In the UK, the Freedom of Information Act came fully into force in 2005. At the time there was some concern that private fund managers may refuse commitments from UK local authority pension funds. However, exemptions in the legislation meant that sensitive data relating to portfolio companies could be kept out of the public domain, even if fund level rates of return and fees had to be disclosed.
In the U.S., where state and local pension plans control vast sums of capital and, in many cases, hold significant negotiating power when it comes to agreeing terms with fund managers, there have been significant recent developments. Last year, California passed Assembly Bill No. 2833, which requires public investment funds in the state to make annual disclosures of fees, expenses and carried interest paid to underlying fund managers, as well as the funds' gross and net rates of return. While investors push for greater transparency, and many managers are already providing such transparency, obligating public investors to release sensitive information publicly could have the effect of limiting such investors’ opportunities to access top performing, oversubscribed funds.
A recent development in U.S. freedom of information laws is Kentucky Senate Bill 2, passed earlier this year. Fund managers who have admitted Kentucky Retirement System or Kentucky Teachers Retirement System (together, “KRS”) to any of their funds may see their offering documents and limited partnership agreements (or equivalent) displayed on KRS’ website, as the bill states that “contracts or offering documents for services, goods, or property purchased or utilized by the system” need to be disclosed. Affected fund managers will likely have been contacted by KRS by now and asked to assist them in complying with the bill. Fund managers will undoubtedly wish to consider whether KRS has such a right, including whether such a change in law is applicable to a particular fund retrospectively. Should a manager agree to comply, it is possible to redact certain information, prior to publishing, that is exempt from disclosure under Kentucky law, but all unredacted documents are subject to review by the board of KRS, the Auditor of Public Accounts and the Government Contract Review Committee, who have the power to publish any redacted information that they deem does not fall under an exemption. Fund managers should therefore seek to agree on an approach with KRS as soon as possible and also take advice on what information is and is not exempted under Kentucky law.
In addition to the contracts and offering documents, the bill also obliges KRS to disclose quarterly all fees and commissions paid, including profit shares, carried interest or other incentive arrangements, and net investment returns, asset allocations and fund performance measured against certain benchmarks. KRS will no doubt want each of their managers to report such information on a quarterly basis going forward to allow compliance with the new law.
Fund managers that have a relationship with KRS at present, should therefore actively engage with KRS, and fund managers currently marketing to KRS should think carefully about whether they are comfortable complying with these requirements going forward.
If you have been contacted by KRS in relation to this issue and require assistance, please contact your usual Goodwin adviser or any of the contacts below.
Paul J. VerbeseyPartner
John M. FergusonPartnerCo-Chair, Real Estate Industry