All counter party risk in over-the-counter derivative
transactions shall be examined at the time of investment and on an
ongoing basis.
(2) The aggregate market value of the underlying security,
future, or other instrument or index made under this section shall
not
exceed 15% 30% of the assets of the system. For purposes of the
asset limitation in this section only, "derivatives" does not
include:
(a) Asset backed pools, mortgage backed pools, or
collateralized mortgage obligations that are otherwise qualified
under this act and are no more exposed to prepayment risk or
interest rate risk than the underlying collateral including planned
amortization classes and sequential-pay collateralized mortgage
obligations.
(b) Convertible bonds, convertible preferred stock, rights or
warrants to purchase stock or bonds or notes or partnership
interests, floating rate notes, zero coupon securities, stripped
principal securities, or stripped interest securities, which items
are otherwise qualified under this act.
(c) Exchange-listed derivatives trading on a daily basis and
settling in cash daily or having a limited and fully defined risk
profile at an identified, fixed cost, including futures contracts
and purchased options.
(d) Currency forwards trading on a daily basis and settling in
cash daily or having a limited and fully defined risk profile at an
identified, fixed cost.
(3) Notwithstanding any other provision of this act to the
contrary, an investment fiduciary shall not invest in derivatives
for the purpose of leveraging a portfolio or shorting securities as
a sole investment.