New Law Mandates Disclosure of Alternative Fund Fees By California Public Pensions

Assembly Bill 2833 was signed into law by California Governor Jerry Brown on September 14, 2016. Beginning January 1, 2017, the new law mandates that California public pension plans (PPPs), whether at the state, county or city level, require all private equity funds, venture funds, hedge funds or absolute return funds, whether a limited partnership, limited liability company or similar legal structure (Alternative Funds), to make disclosures of fees and expenses paid by PPPs. In turn, the PPPs must disclose such information during meetings open to the public.

Disclosure Requirements

Every PPP must require each Alternative Fund it invests in to disclose the following information at least annually:

• The fees and expenses the PPP pays directly to the Alternative Fund, the fund manager or related parties;
• The PPP’s pro rata share of fees and expenses (not already covered above) that are paid from the Alternative Fund to the fund manager or related parties, which may be independently calculated by the PPP based on information contractually required to be provided by the Alternative Fund to the PPP;
• The PPP’s pro rata share of carried interest distributed to the fund manager or related parties;
• The PPP’s pro rata share of the aggregate fees and expenses paid by all portfolio companies held by the Alternative Fund to the fund manager or related parties; and
• Certain identifying and financial information about the Alternative Fund, all of which is already required to be disclosed under Section 6254.26(b) of the California Public Records Act.

In turn, every PPP is required to disclose the information provided by each Alternative Fund in a report presented at a meeting open to the public at least on an annual basis. The report must also include the gross and net rate of return, since inception, of each Alternative Fund in which the PPP participates, which may be based on the PPP’s own calculations or on calculations provided by the Alternative Fund.

The disclosure requirements call for dollar amounts of fees rather than percentage figures. Although earlier drafts of the legislation required a disclosure form prescribed by the PPPs, the final bill removed all references to a form, allowing greater flexibility when negotiating disclosure reporting.

The new law broadly defines “related party” to capture all fees that are directly or indirectly charged to PPPs and paid to:

• the Alternative Fund, fund manager, or general partner;
• their “related person” such as any current or former employee, manager, or partner of any related entity and any of their respective family members;
• an “operational person” such as any operational partner, senior advisor, or other consultant or employee whose primary activity for a relevant entity is to provide operational or back office support to any portfolio company of any Alternative Fund managed by a related person;
• any entity more than 10 percent of which is owned directly or indirectly by a related person or operational person; and
• any consulting, legal, or other service provider regularly engaged by portfolio companies of an Alternative Fund managed by a related person and that also provides advice or services to any related person or relevant entity.

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