Pennsylvania Ponders New Pension Disclosure Rules –

In the wake of California Gov. Arnold Schwarzenegger signing a pension fund disclosure bill into law, the state of Pennsylvania is now considering two separate bills that would regulate the way pension fund investment information is disclosed. Pennsylvania is the latest state to take the initiative and the direction the legislation takes could well effect how the state’s two largest pensions invest in private equity.

The California Governor signed a public pension disclosure limit bill into law on Sept. 22. The bill, S.B. 439, codifies what California courts and legal agreements have already declared: that public pension funds should disclose the funds that they invest in, the rates of return of those funds and the management fees paid to investment firms but not the values of underlying portfolio companies, capital call information or confidential internal private equity firm documents. The California Public Employees’ Retirement System (CalPERS) voiced support for the legislation.

The bill was introduced and championed by California State Senator Joe Simitian, whose district includes a sizeable segment of the venture capital industry. “From the outset I was trying to balance two legit competing interests. I wanted to respect the public’s right to know but also the need to protect proprietary information,” said Simitian. “I think it’s a winner all around.” Simitian says that the ability for California to get this passed bodes well for the pension disclosure issue nationwide. “If we could bring interested parties together in California … it may well prove useful to others around the country,” he says.

On the other side of the United States, Pennsylvania is now considering two separate pieces of legislation that would set similar legal guidelines with its own two pensions, the Pennsylvania State Employees’ Retirement System (SERS) and the Pennsylvania Public School Employees’ Retirement System (PSERS).

Pennsylvania State Representative Robert Godshall, who sits on the SERS board of trustees, introduced H.B.126, which would govern SERS disclosures. Pennsylvania State Representative Steven Nickol, who is vice chairman of the PSERS board of trustees, proposed legislation governing PSERS disclosure as an amendment to another bill, H.B.546. Both pieces of legislation have passed the State House and await action by the State Senate Finance Committee, along with a senate bill that contains language from both bills. As of yet the State Senate Finance Committee has not set a time table for considering any of the legislation.

The differences between the bills governing the two pension systems is that the SERS legislation leaves the decisions about what is disclosed up to private equity funds. The PSERS legislation would have PSERS make those disclosure decisions. The SERS bill specifies “sensitive information” related to private equity firms, whereas critics of the PSERS legislation say that the PSERS bill could apply to any public record held by the pension system.

SERS has urged lawmakers to support H.B.126. A SERS spokesman said that the $27 billion pension has been turned away from a total of five private equity funds with previously existing relationships and that the pension system has lost out on the opportunity to invest as much as $135 million in these five funds. Among these are venture capital firms Charles River Ventures and U.S. Venture Partners.

Godshall says that this rejection from top-tier funds is what motivated him to propose his legislation. “What we tried to put in the bill is what some of the top tier venture capital operations said they had to have,” said Godshall. “It doesn’t do us any good to pass a bill if it doesn’t give us enough leverage to operate with the top firms. More and more of the top tier firms are demanding that confidentiality.”

PSERS has so far not found itself being turned away from any private equity funds, but it is also concerned that failure to achieve clarity on disclosure issues would make it less appealing to top-tier firms. “We haven’t had the same experience but we do have the same concerns,” says Nickol. He delayed the introduction of his legislation until after he had tried to address the concerns of the Pennsylvania Newspaper Association (PNA). Nickol says he introduced his legislation once discussions with the PNA did not produce any meaningful results. The PNA does not support any of the bills.

Nickol said that the two bills will likely have to be reconciled, and that the SERS approach of leaving all disclosure decisions in the hands of private equity firms is perhaps overly conservative.

He adds that because PSERS tends to take larger shares of the funds it invests in, it is harder for them to be turned away by funds. “We have a little bit greater control over some of the funds we invest in whereas SERS does not,” says Nickol. “It’s easy to walk away from 5% but 25% is a bit much.”

These efforts on the heels of California’s new law also follow legislative action in Colorado, Massachusetts and Michigan. State pension funds in California, Massachusetts and Michigan found themselves not welcome into funds raised by Charles River, Sequoia Capital and Woodside Fund. Also, Austin Ventures did not accept any Texas-based public pension funds into its latest fund due to very liberal interpretations of public disclosure laws by the Texas Attorney General.