HB2346 - 541R

Be it enacted by the Legislature of the State of Arizona:

Section 1. Title 38, chapter 5, Arizona Revised Statutes, is amended by adding article 7.1, to read:

ARTICLE 7.1. RETIREMENT SYSTEM INVESTMENT FEES

START_STATUTE38-931. Definitions

In this article, unless the context otherwise requires:

1. "Alternative investment" means an investment in a private equity fund, venture fund, hedge fund or absolute return fund or any investment pool that is privately organized, actively managed by investment professionals and that pays performance or incentive fees to investment managers.

2. "Alternative investment manager" means the general partner, adviser, affiliate or another related party with decision‑making authority over an alternative investment vehicle or providing services to or on behalf of portfolio holdings.

3. "Alternative investment vehicle" means the limited partnership, limited liability company, pooled investment entity or separate account with one or more investors or similar legal structure through which a public pension or retirement system invests in an alternative investment to engage in strategies involving equity or debt financing of public or private companies.

4. "Board" means the Arizona state retirement system board established by section 38‑713, or the board's designee, and the board of trustees established by section 38‑848, or the board's designee.

5. "Carried interest" means any share of profits from an alternative investment vehicle that is distributed to an alternative investment manager or general partner, including allocations of alternative investment vehicle profits that are received by an alternative investment manager in consideration of having waived fees that the alternative investment manager might otherwise have been entitled to receive.

6. "Clawback" means a clawback provision, including a provision that allows the alternative investment manager to pay back an amount less than the full cost of the overpayment received by the alternative investment manager, a provision necessary to understand how the clawback works and all defined terms related to or affecting the clawback.

7. "Fee waiver" means a management fee waiver provision, including a provision that allows the alternative investment manager to waive fees, that specifies the mechanics of the fee waiver or its repayment, that specifies the magnitude of the fee waiver or that is necessary to understand how the fee waiver works, and all defined terms related to or affecting the fee waiver.

8. "Gross rate of return" means the internal rate of return for the alternative investment vehicle before the reduction of fees and expenses described in section 38-932, subsection B, paragraph 2.

9. "Indemnification" means an indemnification provision, including a provision that requires the alternative investment vehicle or its investors to indemnify the alternative investment manager, or any related person or party, for settlements or judgments paid, and includes all provisions necessary to understand how the indemnification works and all defined terms related to or affecting the indemnification.

10. "New agreement" means an agreement that is proposed or executed from and after December 31, 2018, and includes any modification to or amendment of such an agreement that modifies or alters any of the provisions required to be disclosed and any subsequent agreement that implements, memorializes or provides detail about such an agreement.

11. "Operational person" means any operational partner, senior advisor or other consultant or employee whose primary activity for a relevant entity is to provide operational or back office support to any portfolio holding of any alternative investment vehicle, account or fund managed by a related person.

12. "Person" means an individual, corporation, partnership, limited partnership, limited liability company or association, either domestic or foreign.

13. "Portfolio holding" means individual portfolio investments made by the alternative investment vehicle. Portfolio holdings or companies includes any business, partnership, real property or other business entity or asset in which an alternative investment vehicle has, at any time, held either an interest in the securities of or a real property interest in, or has acted as a lender to, the entity or asset.

14. "Portfolio holding fee" means the total payment obligation of a portfolio holding, regardless of whether:

(a) It is actually paid or accrued.

(b) The payment obligation is satisfied in cash, securities or other consideration.

15. "Related party" means any of the following:

(a) Any related person.

(b) Any operational person.

(c) Any entity in which more than ten percent of the ownership is held directly or indirectly, whether through other entities or trusts, by a related person or operational person regardless if the related person or operational person participates in the carried interest received by the general partner or the special limited partner.

(d) Any consulting, legal or other service provider regularly engaged by portfolio companies of an alternative investment vehicle, account or fund managed by a related person and that also provides advice or services to any related person or relevant entity.

16. "Related person" means any current or former employee, manager or partner of any related entity that is involved in the investment activities or accounting and valuation functions of the relevant entity or any of their respective family members.

17. "Relevant entity" means the general partner, any separate carry vehicle, the investor advisor, any of the investment advisor's parent or subsidiary entities or any similar entity related to any other alternative investment vehicle, account or fund advised or managed by any current or former related person. END_STATUTE

START_STATUTE38-932. Investment fees; disclosure requirements; annual report

A. Each alternative investment manager that receives capital commitments for an alternative investment vehicle from the board shall file a disclosure on each alternative investment vehicle at least annually with the state treasurer. The disclosures specified in subsection B, paragraphs 1 through 6 of this section shall include both:

1. The fees and expenses since inception and for the previous one‑year, five‑year and ten‑year periods.

2. The total fees and expenses incurred by each alternative investment vehicle and the pro rata share of those fees and expenses incurred by the board.

B. Each alternative investment manager shall disclose to the state treasurer all of the following for each alternative investment vehicle:

1. The management fees and expenses paid by investors to the alternative investment vehicle, the alternative investment manager or related parties.

2. The fees and expenses that are not included in paragraph 1 of this subsection and that are paid by the alternative investment vehicle to the alternative investment manager or related parties, including partnership expenses.

3. The carried interest or incentive allocation distributed to the alternative investment manager or related parties.

4. The aggregate portfolio holding fees and expenses that are incurred by all of the portfolio holdings held by the alternative investment vehicle and that are paid to the alternative investment manager or related parties.

5. The amount of all management fee waivers or offsets made by the alternative investment vehicle, alternative investment manager or general partners.

6. Any amounts paid in indemnification by the alternative investment vehicle and any amounts deducted from payments owed by the alternative investment manager relating to indemnification.

7. The gross rate of return and net rate of return of each alternative investment vehicle for the preceding one‑year, five‑year and ten‑year periods and since inception. Return calculations shall disclose the use of subscription line financing, and in such cases, calculations shall reflect what returns would have been without subscription line financing.

8. Compensation for the alternative investment manager's named executive officers, as described in 17 Code of Federal Regulations section 229.402(b), who are the principal executive officer, the principal financial officer and the three most highly compensated executive officers, including annual salary, carried interest and any other compensation required by the United States securities and exchange commission regulations.

C. This article applies to all contracts the board enters into from and after December 31, 2018, and to all existing contracts to which the board makes a new capital commitment, amendment, renewal or extension from and after December 31, 2018. If a new agreement consists of a modification of or amendment to a previous new agreement for which the disclosures required under this section have already been made, it is sufficient for the alternative investment manager to either:

1. Identify the previous disclosures and disclose only the parts and provisions of the modification of or amendment to the agreement that modify, alter or affect any of the provisions previously disclosed under this section.

2. Make and disclose a finding that the modification or amendment does not modify, alter or affect any of the provisions previously disclosed under this section.

D. A new agreement is not invalid by the alternative investment manager's good faith effort to make the disclosures required under this section or due to harmless or inadvertent failure to correctly include or identify a component of a required disclosure.

E. Within ninety days after entering into an agreement with the board to invest in an alternative investment vehicle, an alternative investment manager must provide the agreement, including any provisions concerning fee waivers, indemnifications and clawbacks, to the state treasurer.

F. On or before June 30 of each year, the state treasurer shall present a report regarding the information received pursuant to this section to the joint legislative budget committee. The state treasurer shall post and maintain the information received pursuant to this section on the state treasurer's public website. END_STATUTE

Sec. 2. Retroactivity

This act applies retroactively to from and after December 31, 2018.

Sec. 3. Short title

This act may be cited as the "Investment Fee Transparency Act".