California's passage of a new law requiring greater disclosure of alternative investment fees is a credit positive for the state's pension funds and a credit negative for alternative money managers, said Moody's Investors Service in its Thursday credit outlook.
The law, which requires greater fee reporting for commitments made by public pension funds on or after Jan. 1, 2017, was signed by California Gov. Edmund G. “Jerry” Brown Jr. It passed the Legislature in August.
The new law will help the $301.5 billion California Public Employees' Retirement System, Sacramento, and the $192.9 billion California State Teachers' Retirement System, West Sacramento, “more effectively monitor” their investments, making it a credit positive, Moody's said.
However, alternative money managers “will face increased scrutiny and pressure to cut fees,” and for them it's a credit negative, Moody's said.
“Under the new law, alternative investment vehicles must not only disclose management and performance fees, but also the third-party, monitoring and related transaction fees that have previously been more opaque,” Moody's said. “The law will also require disclosure of the fees that these investment vehicles pay to other fund managers, and the gross net rate of return since a vehicle's inception.”
For existing investments, the law requires public pension funds to “undertake reasonable efforts” to obtain and disclose the same information for existing alternative investment commitments made before Jan. 1, 2017.