KRS § 161.430 — KY Code / Title XIII / Chapter 161 / Section 161.430
161.430 Investment of funds -- Standards of conduct -- Investment procurement policy -- Proxy voting guidelines
Status: in_force

161.430 Investment of funds -- Standards of conduct -- Investment procurement

policy -- Proxy voting guidelines.

(1) (a) The board of trustees shall be the trustee of the funds of the retirement system

and shall have full power and responsibility for the purchase, sale, exchange,

transfer, or other disposition of the investments and moneys of the retirement

system. The board shall, by administrative regulation, establish investment

policies and procedures to carry out their responsibilities.

(b) 1. The board shall contract with experienced competent investment

managers to invest and manage assets of the system. The board may also

employ qualified investment staff to advise it on investment matters and

to invest and manage assets of the system not to exceed fifty percent

(50%) of the system's assets. The board may contract with one (1) or

more general investment consultants, as well as specialized investment

consultants, to advise it on investment matters.

2. All internal investment staff and investment consultants shall adhere to

the Code of Ethics and Standards of Professional Conduct, and all board

trustees shall adhere to the Code of Conduct for Members of a Pension

Scheme Governing Body, promulgated by the CFA Institute. Investment

managers shall comply with the federal Investment Advisers Act of

1940, as amended, and the rules and regulations promulgated thereunder

and shall comply with all other applicable federal securities statutes and

related rules and regulations that apply to investment managers.

3. No investment manager shall manage more than forty percent (40%) of

the funds of the retirement system.

(c) The board may appoint an investment committee to act for the board in all

matters of investment, subject to the approval of the board of trustees. The

board of trustees, in keeping with their responsibilities as trustees and

wherever consistent with their fiduciary responsibilities, shall give priority to

the investment of funds in obligations calculated to improve the industrial

development and enhance the economic welfare of the Commonwealth.

Toward this end, the board shall develop procedures for informing the

business community of the potential for in-state investments by the retirement

fund, accepting and evaluating applications for the in-state investment of

funds, and working with members of the business community in executing in-

state investments which are consistent with the board's fiduciary

responsibilities. The board shall include in the criteria it uses to evaluate in-

state investments their potential for creating new employment opportunities

and adding to the total job pool in Kentucky. The board may cooperate with

the board of trustees of Kentucky Retirement Systems in developing its

program and procedures, and shall report to the Legislative Research

Commission annually on its progress in placing in-state investments. The first

report shall be submitted by October 1, 1991, and subsequent reports shall be

submitted by October 1 of each year thereafter. The report shall include the

number of applications for in-state investment received, the nature of the

investments proposed, the amount requested, the amount invested, and the

percentage of applications which resulted in investments.

(2) (a) For the purposes of this subsection:

1. "Solely in the interest of the members and annuitants" shall be

determined using only pecuniary factors and shall not include any

purpose to further a nonpecuniary interest;

2. "Pecuniary factor" means a consideration having a direct and material

connection to the financial risk or financial return of an investment;

3. A "material connection" is established if there is a substantial likelihood

that a reasonable investor would consider it important in determining the

financial risk or the financial return of an investment;

4. "Nonpecuniary interest" includes but is not limited to an environmental,

social, political, or ideological interest which does not have a direct and

material connection to the financial risk or financial return of an

investment;

5. "Investment manager" and "investment consultant" shall have the same

definition attributed to "investment adviser" under the federal

Investment Advisers Act of 1940, 15 U.S.C. sec. 80b-2;

6. "Shareholder-sponsored proposal" means a proposal by a shareholder

included in the proxy statement of an issuer of securities pursuant to 17

C.F.R. sec. 240.14a-8;

7. "Economic analysis" means a written analysis of the economic impact of

a shareholder-sponsored proposal, which shall include, at a minimum:

a. The subject matter of the shareholder-sponsored proposal;

b. Whether the board of directors of the issuer of securities opposes

the shareholder-sponsored proposal and the stated reasons for the

opposition;

c. Whether the shareholder-sponsored proposal is consistent with the

investment policy of the retirement system;

d. The economic benefits and costs of implementing the shareholder-

sponsored proposal, as written, in the long and short term;

e. The quantifiable impact of the shareholder-sponsored proposal, as

written, on the investment returns of the funds of the retirement

system; and

f. An explanation of the modeling, procedures, and processes used to

complete the economic analysis; and

8. a. "Proxy adviser" means any person who is engaged in the business

of providing advice, research, analysis, ratings, or

recommendations specifically with respect to proxy voting and

who has entered into an agreement or contracted with the board of

trustees of the retirement system to receive compensation for those

purposes.

b. "Proxy adviser" does not include an investment manager or

investment consultant as defined in this paragraph.

(b) The board members, investment managers, investment consultants, or other

fiduciaries, and proxy advisers shall discharge their duties with respect to the

assets of the system solely in the interests of the active contributing members

and annuitants and:

1. For the exclusive purpose of providing benefits to members and

annuitants and defraying reasonable expenses of administering the

system;

2. With the care, skill, prudence, and diligence under the circumstances

then prevailing that a prudent person acting in a like capacity and

familiar with these matters would use in the conduct of an enterprise of

a like character and with like aims;

3. By diversifying the investments of the plan so as to minimize the risk of

large losses, unless under the circumstances it is clearly prudent not to

do so; and

4. In accordance with the federal, state, and common laws, administrative

regulations, and other instruments governing the system and fiduciaries.

(c) Evidence that a fiduciary has considered or acted on a nonpecuniary interest

shall include but is not limited to:

1. Statements, explanations, reports, or correspondence;

2. Communications with portfolio companies;

3. Statements of principles or policies, whether made individually or

jointly;

4. Votes of shares or proxies; or

5. Coalitions, initiatives, agreements, or commitments to which the

fiduciary is a participant, affiliate, or signatory.

(d) When exercising or recommending a vote on a shareholder-sponsored

proposal, a proxy adviser that has entered into an agreement or contracted

with the board of trustees of the retirement system acts solely in the interest of

the members and annuitants under this subsection if:

1. The proxy adviser's vote or recommendation is consistent with the

recommendation of the board of directors of the issuer of the shares,

provided:

a. The board of directors of the issuer of the shares is composed of a

majority of independent directors; and

b. The recommendation of the board of directors is not for the

purpose of furthering a nonpecuniary interest; or

2. The proxy adviser's vote or recommendation is inconsistent with the

recommendation of the board of directors of the issuer of the shares,

provided the proxy adviser conducts and documents an economic

analysis demonstrating that the vote or recommendation is solely in the

interest of the members and annuitants.

(3) (a) In choosing and contracting for professional investment management and

consulting services, the board shall do so prudently and in the interest of the

members and annuitants. Any contract that the board makes with an

investment manager shall set forth policies and guidelines of the board with

reference to standard rating services and specific criteria for determining the

quality of investments. Expenses directly related to investment management

and consulting services shall be financed from the guarantee fund in amounts

approved by the board.

(b) An investment manager or consultant appointed under this section shall

acknowledge in writing his or her fiduciary responsibilities to the fund. To be

eligible for appointment, an investment manager, consultant, or an affiliate,

shall be:

1. Registered under the Federal Investment Advisers Act of 1940; or

2. A bank as defined by that Act; or

3. An insurance company qualified to perform investment services under

the laws of more than one (1) state.

(c) Proxy advisers and proxy voting services shall comply with all applicable

provisions of the Investment Advisers Act of 1940, as amended, and the rules

and regulations promulgated thereunder, and shall comply with all other

federal statutes and related rules and regulations that apply to proxy advisers

and proxy voting services.

(d) No contract or agreement, whether made in writing or not, shall in any

manner waive, restrict, or limit a fiduciary's liability as to any of the duties

imposed by this section. Any agreement shall specify that it is made in the

Commonwealth of Kentucky and governed by the laws of the Commonwealth

of Kentucky, unless the agreement is in commingled investments or real

property outside the Commonwealth, in which case the agreements may be

made in or governed by laws outside of the Commonwealth provided that the

other requirements of this section are met.

(4) No investment or disbursement of funds shall be made unless authorized by the

board of trustees, except that the board, in order to ensure timely market

transactions, shall establish investment guidelines and may permit its staff and

investment managers who are employed or under contract with the board pursuant

to this section to execute purchases and sales of investment instruments within

those guidelines without prior board approval.

(5) In discharging his or her administrative duties under this section, a trustee shall

strive to administer the retirement system in an efficient and cost-effective manner

for the taxpayers of the Commonwealth of Kentucky.

(6) Notwithstanding any other provision of KRS 161.220 to 161.716, no funds of the

Teachers' Retirement System, including fees and commissions paid to an

investment manager, private fund, or company issuing securities, who manages

systems assets, shall be used to pay fees and commissions to placement agents. For

purposes of this subsection, "placement agent" means a third-party individual, who

is not an employee, or firm, wholly or partially owned by the entity being hired,

who solicits investments on behalf of an investment manager, private fund, or

company issuing securities.

(7) All contracts for the investment or management of assets of the system shall not be

subject to KRS Chapters 45, 45A, 56, and 57. Instead, the board shall conduct the

following process to develop and adopt an investment procurement policy with

which all prospective contracts for the investment or management of assets of the

system shall comply:

(a) On or before July 1, 2017, the board shall consult with the secretary of the

Finance and Administration Cabinet or his or her designee to develop an

investment procurement policy, which shall be written to meet best practices

in investment management procurement;

(b) Thirty (30) days prior to adoption, the board shall tender the preliminary

investment procurement policy to the secretary of the Finance and

Administration Cabinet or his or her designee for review and comment;

(c) Upon receipt of comments from the secretary of the Finance and

Administration Cabinet or his or her designee, the board shall choose to adopt

or not adopt any recommended changes;

(d) Upon adoption, the board shall tender the final investment procurement policy

to the secretary of the Finance and Administration Cabinet or his or her

designee;

(e) No later than thirty (30) days after receipt of the investment procurement

policy, the secretary or his or her designee shall certify whether the board's

investment procurement policy meets or does not meet best practices for

investment management procurement; and

(f) Any amendments to the investment procurement policy shall adhere to the

requirements set forth by paragraphs (b) to (e) of this subsection.

(8) (a) The board shall adopt written proxy voting guidelines which are consistent

with the fiduciary duties and other requirements of this section.

(b) The board shall not adopt the recommendations of a proxy adviser or proxy

voting service and shall not allow such proxy adviser or proxy voting service

to vote on behalf of the system, unless the proxy adviser or proxy voting

service acknowledges in writing and accepts under contract its duties under

this section and commits to follow the board-adopted proxy voting guidelines

when voting the system's shares in order to comply with the board's fiduciary

duties and other responsibilities under this section.

(c) All shares held by or on behalf of the system, and which the system is entitled

to vote under state, federal, or common laws, shall be voted according to the

proxy voting guidelines adopted by the board and subject to the fiduciary

duties and other requirements of this section by:

1. The board, the investment committee of the board, or an employee or

employees of the system who are fiduciaries under this section and are

appointed or otherwise authorized by the board; or

2. A proxy adviser or proxy voting service that acknowledges in writing

and accepts under contract its duties under this section and commits to

follow the board-adopted proxy voting guidelines when voting the

system's shares in order to comply with the board's fiduciary duties and

other responsibilities under this section.

(d) All proxy votes shall be reported at least quarterly to the board. For each vote,

the report shall provide:

1. The vote caption;

2. The date of the vote;

3. The company's name;

4. The vote cast for the system;

5. The recommendation of the company's management; and

6. If applicable, the recommendation of the proxy adviser or proxy voting

service.