The California Public Employees’ Retirement System began lending securities in the early 1980s.  Since the early 1990s, CalPERS has used the Master Securities Loan Agreement (MSLA) originally developed by the former Bond Market Association (fka Public Securities Association and nka Securities Industry and Financial Markets Association).  I’m told by CalPERS that it currently uses the 2000 version of the MSLA.  This raises some arcane, if not interesting, federalism issues.

First, Section 23 of the MSLA provides that each party “irrevocably and unconditionally” submits to the non-exclusive jurisdiction of any federal or New York state court.  The U.S. Constitution does not prevent residents of one state (e.g., New York) from suing another state (e.g., California) in plaintiff’s state courts.  Nevada v. Hall, 440 U.S. 410(1979) (California residents may sue the State of Nevada in California courts for injuries suffered in a California automobile accident involving an employee of the State of Nevada).  However, I do find it surprising that CalPERS would voluntarily submit to the jurisdiction of another sovereign, particularly when that sovereign will not be bound by California’s limitations, if any, on sovereign immunity.  Id.  Interestingly, when CalPERS enters into an exclusive securities loan agreement, it uses a form with a New York governing law provision and a non-exclusive choice of the federal courts sitting in California.

Second, Section 23.2 of the MSLA includes a pre-dispute waiver of jury trial.  The California Supreme Court, however, has held that contractual pre-dispute jury trial waivers are unenforceable in light of the California Constitution (Art. I, § 16) and Section 631 of the California Code of Civil Procedure.  Grafton Partners L.P. v. Superior Court, 36 Cal.4th 944 (2005).

Third, there is that small matter of the Eleventh Amendment to the U.S. Constitution which modifies Article III, § 2 by providing:

The Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State.

CalPERS is carrying on a tradition of borrowing New York law that dates back to its earliest days as a state .  In the Nineteenth Century, the California legislature borrowed heavily from the efforts of David Dudley Field to have New York supplant common law with codes.  See Maurice E. Harrison, First Half-Century of the California Civil Code, 10 Cal. L. Rev. 186 (1922).