Tuesday, June 17, 2014

Reasonable Goals in a Poorly Constructed Bill: Unnecessary Requirements

 Reasonable Goals in a Poorly Constructed Bill:  Unnecessary Requirements

Yesterday I discussed the ten-year lock up for pension documents proposed in legislation endorsed by the State Treasurer of North Carolina.  Today I want to take a look at the rest of North Carolina House Bill 1209.[1]

The investment statute in North Carolina[2] is as unclear as the Internal Revenue Code.  Much of that is intentional, because for the past forty years Treasurers have tried to obfuscate their expanded investment authority, while legislators have tried to rein it in.  The result is a mess.  The prudent person standard governs all other investments in North Carolina.  Instead the pension plan is subject to a convoluted legal list of permissible investments.  Rather than vesting the fiduciary with responsibility to manage risk and reward, we have a complex checklist of permissible investments, and required reports.  Article 6 of Chapter 147 is like a room that has been painted over and over in alternating coats of latex and oil-based paints.  Someone needs to scrape off all the old layers and start over.   Unfortunately, H. 1209 represents a particularly poor paint job. 

The drafters of H. 1209 should rewrite the bill after consulting Federalist No. 62 in which James Madison says:

 It will be of little avail to the people, that the laws are made by men of their own choice, if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood; if they be repealed or revised before they are promulgated, or undergo such incessant changes that no man, who knows what the law is to-day, can guess what it will be to-morrow. Law is defined to be a rule of action; but how can that be a rule, which is little known, and less fixed?[3] 

They should also read The Rule of Nobody: Saving America from Dead Laws and Broken Government by Philip K. Howard.  Mr. Howard makes good use of Federalist No. 62.

Setting aside substantive matters, we have some fine examples of poor draftsmanship.    The bill contains three separate sections of definitions.[4]    Do we really need to be told three times the definition of an external money manager?  Mercifully, the bill only repeats the definition of “person” and “treasurer’s investment” twice.  The bill spells out in detail the required disclosure of manager performance and fees, and then repeats all this minutia moments later in making clear that these items are public records.[5]  As I reviewed yesterday, there’s a ten-year waiting period before most legal documents can become public.  The drafters of the bill make this statement twice in case we missed it the first time.[6] 

I’m beginning to think we should pass a law requiring that bills must be drafted by hand and typed using an Olivetti Underwood typewriter instead of a computer.  Word processing software makes it way too easy to create tortured statutory constructs.  Some might argue that bloggers should adopt the same standard.

Substantively, the bill puts into law matters that shouldn’t be memorialized in a statute.   Hiring an independent auditor to examine the pension plan is already permitted by § 147-69.3(g): “The State Treasurer is authorized to retain the services of independent appraisers, auditors, actuaries . . .possessing specialized skills or knowledge necessary for the proper administration of investment programs created pursuant this section.”  If the State Treasurer’s Investment Fiduciary Governance Commission thinks we need an independent audit and the Treasurer agrees, then the Treasurer should issue an RFP instead of pursuing section 1(a) of H. 1209.

In a similar vein, section 2(a) of H. 1209 should be deleted.  Paragraph (g) of § 147-69.3, which permits the Treasurer to hire an auditor, also permits her to hire consultants.  She’s made ample use of this provision in the past several years and has already conducted the performance review described in the bill.  In my opinion, the performance review as conducted by Ennis Knupp is counter-productive because it has led to the plethora of policies, rules, and checklists that serve to gum up the investment process.  The State Treasurer benefits from these reviews because the report provides a modest amount of political cover when critics attack her.   Ennis Knupp is the only other beneficiary since it is well compensated for its efforts.  In any event, this kind of reporting requirement doesn’t belong in a statute.

Section 3(a) of the bill, which lays out the requirements for reporting manager performance and fees, should be reduced to a sentence or two instead of consuming the better part of page.  The mind-numbing details laid out in the bill, don’t even belong in regulations.  The Treasurer should lay out the requirements in her investment policy and be done with it.    The bill details eight different reporting elements for external managers, fund-of-funds, and placement agents.[7]  As time goes by, some of these elements may become irrelevant and new ones will become important.  Sticking these details is an inflexible statute is a bad idea.

I discussed Section 3(b) on public records yesterday.  However, it’s worth mentioning that it suffers from the same drafting defects.  Along with being grossly overprotective of money managers, it is vastly too detailed.  

I am in favor of giving the State Treasurer greater flexibility in hiring investment professionals.  I battled continually with the Department of Administration to boost salaries and create positions and failed miserably.  However, there’s a deft nuance in the Treasurer’s proposal that may create a lovely little loophole.   Under current law, the State Treasurer had some flexibility with respect to the compensation of professionals in the Investment Division.  The drafters have given her discretion for hiring and paying any one in the Department with “investment functions.”  The reference to the Investment Division is deleted in the relevant section of the law.[8]  While the legislation is precise about defining “external money managers” (remember it does it three times), it is vague about the scope of this expanded hiring authority.  I think this expanded authority will eventually be used to cover political appointees and certain folks in the Treasurer’s office who are only tangentially related to the investment process.

After reading the personnel section of the bill, the report of the Independent Fiduciary Governance Commission, the Report Concerning Placement Agent Review[9], and Ennis Knupp’s Independent Review and Evaluation of the North Carolina Retirement Systems[10], I’ve concluded that the main reason for sections 4(b) and 4(c) of H. 1209 is to make sure the State Treasurer can hire more lawyers to oversee the investment program.

We conclude with placement agents.  The State Treasurer already has a detailed process for letting the public know when a placement agent is involved in the investment hiring process.  Section 5 of the bill makes those folks register as lobbyists.  I’d simply delete this section of the bill.  I think the placement agent issue has been beaten to death.

State Treasurer Cowell has made major strides in providing greater transparency concerning almost every aspect of North Carolina’s investment process, notwithstanding her proposal to lock up a host of legal documents pertaining to the program.  However, H. 1209 is another step in the direction of turning the investment process into a bureaucratic jumble.  I am surprised the members of our General Assembly who rail against bureaucracy would go along with this approach. Luckily none of this hurts the money managers, consultants, and lawyers who continue to reap the biggest benefits from North Carolina’s public pensions.

[1] http://www.ncleg.net/Sessions/2013/Bills/House/PDF/H1209v1.pdf
[3] http://www.constitution.org/fed/federa62.htm
[4] See, sections 3(a), 3(b) and (5) of H.1209 adding N.C.G.S. § 147-69.11(a), N.C.G.S. § 132-1.14(a), and N.C.G.S. § 147-69.12(a), respectively.
[5] See, sections 3(a) and 3(b) of H. 1209 adding N.C.G.S. § 147-69.11(c) and N.C.G.S. § 132-1.14(b).
[6] See, section 3(b) of H. 1209 adding N.C.G.S. § 132-1.14(d).
[7] See, section 3(a) of H. 1209 adding N.C.G.S. § 147-69.11(c).

[8] See, Section 4(c) of H. 1209, amending paragraph (i2) of N.C.G.S. §147-69.3
[9] https://www.nctreasurer.com/inv/IAC%20Resources/IACPlacementAgentReviewReport-121613.pdf
[10] https://www.nctreasurer.com/ret/403b%20Plan%20Features/NCRetirementSystemsEval-EnnisKnupp2.pdf

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