2004 Senate Bill text for SB0316

SENATE BILL 316

46th legislature - STATE OF NEW MEXICO - second session, 2004

INTRODUCED BY

John Arthur Smith

AN ACT

RELATING TO THE INVESTMENT OF PUBLIC MONEY; INCREASING THE PERCENTAGE OF THE LAND GRANT PERMANENT FUNDS AND THE SEVERANCE TAX PERMANENT FUND THAT MAY BE INVESTED IN REAL ESTATE; EXPANDING THE TYPE OF ALLOWABLE REAL ESTATE INVESTMENTS; ALLOWING, UNDER CERTAIN CIRCUMSTANCES, THE LAND GRANT PERMANENT FUNDS AND THE SEVERANCE TAX PERMANENT FUND TO BE INVESTED IN DERIVATIVES, SHORT SELLING ARRANGEMENTS AND HEDGE FUNDS.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF NEW MEXICO:

Section 1. Section 6-8-9 NMSA 1978 (being Laws 1957, Chapter 179, Section 9, as amended) is amended to read:

"6-8-9. SECURITIES AND INVESTMENT.--

A. Money made available from the land grant permanent funds for investment for a period in excess of one year may be invested in the following classes of securities and investments:

(1) bonds, notes or other obligations of the United States government, its agencies, government-sponsored enterprises, corporations or instrumentalities and that portion of bonds, notes or other obligations guaranteed as to principal and interest and issued by the United States government, its agencies, government-sponsored enterprises, corporations or instrumentalities or issued pursuant to acts or programs authorized by the United States government;

(2) bonds, notes, debentures and other obligations issued by the state of New Mexico or a municipality or other political subdivision of the state that are secured by an investment grade bond rating from a national rating service, pledged revenue or other collateral or insurance necessary to satisfy the standard of prudence set forth in Section 6-8-10 NMSA 1978;

(3) bonds, notes, debentures, instruments, conditional sales agreements, securities or other evidences of indebtedness of any corporation, partnership or trust organized and operating within the United States rated not less than Baa or BBB or the equivalent by a national rating service;

(4) bonds, notes, debentures, instruments, conditional sales agreements, securities or other evidences of indebtedness rated not less than BB or B or the national association of insurance commissioners' equivalent by a national rating service. An investment made under this paragraph shall be in publicly traded debt issues with an outstanding par value of at least one hundred million dollars ($100,000,000) and issued by a corporation, partnership or trust listed on a national exchange and organized and operating within the United States; provided that investments made pursuant to this paragraph shall not exceed three percent of the market value of the land grant permanent funds, calculated at the time of investment;

(5) notes or obligations securing loans or participation in loans to business concerns or other organizations that are obligated to use the loan proceeds within New Mexico, to the extent that loans are secured by first mortgages on real estate located in New Mexico and are further secured by an assignment of rentals, the payment of which is fully guaranteed by the United States in an amount sufficient to pay all principal and interest on the mortgage;

(6) common and preferred stocks and convertible issues of any corporation; provided that it has securities listed on one or more national stock exchanges or included in a nationally recognized list of stocks; and provided further that the fund shall not own more than five percent of the voting stock of any company;

(7) real estate investments, including real property and undivided interests in real property, debt instruments secured by [first] liens on real property or limited partnership interests; provided that the total value of investments made under this paragraph shall not exceed [three] ten percent of the market value of the land grant permanent funds, calculated at the time of investment;

(8) securities of non-United States governmental, quasi-governmental, partnership, trust or corporate entities, and these may be denominated in foreign currencies; provided:

(a) aggregate non-United States investments shall not exceed fifteen percent of the book value of the land grant permanent funds;

(b) for non-United States stocks and non-United States bonds and notes, issues permitted for purchase shall be limited to those issues traded on a national stock exchange or included in a nationally recognized list of stocks or bonds;

(c) currency contracts may be used for investing in non-United States securities only for the purpose of hedging foreign currency risk and not for speculation;

(d) the investment management services of a trust company or national bank exercising trust powers or of an investment counseling firm may be employed; and

(e) reasonable compensation for investment management services and other administrative and investment expenses related to these investments shall be paid directly from the assets of the funds, subject to budgeting and appropriation by the legislature; [and]

(9) stocks or shares of a diversified investment company registered under the federal Investment Company Act of 1940, as amended, and listed securities of long-term unit investment trusts or individual, common or collective trust funds of banks or trust companies that invest primarily in equity securities authorized in Paragraphs (6) and (8) of this subsection; provided that the investment company has total assets under management of at least one hundred million dollars ($100,000,000); and provided further that the council may allow reasonable administrative and investment expenses to be paid directly from the assets derived from these investments, subject to budgeting and appropriation by the legislature;

(10) derivatives, including forward contracts, futures contracts, swap contracts and option-based contracts; provided that:

(a) the council has approved a derivative investment policy that ensures: 1) appropriate systems are in place to mitigate risks; 2) the personnel implementing the policy have the expertise to appropriately identify, measure, monitor and control the risk-return liquidity characteristics in using derivative strategies; and 3) the risk characteristics of a derivative investment are appropriate for and consistent with the investment objectives of the land grant permanent funds;

(b) investments in derivatives shall be used only for: 1) hedging, including cross-hedging of currency exposures, intended to reduce clearly defined risks to which another investment of the land grant permanent funds is exposed; 2) replicating the risk-return profile of an asset or asset class but only if the land grant permanent funds may be invested in the underlying assets themselves; or 3) managing country or asset allocation exposure but only if the land grant permanent funds may be invested in the underlying assets themselves; and

(c) investments in derivatives shall not be used to increase exposure to an asset or asset class beyond that which is otherwise allowed for that asset or asset class;

(11) short selling arrangements; provided that the short sale is made for the purpose of hedging investment exposures already present in the land grant permanent funds; and

(12) hedge funds that invest primarily in publicly traded securities and derivatives and use long and short positions and leverage to reduce market exposure in order to profit from security selection; provided that:

(a) the hedge fund advisors shall be registered under the federal Investment Company Act of 1940; and

(b) investments made pursuant to this paragraph shall not exceed ten percent of the market value of the land grant permanent funds, calculated at the time of investment.

B. Not more than sixty-five percent of the book value of the land grant permanent funds shall be invested at any given time in:

(1) securities described in Paragraphs (6), (8) and (9) of Subsection A of this section; and

(2) investments described in Paragraphs (10), (11) and (12) of Subsection A of this section in which the underlying asset or asset class is a security described in Paragraph (6), (8) or (9) of Subsection A of this section.

C. No more than ten percent of the book value of the land grant permanent funds shall be invested at any given time in securities described in Paragraph (3) of Subsection A of this section that are rated Baa or BBB.

D. Assets of the land grant permanent funds may be combined for investment in common pooled funds to effectuate efficient management.

[C.] E. Commissions paid for the purchase and sale of any security shall not exceed brokerage rates prescribed and approved by national stock exchanges or by industry practice."

Section 2. Section 7-27-5.1 NMSA 1978 (being Laws 1983, Chapter 306, Section 8, as amended) is amended to read:

"7-27-5.1. MARKET RATE INVESTMENTS.--

A. Money made available from the severance tax permanent fund for investment for a period in excess of one year in market rate investments may be invested in the following classes of securities and investments:

(3) bonds, notes, debentures, instruments, conditional sales agreements, securities or other evidences of indebtedness of any corporation, partnership or trust organized and operating within the United States rated not less that Baa or BBB or the equivalent by a national rating service;

(4) bonds, notes, debentures, instruments, conditional sales agreements, securities or other evidences of indebtedness rated not less than BB or B or the national association of insurance commissioners' equivalent by a national rating service. An investment made under this paragraph shall be in publicly traded debt issues with an outstanding par value of at least one hundred million dollars ($100,000,000) and issued by a corporation, partnership or trust listed on a national exchange and organized and operating within the United States; provided that investments made pursuant to this paragraph shall not exceed three percent of the market value of the severance tax permanent fund, calculated at the time of investment;

(7) real estate investments, including real property and undivided interests in real property, debt instruments secured by [first] liens on real property, or limited partnership interests; provided that the total value of investments made under this paragraph shall not exceed [three] ten percent of the market value of the severance tax permanent fund, calculated at the time of investment;

(8) securities of non-United States governmental, quasi-governmental, partnership, trust or corporate entities, and these may be denominated in foreign currencies; provided:

(a) aggregate non-United States investments shall not exceed fifteen percent of the book value of the severance tax permanent fund;

(c) currency contracts may be used for investing in non-United States securities only for the purpose of hedging foreign currency risk and not for speculation;

(d) the investment management services of a trust company or national bank exercising trust powers or of an investment counseling firm may be employed; and

(e) reasonable compensation for investment management services and other administrative and investment expenses related to these investments shall be paid directly from the assets of the fund, subject to budgeting and appropriation by the legislature;

(10) participation interests in New Mexico real-property-related business loans. The actual amount invested under this paragraph shall not exceed ten percent of the severance tax permanent fund and shall be included in any minimum amount of severance tax permanent fund investments required to be placed in New Mexico certificates of deposit. Investments authorized in this paragraph are subject to the following:

(a) the state investment officer may purchase from eligible institutions a participation interest of up to eighty percent in any loan secured by a first mortgage or a deed of trust on the real property located in New Mexico of an eligible business entity, or its subsidiary, that is operating or shall use loan proceeds to commence operations within New Mexico plus any other guarantees or collateral that may be judged by the eligible institution or the state investment officer to be prudent. To be eligible for investment the following minimum requirements shall be met: 1) the loan proceeds shall be used exclusively for the purpose of expanding or establishing businesses in New Mexico, including the refinancing of such businesses for expansion purposes only. If a portion of the loan proceeds were used for refinancing or repaying an existing loan and payment of principal and interest to the state has not been made within ninety days from the due date, unless extended pursuant to agreement between the originating institution and the state investment officer, the originating institution shall buy back the state's participation interest in the loan and begin foreclosure proceedings; 2) eligible business entities shall not include public utilities or financial institutions or shopping centers, apartment buildings or other such passive investments; 3) the minimum loan amount shall be two hundred fifty thousand dollars ($250,000) and may be met by packaging up to ten separate loans satisfying the requirements of this paragraph. The maximum loan amount shall be two million dollars ($2,000,000); 4) the loan maturity shall be not less than five years or more than thirty years; 5) the maximum loan-to-value ratio shall be seventy-five percent and based on current appraisal of the real property by an appraiser who is licensed or certified in New Mexico and approved by the state investment officer, which shall be made not more than one hundred eighty days from the loan origination date; 6) the interest rate of the loan shall be fixed for five years and shall be adjusted at every fifth anniversary of the note to the rate specified in Item 7) of this subparagraph; 7) the yield on the state's participation interest shall in no case be less than the greater of the then-prevailing yield on United States treasury securities of five-year maturity plus two and one-half percent or the yield received by the lending institution calculated exclusive of servicing fees; 8) if payment of principal or interest has not been made within one hundred eighty days from the due date, unless extended pursuant to agreement between the originating institution and the state investment officer, the originating institution shall buy back the state's participation interest in the loan, substitute another qualifying loan or begin foreclosure proceedings; and 9) if foreclosure proceedings are commenced, the state and the originating institution shall share in proportion to their participation interest, as provided in this subparagraph, in the legal and other foreclosure expenses and in any loss incurred as a result of a foreclosure sale;

(b) a standardized participation agreement, the form of which shall be approved by the attorney general's office, shall be executed between the investment office and each eligible originating institution. The participation agreement shall provide that the originating institution shall not assign its interest in any loan covered by the agreement without the prior written consent of the state investment officer;

(c) a formal forward commitment program may be instituted by the state investment officer with the approval of the council;

(d) the council shall adopt regulations: 1) defining passive investments; 2) establishing underwriting guidelines; 3) ensuring diversification across a variety of types of collateral, types of businesses and regions of the state; and 4) providing for the review by the state investment officer of servicing and other fees that may be charged by the eligible institution;

(e) eligible institutions include banks, savings and loan associations and credit unions operating in the state; and

(f) real property is defined as land and attached buildings, but excludes all interests that may be secured by a security interest under Article 9 of the Uniform Commercial Code, and mineral resource values;

(11) derivatives, including forward contracts, futures contracts, swap contracts and option-based contracts; provided that:

(b) investments in derivatives shall be used only for: 1) hedging, including cross-hedging of currency exposures, intended to reduce clearly defined risks to which another investment of the severance tax permanent fund is exposed; 2) replicating the risk-return profile of an asset or asset class but only if the severance tax permanent fund may be invested in the underlying assets themselves; or 3) managing country or asset allocation exposure but only if the severance tax permanent fund may be invested in the underlying assets themselves; and

(c) investments in derivatives shall not be used to increase exposure to an asset or asset class beyond that which is otherwise allowed for that asset or asset class;

(12) short selling arrangements; provided that the short sale is made for the purpose of hedging investment exposures already present in the severance tax permanent fund; and

(13) hedge funds that invest primarily in publicly traded securities and derivatives and use long and short positions and leverage to reduce market exposure in order to profit from security selection; provided that:

(a) the hedge fund advisors shall be registered under the federal Investment Company Act of 1940; and

(b) investments made pursuant to this paragraph shall not exceed ten percent of the market value of the severance tax permanent fund, calculated at the time of investment.

B. Not more than sixty-five percent of the book value of the severance tax permanent fund shall be invested at any given time in:

(1) securities described in Paragraphs (6), (8) and (9) of Subsection A of this section; and

(2) investments described in Paragraphs (11), (12) and (13) of Subsection A of this section in which the underlying asset or asset class is a security described in Paragraph (6), (8) or (9) of Subsection A of this section.

C. No more than ten percent of the book value of the severance tax permanent fund shall be invested at any given time in securities described in Paragraph (3) of Subsection A of this section that are rated Baa or BBB.

D. Assets of the severance tax permanent fund may be combined for investment in common pooled funds to effectuate efficient management.

[C.] E. Commissions paid for the purchase and sale of any security shall not exceed brokerage rates prescribed and approved by national stock exchanges or by industry practice."

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