ERS Divestment; Companies in Iran
Requires employees retirement system to divest itself of investments in companies that invest in or do business with the Islamic Republic of Iran. Allows reinvestment. Provides exemptions. Requires reporting. Authorizes enforcement by Attorney General. Sets conditions for repeal.
HOUSE OF REPRESENTATIVES
TWENTY-FIFTH LEGISLATURE, 2009
STATE OF HAWAII
A BILL FOR AN ACT
relating to the employees' retirement system.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:
SECTION 1. The legislature finds that, currently, the United States Secretary of State has determined that five countries have repeatedly provided support for acts of international terrorism and that have been designated as state sponsors of terrorism. The Islamic Republic of Iran has been so designated since January 19, 1984. The four main categories of sanctions imposed as a result of this designation include:
(1) Restrictions on United States foreign assistance;
(2) A ban on defense exports and sales;
(3) Certain controls over exports of dual use items; and
(4) Miscellaneous financial and other restrictions.
These sanctions are monitored by the United States Treasury Department's Office of Foreign Assets Control.
According to a report released on April 28, 2006, by the Office of the Coordinator for Counterterrorism within the Department of State, the Islamic Republic of Iran has continued to maintain ties to terrorist groups and has routinely provided unique safe haven, substantial resources, and guidance to terrorist organizations. State sponsors of terrorism provide critical support to non-state terrorist groups. Without state sponsors, terrorist groups would have much more difficulty obtaining the funds, weapons, materials, and secure areas they require to plan and conduct operations. Most worrisome is that some of these countries also have the capability to manufacture weapons of mass destruction and other destabilizing technologies that can get into the hands of terrorists.
According to the 2006 report:
(1) The Islamic Republic of Iran remained the most active state sponsor of terrorism. Its Islamic Revolutionary Guard Corps and Ministry of Intelligence and Security were directly involved in the planning and support of terrorist acts and continued to exhort a variety of groups, especially Palestinian groups with leadership cadres in Syria and Lebanese Hezbollah, to use terrorism in pursuit of their goals. In addition, the Islamic Revolutionary Guard Corps was increasingly involved in supplying lethal assistance to Iraqi militant groups, which destabilizes Iraq;
(2) The Islamic Republic of Iran continues to be unwilling to bring to justice senior al-Qaida members it detained in 2003. The Islamic Republic of Iran has refused to identify publicly these senior members in its custody on "security grounds." The Islamic Republic of Iran has also resisted numerous calls to transfer custody of its al-Qaida detainees to their countries of origin or to third countries for interrogation, trial, or both;
(3) The Islamic Republic of Iran maintained a high-profile role in encouraging anti-Israeli terrorist activity--rhetorically, operationally, and financially. Supreme Leader Khamenei and President Ahmadinejad praised Palestinian terrorist operations, and the Islamic Republic of Iran provided Lebanese Hezbollah and Palestinian terrorist groups--notably HAMAS, Palestinian Islamic Jihad, the al-Aqsa Martyrs Brigades, and the Popular Front for the Liberation of Palestine-General Command--with extensive funding, training, and weapons;
(4) The Islamic Republic of Iran pursued a variety of policies in Iraq, some of which appeared to be inconsistent with its stated objectives regarding stability in Iraq and with the objectives of the Iraqi Transitional Government and the Multi-national Forces in Iraq. Senior Iraqi officials have publicly expressed concern over Iranian interference in Iraq, and there were reports that the Islamic Republic of Iran provided funding, safe passage, and arms to insurgent elements; and
(5) State sponsors of terrorism pose a grave terrorism threat by employing a weapons of mass destruction program. Such a program in a state that sponsors terrorism could enable a terrorist organization to acquire sophisticated weapons of mass destruction. State sponsors of terrorism and nations that fail to live up to their international obligations deserve special attention as potential facilitators of terrorism involving weapons of mass destruction. The Islamic Republic of Iran presents a particular concern, given its active sponsorship of terrorism and its continued development of a nuclear program. The Islamic Republic of Iran is also capable of producing biological and chemical agents or weapons. Like other state sponsors of terrorism having weapons of mass destruction programs, the Islamic Republic of Iran could support terrorist organizations seeking to acquire such weapons of mass destruction.
The legislature further finds that, according to a former chair of the United States Securities and Exchange Commission, "the fact that a foreign company is doing material business with a country, government, or entity on OFAC's [Office of Foreign Assets Control] sanctions list is, in the SEC staff's view, substantially likely to be significant to a reasonable investor's decision about whether to invest in that company." A 2006 United States House of Representatives report stated that "a company's association with sponsors of terrorism and human rights abuses, no matter how large or small, can have a materially adverse result on a public company's operations, financial condition, earnings, and stock prices, all of which can negatively affect the value of an investment." In response to the financial risk posed by investments in companies doing business with a state sponsor of terrorism, the Securities and Exchange Commission established its Office of Global Security Risk to provide for enhanced disclosure of material information regarding these companies.
The legislature finds that it is a fundamental responsibility of the State to decide where, how, and by whom financial resources in its control should be invested, taking into account numerous pertinent factors. It is the desire of the legislature, with respect to investment resources in its control and to the extent reasonable, with due consideration for, among other things, return on investment, on behalf of itself and its investment beneficiaries, not to participate in an ownership or capital-providing capacity with entities that conduct certain business operations in the Islamic Republic of Iran, including certain non-United States companies presently doing business in that country.
The legislature finds that this Act should remain in effect only insofar as it continues to be consistent with, and does not unduly interfere with, the foreign policy of the United States as determined by the United States federal government. Mandatory divestment of public funds from certain companies is a measure that should be employed sparingly and judiciously and the designation of a country as a state sponsor of terrorism satisfies this high threshold.
The purpose of this Act is to require the state employees' retirement system to divest itself of investments in companies that conduct certain types of business operations in the Islamic Republic of Iran.
SECTION 2. Definitions. As used in this Act:
"Active business operations" means all business operations that are not inactive business operations.
"Business operations" means engaging in commerce in any form in the Islamic Republic of Iran, including by acquiring, developing, maintaining, owning, selling, possessing, leasing, or operating equipment, facilities, personnel, products, services, personal property, real property, or any other apparatus of business or commerce.
"Company" means any sole proprietorship, organization, association, corporation, partnership, joint venture, limited partnership, limited liability partnership, limited liability company, or other entity or business association, including all wholly-owned subsidiaries, majority-owned subsidiaries, parent companies, or affiliates of those entities or business associations that exist for profit-making purposes.
"Direct holdings" in a company means all securities of that company held directly by the public fund or in an account or fund in which the public fund owns all shares or interests.
"Inactive business operations" means the mere continued holding or renewal of rights to property previously operated for the purpose of generating revenues but not presently deployed for that purpose.
"Indirect holdings" in a company means all securities of that company held in an account or fund, such as a mutual fund, managed by one or more persons not employed by the public fund, in which the public fund owns shares or interests together with other investors not subject to the provisions of this Act.
"Islamic Republic of Iran" means the government in Tehran, Iran, whose President is Mahmud Ahmadinejad and whose Supreme Leader is Ali Hoseini-Khamenei.
"Military equipment" means weapons, arms, military supplies, and equipment that readily may be used for military purposes, including but not limited to radar systems, military-grade transport vehicles, supplies, and services sold or provided directly or indirectly to the government of the Islamic Republic of Iran.
"Mineral extraction activities" includes exploring, extracting, processing, transporting, or wholesale selling or trading of elemental minerals or associated metal alloys or oxides (ore), including gold, copper, chromium, chromite, diamonds, iron, iron ore, silver, tungsten, uranium, and zinc; as well as facilitating such activities, including by providing supplies or services in support of such activities.
"Oil-related activities" includes but is not limited to:
(1) Owning rights to oil blocks; exporting, extracting, producing, refining, processing, exploring for, transporting, selling, or trading of oil;
(2) Constructing, maintaining, or operating a pipeline, refinery, or other oil-field infrastructure; and
(3) Facilitating the foregoing activities, including the provision of supplies or services in support of such activities;
provided that the mere retail sale of gasoline and related consumer products shall not be considered oil-related activities.
"Power production activities" means any business operation that involves a project commissioned by the government of Islamic Republic of Iran or any entity of that government whose purpose is to facilitate power generation and delivery, including:
(1) Establishing power-generating plants or hydroelectric dams;
(2) Selling or installing components for the project;
(3) Providing service contracts related to the installation or maintenance of the project; or
(4) Facilitating the foregoing activities, including the provision of supplies or services in support of those activities.
"Public fund" means the employees' retirement system of the State of Hawaii or the board of trustees of the employees' retirement system of the State of Hawaii.
"Scrutinized company" means any company that meets the criteria in paragraph (1) or (2):
(1) The company has the following characteristics:
(A) Its business operations involve contracts with and provision of supplies or services to:
(i) The government of the Islamic Republic of Iran;
(ii) Companies in which the government of the Islamic Republic of Iran has any direct or indirect equity share;
(iii) Government of the Islamic Republic of Iran-commissioned consortiums or projects; or
(iv) Companies involved in government of the Islamic Republic of Iran-commissioned consortiums or projects; and
(B) More than ten per cent of the company's revenues or assets linked to the Islamic Republic of Iran:
(i) Involve oil-related activities or mineral extraction activities; or
(ii) Involve power production activities; or
(2) The company supplies military equipment within the Islamic Republic of Iran.
"Social development company" means a company whose primary purpose in the Islamic Republic of Iran is to provide:
(1) Humanitarian goods or services, including medicine or medical equipment, agricultural supplies or infrastructure, educational opportunities, journalism-related activities, information or information materials, spiritual-related activities, services of a purely clerical or reporting nature, food, clothing; or
(2) General consumer goods that are unrelated to oil-related activities, mineral extraction activities, or power production activities.
"Substantial action" means adopting, publicizing, and implementing a formal plan to cease scrutinized business operations within one year and to refrain from any such new business operations.
SECTION 3. Identification of companies. (a) Within ninety days following passage of this Act, the public fund shall make its best efforts to identify all scrutinized companies in which the public fund has direct or indirect holdings or could possibly have such holdings in the future. These efforts shall include any of the following, as appropriate:
(1) Reviewing and relying, as appropriate in the public fund's judgment, on publicly available information regarding companies with business operations in the Islamic Republic of Iran, including information provided by non-profit organizations, research firms, international organizations, and government entities;
(2) Contacting asset managers contracted by the public fund that invest in companies with business operations in the Islamic Republic of Iran; or
(3) Contacting other institutional investors that have divested from and engaged with companies that have business operations in the Islamic Republic of Iran.
(b) By the first meeting of the public fund following the ninety-day period described in subsection (a), the public fund shall assemble a list of all scrutinized companies identified.
(c) The public fund shall update the list on a quarterly basis based on evolving information from, among other sources, those listed in subsection (a).
SECTION 4. Required actions. (a) The public fund shall adhere to the procedures in this section with respect to companies on the scrutinized companies list.
(1) The public fund shall immediately identify the companies on the scrutinized companies list in which the public fund owns direct or indirect holdings;
(2) For each company identified in paragraph (1) with only inactive business operations in the Islamic Republic of Iran, the public fund shall send a written notice informing the company of this Act and encouraging the company to continue to refrain from initiating active business operations in the Islamic Republic of Iran until it is able to avoid business operations as a scrutinized company. The public fund shall continue that correspondence on a semi-annual basis. If the company converts its operations to active business operations, paragraph (3) shall apply;
(3) For each company newly identified in paragraph (1) with active business operations, or that has converted from inactive to active business operations under paragraph (2), the public fund shall send a written notice informing the company of its scrutinized company status and that it may become subject to divestment by the public fund. The notice shall offer the company the opportunity to clarify its Iran-related activities and shall encourage the company, within ninety days, to either cease its scrutinized business operations or convert such operations to inactive business operations to avoid qualifying for divestment by the public fund; and
(4) If, within ninety days following the public fund's first engagement with a company pursuant to paragraph (3), that company ceases scrutinized business operations, the company shall be removed from the scrutinized companies list and this section shall cease to apply unless the company resumes scrutinized business operations. If, within ninety days following the public fund's first engagement, the company converts its scrutinized active business operations to inactive business operations, the company shall be subject to all provisions relating thereto.
(1) Except as provided in subsections (e) and (f), after ninety days following the public fund's first engagement with a company pursuant to subsection (b)(3), the company continues to have scrutinized active business operations, and only while the company continues to have scrutinized active business operations, the public fund shall sell, redeem, divest, or withdraw all publicly-traded securities of the company according to the following schedule:
(A) At least fifty per cent of those assets shall be removed from the public fund's assets under management not later than nine months after the company's most recent appearance on the scrutinized companies list; and
(B) One hundred per cent of those assets shall be removed from the public fund's assets under management within fifteen months after the company's most recent appearance on the scrutinized companies list; and
(2) If a company that ceased scrutinized active business operations following engagement pursuant to subsection (b)(3) resumes those operations, or following engagement converts scrutinized active business operations to inactive business operations pursuant to subsection (b)(4), then resumes scrutinized active business operations, paragraph (1) shall immediately apply and the public fund shall send a written notice to the company. If applicable, the company shall also be immediately reintroduced onto the scrutinized companies list.
(d) At no time shall the public fund acquire securities of companies on the scrutinized companies list that have active business operations, except as provided in subsections (e) and (f).
(e) No company that the United States government affirmatively declares to be excluded from its present or any future federal sanctions regime relating to the Islamic Republic of Iran shall be subject to divestment or investment prohibition pursuant to subsections (c) and (d).
(f) Notwithstanding anything in this section to the contrary, subsections (c) and (d) shall not apply to indirect holdings in actively managed investment funds; provided that the public fund shall submit letters to the managers of such investment funds containing companies with scrutinized active business operations requesting that they consider removing the companies from the fund or create a similar actively managed fund with indirect holdings devoid of those companies. If the manager creates a similar fund, the public fund shall replace all applicable investments with investments in the similar fund in an expedited timeframe consistent with prudent investing standards. For the purposes of this section, "private equity funds" shall be deemed to be actively managed investment funds.
SECTION 5. Reinvestment in certain companies with scrutinized active business operations. (a) Notwithstanding anything in this section to the contrary, the public fund shall be permitted to cease divesting from certain scrutinized companies pursuant to section 4(c) and to reinvest in certain scrutinized companies from which it divested pursuant to section 4(c) if clear and convincing evidence shows that the value of all assets under management by the public fund becomes equal to or less than ninety-nine and one-half per cent of the hypothetical value of all assets under management by the public fund assuming no divestment for any company had occurred under section 4(c). Cessation of divestment, reinvestment, and any subsequent ongoing investment authorized by this section shall be strictly limited to the minimum steps necessary to avoid the contingency set forth in the preceding sentence.
(b) For any cessation of divestment, reinvestment, or subsequent ongoing investment authorized by this section, the public fund shall provide a written report to the legislature and attorney general in advance of initial reinvestment, updated semi-annually thereafter as applicable, setting forth the reasons and justification, supported by clear and convincing evidence, for its decisions to cease divestment, reinvest, or remain invested in companies with scrutinized active business operations.
(c) This section shall not apply to reinvestment in companies on the grounds that they have ceased to have scrutinized active business operations.
SECTION 6. Reporting. (a) The public fund shall file a report to the legislature and attorney general and made available to the public that includes the scrutinized companies list within thirty days after the list is created.
(b) Annually thereafter, the public fund shall file and make available to the public a report to the legislature and attorney general and send a copy of that report to the United States Secretary of State for transmittal to the government of the Islamic Republic of Iran, which includes:
(1) A summary of correspondence with companies engaged by the public fund under section 4(b)(2) and (3);
(2) All investments sold, redeemed, divested, or withdrawn in compliance with section 4(c);
(3) All prohibited investments under section 4(d); and
(4) Any progress made under section 4(f).
SECTION 7. Enforcement. The attorney general shall enforce this Act and through any lawful designee may bring such actions in court as are necessary to do so.
SECTION 8. Other legal obligations of the public fund. With respect to actions taken in compliance with this Act, including all good faith determinations regarding companies as required by this Act, the public fund shall be exempt from any conflicting statutory or common law obligations, including any such obligations in respect to choice of asset managers, investment funds, or investments for the public fund's securities portfolios.
SECTION 9. If any provision of this Act, or the application thereof to any person or circumstance is held invalid, the invalidity does not affect other provisions or applications of the Act, which can be given effect without the invalid provision or application, and to this end the provisions of this Act are severable.
SECTION 10. This Act shall be repealed upon the occurrence of the following:
(1) (A) The United States revokes all sanctions imposed against the government of the Islamic Republic of Iran; or
(B) The Congress or President of the United States, through legislation or executive order, declares that mandatory divestment of the type provided for in this Act interferes with the conduct of United States foreign policy; and
(2) The governor publishes a notice statewide as provided in section 1-28.5, Hawaii Revised Statutes, that the events in paragraph (1) or (2) have occurred.
SECTION 11. This Act shall take effect on July 1, 2009.