Legislature(2021 - 2022)GRUENBERG 120
03/10/2022 03:00 PM House STATE AFFAIRS
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| Audio | Topic |
|---|---|
| Start | |
| HB396 | |
| HB218 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 396 | TELECONFERENCED | |
| *+ | HB 218 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
HB 396-DIVEST INVESTMENTS IN RUSSIAN ENTITIES
3:07:07 PM
CHAIR KREISS-TOMKINS announced that the first order of business
would be HOUSE BILL NO. 396, "An Act restricting certain
investments of state funds in certain Russian entities; and
providing for an effective date."
3:08:47 PM
LUCINDA MAHONEY, Commissioner, Department of Revenue, co-
presented a PowerPoint presentation, titled "Divestment
regarding Russian Entities" [hard copy included in the committee
packet]. She provided an overview of the presentation on slide
2, which read as follows [original punctuation provided]:
? Introduction
? Status and Sanctions
? Market Overview
? Treasury Investments
? APFC Investments
? Actions by Institutional Investors
? Fiduciary Standards
? Q&A
3:10:58 PM
COMMISSIONER MAHONEY continued to slide 3, which provided a
summary of Alaska investments in Russian assets. She pointed
out that the Alaska Permanent Fund Corporation (APFC) had $219
million invested in Russian assets, the majority of which was in
stocks; the Alaska Retirement Management Board (ARM Board) had
$94 million invested in Russian assets; state funds had $7
million invested in Russian assets; and defined contribution
investments in Russian assets totaled $13 million. In total,
$333 million was invested in Russian assets. She estimated that
liquidating the stocks would yield 2 percent of the value, the
bonds would yield 20 percent, and private equity investment
would yield zero percent, resulting in a combined total
estimated value of $18 million, as of 3/7/22.
3:14:23 PM
REPRESENTATIVE EASTMAN inquired about the definition of Russian
assets.
COMMISSIONER MAHONEY said in regard to stocks, Russian assets
were investments in Russian companies that were traded on the
stock exchange. In terms of bonds, "Russian assets" were bonds
that were issued by a Russian company or the Russian government
itself.
REPRESENTATIVE EASTMAN inquired about the definition of private
equity investments in Russian assets.
COMMISSIONER MAHONEY deferred to Mr. Frampton.
3:15:26 PM
MARCUS FRAMPTON, Chief Investment Officer, Alaska Permanent Fund
Corporation, explained that APFC was a limited partner in three
venture capital funds, which were each invested in at least one
technology software company in Russia.
CHAIR KREISS-TOMKINS asked which fund had those private equity
investments.
MR. FRAMPTON reiterated that the venture capital funds had made
those investments. One, he said, was a European venture fund
called Index Ventures and another was a global fund called Y
Combinator.
3:16:52 PM
REPRESENTATIVE VANCE asked whether any additional fees or costs
would be incurred in the divestment process that would reduce
the estimated valuation of $18 million.
COMMISSIONER MAHONEY acknowledged that there would be fees
associated with divestment, which were not included in the $18
million. She reiterated that the valuation was a rough
estimate.
REPRESENTATIVE VANCE expressed her concern that the state could
lose more money by taking sudden action. She asked whether
there was a more prudent divestment method to minimize losses.
COMMISSIONER MAHONEY recommended providing the Department of
Revenue (DOR) with as much time as possible to watch the market
and potentially work with large banks that may consolidate and
procure some investments. She said flexibility was the most
important factor to allow investment managers to take
appropriate action.
3:19:53 PM
REPRESENTATIVE KAUFMAN wondered whether legislative action was
required in this scenario. He asked whether the Russian assets
could be managed within the regular risk management process.
COMMISSIONER MAHONEY confirmed that they could be managed within
the regular risk management process.
REPRESENTATIVE KAUFMAN opined that [the Russian assets] should
be managed within the autonomy of the fund managers to the
greatest extent possible.
COMMISSIONER MAHONEY pointed out that there were different
perspectives among the trustees. Some believed that the prudent
course of action was to hold off on divestment, thereby avoiding
a "fire sale." Other trustees might conclude that the financial
conditions in Russia would continue to deteriorate making it
prudent to sell sooner than later. She ventured that the
majority of the trustees recommended holding off in anticipation
of a recovery period.
3:22:58 PM
REPRESENTATIVE TARR shared her understanding that the chair of
the APFC Board of Trustees was seeking direction from the
legislature on this issue. She asked if that was correct.
COMMISSIONER MAHONEY said the board was not authorized to make
decisions based on social factors. She noted that slide 11
reviewed the Prudent Investor Rule, which was the foundation for
investment decisions.
3:26:23 PM
COMMISSIONER MAHONEY resumed the presentation on slide 4, which
highlighted unprecedented global sanctions against Russia. She
noted that the swift ban enacted on seven Russian banks crippled
Russia's financial system by denying them access to
international markets. She turned the presentation over to Mr.
Hanna
3:29:13 PM
ZACHARY HANNA, Chief Investment Officer, DOR, provided a summary
of international equity markets in Russia on slide 5, which read
as follows [original punctuation provided]:
? Most institutional investors invest in a diverse
basket of global securities.
? The Morgan Stanley All-Country World Index
Investable Market Index (MSCI ACWI IMI) is a common
institutional index that incorporates 99% of globally
publicly traded equities.
? The index is diversified across 48 countries 23
developed and 25 emerging market and includes roughly
9,300 securities.
? The index is a reasonable proxy for many
institutional investor portfolios:
CHAIR KREISS-TOMKINS sought to clarify whether the term
"securities" in bullet points one and three should be replaced
with the term "equities," as equities were being discussed on
this slide.
3:31:53 PM
MR. HANNA confirmed that equities were being discussed on slide
5. He advanced provided an update on the current status of
Russian equity investments on slide 6, which read as follows
[original punctuation provided]:
? Russian equities decreased by 53% in value in
February.
? Trading halted on February 25th for all Russian-
listed equities.
? There is currently no way to buy or sell Russian
equities on an exchange.
? Valuations are now highly speculative since they are
no longer provided by the market.
All major stock indexes are taking Russian
securities out this month and passive index funds are
holding Russian securities at low-to-no-value.
3:33:17 PM
REPRESENTATIVE EASTMAN inquired about the 90-day divestment
period in HB 396 and how that would impact the board's ability
to act with discretion.
MR. HANNA suggested that the [90-day timeframe] should begin
once markets open, as there was no ability to transact in volume
with these securities at present.
3:35:53 PM
MR. HANNA resumed the presentation on slide 7, which read as
follows [original punctuation provided]:
Treasury Russian equity investments 0.23% of $50.6
billion in assets:
Defined Benefit Retirement Systems 0.28% of $33.9
billion in assets
? 0.28% of the retirement funds had Russian equity
exposure on 1/31/22 ($93.5 million).
? 7 investment managers 4 active, 3 passive/index.
State Investments 0.10% of $7.7 billion in assets
? 0.10% of state assets had Russian equity exposure on
1/31/22 ($7.4 million).
? 1 passive/index investment manager.
Participant Directed 0.15% of $9.0 billion in assets
? 0.15% of participant directed assets had Russian
equity exposure on 1/31/22 ($13.4 million).
? 4 investment managers 2 managers active, 2
passive/index funds.
? All of the Russian exposure is through commingled
funds where the ARMB is not the direct fiduciary for
the funds.
Treasury has directed a halt to the purchase of
Russian securities at this time.
CHAIR KREISS-TOMKINS inquired about the impetus of the
Treasury's direction to halt the purchase of Russian securities.
MR. HANNA said the direction was due to market conditions, which
were completely illiquid. He added that the risk profile for
Russian securities was highly uncertain due to that illiquidity.
3:40:37 PM
CHAIR KREISS-TOMKINS asked how index funds absolved themselves
of any exposure in Russian securities if the Moscow Stock
Exchange (MOEX) was closed.
MR. HANNA explained that index managers publish a list of
securities included in the index, which investment managers use
to invest passive investment funds. He conveyed that when an
index manager takes something out of its holding list, it would
no longer be included in something that's passively managed. He
noted that securities in such portfolios still exist; however,
they're largely held at a zero value and therefore, have no
impact on the portfolios. He expected that over time, the
securities would be divested from.
CHAIR KREISS-TOMKINS sought to confirm that there were still
Russian assets held by the index funds that the State of Alaska
was invested in.
MR. HANNA confirmed, adding that the passive index funds were
being managed to track the overall index without any Russian
securities in it to minimize their tracking error. Once markets
reopen, he said, the managers that manage index funds would be
highly motivated to sell the securities in question, as they
would become a source of tracking error.
CHAIR KREISS-TOMKINS concluded that in the near future, the
index funds would not hold Russian assets, which they do hold at
present.
MR. HANNA said, "Correct."
3:44:04 PM
REPRESENTATIVE EASTMAN inquired about the limitations on
purchasing Russian securities.
MR. HANNA noted that there was no ability to purchase Russian
securities in any case at present; further, there was a
prohibition on the purchase of Russian securities when the
option became available again. He addressed sanctions, noting
that the ARM Board and other fiduciaries were considered U.S.
persons for that purpose, making the prohibitions applicable to
them. He emphasized that the prohibition was on new issuance of
equities, as opposed to a prohibition on secondary sales of
equities.
REPRESENTATIVE EASTMAN asked to what extent Ukrainian assets had
been sanctioned due to volatility.
MR. HANNA said that step had not been taken.
3:49:19 PM
MR. FRAMPTON addressed APFC's exposure to Russian securities on
slide 8, which read as follows [original punctuation provided]:
As of December 31, 2021 APFC's exposure to Russian
securities totals to $219 million which accounts for
0.3% of Alaska Permanent Fund's $82 billion assets
under management.
Fixed Income:
$63 million in Russian and Ukrainian governments bonds
in the Fixed Income portfolio. Less than $10 million
of that under internal management.
Public Equity:
$153 million in publicly traded Russian stocks, traded
on the Moscow Stock Exchange. All public stocks held
in APFC's name are in externally managed accounts.
Private Equity:
$2.7 million represents Private Equity stakes in
portfolio companies held by funds in which APFC is one
of many investors. APFC does not maintain control of
the investments in these portfolio companies.
3:52:18 PM
CHAIR KREISS-TOMKINS inquired about the status of the London
equities and asked whether they had been delisted.
MR. FRAMPTON explained that in New York and London, there was a
type of security, called an ADR or GDR, that reference
securities traded in another market. He conveyed that the
London Stock Exchange halted trading in Russian GDRs over a week
ago.
3:56:47 PM
MR. FRAMPTON proceeded to slide 9, highlighting APFC's current
situation, which read as follows [original punctuation
provided]:
Global Complexity:
Divestment strategies are complicated. Given the
market conditions, selling Russian assets today would
be challenging.
Markets Closure:
The vast majority of APFC's Russian securities are
blocked from trading due to Russian and US sanctions.
Valuations Uncertain:
External and internal managers have been directed not
to purchase any Russian securities.
APFC Board and Staff are and will comply with all
policy directives from federal and state levels.
3:57:55 PM
CHAIR KREISS-TOMKINS asked Mr. Frampton whether he knew what
portfolio companies were invested in by funds in which APFC was
a limited partner (LP).
MR. FRAMPTON said yes, noting that APFC receives data on
portfolio companies from every fund its in. He listed the
portfolio companies as follows: ClickHouse, TradingView, and
Datrix.
3:59:19 PM
REPRESENTATIVE TARR asked whether the portfolio companies would
be evaluated on the policy set by the legislature if the
proposed legislation, HB 396, were to pass.
MR. FRAMPTON pointed out that HB 396 included a provision on co-
mingled funds.
4:00:55 PM
REPRESENTATIVE CLAMAN inquired about Y Combinator's investments
in Russian companies and asked whether APFC would have to direct
the company to sell its Russian investments.
CHAIR KREISS-TOMKINS shared his understanding that HB 396 would
create a carveout for comingled funds such as Y Combinator;
therefore, APFC could hold its interests in Y Combinator, which
in turn had interests in Russian companies. He asked Mr.
Frampton whether that analysis was accurate.
MR. FRAMPTON answered yes.
REPRESENTATIVE CLAMAN inquired about slide 5.
MR. FRAMPTON explained that the Morgan Stanley All-Country World
Index Investable Market Index (MSCI ACWI IMI) was a benchmark
used by APFC to manage its public equity portfolio against. He
said the purpose of the slide was to highlight the weight of
Russia in that market index. Further, MSCI had announced that
Russia would be removed from the index by the end of March
[2022].
4:04:45 PM
REPRESENTATIVE CLAMAN considered a scenario in which APFC owned
stock in a Russian company. He inquired about the process of
selling stocks that were no longer economically viable to hold
unrelated to a divestment order that may come from the
legislature.
MR. FRAMPTON perceived Russian stocks as close to worthless in
today's state of affairs. Despite some option value, he said,
it was not possible to sell interest in these stocks at present,
which was why flexibility would be important in the proposed
legislation.
4:06:56 PM
COMMISSIONER MAHONEY resumed the presentation on slide 10,
titled "What are others doing?" which read as follows [original
punctuation provided]:
States
? Based on a survey administered by The Pennsylvania
Treasurer, on 3/4/22, there were a total of 27 states
who are currently looking into or currently freezing
state money or pension funds going to Russian
companies, investments or oligarchs
? Other actions taken by other states include the
following:
? Looking into or currently banning state
agencies from doing business with Russian state-owned
firms and subcontractors
? Blocking Russian businesses and nonprofits from
acquiring property in their state for 1 year
? Looking into or ending sister state
relationship with Russia
? Officially condemned Russia's invasion
? Welcoming refugees
? Calling on businesses to ban Russian made goods
Norway Sovereign Wealth Funds
? Norway announced that they are divesting from Russia
? Russian assets at the end of 2021 made up 0.2% of
Norway fund ($3 billion in total)
? Recognize that divestment takes time because they
want to ensure sales are not made to sanctioned
individuals/entities
4:09:56 PM
REPRESENTATIVE TARR asked whether the administration was
considering the call for businesses to ban the sale of Russian-
made goods.
COMMISSIONER MAHONEY agreed that such a call would be made by
the governor.
4:10:34 PM
CHAIR KREISS-TOMKINS asked whether the administration supported
divesting the State of Alaska of its Russian assets.
COMMISSIONER MAHONEY relayed that the governor supported
divestment; however, the governor would be proposing a separate
divestment bill that would differ from HB 396. She stated that
the governor's bill would not include APFC or the retirement
fund; further, it would extend the timeframe for divestiture and
have a different repeal date. The forthcoming bill would also
include language addressing the global banks that had been
reportedly profiteering from trading Russian investments.
CHAIR KREISS-TOMKINS asked what the governor's bill would be
divesting from if it didn't include APFC and the pension funds.
COMMISSIONER MAHONEY said the $7 billion managed under the
fiduciary control of the commissioner of DOR.
CHAIR KREISS-TOMKINS asked why the governor's proposal would
have such a limited scope.
COMMISSIONER MAHONEY said the governor was concerned about
compromising concerns.
CHAIR KREISS-TOMKINS questioned the perceived upside of holding
Russian assets at this moment.
COMMISSIONER MAHONEY said the governor wanted to allow the Board
of Trustees to make the determination to divest if and when
appropriate.
CHAIR KREISS-TOMKINS asked why the governor would only apply
that rationale to the pension fund and APFC.
COMMISSIONER MAHONEY indicated that the $7 billion "wasn't that
significant of an impasse" while still sending a message of
support for divestiture from Russian assets.
4:14:09 PM
REPRESENTATIVE KAUFMAN asked how reentry could be structured if
a divestment bill were to pass.
COMMISSIONER MAHONEY explained that the governor's legislation
would likely incorporate a simultaneous repeal of the bill with
the federal government's repeal of the sanctions identified in
Executive Order (EO) 14024. In summary, the administration
would feel comfortable reengaging with Russian investments when
the federal government lifted its sanctions.
4:16:22 PM
COMMISSIONER MAHONEY concluded the presentation on slide 11,
titled "Guiding Statutes for Investing," which read as follows
[original punctuation provided]:
? Prudent Investor Rule Summary
? In addition to other considerations, a fiduciary
shall exercise the judgment and care under the
circumstances then prevailing that an institutional
investor of ordinary prudence, discretion, and
intelligence exercises in the management of large
investments.
? ARMB/Treasury Statutes
? AS 37.10.071(c) In exercising investment,
custodial, or depository powers or duties under this
section, the fiduciary of a state fund shall apply the
prudent investor rule and exercise the fiduciary duty
in the sole financial best interest of the fund
entrusted to the fiduciary. Among beneficiaries of a
fund, the fiduciaries shall treat beneficiaries with
impartiality.
? AS 37.10.210(a) Consistent with standards of
prudence, the board has the fiduciary obligation to
manage and invest these assets in a manner that is
sufficient to meet the liabilities and pension
obligations of the systems, plan, program, and trusts.
? APFC Statutes
? 37.13.120. Investment responsibilities. (a) The
board shall adopt regulations specifically designating
the types of income-producing investments eligible for
investment of fund assets. When adopting regulations
authorized by this section or managing and investing
fund assets, the prudent-investor rule shall be
applied by the corporation. The prudent-investor rule
as applied to investment activity of the fund means
that the corporation shall exercise the judgment and
care under the circumstances then prevailing that an
institutional investor of ordinary prudence,
discretion, and intelligence exercises in the
designation and management of large investments
entrusted to it, not in regard to speculation, but in
regard to the permanent disposition of funds,
considering preservation of the purchasing power of
the fund over time while maximizing the expected total
return from both income and the appreciation of
capital.
4:19:03 PM
CHAIR KREISS-TOMKINS inquired about the GeFONSI [General Fund
and Other Non-segregated Funds] acronym.
COMMISSIONER MAHONEY explained that the acronym referenced the
general government funds that comprised the $7 billion.
CHAIR KREISS-TOMKINS, returning to slide 3, asked what category
the $7 billion in general government funds fell under.
4:20:24 PM
MR. HANNA said the $7 billion would fall under "State Funds."
He noted that the $7 million on slide 3 was composed of any
state funds with a longer time horizon and therefore exposure to
international equities
CHAIR KREISS-TOMKINS asked whether the $7 million on slide 3 was
a pre-war evaluation before Russian trading activity shut down.
MR. HANNA confirmed.
4:21:18 PM
REPRESENTATIVE CLAMAN recalled that Commissioner Mahoney had
mentioned investing in the full best interest of the fund. He
asked where that language was referenced on slide 11.
COMMISSIONE MAHONEY asked Representative Claman whether he was
referring to her statement on "the sole financial best interest
of the fund?"
REPRESENTATIVE CLAMAN answered yes.
COMMISSIONER MAHONEY cited AS 37.10.071(c), which was featured
in the second bullet, titled "ARM/Treasure Statutes," on slide
11.
REPRESENTATIVE CLAMAN sought to confirm that the language in
questions only applied to the ARM Board not the management of
the Alaska Permanent Fund.
COMMISSIONER MAHONEY said the permanent fund statutes were
highlighted in bullet three of slide 11. She pointed out that
the same language was not used; nonetheless, APFC trustees
managed the fund in the same manner, as the sole financial
interest was executed on.
4:22:54 PM
REPRESENTATIVE EASTMAN asked for Ms. Mahoney to opine on the
broad exemption [in HB 396] statutes given the importance of the
Prudent Investor Rule.
COMMISSIONER MAHONEY asked whether Representative Eastman was
referring to exemptions associated with co-mingled funds.
REPRESENTATIVE EASTMAN remarked:
I'm talking about the exemptions dealing with any
conflicting statute or law that might conflict with
this bill. In the scenario where, perhaps, the
Prudent Investor Rule might conflict with this bill, I
think that exemption might apply.
COMMISSIONER said if the legislature were to provide direction
to divest and if the bill exempted the prudent investor rule,
the trustees would follow that directive.
4:24:11 PM
REPRESENTATIVE TARR expressed her surprise that APFC lacked a
specific environmental, social, and governance (ESG) directive.
She wondered whether a military invasion would be considered ESG
policy.
COMMISSIONER MAHONEY answered yes, adding that the goal was to
keep the funds [APFC and the retirement fund] completely
independent. To the extent that either fund deviated from the
Prudent Investor Rule, she said, the trustees would require a
directive.
4:25:38 PM
CHAIR KREISS-TOMKINS sought to confirm that the governor's
forthcoming proposal would relate to $7 million of the $333
million in Russian assets.
COMMISSIONER MAHONEY said yes. Additionally, the bill would
evaluate working with companies that were profiteering from
trades, she noted.
4:26:37 PM
REPRESENTATIVE CLAMAN asked whether the legislature would have
any assurance that the trustees wouldn't buy options in Russian
stocks, which were practically worthless.
COMMISSIONER MAHONEY pointed out that both the retirement fund
and APFC were given a directive not to purchase Russian stocks
based on the uncertainty associated with the risk of such
investment. She reiterated that the trustees were not allowed
to make decisions based on anything other than financial benefit
to the funds.
REPRESENTATIVE CLAMAN sought to confirm that absent legislation
directing a halt to investment in Russian assets, APFC could
make an investment in Russian assets while the war was ongoing.
COMMISSIONER MAHONEY answered yes.
4:29:20 PM
REPRESENTATIVE STORY asked the commissioner to elaborate on
companies that were profiteering.
COMMISSIONER MAHONEY recalled that various media had reported
that Goldman Sachs and JP Morgan were profiteering from
facilitating transactions in the secondary market between buyers
and sellers. It was reported that they were encouraging
investors to buy in an attempt to represent a significant
recovery opportunity. Additionally, she pointed out that
Goldman Sachs had listed "human rights" as one of its social
goals, which she found to be hypocritical if the company was
indeed profiteering from facilitating transactions. She
suggested using alternative banks if they provided the same
services.
CHAIR KREISS-TOMKINS expressed his interest in the subject.
4:31:43 PM
REPRESENTATIVE VANCE asked whether APFC had ever faced a similar
situation in regard to potential divestment.
MR. HANNA understood that in 2012, the ARM Board and state funds
divested from Iran due to a nuclear decommissioning effort;
however, he was unsure whether APFC took part in that effort.
4:34:13 PM
REPRESENTATIVE EASTMAN asked whether any policies dealt with an
organization's criminal history or habitual criminal actions.
COMMISSIONER MAHONEY said she was not aware of any statutes that
addressed that.
CHAIR KREISS-TOMKINS announced that HB 396 was held over.