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Volume XI, Number 57

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New California Law Requires Increased Private Fund Fee and Expense Disclosure

Recent state legislative developments in California will require disclosure of certain information by private investment fund managers, primarily in the area of fees and expenses incurred by state and local pension and retirement plans.

On September 14, 2016, the Governor of California approved a bill adding Section 7514.7 to the California Government Code, which imposes significant new disclosure requirements for private funds with investments by California state and local public pension and/or retirement systems, including the University of California's retirement plan (Public Plan Investors).

Section 7514.7 will apply to Public Plan Investors investing in private investment funds (defined to include private equity funds, venture capital funds, hedge funds and absolute return funds) on and after January 1, 2017. The Public Plan Investor will be required to obtain assurances that the fund will make specified disclosures regarding fees, expenses, carried interest and portfolio company fees, in addition to other specified information. Section 7514.7 also will require the Public Plan Investor to disclose such information, as well as the gross and net rates of return of the fund since inception, at least once annually at a meeting open to the public.

Specifically, every Public Plan Investor will require each private investment fund in which it invests to make each of the following disclosures to the Public Plan Investor at least annually:

(i)   The fees and expenses that the Public Plan Investor pays directly to the private investment fund, the fund manager (including the general partner) or related parties[1].

(ii)  The Public Plan Investor's pro rata share of fees and expenses not included above that are paid from the private investment fund to the fund manager or related parties. The Public Plan Investor may independently calculate this information based on information contractually required to be provided by the private investment fund to the Public Plan Investor. If the Public Plan Investor independently calculates this information, then the private investment fund will not be required to provide the information identified in this item (ii).

(iii) The Public Plan Investor's pro rata share of carried interest distributed by the private investment fund to the fund manager or related parties.

(iv) The Public Plan Investor's pro rata share of aggregate fees and expenses paid by all of the portfolio companies held by the private investment fund to the fund manager or related parties.

(v)  The following information that under the California Public Records Act is required to be disclosed upon request:

    • The name, address, and vintage year of the private investment fund;

    • The dollar amount of the commitment made to the private investment fund by the Public Plan Investor;

    • The dollar amount of cash contributions made by the Public Plan Investor to the private investment fund since inception;

    • The dollar amount, on a fiscal year-end basis, of cash distributions received by the Public Plan Investor from the private investment fund;

    • The dollar amount, on a fiscal year-end basis, of cash distributions received by the Public Plan Investor plus remaining value of assets attributable to the Public Plan Investor's investment in the private investment fund;

    • The net internal rate of return of the private investment fund since inception;

    • The investment multiple of the private investment fund since inception;

    • The dollar amount of the total management fees and costs paid on an annual fiscal year-end basis by the Public Plan Investor to the private investment fund; and

    • The dollar amount of cash profit received by the Public Plan Investor from the private investment fund on a fiscal year-end basis.

Additional disclosure requirements may also be required by specific Public Plan Investors themselves. Section 7514.7 will apply to new contracts entered into on and after January 1, 2017, and for existing contracts for which a new capital commitment is made on or after January 1, 2017. Section 7514.7 also will require Public Plan Investors to undertake reasonable efforts to obtain the above-mentioned information with respect to contracts in place prior to January 1, 2017.

Similar legislation may be introduced in other states, including legislation currently pending in Illinois, seeking to require increased transparency around public investments in private investment funds. These efforts may include a private investment fund being required to provide a report to a state or local pension or retirement plan investor using a template developed by the Institutional Limited Partners Association, which to date has been endorsed by a significant number of state and local pension and retirement systems.

While these requirements may only apply to contracts entered into (or investments made) after a certain future date, they also may require pension or retirement plan investors to use "best efforts" (or a similar standard) to obtain this information in connection with existing private fund investments. Accordingly, sponsors of private investment funds should be vigilant for potential disclosure requirements that could apply in connection with investments secured from state and local retirement and pension plans and consult with counsel versed in these areas to ensure that provisions in fund governance documents do comply with statutory requirements.


[1] The definition of a related party includes (i) any current or former employee, manager, or partner of any entity owned 10% or more by related persons (as defined in Section 7514.7) that is involved in the investment activities or accounting and valuation functions of the general partner, investment adviser or separate carried interest vehicle (each a "relevant entity"), and (ii) 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 private investment fund or account managed by a related person.

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© 2020 Proskauer Rose LLP. National Law Review, Volume VI, Number 276
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About this Author

David Jones, Private Investment Funds, Proskauer Ros Law Firm
Partner

David T. Jones is a partner in the Private Investment Funds Group. He focuses on representing private equity funds and institutional investors in fund formations, fund investments and secondary transactions.

David is actively involved in all stages of fund formation and fund sponsor representation, counseling on terms and marketing strategy, negotiating with placement agents, drafting partnership and general partner documents, negotiating with investors and providing advice on internal general partner and management company issues. In addition, he routinely represents institutional...

617.526.9751
Michael F Mavrides, Proskauer Rose Law Firm, Private Investment Attorney
Partner

Michael F. Mavrides is a Partner in the Hedge Funds Group. Mike focuses his practice on representing domestic and offshore hedge funds, funds of funds and other private investment funds, including private equity and real estate investment funds. He regularly advises funds and their managers on a wide variety of issues, including formation and structuring, seed capital, anchor capital and other strategic arrangements, placement agency, solicitation and other marketing arrangements, succession planning, separately managed accounts, and all types of portfolio management, trading and...

212-969-3670
Christopher M Wells, Proskauer Rose Law Firm, Private Investment Attorney
Partner

Christopher M. Wells is a Partner and head of the Hedge Funds Group. Chris advises hedge funds, funds of funds and other pooled investment vehicles and their managers on all aspects of fund formation, operations and compliance.

212-969-3600
Anthony M. Drenzek, Special regulatory Counsel, Proskauer Rose, Attorney, Finance Policy Lawyer
Special Regulatory Counsel

Tony is special regulatory counsel in the Corporate Department and a member of the Private Funds Group and the Private Equity & Hedge Fund Litigation team. His practice focuses on advising U.S. and offshore private fund managers on all aspects of federal, state and SRO organizational and operational compliance, with a specific emphasis on the Investment Advisers Act of 1940.

Tony assists U.S. and offshore private fund clients in registering with the SEC as investment advisers, or reporting as exempt reporting advisers, and complying with...

617.526.9655
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