New Jersey-2012-A1309-Introduced

An Act concerning the structure, functions and authority of the State Investment Council and the Director of the State Division of Investment, amending P.L.1974, c.36 and amending and supplementing P.L.1950, c.270.

Be It Enacted by the Senate and General Assembly of the State of New Jersey:

1. Section 5 of P.L.1950, c.270 (C.52:18A-83) is amended to read as follows:

5. There is hereby established in the Division of Investment a State Investment Council which shall consist of [11] 13 members.

[Each of the following agencies, namely,]a. Six of those members shall be active participants in or retirees receiving a benefit from the retirement systems and shall be appointed as follows: two from [the Board of Trustees of] the Public Employees' Retirement System elected by the Board of Trustees of that system, [the Board of Trustees of] one from the State Police Retirement System [,] elected by the Board of Trustees of that system, two from the Teachers' Pension and Annuity Fund[,] elected by the Board of Trustees of that fund, and one from the Police and Firemen's Retirement System of New Jersey [and the Consolidated Police and Firemen's Pension Fund Commission, shall designate one of their members to serve as a member of the State Investment Council herein established]elected by the Board of Trustees of that system. The [five] six members of the council so selected shall serve as such for a period of [one year] four years from the date of their selection and until their respective successors are in like manner selected. One member shall be an active or retired member of the Judicial Retirement System who shall be appointed by the Chief Justice of the New Jersey Supreme Court and shall serve for a period of four years from the date of the member's selection and until their respective successor is in a like manner selected.

[Five of the remaining] Four members of the State Investment Council shall be appointed by the Governor, with the advice and consent of the Senate, [for a term of five years and] two of whom shall serve for an initial period of four years and two of whom shall serve for an initial period of two years, who shall serve until his or her successor is appointed and has qualified for a subsequent four year period of service as a member of the council. The Senate shall provide its advice and consent for the Governor's appointees within 180 days after the submission of the Governor's nomination to the President of the Senate. No nominee shall serve as an acting
member of the council unless the consent of the Senate is provided. If the Senate grants its consent or fails to take any action upon its consent within 180 days after the submission of the Governor's nomination, the appointee shall become a member of the council

One member of the State Investment Council shall be appointed by [the Governor from among three persons nominated jointly by] the President of the Senate [and] who shall serve for a period of four years from the date of selection and until a respective successor is in a like manner selected. One member of the State Investment Council shall be appointed by the Speaker of the General Assembly [and shall serve for a term of five years] and shall serve for an initial period of two years, who shall serve until [his] the respective member's successor is appointed and has qualified for a subsequent four year period of service as a member of the council. until the member's successor is appointed and has qualified in a like manner.

[At least four of the] b. The six members appointed by the Governor, the President of the Senate and the Speaker of the General Assembly to the council shall be experts qualified by training and experience in the field of investment and finance, provided that this training and experience has been acquired through academic training or actual employment in those fields.

c. No member of the State Investment Council shall hold any office, position or employment in any political party nor shall any such member benefit directly or indirectly from any transaction made by the Director of the Division of Investment provided for herein. Members of the State Investment Council shall be subject to the same limitations, prohibitions, disclosure requirements, and sanctions as are imposed upon the employees of, or the persons providing services to, the State Investment Council or the Division of Investment as set forth in section 7 of P.L. , c. (C. ) (pending before the Legislature as this bill).

The members of the council shall elect annually from their number a chairman of such council. Any member of the council so elected shall serve as such chairman for a term of one year and until his successor is, in like manner, elected. The chairman of the council shall be its presiding officer.

The members of the council shall serve without compensation but shall be reimbursed for necessary expenses incurred in the performance of their duties as approved by the chairman of the council.

Each member of the council, except the [member] members appointed from among persons nominated by the President of the Senate and the Speaker of the General Assembly, may be removed from office by the Governor, for cause, upon notice and opportunity to be heard at a public hearing. Any vacancy in the membership of the council occurring other than by expiration of term shall be filled in the same manner as the original appointment, but for the unexpired term only.

(cf: P.L.1992, c.41, s.32)

2. Section 6 of P.L.1950, c.270 (C.52:18A-84) is amended to read as follows:

6. The Division of Investment established hereunder shall be under the immediate supervision and direction of a director, who shall be [a person qualified by training and experience to direct the work of such division. The director of such division shall be] appointed by the [State Treasurer from a list of one or more persons qualified for such office and submitted to the State Treasurer by the] State Investment Council [; provided, that the State Treasurer may require the submission of an additional list or lists. Each list so submitted by the council shall also contain the qualifications of each person whose name appears thereon who shall be certified by the council to the State Treasurer as qualified for the office of director of such division. The detailed qualifications of each person so named by the council shall be contained in such certification]. The director shall be responsible for the supervision and management of the Division of Investment. In all matters regarding the development and promulgation of investment policy, and in relation to the decisions to invest, manage, and divest investments, the Director of the Division of Investment shall report only to the State Investment Council and to no other person, officer, or entity.

Prior to appointing the director, the State Investment Council shall conduct a nationwide search, the purpose of which shall be to identify candidates qualified for such position according to the following criteria: individuals who have completed appropriate training and possess such work experience as deemed necessary to exercise such authority as may be set forth in regulations promulgated by the State Investment Council. No person shall be employed as the Director of the Division of Investment unless that person is selected as a result of the nationwide search conducted by the State Investment Council.

Any director so appointed shall serve without term but may be removed from office [(a) by the State Treasurer], for cause, upon notice and opportunity to be heard at a public hearing, [or (b)] by the State Investment Council, if [seven] nine or more members thereof shall vote for such director's removal from office.

Any vacancy occurring in the office of the Director of the Division of Investment shall be filled in the same manner as the original appointment.

The director of said division shall devote his entire time and attention to the duties of his office and shall not be engaged in any other occupation or profession. Notwithstanding any other provision of law to the contrary, the State Treasurer shall determine the salary of the director the amount of which shall not exceed $200,000.

(cf: P.L.1998, c.38, s.2)

3. Section 1 of P.L.1974, c.36 (C.52:18A-84.1) is amended to read as follows:

1. The [State Treasurer] Director of the Division of Investment shall, whenever he shall deem the same necessary, designate no more than two Deputy Directors of the Division of Investment, who shall be a person or persons qualified by training and experience to undertake such an office, and who shall serve as deputy director unless and until disapproved in writing by the State Investment Council. A second deputy director shall be designated only under the conditions set forth in this section. The [State Treasurer's] director's designation shall be in writing and shall be filed with the Secretary of State. The [State Treasurer] director may at any time change or cancel one or both designations, which change or cancellation shall be in writing and shall be filed with the Secretary of State.

A Deputy Director of the Division of Investment shall have and exercise such of the powers and perform such of the functions and duties of the director as the director shall authorize and direct. Any such authorization and direction shall be in writing, signed by the [State Treasurer and by the] Director of the Division of Investment, and filed with the Secretary of State, and shall include a designation of the period during which it shall be and remain in force. No such authorization and direction shall be deemed to preclude the director himself from exercising the powers and the performance of the duties included in said authorization and direction. In the event that a vacancy occurs in the office of the director for any cause whatsoever, the person then holding the office of deputy director shall continue to hold such office and shall exercise the powers and perform the functions and duties of the director until the successor to the director shall be appointed and shall qualify.

The [State Treasurer] director may designate a second deputy director of the division for a period not to exceed six months in anticipation of a vacancy in the director's position provided that the person so designated shall be the person the State [Treasurer] Investment Council shall appoint as the Director of the Division of Investment pursuant to section 6 of P.L.1950, c.270 (C.52:18A-84) within or at the conclusion of the six-month period.

Notwithstanding any other provision of law to the contrary, the State Treasurer shall determine the salary for the position of deputy director the amount of which shall not exceed 95% of the salary of the director.

(cf: P.L.1998, c.38, s.3)

4. Section 11 of P.L.1950, c.270 (C.52:18A-89) is amended to read as follows:

11. a. Limitations, conditions and restrictions contained in any law concerning the kind or nature of investment of any of the moneys of any of the funds or accounts referred to herein shall continue in full force and effect; provided, however, that subject to any acceptance required, or limitation or restriction contained herein: the Director of the Division of Investment shall at all times have authority to invest and reinvest any such moneys in investments as defined in subsection c. of this section and, for or on behalf of any such fund or account, to sell or exchange any such investments.

b. In investing and reinvesting any and all money and property committed to the director's investment discretion from any source whatsoever, and in acquiring, retaining, selling, exchanging and managing investments, the Director of the Division of Investment shall exercise the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. In making each investment, the director may, depending on the nature and objectives of the portfolio, consider the whole portfolio, provided that, in making each investment, the director shall act with the reasonable expectation that the return on each investment shall be commensurate with the risk associated with each investment. The director shall be under a duty to manage and invest the portfolio solely in the interests of the beneficiaries of the portfolio and for the exclusive purpose of providing financial benefits to the beneficiaries of the portfolio.

c. [For the purposes of this section,] As used in this act:

"alternative assets" means assets in any asset classes which are not regularly traded or priced in a market or exchange which is regulated by the United States Securities and Exchange Commission, and shall include but not be limited to hedge funds, venture capital, private equities, direct investments in individual real estate properties, commodities, derivatives, assets that cannot quickly and easily be converted into cash, assets that are subject to leveraging, except for direct investments in real estate properties, which may not be leveraged more than 50%, currency swaps, and any other securities of the type described herein;

"investments" means and includes property of every nature, real, personal and mixed, tangible and intangible, and specifically includes, solely by way of description and not by way of limitation, bonds, debentures and other corporate obligations, direct and indirect investments in equity real estate, mortgages and other direct or indirect interests in real estate or investments secured by real estate, capital stocks, common stocks, preferred stocks, diversified pools of venture capital which otherwise could be made consistent with the standard of care required by subsection b. of this section, common trust funds as defined in and regulated by sections 36 through 46 of P.L.1948, c.67 (C.17:9A-36 through 17:9A-46), repurchase agreements, securities loan transactions secured by cash, securities issued by the United States government or its agencies, or irrevocable bank letters of credit, whether directly or through a bank or similar financial institution acting as agent or trustee, mutual funds, and any other security issued by an investment company or investment trust, whether managed or not by third parties, registered under the "Investment Company Act of 1940," 15 U.S.C. s.80a-1 et seq. No investment that is otherwise permissible under this subsection shall be considered to be unlawful solely because the investment is made indirectly or through a partnership, trust, or other legal entity.

d. (1) Except for direct investments in real estate, neither the director nor any external asset managers shall invest in any alternative assets, unless at least one third of the purchase value of the asset is purchased by other parties, who are not part of, related to, or affiliated in any manner with the State of New Jersey or with the external asset manager, or with any of the external asset manager's employees.

(2) Alternative assets shall not exceed 8%of the book value of the portfolio of investments made by the Division of Investment on behalf of the funds and accounts of all State pension systems. The portfolio of investments shall be annually rebalanced based upon the June 30 book valuation of each asset class. If the book value of alternative assets exceeds 8% of the book value of the portfolio of investments made by the Division of Investment on behalf of the funds and accounts of all State pension systems based upon the June 30 valuation, no further investments in such alternative assets shall be made until the book value of such assets is reduced below 8% of the book value of the portfolio of investments. This reduction shall require the Division of Investment to dispose of sufficient alternative assets to return the percentage of such assets below 8% of the book value of the portfolio of investments as expeditiously as possible. In addition, the Division of Investment may allow the percentage of such alternative assets to increase to no more than 10% of the book value of the portfolio of investments during the process of disposal in order to avoid disadvantageous liquidation of assets, provided that the Division of Investment shall report to the State Investment Council the reasons for any delay in disposition of assets necessary to fulfill the requirements of this subsection.

e. Notwithstanding the provisions of subsection d. of this section, if the divestment of any alternative asset may result in excessive losses due to the liquidity of the asset in the market, the Director of the Division of Investment may seek a waiver from the State Investment Council, which the council may grant, for 90 day
intervals, but for not more than one year, subject to the approval of the Attorney General.

f. No alternative assets shall be acquired until the State Investment Council adopts regulations, which shall include all of the following criteria:

(1) That investment policies and objectives take into account the unique risk and return characteristics of alternative asset classes and impose prudent limits upon such investments;

(2) That all such investment policies include a clear rationale based upon the overall portfolio of investments;

(3) That no such investments be made until suitable criteria are developed to measure and monitor their performance, risks, costs, and benefits;

(4) That no such investments be made until a careful review of the liquidity needs is completed; and

(5) That any such investments must include a careful plan of staggered investment dates to coordinate the maturity dates, returns, and cashflow for each alternative asset investment.

(cf: P.L.1997, c.26, s.26)

5. Section 13 of P.L.1950, c.270 (C.52:18A-91) is amended to read as follows:

13. The State Investment Council shall consult with the Director of the Division of Investment from time to time with respect to the work of the division. It shall have access to all files and records of the division and may require any officer or employee therein to provide such information as it may deem necessary in the performance of its functions. The council shall have authority to inspect and audit the respective accounts and funds administered through the Division of Investment. The council shall solicit such accounting and auditing services from such professionals as it deems necessary and as may be required by law, and shall pay for such service with such funds as are appropriated for such purposes. It shall formulate and establish, and may from time to time amend, modify or repeal, such policies as it may deem necessary or proper, which shall govern the methods, practices or procedures for investment, reinvestment, purchase, sale or exchange transactions to be followed by the Director of the Division of Investment established hereunder.

On or before January first of each year, and at such other times as it may deem in the public interest, the council shall report to the Governor, the Legislature, and the State Treasurer with respect to its work and the work of the Division of Investment.

(cf: P.L.1950, c.270, s.13)

6. (New section) Notwithstanding any other law to the contrary, a. (1) No individual who is employed by the Division of Investment and no person who provides investment, management or consulting services to the State Investment Council or to the Division of Investment, shall have contributed more than $250 in any year to any candidate, candidate committee, joint candidates committee, political committee, continuing political committee, political party committee or legislative leadership committee, or national political action committee, during the two-year period prior to providing such services, being so employed or otherwise serving in such capacity, and during any period during which they are providing such services, are so employed or are otherwise serving in such capacity.

(2) The prohibition of paragraph (1) of this subsection also shall apply to contributions made during a two-year period immediately after the conclusion of such employment or the provision of services, provided that any period of time prior to the effective date of P.L. , c. (C. ) (pending before the Legislature as this bill) shall not count in calculating any portion of this subsequent two-year period.

(3) The prohibition set forth in this subsection also shall apply if contributions are made by a committee controlled by an individual or person subject to this section and shall apply to the solicitation of any individual, person or committee to make a prohibited contribution or an attempt to coordinate or bundle contributions that are more than $250 separately or if combined.

(4) No individual, person or committee subject to this subsection shall perform or do indirectly or otherwise, or facilitate the taking of any action, which the individual, person or political action committee is prohibited from doing or performing under this subsection.

b. Any individual or person who provides investment, management or consulting services to the State Investment Council or to the Division of Investment, or who is employed by a person who provides investment, management or consulting services to the State Investment Council or to the Division of Investment, shall disclose, on an annual basis, in a format specified by the Attorney General, all business and personal relationships of any nature with any other individual or person who serves as a member of the State Investment Council, or who is employed by the State Division of Investment, or who provides investment, management, or consulting services to the State, directly, indirectly, or otherwise.

c. An individual or person who violates any of the provisions of this section may, in the discretion of the State Investment Council, be barred from transacting business with the State for a period of not more than five years, and may be subject to a fine of $100,000 per occurrence. Any actions under this section taken by the State Investment Council shall be based upon the recommendation of the Attorney General, and no such action shall be effective unless recommended by the Attorney General.

7. (New section) The State Investment Council shall develop an annual budget for the next ensuing State fiscal year on or before a date necessary for that annual budget to be included in the Governor's annual State budget recommendations submitted to the Legislature. The State Investment Council's budget shall be developed with the advice and assistance of the Director of the Division of Investment. The annual budget of the State Investment Council shall be submitted directly to the Governor and the Legislature, and shall not be subject to changes made by the State Treasurer or by any other executive branch entity or officer. The budget developed by the State Investment Council shall be included in the Governor's budget proposal, in the form and in the manner submitted by the council, and thereafter shall be reviewed by the Legislature in the same manner and under the same procedures as all other proposals contained in the Governor's budget recommendations submitted to the Legislature.

8. (New section) a. The Director of the Division of Investment may contract with external asset managers, but only for the purpose of acquiring, managing and divesting alternative assets.

b. Notwithstanding the provisions of subsection a. of this section, the Division of Investment shall hire as employees appropriately qualified individuals to purchase, manage, and divest alternative assets, and shall only contract with outside investment managers if the employment of qualified division staff for such purpose is not practicable.

c. Prior to contracting with any external asset managers, the Director of the Division of Investment shall present documentation to the State Investment Council which demonstrates that efforts to employ qualified staff for such purposes have been made and were unsuccessful, and shall obtain the approval of any such contract by the State Investment Council.

d. All records of efforts to hire qualified individuals as division employees pursuant to the provisions of this section shall be reviewed by the State Auditor, who shall render an opinion as to the thoroughness and efficiency of such efforts, and make such recommendations as the State Auditor deems appropriate, regarding how qualified individuals may be identified and employed.

e. The opinion of the State Auditor and any recommendations of the Director of the Division of Investment or the State Auditor shall be delivered to the State Investment Council and to the Governor and shall be distributed to all members of the Legislature.

f. The contracting of any external asset managers shall be subject to the recommendation of the State Investment Council, which shall be made at a public meeting of the council and supported by documentation including the information set forth in subsection c. of this section.

g. The Division of Investment shall not contract with any external asset manager unless that manager meets criteria required under standards as may be set forth in regulations promulgated by the State Investment Council, which shall include stringent policies for screening, selecting, and terminating the services of external asset managers. The criteria shall include, but not be limited to, the following:

(1) A competitive, merit-based public procurement process for the selection of external asset managers.

(2) A selection process that is used prior to the contracting of an external manager to make investments in alternative asset classes, which shall include the review and consideration by a consultant, or a review committee appointed by the Division of Purchase and Property in the Department of the Treasury, which process shall establish a procedure and process for requests for proposals for interested candidates, and the performance of a due diligence search on all candidates for such a contract.

9. (New section) The State Investment Council shall retain a qualified consultant, not otherwise employed by it or by the State of New Jersey, or employed by any external asset manager who is employed by the State, for the purpose of preparing an annual study of the relative costs and benefits of investments in alternative assets. The recommendations shall be based upon the determination of whether the investment in alternative assets is financially advantageous to the portfolio, and has not placed the portfolio in a position of significant or unreasonable risk. The annual study shall include and provide recommendations regarding whether investments in such alternative assets should continue or be discontinued, based upon criteria established by the State Investment Council.

10. This act shall take effect January 1 next following enactment.

STATEMENT

This bill revises the structure, functions and authority of the State Investment Council and the Director of the State Division of Investment. The bill increases the membership of the State Investment Council from 11 to 13, increasing representation from the Public Employee's Retirement System and the Teachers' Pension and Annuity Fund to two members each, adding a member from the Judicial Retirement System in place of a member of the Consolidated Police and Firemen's Retirement System, and reducing from 5 to 4 the number of members appointed by the Governor. The lengths of members' terms are changed to provide better continuity of membership, the presiding officers of the Legislature are each given the authority to appoint a council member. The members of the council appointed by the presiding officers and the Governor are required to be experts qualified by training or experience in the field of investment and finance.

The bill also establishes a strict system of disclosure and limits on certain campaign contributions made by council members and individuals and entities who are employed to or otherwise provide investment, management or consulting services to the council or the Division of Investment. These limits involve pre-employment and post-employment contribution limits and sanctions for violations.

This bill also makes the State Investment Council responsible for the hiring and supervision of the Director of the Division of Investment, submitting its own annual budget, and obtaining independent audits of the accounts and funds administered by the Division of Investment.

The bill also authorizes the investment in alternative assets which are assets in any asset classes which are not regularly traded or priced in a market or exchange which is regulated by the United States Securities and Exchange Commission. They include but are not be limited to hedge funds, venture capital, private equities, direct investments in individual real estate properties, commodities, derivatives, assets that cannot quickly and easily be converted into cash, assets that are subject to leveraging, except for direct investments in real estate properties, which may not be leveraged more than 50%, currency swaps, and any other securities of this type.

Restrictions are placed on the percentage of the book value of the portfolio of investments made by the Division of Investment on behalf of the funds and accounts of all State pension systems made in alternative assets and provide safeguards to protect against the acquisition and disposition of such assets resulting in excessive losses. The bill also establishes a procedure under which the State Investment Council may contract with outside investment managers for the purpose of acquiring, managing and divesting alternative assets if qualified employees of the Division of Investment cannot be hired for these tasks. Efforts by the council to hire division employees for these tasks will be documented and audited by the State Auditor and recommendations made to improve opportunities to make such direct hiring actions. Division of Investment contracts with external asset managers will be subject to stringent policies for screening, selecting and terminating of their services which include a merit based procurement process and the use of a hiring consultant and the performance of due diligence searches on all candidates for such contractual services. The bill also requires the council to retain a qualified consultant to conduct an annual study of the relative costs and benefits of making investments in alternative assets.

While this bill allows for the hiring of outside managers to oversee a portion of the investments of the funds and accounts of the State pension systems and the investment in alternative assets, it seeks to reasonably limit this new statutory authority in light of concerns expressed about the size of the such investments and the potential for political mischief once private investment managers have access to public funds. Revisions to the authority and appointments to the State Investment Council are intended to safeguard against the possibility of political interference if such a transition to private management takes place.

This bill attempts to allow diversification of investments through the use of outside professionals, while providing important safeguards to protect the health of the State's investments. More than 50 years ago, the State chose to assume management of its retirement systems' investments following a series of scandals. Since that time, New Jersey's investments have been scandal-free, something that not all other funds of similar size can claim. At the same time, by objective measures, long-term returns on the State's investments have been competitive with those of privately managed funds of similar size. Yet, the sponsors of this bill understand the fast-changing dynamics of the investment world require new approaches to investing. Since it is also in the best interest of every New Jersey taxpayer to see the investments managed appropriately, the bill proposes the legal measures and reasonable standards that will ensure the health, integrity and future prosperity of New Jersey's retirement systems.