State Pension Fiduciary Duty Act

Some state governments have begun to fight back against progressive ESG initiatives and the attempt to redefine the purpose of businesses.

States can enact legislation to ensure that state retirement funds are invested solely to achieve a return for state employees who are pension plan beneficiaries rather than to achieve political or social objectives by hiring only investment advisors that commit to not shortchange retirees to further a political or social objective. The following model legislation would accomplish this objective.

AN ACT relating to the fiduciary duty and proxy voting activities of public retirement systems.

Section 1. Definitions

  1. “Fiduciary” includes any person acting on behalf of the [state][pension board] as an investment’
    manager, or proxy advisor.
  2. “Fiduciary Commitment” means any evidence of a fiduciary’s purpose in managing assets as a
    fiduciary, including, but not limited to, any of the following in a fiduciary’s capacity as a fiduciary:
    1. 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.
  3. “Financial” means having been prudently determined by a fiduciary to have a material effect on the financial risk or the financial return of an investment.
    1. “Financial” does not include any action taken, or factor considered, by a fiduciary with any
      purpose whatsoever to further social, political, or ideological interests.
    2. A fiduciary may reasonably be determined to have taken an action, or considered a factor, with a purpose to further social, political, or ideological interests based upon evidence indicating such a purpose, including, but not limited to, any Fiduciary Commitment to further, through portfolio company engagement, board or shareholder votes, or otherwise as a fiduciary, any of the
      following beyond what controlling federal or state law requires:
      1. eliminating, reducing, offsetting, or disclosing greenhouse gas emissions;
      2. instituting or assessing corporate board, or employment, composition, compensation, ordisclosure criteria that incorporates characteristics protected in this state under [state civil rights statute];
      3. divesting from, limiting investment in, or limiting the activities or investments of, any company, for failing, or not committing, to meet environmental standards or disclosures; or
      4. [access to abortion, sex or gender change or transgender surgery; or]
      5. divesting from, limiting investment in, or limiting the activities or investments of, any company, for engaging in, facilitating, or supporting the manufacture, distribution, sale, or use of firearms.
  4. “Public Retirement System” means any retirement or pension system or plan maintained, provided or offered by:
    1. the State or any political subdivision of the State, including but not limited to any county, city [list all other subdivisions possible in the state (village, borough, school district, water district, etc.)], or
    2. any school, college, university, administration, authority, or other enterprise operated by the State or any political subdivision of the State.

Section 2. Fiduciary Duty

  1. In making and supervising investments of the reserve fund of a public retirement system, an [investment manager] [fiduciary] or [the governing body] shall discharge its duties solely in the financial interest of the participants and beneficiaries for the exclusive purposes of:
    1. providing financial benefits to participants and their beneficiaries; and
    2. defraying reasonable expenses of administering the system.
  2. An investment manager appointed under [state authorization state] shall be subject to the same fiduciary duties as the [governing body].
  3. A fiduciary shall take into account only financial factors when discharging its duties with respect to a plan.
  4. All shares held directly or indirectly by or on behalf of a public retirement system and/or the participants and their beneficiaries shall be voted solely in the financial interest of plan participants and their beneficiaries.
  5. [Unless no economically practicable alternative is available,] the [governmental entity] that establishes or maintains a public retirement system may not grant proxy voting authority to any person who is not a part of the [governmental entity], unless that person has a practice of, and in writing commits to, follow guidelines that match the [governmental entity’s] obligation to act solely upon financial factors.
  6. [Unless no economically practicable alternative is available,] public retirement system assets shall not be entrusted to a fiduciary, unless that fiduciary has a practice of, and in writing commits to, follow guidelines, when engaging with portfolio companies and voting shares or proxies, that match the [governmental entity’s] obligation to act solely upon financial factors.
  7. [Unless no economically practicable alternative is available,] an [investment manager] [fiduciary] or [governmental entity] may not adopt a practice of following the recommendations of a proxy advisor or other service provider, unless such advisor or service provider has a practice of, and in writing commits to, follow proxy voting guidelines that match the [governmental entity’s] obligation to act solely upon financial factors.
  8. All proxy votes shall be tabulated and reported annually to the [Board]. For each vote, the report shall contain a vote caption, the plan’s vote, the recommendation of company management, and, if applicable, the proxy advisor’s recommendation. These reports shall be posted on a publicly available webpage on the Board’s website.

Section 3. Enforcement

  1. This article, or any contract subject to this article, may be enforced by the attorney general, or [applicable executive branch official].
  2. If the attorney general or [applicable executive branch official] has reasonable cause to believe that a person has engaged in, is engaging in, or is about to engage in, a violation of this article, he may:
    1. Require such person to file on such forms as he prescribes a statement or report in writing, under oath, as to all the facts and circumstances concerning the violation, and
    2. such other data and information as he may deem necessary.
  3. Examine under oath any person in connection with the violation.
  4. Examine any record, book, document, account, or paper as he may deem necessary.
  5. Pursuant to an order of the [state trial court], impound any record, book, document, account, paper, or sample or material relating to such practice and retain the same in his possession until the completion of all proceedings undertaken under this article or in the courts.

Section 4. Applicability and Effective Date

Content courtesy of the Heritage Foundation

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