SB402: Bill Text

LRB-4419/2

RAC/KSH:skg/kmg:jlb

1995 - 1996 LEGISLATURE

1995 Senate BILL 402

November 1, 1995 - Introduced by Committee on Audit. Referred to Committee on Audit.

SB402,1,10 An Act to repeal 15.07 (2) (a) and 25.18 (1) (L); to renumber and amend 25.50 (5); to amend 13.94 (1) (df), 13.94 (1s) (c) 3., 15.76 (intro.), 19.42 (10) (L) and (13) (k), 25.156 (4), 25.16 (1), 25.16 (2), 25.16 (4), 25.17 (intro.), 25.17 (51), 25.18 (1) (intro.), 25.18 (2) (intro.) and 25.18 (2) (e); to repeal and recreate 25.17 (14m); and to create 15.76 (1r), 25.156 (2m), 25.156 (8), 25.165, 25.167, 25.17 (14g), 25.17 (14r), 25.17 (51m), 25.183, 25.50 (5) (a) to (d) and 25.50 (5m) of the statutes; relating to: legislative oversight of the investment board, structure and composition of the investment board, regulation of certain investments by the investment board, granting rule-making authority and making an appropriation.

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 Section 1. 13.94 (1) (df) of the statutes is amended to read:

SB402,5,9 13.94 (1) (df) Annually, perform a financial audit of the investment board, including an assessment of the fair presentation of the financial statements and an evaluation of accounting controls and accounting records the internal control structure of the board. As part of the financial audit, the bureau shall identify certain statutes and policies and guidelines adopted by the board and shall determine the extent of compliance by the board with the statutes, policies and guidelines. Biennially, the bureau shall conduct a performance evaluation audit of the investment board that includes an audit of the board's policies and management practices.

SB402, s. 2 Section 2. 13.94 (1s) (c) 3. of the statutes is amended to read:

SB402,5,12 13.94 (1s) (c) 3. The investment board for the cost of the any audit required to be performed under sub. (1) (df).

SB402, s. 3 Section 3. 15.07 (2) (a) of the statutes is repealed.

SB402, s. 4 Section 4. 15.76 (intro.) of the statutes is amended to read:

SB402,5,18 15.76 Investment board; creation. (intro.) There is created a state of Wisconsin investment board, to be known for statutory purposes as the investment board. The investment board shall consist of 8 members, as follows the following members:

SB402, s. 5 Section 5. 15.76 (1r) of the statutes is created to read:

SB402,5,24 15.76 (1r) One member appointed for a 6-year term, who is a representative of a local government that participates in the local government pooled-investment fund under s. 25.50 and that has a population of less than 150,000. The member shall be employed by the local government in a finance position and have had at least 10 years of financial experience, but may not be an elected official.

SB402, s. 6 Section 6. 19.42 (10) (L) and (13) (k) of the statutes are amended to read:

SB402,6,3 19.42 (10) (L) The executive director, executive assistant to the executive director, internal auditor, chief investment officer and investment directors of the investment board.

SB402,6,6 (13) (k) The executive director, executive assistant to the executive director, internal auditor, chief investment officer and investment directors of the investment board.

SB402, s. 7 Section 7. 25.156 (2m) of the statutes is created to read:

SB402,6,10 25.156 (2m) The investment board shall employe an internal auditor, who shall serve outside the classified service. The board shall fix the compensation of the internal auditor.

SB402, s. 8 Section 8. 25.156 (4) of the statutes is amended to read:

SB402,6,18 25.156 (4) The members of the board shall promulgate rules restricting the executive director, internal auditor, chief investment officer, investment directors and employes from having financial interest, directly or indirectly, in firms or corporations providing services to the department and governing the receipt of gifts or favors therefrom, and also governing personal investments of all employes including the executive director, internal auditor, chief investment officer and investment directors to prevent conflicts of interest.

SB402, s. 9 Section 9. 25.156 (8) of the statutes is created to read:

SB402,6,20 25.156 (8) The investment board shall keep full minutes of its proceedings.

SB402, s. 10 Section 10. 25.16 (1) of the statutes is amended to read:

SB402,7,2 25.16 (1) The executive and administrative functions of the investment board, except for the functions performed by the internal auditor under s. 25.165 (2), shall be vested in an executive director, who shall perform the functions of executive director in conformity with the requirements of the members of the board and in accordance with policies, principles and directives determined by the members of the board.

SB402, s. 11 Section 11. 25.16 (2) of the statutes is amended to read:

SB402,7,15 25.16 (2) The Subject to authorization under s. 16.505, the executive director may appoint one division administrator and investment directors and shall appoint a chief investment officer and all other employes necessary to carry out the functions of the investment board, except that the investment board shall appoint the internal auditor and shall participate in the selection of the chief investment officer and investment directors and the internal auditor shall appoint his or her staff. The executive director shall appoint all employes outside the classified service, except blue collar and clerical employes. Neither the executive director, the internal auditor, the chief investment officer, any investment director nor any other employe of the board shall have any financial interest, either directly or indirectly, in any firm engaged in the sale or marketing of real estate or investments of any kind, nor shall any of them render investment advice to others for remuneration.

SB402, s. 12 Section 12. 25.16 (4) of the statutes is amended to read:

SB402,7,20 25.16 (4) The executive director shall take the official oath and the executive director, chief investment officer and each investment director shall file a bond for the faithful performance of that person's duties in such amount and with such sureties as the members of the board require.

SB402, s. 13 Section 13. 25.165 of the statutes is created to read:

SB402,8,7 25.165 Internal auditor. (1) There is created in the investment board an internal audit subunit, under the supervision of the internal auditor. The internal auditor shall report directly to the board and, subject to authorization under s. 16.505, shall appoint all employes necessary to carry out the duties of the internal auditor. The internal auditor shall appoint all employes outside the classified service, except blue collar and clerical employes. The internal auditor shall fix the compensation of all employes appointed by the internal auditor, subject to restrictions set forth in the compensation plan under s. 230.12 or any applicable collective bargaining agreement in the case of employes in the classified service, but the investment board may provide for bonus compensation to employes in the unclassified service as authorized under s. 25.156 (6).

SB402,8,10 (2) The internal auditor may review any activity, information or investment of the board and have access to records of the board and any external party under contract with the board and shall do all of the following:

SB402,8,13 (a) 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.

SB402,8,14 (b) Coordinate and assist with external audits and reviews of the board.

SB402,8,20 (c) Monitor for compliance with applicable legal requirements and 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 under s. 25.17 (11); any investment advisers with which the board has contracted to manage and control board assets under s. 25.18 (2) (e); and any other external parties with which the board has contracted to provide investment services to the board.

SB402, s. 14 Section 14. 25.167 of the statutes is created to read:

SB402,8,23 25.167 Chief investment officer. Under the supervision of the executive director, the chief investment officer shall do all of the following:

SB402,9,3 (1) Monitor activities of the investment directors for compliance with the board's investment policies and guidelines in investment decisions and approve unusual transactions, as defined by the board.

SB402,9,5 (2) Develop and implement operating procedures that are intended to ensure that the investment policies and guidelines of the board are followed.

SB402,9,8 (3) Ensure that investments are completely and accurately reported on all management and financial reports and that any information requested by the board is provided to the board on a timely basis.

SB402, s. 15 Section 15. 25.17 (intro.) of the statutes is amended to read: