Fund managers in Chicago and elsewhere that manage Illinois public pension plan investments should be aware of Illinois House Bill 6292 (the IL Bill). The IL Bill, if passed, would amend the Illinois Pension Code to require managers of any private equity fund, hedge fund, absolute return fund, total return fund, or any investment pool that is privately organized (Private Fund) to disclose the existence of certain key deal provisions contained in the limited partnership agreement (Agreement). The IL Bill would also require disclosure of fees and expenses paid directly by an Illinois pension fund or retirement system (Illinois Plan) to a Private Fund. The IL Bill (in its current form) incorporates certain elements of the Institutional Limited Partners Association (ILPA) reporting template (ILPA Template), but would not necessarily require that Private Funds use the ILPA Template. Nonetheless, the IL Bill would require disclosures beyond what is required by Assembly Bill 2833, California’s first-in-the-nation fee disclosure bill (the Cal Bill).

Key Provisions in the Limited Partnership Agreement

The IL Bill would require an Illinois Plan to disclose the existence of the Agreement with the Private Fund. Furthermore, unlike the Cal Bill, an Illinois Plan would have to disclose any management fee waiver, indemnification and clawback provisions (Key Provision) contained in the Agreement. Key Provisions include the following:

  1. All management fee waiver provisions, including, but not limited to, provisions that permit the Private Fund’s external manager or general partner to waive fees, or that specify the mechanics of the fee waiver or its repayment, or that specify the magnitude of the fee waiver, or that are necessary to understand how the fee waiver works, and all defined terms related to or affecting the fee waiver.
  2. All indemnification provisions, including, but not limited to, provisions that require the Private Fund or its investors to indemnify the fund’s external manager or general partner, or any of its affiliates, for settlements or judgments paid, and including all provisions necessary to understand how the indemnification works and all defined terms related to or affecting indemnification.
  3. All clawback provisions, including, but not limited to, provisions that allow the Private Fund’s external manager or general partner to pay back an amount less than the full cost of the overpayment received by the manager, and including all provisions necessary to understand how the clawback works and all defined terms related to or affecting clawbacks.
  4. The cover page and signature block of the Agreement.

The ILPA Template requires disclosure of these Key Provisions, but not the Cal Bill.

Fee and Expense Information

In addition to the Key Provisions above, Private Funds would be required to disclose the following fee and expense information (Fee Information):

  1. The fees and expenses that the Illinois Plan pays directly to the Private Fund, or to the Private Fund’s external manager or general partner.
  2. The Illinois Plan’s share of all fees and expenses not included in paragraph (1) of the Fee Information, including carried interest, paid or allocated from the Private Fund to the Private Fund’s external manager or general partners, or deducted from payments owed from the Private Fund’s external manager or general partners to the Private Fund. The IL Bill defines “carried interest” to mean a share of the profits of a Private Fund paid, accrued, or due to the general partner or the external manager of their affiliates.
  3. The amount of all management fee waivers made by the Private Fund’s external managers or general partners.
  4. The total amount of portfolio holding fees incurred by each portfolio holding of the Private Fund as payment to any person who is a member of the external manager group. The IL Bill defines “external manager group” to mean (1) the external manager, (2) its affiliates, (3) any other parties described in the external manager’s marketing materials for the relevant alternative investment fund as providing services to or on behalf of portfolio holdings, and (4) any other parties described in the external manager’s affiliated adviser’s SEC Form ADV filing as receiving portfolio holding fees or portfolio holding other compensation. The external manager group does not include the affiliated Private Fund in which the Illinois Plan is an investor, nor does it include a Private Fund used to effectuate investments of the affiliated fund in which the Illinois Plan is an investor.

If Private Funds elect to use the ILPA Template, such use would constitute compliance with the Key Provision and Fee Information disclosure requirements.

Public Disclosure Details

Within 90 days of entering into an Agreement with a Private Fund, an Illinois Plan must disclose the Key Provisions by making filings with the Public Pension Division of the Illinois Department of Insurance (the DOI) and the Illinois Secretary of State. The Illinois Plan must also post and maintain the Key Disclosures on its website. Private Funds must provide the Fee Information to the Illinois Plan, which then must disclose the Fee Arrangements by making a filing with the DOI and including the Fee Information on its website. The IL Bill would apply to Agreements proposed or executed after February 1, 2019, and includes modifications or amendments to agreements that modify or alter any of the provisions discussed under the IL Bill.

Next Steps

The Illinois House is expected to vote on the version of the IL Bill already passed by the Senate. The Illinois House will likely vote on this version of the IL Bill in November 2016. However, it’s unclear whether Governor Rauner would sign the current IL Bill into law or if the Illinois Senate may further amend the IL Bill. If Illinois does further amend the IL Bill, it could take a national approach and require disclosures consistent with the Cal Bill. Alternatively, Illinois could mandate that Private Funds use the ILPA Template. Many Illinois Plans may prefer no additional fee disclosures at all. For example, large plans may lose leverage to negotiate custom arrangements with reduced fees or favorable terms for substantial capital commitments. Smaller plans could be turned away from new alternative investment vehicles if pension plans require fund managers to disclose certain terms or fees. To be sure, more transparency is better when making investment decisions, but politicians in Springfield and Chicago should consider the unintended consequences before voting on any new Private Fund disclosure bills.