New California Law Will Require Increased Private Fund Fee Disclosures
On September 14, California Gov. Jerry Brown signed into law legislation intended to increase transparency regarding the fees and expenses paid by public pension or retirement systems to certain private funds in which they invest, including private equity and hedge funds.
The Fee Disclosure Law adds Section 7514.7 to the California Government Code and requires public pension funds in California receive from their alternative investment vehicle fund managers certain fee and other information, which will be disclosed to public at least annually. The law applies to all new contracts and existing contracts to which the public pension fund makes a new capital commitment on or after January 1.
Under the Fee Disclosure Law, the private fund must provide its public pension fund investors with the following information:
- the fees and expenses that the public pension fund pays directly to the alternative investment vehicle, the fund manager, or related parties;
- the public pension fund’s pro rata share of fees and expenses not included in the above paragraph that are paid from the alternative investment vehicle to the fund manager or related parties;
- the public pension fund’s pro rata share of carried interest distributed to the fund manager or related parties;
- the public pension fund’s pro rata share of aggregate fees and expenses paid by all of the private fund’s portfolio companies; and
- additional information described in subdivision (b) of Section 6254.26 of the California Public Records Act, which includes, among other things, identifying information about the private fund (name, address, etc.), contributions made by the public pension fund to the private fund and distributions received by the public pension fund.
The law applies to all California public pension and retirement systems, including state-level plans, as well as those at the county and city levels. Some notable public pension funds that fall under the law include CalPERS, CalSTERS and the University of California retirement system. Under the Fee Disclosure Law, public pensions funds are required to “undertake reasonable efforts” to obtain the required information.
While no other state has a similar statute in place, there are initiatives like the Fee Disclosure Law in some places - New Jersey and Illinois, to name a couple - and it’s expected that this trend will continue.