LRB-4419/2
RAC/KSH:skg/kmg:jlb
1995 - 1996 LEGISLATURE
November 1, 1995 - Introduced by
Committee on Audit. Referred to Committee
on Audit.
SB402,1,10
1An Act to repeal 15.07 (2) (a) and 25.18 (1) (L);
to renumber and amend 25.50
2(5);
to amend 13.94 (1) (df), 13.94 (1s) (c) 3., 15.76 (intro.), 19.42 (10) (L) and
3(13) (k), 25.156 (4), 25.16 (1), 25.16 (2), 25.16 (4), 25.17 (intro.), 25.17 (51), 25.18
4(1) (intro.), 25.18 (2) (intro.) and 25.18 (2) (e);
to repeal and recreate 25.17
5(14m); and
to create 15.76 (1r), 25.156 (2m), 25.156 (8), 25.165, 25.167, 25.17
6(14g), 25.17 (14r), 25.17 (51m), 25.183, 25.50 (5) (a) to (d) and 25.50 (5m) of the
7statutes;
relating to: legislative oversight of the investment board, structure
8and composition of the investment board, regulation of certain investments by
9the investment board, granting rule-making authority and making an
10appropriation.
Analysis by the Legislative Reference Bureau
This bill does all of the following:
1. Under current law, the investment board (board) consists of the following 8
members: the secretary of administration or the secretary's designee; 5 members
appointed by the governor for 6-year terms, 4 of whom must have at least 10 years'
experience in making investments; and 2 participants in the Wisconsin retirement
system (WRS), one of whom is a teacher appointed by the teachers retirement board
for a 6-year term and one of whom is a nonteacher appointed by the Wisconsin
retirement board for a 6-year term. This bill requires the governor to appoint a
representative of local government to the board.
Under current law, the chairperson and vice chairperson of the board are
designated biennially by the governor. The bill provides that the board must select
its chairperson and vice chairperson.
2. The bill creates an internal audit subunit in the board, under the supervision
of an internal auditor. The internal auditor is appointed by the board, reports
directly to the board (unlike other board employes who are appointed by, and report
to, the executive director of the board) and is authorized to appoint his or her staff.
The internal auditor and his or her staff are to serve outside of the classified service
and are to participate in the board's bonus compensation program. The internal
auditor is required to file an annual statement of economic interests with the state
ethics board.
The internal auditor is authorized to review any activity, information or
investment of the board and have access to the records of the board or any external
party under contract with the board. In addition, the internal auditor is required to
plan and conduct audit activities, risk assessments, research projects and
management reviews under the direction of the board and in accordance with
policies, principles and directives determined by the board; coordinate and assist
with external audits and reviews of the board; monitor for compliance with the
board's contractual agreements any bank, savings and loan association, savings
bank or credit union with which the board has entered into a custodial agreement,
any investment advisers with which the board has contracted to manage and control
board assets and any other external parties with which the board has contracted to
provide investment services to the board.
3. The bill requires the board to keep full minutes of its proceedings.
4. The bill limits the ability of the board to make certain types of investments.
The bill prohibits the board from purchasing or acquiring any derivative in the state
investment fund except in accordance with rules promulgated by the board. These
rules must restrict the purchase or acquisition of derivatives to certain specified
types of risk-reducing transactions. The bill defines "derivative" to mean any
financial contract or other instrument that derives its value from the value or
performance of any security, currency exchange rate or interest rate or of any index
or group of any securities, currency exchange rates or interest rates. The bill also
provides that "derivative" does not include the following types of instruments:
securities traded on a national securities exchange or on a interdealer quotation
system sponsored by a registered securities association; forward contracts with a
maturity of less than 270 days; contracts for the sale of a commodity for future
delivery, or any option on such a contract, traded or executed on a designated contract
market and subject to federal regulation; registered mutual fund or investment trust
shares; deposits held by a financial institution; certain types of investments that the
board is specifically authorized to invest in under current law; certain collateralized
mortgage obligations and other asset-backed securities; certain types of
transactions, commonly referred to as "swaps", if the counterparty meets certain
creditworthiness requirements, if the transaction is used only for risk reduction and
if the board's payment obligations are fully backed by identified assets of the state
investment fund; and any financial contract or instrument that the board
determines, by rule, is not a derivative. The bill defines a "reverse repurchase
agreement" to mean an agreement for the sale of securities by the board under which
the board will repurchase those securities on or before a specified date and for a
specified amount. The bill prohibits the board from entering into a reverse
repurchase agreement unless the repurchase of securities under the agreement will
occur no later than the next business day.
5. The bill also requires the board to provide more information to local
governments investing in the local government pooled-investment fund (the fund).
Under current law, the board is required to formulate policies for the investment and
reinvestment of moneys in the fund and the acquisition, retention, management and
disposition of such investments. The bill amends this provision to require that the
board provide a copy of the investment policies, together with any guidelines adopted
by the board to direct staff investment activity, to each local government having an
investment in the fund. The investment policies and guidelines must be provided
upon the local government's request and at least annually to all investors. These
policies must include information about prohibited investments, asset allocation
requirements, credit standards for private companies in which the fund may invest
and limits on investments in a single company or bank. The board must distribute
at least annually performance information on the fund for the preceding one-year,
5-year and 10-year periods, compared with appropriate indices or benchmarks in
the private sector. Separately, the bill also requires the board to provide information
to the state treasurer to provide a monthly report to each local government having
an investment in the fund. This board must provide this information to the state
treasurer in time to permit the treasurer to mail or electronically transmit the report
to each local government no later than 6 business days after the end of the month
covered by the report. The report must include information on the fund's monthly
earnings with comparison to appropriate indices or benchmarks in the private sector.
Upon the request of a local government having an investment in the fund, the board
is also required to provide a summary of securities held by the fund, including for
each type of security, its cost, current value and, in the case of debt instruments, the
average maturity. The board must provide the information as soon as practicable
after receiving the request.
6. Currently, the board may contract with investment advisers for the
management and control of not more than 10% of the assets of the fixed retirement
investment trust or the variable retirement investment trust. These assets may be
invested in real estate, mortgages, equities, debt of foreign governments and debt of
corporations not organized under the laws of this state. Responsibility for
management and control of the balance of the assets of these trusts rests directly
with the board's employes. When retained, investment advisers are paid from the
income that would otherwise accrue to the trusts. This bill permits the board to
contract with investment advisers for the management and control of not more than
20% of the assets of the fixed retirement investment trust or the variable retirement
investment trust.
7. The bill requires that the executive director of the board appoint a chief
investment officer and that the board participate in the selection of that person. The
chief investment officer will participate in the board's bonus compensation program.
The chief investment officer, under the supervision of the executive director, is
required to monitor the activities of the investment directors for compliance with the
board's policies and guidelines and approve any unusual investments, develop and
implement operating procedures that are intended to ensure that the investment
policies and guidelines of the board are followed and ensure that investments are
completely and accurately reported on all management and financial reports and
that any information requested by the board is provided on a timely basis. The chief
investment officer is required to file an annual statement of economic interests with
the state ethics board.
8. The bill provides that annually, on or before January 1, the board must
submit to the joint legislative audit committee and to the chief clerk of each house,
for distribution to the appropriate standing committees, a report of the board's
annual investment goals and long-term investment strategies. In addition, the bill
requires that the board submit annually to those entities, on or before March 31, a
report which includes all of the following: an assessment of the board's progress in
meeting its annual investment goals; information on the types of investments held
by the board, including the market values of the investments and the degree of risk
associated with the investments, the board's use of derivatives, any ventures by the
board into new markets, any use of new investment instruments by the board and
a comparison of the investment performance of the board to that achieved by a peer
group of public and private entities that invest similar-sized funds; and a discussion
of the amounts and categories of investments made within the state. The bill also
provides that upon adopting any change in the board's investment policies or
guidelines, the board must submit to the joint legislative audit committee and to the
chief clerk of each house, for distribution to the appropriate standing committees, a
report summarizing the change in the investment policies or guidelines.
9. Finally, the bill requires the legislative audit bureau (LAB), in its annual
financial audit of the board, to include an assessment of the fair presentation of the
board's financial statements and an evaluation of the board's internal control
structure. As part of the financial audit, LAB is required to identify certain statutes
and policies and guidelines adopted by the board and determine the extent of
compliance by the board with these statutes, policies and guidelines. In addition, the
bill requires LAB biennially to conduct a performance evaluation audit of the board
that includes an audit of the board's policies and management practices and to
charge the board for the performance evaluation audit, as it does under current law
for the annual financial audit.
For further information see the state fiscal estimate, which will be printed as
an appendix to this bill.
The people of the state of Wisconsin, represented in senate and assembly, do
enact as follows:
SB402, s. 1
1Section
1. 13.94 (1) (df) of the statutes is amended to read:
SB402,5,9
113.94
(1) (df) Annually, perform a financial audit of the investment board,
2including
an assessment of the fair presentation of the financial statements and an
3evaluation of
accounting controls and accounting records the internal control
4structure of the board.
As part of the financial audit, the bureau shall identify
5certain statutes and policies and guidelines adopted by the board and shall
6determine the extent of compliance by the board with the statutes, policies and
7guidelines. Biennially, the bureau shall conduct a performance evaluation audit of
8the investment board that includes an audit of the board's policies and management
9practices.
SB402, s. 2
10Section
2. 13.94 (1s) (c) 3. of the statutes is amended to read:
SB402,5,1211
13.94
(1s) (c) 3. The investment board for the cost of
the any audit required to
12be performed under sub. (1) (df).
SB402, s. 3
13Section
3. 15.07 (2) (a) of the statutes is repealed.
SB402, s. 4
14Section
4. 15.76 (intro.) of the statutes is amended to read:
SB402,5,18
1515.76 Investment board; creation. (intro.) There is created a state of
16Wisconsin investment board, to be known for statutory purposes as the investment
17board. The investment board shall consist of
8 members, as follows the following
18members:
SB402, s. 5
19Section
5. 15.76 (1r) of the statutes is created to read:
SB402,5,2420
15.76
(1r) One member appointed for a 6-year term, who is a representative
21of a local government that participates in the local government pooled-investment
22fund under s. 25.50 and that has a population of less than 150,000. The member shall
23be employed by the local government in a finance position and have had at least 10
24years of financial experience, but may not be an elected official.
SB402, s. 6
25Section
6. 19.42 (10) (L) and (13) (k) of the statutes are amended to read:
SB402,6,3
119.42
(10) (L) The executive director, executive assistant to the executive
2director
, internal auditor, chief investment officer and investment directors of the
3investment board.
SB402,6,6
4(13) (k) The executive director, executive assistant to the executive director
,
5internal auditor, chief investment officer and investment directors of the investment
6board.
SB402, s. 7
7Section
7. 25.156 (2m) of the statutes is created to read:
SB402,6,108
25.156
(2m) The investment board shall employe an internal auditor, who shall
9serve outside the classified service. The board shall fix the compensation of the
10internal auditor.
SB402, s. 8
11Section
8. 25.156 (4) of the statutes is amended to read:
SB402,6,1812
25.156
(4) The members of the board shall promulgate rules restricting the
13executive director,
internal auditor, chief investment officer, investment directors
14and employes from having financial interest, directly or indirectly, in firms or
15corporations providing services to the department and governing the receipt of gifts
16or favors therefrom, and also governing personal investments of all employes
17including the executive director
, internal auditor, chief investment officer and
18investment directors to prevent conflicts of interest.
SB402, s. 9
19Section
9. 25.156 (8) of the statutes is created to read:
SB402,6,2020
25.156
(8) The investment board shall keep full minutes of its proceedings.
SB402, s. 10
21Section
10. 25.16 (1) of the statutes is amended to read:
SB402,7,222
25.16
(1) The executive and administrative functions of the investment board
,
23except for the functions performed by the internal auditor under s. 25.165 (2), shall
24be vested in an executive director, who shall perform the functions of executive
25director in conformity with the requirements of the members of the board and in
1accordance with policies, principles and directives determined by the members of the
2board.
SB402, s. 11
3Section
11. 25.16 (2) of the statutes is amended to read:
SB402,7,154
25.16
(2) The Subject to authorization under s. 16.505, the executive director
5may appoint one division administrator and investment directors and shall appoint
6a chief investment officer and all other employes necessary to carry out the functions
7of the investment board, except that the investment board
shall appoint the internal
8auditor and shall participate in the selection of
the chief investment officer and 9investment directors
and the internal auditor shall appoint his or her staff. The
10executive director shall appoint all employes outside the classified service, except
11blue collar and clerical employes. Neither the executive director,
the internal
12auditor, the chief investment officer, any investment director nor any other employe
13of the board shall have any financial interest, either directly or indirectly, in any firm
14engaged in the sale or marketing of real estate or investments of any kind, nor shall
15any of them render investment advice to others for remuneration.
SB402, s. 12
16Section
12. 25.16 (4) of the statutes is amended to read:
SB402,7,2017
25.16
(4) The executive director shall take the official oath and the executive
18director
, chief investment officer and each investment director shall file a bond for
19the faithful performance of that person's duties in such amount and with such
20sureties as the members of the board require.
SB402, s. 13
21Section
13. 25.165 of the statutes is created to read:
SB402,8,7
2225.165 Internal auditor. (1) There is created in the investment board an
23internal audit subunit, under the supervision of the internal auditor. The internal
24auditor shall report directly to the board and, subject to authorization under s.
2516.505, shall appoint all employes necessary to carry out the duties of the internal
1auditor. The internal auditor shall appoint all employes outside the classified
2service, except blue collar and clerical employes. The internal auditor shall fix the
3compensation of all employes appointed by the internal auditor, subject to
4restrictions set forth in the compensation plan under s. 230.12 or any applicable
5collective bargaining agreement in the case of employes in the classified service, but
6the investment board may provide for bonus compensation to employes in the
7unclassified service as authorized under s. 25.156 (6).
SB402,8,10
8(2) The internal auditor may review any activity, information or investment of
9the board and have access to records of the board and any external party under
10contract with the board and shall do all of the following:
SB402,8,1311
(a) Plan and conduct audit activities, risk assessments, research projects and
12management reviews under the direction of the board and in accordance with
13policies, principles and directives determined by the board.
SB402,8,1414
(b) Coordinate and assist with external audits and reviews of the board.
SB402,8,2015
(c) Monitor for compliance with applicable legal requirements and with the
16board's contractual agreements any bank, savings and loan association, savings
17bank or credit union with which the board has entered into a custodial agreement
18under s. 25.17 (11); any investment advisers with which the board has contracted to
19manage and control board assets under s. 25.18 (2) (e); and any other external parties
20with which the board has contracted to provide investment services to the board.
SB402, s. 14
21Section
14. 25.167 of the statutes is created to read:
SB402,8,23
2225.167 Chief investment officer. Under the supervision of the executive
23director, the chief investment officer shall do all of the following:
SB402,9,3
1(1) Monitor activities of the investment directors for compliance with the
2board's investment policies and guidelines in investment decisions and approve
3unusual transactions, as defined by the board.
SB402,9,5
4(2) Develop and implement operating procedures that are intended to ensure
5that the investment policies and guidelines of the board are followed.
SB402,9,8
6(3) Ensure that investments are completely and accurately reported on all
7management and financial reports and that any information requested by the board
8is provided to the board on a timely basis.
SB402, s. 15
9Section
15. 25.17 (intro.) of the statutes is amended to read:
SB402,9,13
1025.17 Powers and duties of board. (intro.) The "State of Wisconsin
11Investment Board" shall be a body corporate with power to sue and be sued in said
12name. The board shall have a seal with the words, "State of Wisconsin Investment
13Board".
The Subject to s. 25.183, the board shall:
SB402, s. 16
14Section
16. 25.17 (14g) of the statutes is created to read:
SB402,9,2015
25.17
(14g) Annually, on or before January 1, submit to the joint legislative
16audit committee and to the chief clerk of each house, for distribution to the
17appropriate standing committees under s. 13.172 (3), a report of the board's annual
18investment goals and long-term investment strategies. The report shall specify any
19change in the annual investment goals and long-term investment strategies from
20those in the previous year.
SB402, s. 17
21Section
17. 25.17 (14m) of the statutes is repealed and recreated to read:
SB402,9,2522
25.17
(14m) Annually, on or before March 31, submit to the joint legislative
23audit committee and to the chief clerk of each house, for distribution to the
24appropriate standing committees under s. 13.172 (3), a report including all of the
25following:
SB402,10,2
11. An assessment of the board's progress in meeting its annual investment
2goals established in the report under sub. (14g).
SB402,10,93
2. Information on the types of investments held by the board, including the
4market values of the investments and the degree of risk associated with the
5investments, the board's use of derivatives, as defined in s. 25.183 (1) (a), any
6ventures by the board into new markets, any use of new investment instruments by
7the board and a comparison of the investment performance of the board to that
8achieved by a peer group of public and private entities that invest similar-sized
9funds.