Friday, August 26, 2016

California leads: Public pension funds must disclose private equity fees

By Jay Fishman, J.D.

California, by passing a bill, has taken the lead on requiring all public pension funds to publicly disclose the various fees paid to private equity managers on Wall Street. Assemblyman Ken Cooley’s AB 2833, sponsored by State Treasurer John Chiang, specifically pertains to public retirement system disclosure of fees paid to alternative investment vehicles. The bill was passed off the Assembly Floor by a vote of 69-0 and now heads to Governor Jerry Brown’s desk for signature.

The California bill. AB 2833 would, for new contracts entered into on or after January 1, 2017, and for existing contracts for which a new capital commitment is made on or after January 1, 2017, require a “public investment fund,” defined as a public pension or retirement system fund (including the University of California) to mandate alternative investment vehicles, as defined, to make specified disclosures about their fees, expenses, and carried interest. The bill would also require a public investment fund to at least annually at public meetings disclose the gross management fees, management fee offsets, fund expenses, carried interest and any related party transactions paid to their private equity general partners, hedge fund partners and other alternative investment partners. The bill would lastly require a public investment fund to make a reasonable effort to obtain the above-mentioned fees for any existing contract for which the public investment fund has not made a new capital commitment on or after January 1, 2017.

State Treasurer Chiang said that “California passed a bill that will impose the most robust transparency requirements in the nation with respect to public fund investments in private equity firms. For the first time taxpayers and pension beneficiaries will get to go behind the curtain to view the previously hidden fees and charges paid to private equity investment companies. This is important because every dollar paid in fees is one less dollar available for promised pension benefits. I extend my deepest thanks to Assemblyman Cooley for partnering with me on this first-in-the-nation effort to protect taxpayers, as well as pension dollars.”

National disclosure urgency. On the national level, ten state treasurers and two comptroller have written to SEC Chair Mary Jo White urging the Commission to require better disclosure by general partners of their private equity expenses to limited partners. Increased disclosure transparency, they proclaimed, would provide limited partners with a stronger negotiating position, resulting in more efficient investment options.