Within hours of the federal indictment of former Governor Rod Blagojevich, a bill addressing ethics reform for public pension funds in Illinois passed almost unanimously through both houses of the Illinois General Assembly and was signed into law by Governor Pat Quinn on April 3, 2009. Effective immediately, P.A. 96-0006 primarily addresses ethics issues involving the statewide public pension systems. However, several provisions of this new law are applicable to Article 3 and 4 (police and fire) pension funds. Below is a summary of those provisions:

Required annual filing of statements of economic interests – The new law clarifies that members of a board of any pension fund established under the Illinois Pension Code must annually file a statement of economic interest with the Secretary of State or applicable county clerk under the Illinois Governmental Ethics Act (5 ILCS 420/4A-101(o)). Furthermore, under the new law, the Secretary of State and the county clerks are required to provide the Attorney General with the names of persons who failed to file a statement. (5 ILCS 420/4A-107)

Working group to review performance of investment managers and consultants – New Section 16.10 of the State Treasurer Act (15 ILCS 505/16.10) provides that the State Treasurer will convene a working group consisting of representatives from the retirement systems, pension funds, and investment board created under the Illinois Pension Code, as well as persons who provide investment services and members of the financial industry. The working group will review the performance of investment managers and consultants providing investment services for retirement systems, pension funds and the investment board, as well as develop uniform standards for comparing the costs of investment services, and make recommendations. The working group shall coordinate its efforts with the Commission on Government Forecasting and Accountability, and the Office of the State Treasurer shall provide administrative assistance as needed. The new section requires the working group to draft a report to be submitted to the Governor and the Illinois General Assembly by January 1, 2011.

Additional definition of “fiduciary” ­– The new law amends the definition of “fiduciary” to include a person who “renders advice on the selection of fiduciaries” for a fee or other compensation, direct or indirect, with respect to any money or other property of a pension fund. (40 ILCS 5/1-101.2(2))

New definition of “consultant” – New Section 1-101.5 of the Illinois Pension Code provides that a consultant means “any person or entity retained or employed by the board of a retirement system, pension fund, or investment board to make recommendations in developing an investment strategy, assist with finding appropriate investment advisers, or monitor the board’s investments.” This new section further provides that a “consultant” does not include non-investment related professionals or professionals offering services that are not directly related to the investment of assets, such as legal counsel and actuaries. (40 ILCS 5/1-101.5)

Redefinition of “emerging investment manager” and expansion of public policy – Section 1-109.1, Allocation of Delegation of Fiduciary Duties, is amended to define “emerging investment manager” to mean a qualified investment adviser that manages an investment portfolio of at least $10,000,000 but less than $10,000,000,000 [formerly, $2,000,000,000] and is a minority-owned or female-owned business, and now also “business owned by a person with a disability.” Furthermore, the public policy of the State of Illinois to encourage the use of emerging investment managers in managing public pension assets has been extended to all pension funds in the state, and now includes their use in “all asset classes” with a goal to “increase the racial, ethnic, and gender diversity of its fiduciaries.” (40 ILCS 5/1-109.1(4))

Investment transparency – New Section 1-113.16 of the Illinois Pension Code provides for investment transparency by requiring the reporting of full and complete information regarding the investments by pension funds, retirement systems, and investment boards. (40 ILCS 5/1-113.16(a)) Under this new section, Article 3 and 4 pension funds must:

1. Comply with the Open Meetings Act. While this is not a change in the law, this provision makes it clear that the pension fund board itself and any committees established by the pension fund board must conduct their meetings in compliance with the provisions of the Open Meetings Act, including the proper posting of meeting notices and agendas, keeping of meeting minutes, as well as making meetings open to the public. (40 ILCS 5/1-113.16(b))

2. Ensure that the majority of the members on any committee of the board are “board members,” and furthermore, any committee members who are not also board members shall be “fiduciaries” to the pension fund. (40 ILCS 5/1-113.16(c))

3. Make specific information regarding its investments available on the pension fund’s web site or in a location that allows the information to be available for inspection by the public. This specific information includes ten (10) delineated items, from the total amount of funds held by the pension fund, to performance of investments compared against established benchmarks, and the names and email addresses of all board members and senior staff. Note that any applicable exemptions from disclosure of information under the Freedom of Information Act still apply. (40 ILCS 5/1-113.16 (d, e and f))

Mandatory ethics training – New Section 1-113.18 of the Illinois Pension Code now requires all pension fund board members to attend at least eight hours of training on ethics, fiduciary duty and investment issues, as well as “any other curriculum that the board of the . . . pension fund . . . establishes as being important” for the administration of the pension fund. Furthermore, the board must annually certify its members’ compliance with this training and submit the annual certification to the Department of Insurance. (40 ILCS 5/1-113.8)

Prohibition on gifts revisited – Section 1-125 of the Illinois Pension Code (which had been added as part of last year’s pension reform initiatives for Article 3 and 4 pension funds) has been amended to allow any pension fund trustee or employee to accept a gift from a prohibited source that falls under one of the exceptions to the gift ban prohibitions delineated in Section 10-15 (1) through (12) of the State Officials and Employees Ethics Act, except for subsections 4 (educational missions) and 5 (travel expenses). (40 ILCS 5/1-125) This amendment helps clarify the confusion over the gift ban provisions that arose from last year’s amendments which had prohibited Article 3 and 4 pension fund trustees from accepting any gift from a prohibited source, except educational materials.

No monetary gain on investments – New Section 1-130 of the Illinois Pension Code provides that no pension board member or employee – or spouse of such member or employee – shall knowingly have any direct interest in the income, gains, or profits of any investments made on behalf of a pension fund for which the person is a member or employee. Furthermore, this new section prohibits such persons from receiving any pay or emolument for services in connection with any investment. Finally, such persons may not become “an endorser or surety, or in any manner an obligor for money loaned or borrowed from the pension fund.” This new section specifically provides that annuities, as well as any “income, gains, or profits related to any non-controlling interest in any public securities, mutual fund, or other passive investment,” are not considered “monetary gain on investments” for purposes of this prohibition. Note that violation of this new section is a Class 3 felony. (40 ILCS 5/1-130)

Expansion of fraud prohibition -- The prohibition on fraud that was added to Articles 3 and 4 last year (see 40 ILCS 5/3-144.5 and 4-138.5) has now been added to Article 1. Furthermore, the penalty for violations has been stiffened. Any person who knowingly makes any false statement or falsifies or permits the falsification of any record in an attempt to defraud the pension fund is now guilty of a Class 3 felony (previously, a Class A misdemeanor). (40 ILCS 5/1-135)