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.