STATE OF NEW JERSEY
PRE-FILED FOR INTRODUCTION IN THE 2018 SESSION
Assemblyman RALPH R. CAPUTO
District 28 (Essex)
Assemblyman JOHN J. BURZICHELLI
District 3 (Cumberland, Gloucester and Salem)
Assemblyman REED GUSCIORA
District 15 (Hunterdon and Mercer)
Caps at 35 percent share of State public employee pension and annuity funds portfolio that may be invested in combination of hedge funds, private equity, commodities, and real estate.
CURRENT VERSION OF TEXT
Introduced Pending Technical Review by Legislative Counsel.
An Act capping at 35 percent the share of the State public employee pension and annuity funds portfolio that may be invested in a combination of hedge funds, private equity, commodities, and real estate, and supplementing P.L.1950, c.270.
Be It Enacted by the Senate and General Assembly of the State of New Jersey:
1. a. As used in this section:
“Absolute return strategy” means an investment strategy with the goal of achieving consistent positive returns with less correlation to traditional performance benchmarks than long position only strategies.
“Commodity-linked investments” means equity or debt investments; including derivative products, such as forwards, futures, options, and swaps; whose return is a function of the price of a particular commodity, several commodities, or an index thereof.
“Commodity-related investments” means equity or debt investments in the exploration, production, processing, transportation, storage or trading of commodities or other similar activities.
“Hedge fund” means a firm, foreign or domestic, that provides investment management services to third parties, pursues an absolute return strategy, may use leverage as part of its investment strategy, does not offer the placement of investments in the hedge fund to the general public, and charges performance-based fees as part of its remuneration. “Hedge fund” includes a domestic “investment company,” as defined in paragraph (1) of subsection (a) of section 3 of the “Investment Company Act of 1940,” Pub.L.76-768 (15 U.S.C. s.80a-3), that claims an exemption under paragraph (1) or paragraph (7) of subsection (c) of section 3 of that act and whose offering of securities is deemed to be transactions not involving any public offering under section 230.506 of title 17, Code of Federal Regulations and paragraph (2) of subsection (a) of section 4 of the “Securities Act of 1933,” Pub.L.73-22 (15 U.S.C. s.77d).
“Long position only strategy” means an investment strategy that relies on the expectation that an asset in which the investor places moneys will rise in value.
“Private equity” means investments in a company or an entire business unit with the intention of exercising managerial and strategic control of the target company or business unit. Investment returns are typically realized through an initial public offering, sale or merger of the company or business unit, or a recapitalization. Private equity may consist of buyout funds, venture capital funds and debt-related investments.
“Real assets” means equity or debt investments in real estate, infrastructure, energy, utilities, water, timber, agriculture, metals, mining, royalty trusts, commodity-related investments, commodity-linked investments, and real asset investments in related products, services, and technology.
“Royalty trusts” means investments that generate an income stream for investors; these primarily include natural resource assets, pharmaceuticals, and medical devices.
“Venture capital funds” means investments in the equity of a small, privately-owned, high-growth company during its early or expansionary stages.
b. Notwithstanding any provision of law to the contrary, no assets in excess of 35 percent of the total holdings of any pension or annuity fund under the jurisdiction of the Director of the Division of Investment in the Department of the Treasury shall be invested in a combination of hedge funds, private equity, and real assets.
c. The State Investment Council and the Director of the Division of Investment shall sell, redeem, divest or withdraw any investment held in violation of subsection b. of this section. This section shall not be construed to require the premature or otherwise imprudent sale, redemption, divestment or withdrawal of an investment, but such sale, redemption, divestment or withdrawal shall be completed not later than three years following the effective date of P.L. , c. (C. ) (pending before the Legislature as this bill).
d. Within one year after the effective date of P.L. , c. (C. ) (pending before the Legislature as this bill) the Director of the Division of Investment shall file with the Legislature, in accordance with section 2 of P.L.1991, c.164 (C.52:14-19.1), a report of all investments held as of the effective date that are in violation of subsection b. of this section. Each year thereafter, the director shall report on all investments sold, redeemed, divested or withdrawn in compliance with subsection c. of this section.
Each report after the initial report shall provide a description of the progress that the division has made since the previous report and since the enactment of P.L. , c. (C. ) (pending before the Legislature as this bill) in implementing subsection b. of this section.
e. State Investment Council members and State officers and employees involved therewith, shall be immune to any legal or disciplinary action arising from their decision to reduce or eliminate investments pursuant to P.L. , c. (C. ) (pending before the Legislature as this bill).
2. This act shall take
This bill caps at 35 percent the share of the State public employee pension and annuity funds portfolio that may be invested in alternative assets (i.e., hedge funds, private equity, commodities, and real estate).
In so doing, the bill acknowledges the importance of diversifying pension and annuity funds holdings and recognizes that alternative assets are an integral part of an effective diversification strategy. Nonetheless, alternative assets make for thorny placements of public funds, as their investment strategies and specific investments tend to be protected information. This opacity and the resultant asymmetrical information open the door to manipulation and pay-to-play abuses. In establishing an alternative investment ceiling, the bill therefore seeks to limit the appearance of impingement on the ethical integrity of the State’s pension fund investment process.
Current statutory law does not explicitly restrict pension and annuity funds placements in alternative assets. State Investment Council regulations, however, set a 38.0 percent limit (N.J.A.C.17:16-69.9), while its FY 2012 asset allocation plan called for 26.0 percent of pension and annuity funds to be invested in alternative assets. In actuality, 23.1 percent of the portfolio, or $16.2 billion, were invested thusly at the end of FY 2012 (New Jersey Division of Investment, June 2012 “Investment Reporting Package”).