PRINTER'S NO. 1540
No. 1332 Session of 1989
INTRODUCED BY MOWERY, VAN HORNE, HECKLER, FARGO, MORRIS,
McVERRY, NAHILL, BOYES, WOGAN, D. W. SNYDER, PHILLIPS,
KASUNIC, BILLOW, ROBBINS, DISTLER, JOHNSON, VROON, GEIST,
TANGRETTI, HALUSKA, MELIO, NOYE, SERAFINI, E. Z. TAYLOR,
BROUJOS, ITKIN, CIVERA AND SEMMEL, APRIL 26, 1989
REFERRED TO COMMITTEE ON LOCAL GOVERNMENT, APRIL 26, 1989
AN ACT
1 Regulating the fiduciary affairs of local government employee
2 retirement systems by providing for persons defined to be
3 fiduciaries, fiduciary activities subject to regulation,
4 general standards of fiduciary conduct, specific,
5 supplemental fiduciary standards, liability for fiduciary
6 breaches including breaches by other fiduciaries, delegation
7 and allocation of fiduciary activities, fiduciary insurance
8 and bonding; providing for penalties; and making repeals.
9 TABLE OF CONTENTS
10 Chapter 1. General Provisions
11 Section 101. Short title.
12 Section 102. Findings of fact.
13 Section 103. Declaration of purpose.
14 Section 104. Definitions.
15 Chapter 2. Substantive Provisions
16 Subchapter A. Designation of Affected Fiduciaries and
17 Activities
18 Section 201. Fiduciary positions and functions.
19 Section 202. Engaging in fiduciary activity.
1 Section 203. Named fiduciaries.
2 Section 204. Persons excluded from definition of fiduciary.
3 Section 205. Persons prohibited from being fiduciaries.
4 Subchapter B. General Standards of Fiduciary Conduct
5 Section 211. To whom fiduciary duty is owed.
6 Section 212. Fiduciary standards.
7 Section 213. Sole interest and exclusive purpose.
8 Section 214. Expert and nonexpert fiduciaries.
9 Subchapter C. Specific, Supplemental Standards of Fiduciary
10 Conduct
11 Section 221. Retirement system trust.
12 Section 222. Title to retirement system assets.
13 Section 223. Diversifying investments.
14 Section 224. Prohibited transactions by retirement systems.
15 Section 225. Prohibited activities by fiduciary.
16 Section 226. Certain transactions and activities permitted.
17 Section 227. Certain interfund transactions.
18 Section 228. Statement of financial interest.
19 Section 229. Prohibitions in procuring bonds and insurance.
20 Subchapter D. Nonexpert Fiduciaries Investments
21 Section 231. Authorized investments by nonexpert fiduciaries
22 in general.
23 Section 232. Liquidity.
24 Section 233. United States Government obligations.
25 Section 234. Other government obligations.
26 Section 235. Corporate obligations.
27 Section 236. Certificates of deposit.
28 Section 237. Savings accounts.
29 Section 238. Insurance products.
30 Section 239. Shares of an investment company.
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1 Subchapter E. Delegation and Allocation of Fiduciary
2 Activities
3 Section 241. Cofiduciary responsibility in general.
4 Section 242. Liability for breach of fiduciary duty by
5 another fiduciary.
6 Section 243. Limitation on responsibility and liability for
7 fiduciary breach of another fiduciary.
8 Section 244. Allocation of fiduciary activities.
9 Section 245. Delegation of fiduciary activities.
10 Subchapter F. Fiduciary Bonding and Fiduciary Insurance
11 Section 251. General prohibition of indemnification.
12 Section 252. Indemnified fiduciaries.
13 Section 253. Required indemnification.
14 Section 254. Bonding and alternative security arrangements.
15 Section 255. Insurance.
16 Subchapter G. Special Asset Rules
17 Section 261. Investment company security.
18 Section 262. Insurance contract or policy.
19 Section 263. Indirect investment in local government
20 securities.
21 Section 264. Investments that become unauthorized.
22 Chapter 3. Administrative Provisions
23 Section 301. Open meetings.
24 Section 302. Inspection and copying of records.
25 Section 303. Plan document.
26 Section 304. Contracting for investment advice permitted.
27 Section 305. Contracting for investment management permitted.
28 Section 306. Contracting for retirement system administration
29 permitted.
30 Section 307. Disclosure of business placed or commissions
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1 allocated.
2 Section 308. Administrative remedies.
3 Chapter 4. Penalties
4 Section 401. Compensatory damages.
5 Section 402. Other equitable or remedial relief.
6 Section 403. Criminal penalties.
7 Section 404. No limitation on other penalties.
8 Chapter 5. Savings Clause; Repeals; Effective Date
9 Section 501. Savings clause.
10 Section 502. Repeals.
11 Section 503. Effective date.
12 The General Assembly of the Commonwealth of Pennsylvania
13 hereby enacts as follows:
14 CHAPTER 1
15 GENERAL PROVISIONS
16 Section 101. Short title.
17 This act shall be known and may be cited as the Local
18 Government Employee Retirement System Fiduciary Act.
19 Section 102. Findings of fact.
20 The various statutory provisions that govern the wide variety
21 of local government employee retirement systems in Pennsylvania
22 do not adequately provide for fiduciary responsibility and
23 fiduciary liability.
24 Section 103. Declaration of purpose.
25 (a) Policy.--To protect the interest of members and
26 beneficiaries in local government employee retirement systems
27 and the interests of the Commonwealth and local governments and
28 the general public in the operation of these retirement systems
29 and to minimize the possible adverse impact of the operations of
30 these retirement systems on government revenues and
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1 expenditures, it is hereby declared to be a public policy of
2 this Commonwealth that the assets of a local government employee
3 retirement system are pension trust funds and shall be held for
4 the exclusive purposes of providing benefits to members in the
5 retirement system and their beneficiaries and defraying
6 reasonable expenses of administering the retirement system.
7 (b) Legislative intent.--It is the intent of the General
8 Assembly to:
9 (1) provide a statute comprehensively regulating the
10 fiduciary affairs of all local government employee retirement
11 systems;
12 (2) encourage valuable service on management boards and
13 advisory committees by qualified individuals who receive no
14 compensation or minimum compensation for their services;
15 (3) enable retirement systems to obtain the best
16 possible investment, management and other professional
17 expertise; and
18 (4) enable retirement systems to obtain bonds and
19 fiduciary insurance at reasonable costs.
20 Section 104. Definitions.
21 The following words and phrases when used in this act shall
22 have the meanings given to them in this section unless the
23 context clearly indicates otherwise:
24 "Active member." A local government employee or officer, or
25 a local government employee on leave without pay:
26 (1) for whom at any time during the retirement system
27 year benefits are accrued under the pension plan on the
28 individual's behalf;
29 (2) for whom contributions are being made to a
30 retirement system;
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1 (3) for whom the local government is obligated to
2 contribute to the retirement system or under the pension plan
3 on the individual's behalf; or
4 (4) whom the local government would have been obligated
5 to contribute to the retirement system or under the pension
6 plan on the individual's behalf if any contributions were
7 made to the retirement system or under the pension plan.
8 "Adequate consideration."
9 (1) In the case of a security for which there is
10 generally recognized market, either:
11 (i) the price of the security prevailing on a
12 national securities exchange that is registered under
13 section 6 of the Securities Exchange Act of 1934 (48
14 Stat. 881, 15 U.S.C. § 78f); or
15 (ii) if the security is not traded on a national
16 securities exchange that is registered under section 6 of
17 the Securities Exchange Act of 1934, a price not less
18 favorable to the retirement system that the offering
19 price for the security as established by the current bid
20 and asked prices quoted by persons independent of the
21 issuer and of any party in interest.
22 (2) In the case of an asset other than a security for
23 which there is a generally recognized market, the fair market
24 value of the asset as determined in good faith by the
25 managing board or named fiduciary under the terms of the
26 pension plan.
27 "Assets." Probable future economic benefits obtained or
28 controlled by a particular entity, such as a retirement system
29 or a local government, as a result of past transactions or
30 events. The term includes, but is not limited to, current assets
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1 such as cash and cash equivalents, short-term investments,
2 receivables, inventories and prepaid expenses; investment and
3 funds such as long-term investments in securities, advances to
4 other funds, long-term savings deposits, cash surrender value of
5 life insurance policies, and long-term investments in tangible
6 assets that are not used in current operations; tangible
7 operational assets such as land, buildings, improvements other
8 than buildings, machinery and equipment, and construction work
9 in progress; intangible operational assets such as patents,
10 copyrights, franchises and trademarks; other assets such as
11 long-term receivables from employees and idle operational
12 assets; and deferred charges such as machinery rearrangement
13 costs, deferred income taxes, pension costs paid in advance,
14 long-term prepaid insurance and prepaid leasehold costs.
15 "Bank." A bank, banking and trust company, savings bank,
16 trust company or private bank, as defined in the act of November
17 30, 1965 (P.L.847, No.356), known as the Banking Code of 1965,
18 or any savings and loan association, as defined in the act of
19 December 14, 1967 (P.L.746, No.345), known as the Savings
20 Association Code of 1967, or any successor statutes to these
21 statutes, or any banking institution, trust company or savings
22 and loan association organized under the laws of the United
23 States or of any state, or a receiver, conservator or other
24 liquidating agent of any of the foregoing.
25 "Beneficiary." A person designated by a member, or by the
26 terms of a pension plan, who is or may become entitled to a
27 benefit under the pension plan, or the estate or person who, as
28 the result of the death of a member, qualifies for or is
29 receiving some right or benefit under a pension plan.
30 "Business entity." An association, business trust,
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1 corporation, group or two or more persons having a joint or
2 common interest, partnership, trust or other legal or commercial
3 enterprise.
4 "Chief administrative officer." The individual who has the
5 primary responsibility for the execution of the administrative
6 or management affairs of a local government in the case of a
7 local government, or of the retirement system in the case of a
8 retirement system, or the designee of that person.
9 "Discretionary activity." A retirement system activity not
10 required by law or pension plan or undertaken without the
11 direction of a person in a superior position or of a superior
12 rank or, if required or directed, the time, manner or extent of
13 execution of which is left to the person's prudence and
14 judgment.
15 "Employee organization." An organization of any kind, or any
16 agency or employee representation committee or plan in which
17 membership includes public employees, and that exists for the
18 purpose, in whole or in part, of dealing with employers
19 concerning grievances, employee-employer disputes, wages, rates
20 of pay, hours of employment, or conditions of work; that has
21 been certified as an exclusive bargaining representative of a
22 bargaining unit of public employees under the act of June 24,
23 1968 (P.L.237, No.111), referred to as the Policemen and Firemen
24 Collective Bargaining Act, or the act of July 23, 1970 (P.L.563,
25 No.195), known as the Public Employe Relations Act, or both; and
26 that does not practice discrimination in membership because of
27 race, color, creed, national origin, political affiliation or
28 sex.
29 "Exercise of discretion." Acting or failing to act in
30 accordance with the dictates of the person's own judgment or
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1 conscience uncontrolled by the judgment or conscience of another
2 person in a superior position.
3 "Fiduciary." A person described in Subchapter A of Chapter
4 2.
5 "Function." When used in connection with a fiduciary, any
6 duty, obligation, power, authority, responsibility, right,
7 privilege, activity or program.
8 "General-scope fiduciary activity." A retirement system
9 activity that reflects broad or original policymaking powers and
10 duties and that requires broad exercise of discretion by a
11 fiduciary.
12 "Governing body." The body or board of a local government
13 designated to exercise the chief policymaking or legislative
14 powers of the local government.
15 "Inactive member." A local government employee or officer,
16 or former local government employee or officer, who is a former
17 active member and for whom no contributions are being made but
18 who has accumulated contributions standing to that individual's
19 credit in the retirement system and who is not eligible to
20 become or has not elected to become vestee or has not filed an
21 application for a retirement benefit.
22 "Investment adviser." A person registered as an investment
23 adviser with the Securities and Exchange Commission under the
24 Investment Advisers Act of 1940 (54 Stat. 847, 15 U.S.C. § 80b-1
25 et seq.) or a person registered as an investment adviser with
26 the Pennsylvania Securities Commission under the act of December
27 5, 1972 (P.L.1280, No.284), known as the Pennsylvania Securities
28 Act of 1972, who has acknowledged in writing that the person is
29 a fiduciary of the retirement system.
30 "Investment manager." A fiduciary (other than a member of a
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1 governing body, a member of a managing board or a named
2 fiduciary):
3 (1) who has the power to manage, acquire or dispose of
4 any asset of a retirement system; or
5 (2) who is an investment adviser, a bank, or an
6 insurance company qualified to perform services described in
7 paragraph (1) under the laws of a state; and
8 (3) has acknowledged in writing that the person is a
9 fiduciary of the retirement system.
10 "Local government." A local authority; a municipality,
11 however constituted, whether operating under a legislative
12 charter, municipal code, optional charter, home rule charter,
13 optional plan or other arrangement; an association of these
14 local authorities, or these municipalities, or both cooperating
15 under the act of July 12, 1972 (P.L.762, No.180), referred to as
16 the Intergovernmental Cooperation Law; or a Commonwealth-created
17 authority or governmental entity whose employees are not members
18 of the State Employes' Retirement System or the Public SChool
19 Employes' Retirement System.
20 "Local government employee retirement system." An entity,
21 whether a separate entity or part of a local government entity,
22 that collects retirement and other employee benefit
23 contributions from local government employees and local
24 governments; holds and manages the resulting assets as reserves
25 for present and future retirement benefit payments; and makes
26 provision for these payments to qualified retirees and
27 beneficiaries. The term does not include a plan, program or
28 arrangement that is financed solely with local government
29 employee earnings or compensation reported as local government
30 employee earnings or compensation to the Internal Revenue
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1 Service, United States Department of the Treasury, on Form W-2,
2 Wage and Tax Statement, or established under sections 8.1
3 through 8.3 of the act of March 30, 1811 (P.L.145, 5 Sm.L. 228),
4 or established under section 408 of the Internal Revenue Code of
5 1986 (Public Law 99-514, 26 U.S.C. § 408 et seq.).
6 "Managing board." Body or board of a retirement system that
7 is appointed or assigned, or undertakes to jointly exercise the
8 chief policymaking powers and management duties of the
9 retirement system or, if this body or board does not exist, the
10 governing body of the retirement system.
11 "Member." An active member, inactive member, retiree or
12 vestee.
13 "Ministerial activity." A retirement system activity
14 required by law or pension plan or undertaken at the direction
15 of a person in a superior position or of a superior rank the
16 execution of which is prescribed without regard to or the
17 exercise of the person's own judgment upon the propriety of the
18 act being done.
19 "Particular-scope fiduciary activity." A retirement system
20 activity that reflects limited or derivative policymaking powers
21 and duties and that requires a narrow exercise of discretion by
22 a fiduciary.
23 "Party in interest."
24 (1) Except as provided in paragraph (2), the term
25 includes:
26 (i) a fiduciary, counsel or employee of a retirement
27 system;
28 (ii) a person providing services to a retirement
29 system;
30 (iii) a local government any of whose employees or
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1 officers are covered by the retirement system;
2 (iv) an employee organization any of whose members
3 are covered by the retirement system;
4 (v) a relative of any individual described in
5 subparagraphs (i) or (ii); or
6 (vi) an employee, officer, director (or an
7 individual having powers or responsibilities similar to
8 those of officers or directors), or a 10% or more
9 shareholder directly or indirectly, of:
10 (A) a person described in subparagraphs (ii),
11 (iii) or (iv); or
12 (B) the retirement system.
13 (2) If any assets of a retirement system are invested in
14 securities issued by an investment company registered under
15 the Investment Company Act of 1940 (54 Stat. 789, 15 U.S.C. §
16 80a-1 et seq.) the investment shall not by itself cause the
17 investment company or the investment company's investment
18 adviser or principal underwriter to be a party in interest
19 except insofar as the investment company or its investment
20 adviser or principal underwriter acts in connection with a
21 retirement system covering employees of the investment
22 company, the investment adviser or its principal underwriter.
23 Nothing contained in this definition shall limit the duties
24 imposed on an investment company, investment adviser or
25 principal underwriter by any other law.
26 "Pension plan." All aspects of an arrangement between a
27 public employer and its employees concerning the retirement
28 benefit coverage provided to the employees. The term does not
29 include a plan, program or arrangement that is financed solely
30 with local government employee earnings or compensation reported
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1 as local government employee earnings or compensation to the
2 Internal Revenue Service, United States Department of the
3 Treasury, on Form W-2, Wage and Tax Statement, or established
4 under sections 8.1 through 8.3 of the act of March 30, 1811
5 (P.L.145, 5 Sm.L.228), or established under section 408 of the
6 Internal Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. §
7 408).
8 "Pension trust fund." A fiscal and accounting entity with a
9 self-balancing set of accounts recording cash and other
10 financial resources, together with all related liabilities, and
11 residual equities or balances, and changes therein, that is
12 segregated for the purpose of accounting for assets held by a
13 governmental unit in a trustee capacity for the members and
14 beneficiaries of a public employee retirement system.
15 "Plan document." The written document the managing board is
16 required to compile and file under section 303.
17 "Relative." A spouse, brother, sister, spouse of a brother
18 or sister, ancestor, lineal descendant or spouse of a lineal
19 descendant.
20 "Retiree." A former local government employee or officer who
21 is a former active member with vested rights in a retirement
22 system on or after the effective date of retirement until that
23 individual's retirement benefit is terminated.
24 "Retirement benefit." Annuity, pension, pension benefit,
25 retirement pay, disability benefit, or other employee benefit
26 payment from a retirement system.
27 "Retirement system." A local government employee retirement
28 system.
29 "Security."
30 (1) The term includes any note; stock; treasury stock;
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1 bond; debenture; evidence of indebtedness; share of a
2 beneficial interest in a business trust; certificate of
3 interest or participation in any profit-sharing agreement;
4 collateral trust certificate; preorganization certificate of
5 subscription; transferable share; investment contract; voting
6 trust certificate; certificate of deposit for a security;
7 limited partnership interest; certificate of interest or
8 participation in an oil, gas or mining title or lease or in
9 payments out of production under such a title or lease, or
10 other mineral rights; or, in general, any interest or
11 instrument commonly known as or having the incidents of a
12 "security," including a "security" as defined in section 2(1)
13 of the Securities Act of 1933 (48 Stat 74, 15 U.S.C. § 77a et
14 seq.), or as defined in section 102(t) of the act of December
15 5, 1972 (P.L.1280, No.284), known as the Pennsylvania
16 Securities Act of 1972;, or any certificate of interest or
17 participation in, temporary or interim certificate for,
18 receipt for, guarantee of, or warrant or right to subscribe
19 to or purchase any of the foregoing. All of the foregoing are
20 securities whether or not evidenced by written document.
21 (2) The term does not include:
22 (i) Any beneficial interest in any voluntary inter
23 vivos trust that is not created for the purpose of
24 carrying on any business.
25 (ii) Any beneficial interest in any testamentary
26 trust.
27 (iii) Any insurance or endowment policy or annuity
28 contract under which an insurance company admitted in
29 this Commonwealth promises to pay a sum of money (whether
30 or not based upon the investment performance of a
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1 segregated fund) either in a lump sum or periodically for
2 life or some other specified period.
3 (iv) Any certificate issued under section 809 of the
4 act of May 17, 1921 (P.L.682, No.284), known as The
5 Insurance Company Law of 1921.
6 "Separate account." An account established or maintained by
7 an insurance company under which income, gains and losses,
8 whether or not realized, from assets allocated to such account,
9 are, in accordance with the applicable contract, credited to or
10 charged against such accounts without regard to other income,
11 gains or losses of the insurance company.
12 "Vestee." A former local government employee or officer who
13 is a former active member with vested rights in a retirement
14 system and who has terminated local government service and has
15 elected to leave that individual's accumulated contributions in
16 the retirement system and to defer receipt of a retirement
17 benefit.
18 CHAPTER 2
19 SUBSTANTIVE PROVISIONS
20 SUBCHAPTER A
21 DESIGNATION OF AFFECTED FIDUCIARIES AND ACTIVITIES
22 Section 201. Fiduciary positions and functions.
23 (a) Fiduciary.--A person is a fiduciary of a retirement
24 system:
25 (1) if the individual serves in one or more of the
26 following positions:
27 (i) a member of the governing body when that
28 governing body is exercising its authority, if any, to
29 approve modifications in the pension plan of the
30 retirement system;
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1 (ii) a member of the managing board; or
2 (iii) the chief administrative officer of a
3 retirement system or a person who has actual or apparent
4 authority to act on behalf of the chief administrative
5 officer;
6 (2) if the individual is an employee of a retirement
7 system whose employment position includes the power to spend
8 system assets, approve the expenditure of assets, or approve
9 the incurring of a liability;
10 (3) if the individual is designated a fiduciary under
11 Subchapter E of this chapter; or
12 (4) except as otherwise provided in subsections (b) and
13 (c), if:
14 (i) the person exercises any discretionary authority
15 or discretionary control with respect to management of a
16 retirement system or exercises any authority or control
17 with respect to its assets;
18 (ii) the person renders investment advice for a fee
19 or other compensation, direct or indirect, with respect
20 to any assets of a retirement system or has any authority
21 or responsibility to do so; or
22 (iii) the person has any discretionary authority or
23 discretionary responsibility in the administration of a
24 retirement system.
25 (b) Certain investment companies not fiduciaries.--If any
26 asset of a retirement system is invested in securities issued by
27 an investment company registered under the Investment Company
28 Act of 1940 (54 Stat. 789, 15 U.S.C. § 80a-1 et seq.), that
29 investment shall not by itself cause the investment company or
30 the investment company's investment adviser or principal
19890H1332B1540 - 16 -
1 underwriter to be deemed to be a fiduciary except insofar as the
2 investment company or its investment adviser or principal
3 underwriter acts in connection with a retirement system covering
4 employees of the investment company, the investment adviser or
5 its principal underwriter. Nothing contained in this subsection
6 shall limit the duties imposed on the investment company,
7 investment adviser or principal underwriter by any other law.
8 (c) Certain corporate personnel not fiduciaries.--If the
9 corporation assumes responsibility and liability for the actions
10 taken or responsibilities assumed by its director, officer or
11 employee, no director, officer or employee of a corporation that
12 is itself a fiduciary shall be a fiduciary solely by reason of
13 actions taken or responsibilities assumed in the course of that
14 individual's employment or office with the corporation.
15 Section 202. Engaging in fiduciary activity.
16 A person engages in a fiduciary activity if that activity is:
17 (1) assigned to the person by law or pension plan;
18 (2) undertaken by the person, even if the person by so
19 doing is exceeding the person's actual or apparent authority;
20 or
21 (3) an undertaking the person could reasonably be
22 expected to undertake as a fiduciary.
23 Section 203. Named fiduciaries.
24 Except when a statute of this Commonwealth designates a
25 fiduciary for a retirement system, the governing body shall
26 provide for the designation of one or more named fiduciaries, in
27 a pension plan instrument or under a procedure specified in a
28 pension plan instrument, who shall have authority to control and
29 manage the operation and administration of the retirement
30 system. This named fiduciary may be the governing body or the
19890H1332B1540 - 17 -
1 managing board.
2 Section 204. Persons excluded from definition of fiduciary.
3 (a) General rule.--Persons who have no power to make any
4 decisions as to retirement system policy, interpretations,
5 practices or procedures, who do not have discretionary authority
6 or discretionary control respecting management of a retirement
7 system, who do not exercise any authority or control respecting
8 management or disposition of the assets of a retirement system,
9 and who do not render investment advice with respect to any
10 asset of the retirement system and have no authority or
11 responsibility to do so, but who perform the following purely
12 ministerial activities for a retirement system within a
13 framework of policies, interpretations, rules, practices and
14 procedures made by other persons are not fiduciaries but may be
15 subject to the bonding requirements under section 254:
16 (1) Application of rules to determine eligibility for
17 membership or benefits.
18 (2) Calculation of service and compensation for benefit
19 purposes.
20 (3) Preparation of employee communications material.
21 (4) Maintenance of members' service and employment
22 records.
23 (5) Preparation of reports required by government
24 agencies.
25 (6) Calculation of benefit.
26 (7) Orientation of new members and advising members of
27 their rights and options under the pension plan.
28 (8) Collection of contributions and application of
29 contributions as provided in the pension plan.
30 (9) Preparation of reports concerning members' benefits.
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1 (10) Processing of claims.
2 (11) Making recommendations to others for decisions with
3 respect to retirement system administration.
4 (b) Applicability.--This statute applies to all persons
5 except a person who is a fiduciary of a private retirement
6 system that provides retirement benefit coverage to a local
7 government employee and which is subject to fiduciary regulation
8 under the Employee Retirement Income Security Act of 1974
9 (Public Law 93-406, 88 Stat. 829, 29 U.S.C. Ch. 18).
10 Section 205. Persons prohibited from being fiduciaries.
11 (a) Individuals.--A person may not be a fiduciary of a
12 retirement system, engage in a fiduciary activity or accept a
13 position that is connected with a retirement system, including
14 that of employee, consultant, manager or advisor if that person:
15 (1) has been removed from a fiduciary position for
16 violating a provision of this statute for five years
17 beginning on the day following removal from fiduciary
18 position;
19 (2) has been removed from office under the act of August
20 14, 1963 (P.L.1048, No.452), entitled "An act providing for
21 the forfeiture of office of public officers convicted of
22 certain crimes," for five years beginning on the day
23 following removal from office; or
24 (3) has been convicted of one of the following criminal
25 offenses for five years beginning on the day following
26 conviction or, if the person convicted is then incarcerated,
27 for five years beginning on the day following release from
28 incarceration:
29 (i) a violation of Pennsylvania law that is murder
30 of the first or second degree, a felony of the first,
19890H1332B1540 - 19 -
1 second or third degree, or a misdemeanor of the first or
2 second degree;
3 (ii) a violation of Federal law specified in section
4 411 of the Employee Retirement Income Security Act of
5 1974 (Public Law 93-406, 88 Stat. 829, 29 U.S.C. § 1111);
6 or
7 (iii) a violation of the law of another state,
8 United States possession, federally recognized Indian
9 tribal government, 10 U.S.C. Ch. 47 (relating to Uniform
10 Code of Military Justice), law in effect in a foreign
11 nation, or international law that would be a criminal
12 offense listed in subparagraph (i).
13 (b) Business entities.--No business entity of which more
14 than 5% of the equity or ownership interest is held by an
15 individual who is prohibited from being a fiduciary under
16 subsection (a) may provide consulting, management or advisory
17 service to a retirement system unless the business entity is a
18 publicly held corporation.
19 SUBCHAPTER B
20 GENERAL STANDARD OF FIDUCIARY CONDUCT
21 Section 211. To whom fiduciary duty is owed.
22 A fiduciary, in performing a fiduciary activity or serving in
23 a fiduciary position, owes a fiduciary duty to:
24 (1) the members and beneficiaries;
25 (2) the government that established the retirement
26 system and its revenue payers; and
27 (3) the Commonwealth and its revenue payers:
28 (i) if intergovernmental revenue from the
29 Commonwealth is provided to a local government for its
30 retirement system under the General Municipal Pension
19890H1332B1540 - 20 -
1 System State Aid Program or the Supplemental State
2 Assistance Program, or both, provided for in the act of
3 December 18, 1984 (P.L.1005, No.205), known as the
4 Municipal Pension Plan Funding Standard and Recovery Act;
5 or
6 (ii) if the retirement system is required to file an
7 actuarial valuation report with the Public Employee
8 Retirement Study Commission under either the act of
9 December 6, 1972 (P.L.1383, No.293), entitled "An act
10 requiring municipal pension systems to have an actuarial
11 investigation of the fund made by an actuary who shall
12 report his findings to the Department of Community
13 Affairs," or the Municipal Pension Plan Funding Standard
14 and Recovery Act.
15 Section 212. Fiduciary standards.
16 (a) Nonexpert (prudent person) standard.--A fiduciary who
17 does not have, professes not to have or cannot reasonably be
18 expected to have special expertise in the fiduciary activity in
19 which the fiduciary is engaged shall exercise that degree of
20 judgment and care, under the circumstances then prevailing, that
21 persons of prudence, discretion and intelligence would exercise
22 in the management of their own affairs and, if the fiduciary
23 activity involves the investment of retirement system assets, as
24 they would act for the purpose of investment, not in regard to
25 speculation, but in regard to the permanent disposition of their
26 funds, considering the probable revenue to be derived from the
27 assets as well as the probable safety of their capital.
28 (b) Expert (prudent expert) standard.--A fiduciary who has,
29 professes to have or can reasonably be expected to have special
30 expertise in the fiduciary activity in which the fiduciary is
19890H1332B1540 - 21 -
1 engaged shall act in good faith and shall exercise that degree
2 of judgment, prudence, skill, diligence and care, under the
3 circumstances then prevailing, that persons of prudence,
4 discretion and intelligence acting in a similar capacity and
5 familiar with that activity would exercise in the conduct of an
6 enterprise of a similar character and with similar aims.
7 Section 213. Sole interest and exclusive purpose.
8 To protect the interest of members and beneficiaries in a
9 retirement system and the interests of the Commonwealth, or
10 local government, or both, and the general public in the
11 operation of the retirement system and to minimize the possible
12 adverse impact of the operation of the retirement system on
13 government revenues and expenditures, a fiduciary shall
14 discharge that fiduciary's duties with respect to a retirement
15 system in accordance with the pension plan, the plan document,
16 and law solely in the interest of the members and beneficiaries
17 and for the exclusive purposes of:
18 (1) providing benefits to members and beneficiaries; and
19 (2) defraying reasonable expenses of administering the
20 retirement system.
21 Section 214. Expert and nonexpert fiduciaries.
22 (a) Expert or nonexpert.--A governing body and its members,
23 managing board and its members, chief administrative officer,
24 local government employee, or retirement system employee making
25 investments in accordance with investment advice from an
26 investment adviser, making and managing investments in
27 accordance with investment advice from, and investment
28 management by, an investment manager, or administering a
29 retirement system through a retirement system administrator with
30 whom the local government or the retirement system has
19890H1332B1540 - 22 -
1 contracted under Subchapter E and section 304, 305, or 306 is an
2 expert under section 212(b) only for investing and is otherwise
3 a nonexpert under section 212(a).
4 (b) Expert--An investment adviser with whom the local
5 government or retirement system has contracted under section
6 304, an investment manager with whom the local government or
7 retirement system has contracted under section 305, or a
8 retirement system administrator with whom the local government
9 or retirement system has contracted under section 306 is an
10 expert under section 212(b).
11 (c) Nonexpert.--Except as provided in subsection (a), a
12 governing body member, managing board member or chief
13 administrative officer, as such, is a nonexpert under section
14 212(a), even if the individual is an accountant, actuary,
15 attorney at law, banker, broker-dealer in securities, insurance
16 agent, insurance broker, investment adviser, investment manager,
17 retirement system administrator, etc. for another retirement
18 system.
19 SUBCHAPTER C
20 SPECIFIC, SUPPLEMENTAL STANDARDS OF FIDUCIARY CONDUCT
21 Section 221. Retirement system trust.
22 Unless the pension plan is contained entirely within law, the
23 governing body of the local government of which the retirement
24 system is a part, or the managing board, shall establish a trust
25 to be managed and controlled by the governing body, the managing
26 board or a separate board established for that purpose.
27 Section 222. Title to retirement system assets.
28 (a) General rule.--Except as provided in subsection (b), all
29 assets of a retirement system shall be held in trust for all
30 persons with beneficial interests in these assets by the
19890H1332B1540 - 23 -
1 trustee. The trustee shall hold legal title to all assets of the
2 retirement system, however constituted, in the name of the
3 retirement system, the local government of which the retirement
4 system is a part, or a nominee. The trustee shall be named in
5 the trust instrument described in section 221, named in the plan
6 document described in section 303, or appointed by a person who
7 is a named fiduciary, and, upon acceptance of being named or
8 appointed, the trustee shall have exclusive authority and
9 discretion to manage and control the assets of the retirement
10 system, except to the extent that:
11 (1) the pension plan expressly provides that the trustee
12 is subject to the direction of a named fiduciary who is not a
13 trustee, in which case the trustee shall be subject to proper
14 directions of the named fiduciary that are made in accordance
15 with the terms of the pension plan and that are not contrary
16 to this statute; or
17 (2) the authority to manage, acquire or dispose of
18 assets of the plan is delegated to an investment manager
19 under section 305 or a retirement system administrator under
20 section 306.
21 (b) Exception.--The requirements of subsection (a) do not
22 apply to the assets of:
23 (1) a retirement system that consists of insurance
24 contracts or policies issued by an insurance company
25 qualified to do business in the Commonwealth; or
26 (2) an insurance company or any assets of a retirement
27 system that are held by an insurance company.
28 Section 223. Diversifying investments.
29 Fiduciaries shall diversify the investments of the retirement
30 system so as to minimize the risk of large losses and to
19890H1332B1540 - 24 -
1 maximize the rate of return, unless under the circumstances it
2 is clearly prudent not to do so.
3 Section 224. Prohibited transactions by retirement systems.
4 A fiduciary shall not cause a retirement system to engage in
5 a transaction if the fiduciary knows or should know that the
6 transaction constitutes a direct or indirect:
7 (1) sale, or exchange, or leasing of any asset from the
8 retirement system to a party in interest for less than
9 adequate consideration, or from a party in interest to a
10 retirement system for more than adequate consideration;
11 (2) lending of money or other extension of credit from
12 the retirement system to a party in interest without the
13 receipt of adequate security and a rate of interest that is
14 consistent with the requirements relating to fiduciary
15 functions under sections 211, 212 and 213, or from a party in
16 interest to a retirement system with the provision of
17 excessive security or a rate of interest that is inconsistent
18 with the requirements relating to fiduciary functions under
19 sections 211, 212 and 213;
20 (3) furnishing of goods, services or facilities from the
21 retirement system to a party in interest for less than
22 adequate consideration, or from a party in interest to a
23 retirement system for more than adequate consideration;
24 (4) transfer to, or use by or for the benefit of, a
25 party in interest of any assets of the retirement system for
26 less than adequate consideration; or
27 (5) except as provided in sections 227 and 263,
28 acquisition, on behalf of the retirement system, of any
29 security, real property or loan of the local government of
30 which the retirement system is a part or any of whose
19890H1332B1540 - 25 -
1 employees or officers are covered by the retirement system.
2 Section 225. Prohibited activities by fiduciary.
3 A fiduciary shall not:
4 (1) deal with the assets of the retirement system in
5 that fiduciary's own interest or for that fiduciary's own
6 account;
7 (2) in that fiduciary's individual or in another
8 capacity, act in a transaction involving the retirement
9 system on behalf of a party, or represent a party, whose
10 interests are adverse to the interests of the retirement
11 system or the interests of its members and beneficiaries; or
12 (3) receive consideration for that fiduciary's personal
13 account from a party dealing with the retirement system in
14 connection with a transaction involving the assets of the
15 retirement system.
16 Section 226. Certain transactions and activities permitted.
17 Nothing in section 224 or 225 shall be construed to prohibit:
18 (1) Contracting or making reasonable arrangements with a
19 party in interest for office space, or for accounting,
20 actuarial, legal or other services necessary for the
21 establishment or operation of the retirement system, if no
22 more than reasonable compensation is paid therefor.
23 (2) The investment of all or part of a retirement
24 system's assets in deposits that bear an interest rate that
25 is consistent with the fiduciary duties under sections 211,
26 212 and 213, in a bank or similar institution supervised by
27 the United States or a state, if the bank or other
28 institution is a fiduciary of the retirement system and if
29 the investment is expressly authorized by a provision of the
30 pension plan or by a fiduciary, other than the bank or other
19890H1332B1540 - 26 -
1 institution or an affiliate thereof, who is expressly
2 empowered by the pension plan to authorize the investment.
3 (3) The providing of any ancillary service by a bank or
4 similar financial institution supervised by the United States
5 or a state, if the bank or other institution is a fiduciary
6 of the retirement system, and if:
7 (i) the bank or other institution has adopted
8 adequate internal safeguards that assure that the
9 providing of the ancillary service is consistent with
10 sound banking and financial practice, as determined by
11 Federal or State supervisory authority; and
12 (ii) the extent to which the ancillary service is
13 provided is subject to specific guidelines issued by the
14 bank or similar financial institution, as approved by
15 Federal or State supervisory authority, and adherence to
16 these guidelines would reasonably preclude the bank or
17 other institution from providing the ancillary services:
18 (A) in an excessive or unreasonable manner; and
19 (B) in a manner that would be inconsistent with
20 the best interests of members and beneficiaries of
21 the retirement system.
22 These ancillary services shall not be provided at more than
23 reasonable compensation.
24 (4) Any transaction between a retirement system and a
25 common or collective trust fund or pooled investment fund
26 maintained by a party in interest that is a bank supervised
27 by a Federal or State agency or a pooled investment fund of
28 an insurance company qualified to do business in this
29 Commonwealth, if:
30 (i) the transaction is a sale or purchase of an
19890H1332B1540 - 27 -
1 interest in the fund;
2 (ii) the bank or insurance company receives not more
3 than reasonable compensation; and
4 (iii) the transaction is expressly permitted by the
5 pension plan under which the retirement system is
6 maintained, or by a fiduciary, other than the bank or
7 insurance company, or an affiliate thereof, who has
8 authority to manage and control the assets of the
9 retirement system.
10 (5) A fiduciary or party in interest from receiving any
11 benefit to which the fiduciary or party in interest may be
12 entitled as a member or beneficiary of the retirement system,
13 or paying any benefit to any member or beneficiary, so long
14 as the benefit is computed and paid on the basis that is
15 consistent with the terms of the pension plan as generally
16 applied to all members and beneficiaries.
17 (6) A fiduciary or party in interest from receiving any
18 reasonable compensation for services rendered, or for the
19 reimbursement of expenses properly and actually incurred, in
20 the performance of the functions of the fiduciary or party in
21 interest with respect to the retirement system, except that
22 no individual so serving who already receives full-time pay
23 from a local government whose officers or employees are
24 members in the retirement system or an employee organization
25 whose members are members in the retirement system shall
26 receive compensation from the retirement system, except for
27 reimbursements of expenses properly and actually incurred.
28 (7) A fiduciary from serving as a fiduciary in addition
29 to being an officer, employee, agent or other representative
30 of a party in interest.
19890H1332B1540 - 28 -
1 (8) A merger of retirement systems or the aggregation of
2 public employee pension trust funds under section 607(b) of
3 the act of December 18, 1984 (P.L.1005, No.205), known as the
4 Municipal Pension Plan Funding Standard and Recovery Act.
5 (9) A return of a contribution that was made by a
6 mistake of fact or law within one year after the chief
7 administrative officer determines that the contribution was
8 made by such a mistake.
9 Section 227. Certain interfund transactions.
10 (a) Interfund receivables and advances to other funds.--A
11 fiduciary shall not cause a public employee pension trust fund
12 to engage in a transaction if the fiduciary knows or should know
13 that the transaction constitutes a direct or indirect loan of
14 the retirement system assets to another fund of the local
15 government.
16 (b) Due from and due to other funds.--Nothing in subsection
17 (a) shall prevent a public employee pension trust fund from
18 purchasing goods or services in a quasi-external transaction
19 from another fund of the local government for adequate
20 consideration, or another fund of the local government making
21 routine employer contributions to the public employee pension
22 trust fund in a quasi-external transaction, provided that the
23 amount due from or to the public employee pension trust fund for
24 the goods, services or contributions is paid on the normal
25 fiscal cycle payment date for such transactions (at the end of
26 the week, month, quarter, etc.) or sooner, and provided that the
27 amount due is paid within one year.
28 (c) Interfund reimbursements.--Nothing in subsection (a)
29 shall prevent a public employee pension trust from reimbursing
30 another fund of the local government or another fund of the
19890H1332B1540 - 29 -
1 local government from reimbursing the public employee pension
2 trust fund for expenditures or expenses that are initially made
3 from the one fund but that properly apply to the other fund or
4 clearing-account payments made for expediency in a controlled
5 environment, provided that the reimbursement from or to the
6 public employee pension trust fund is made on the normal fiscal
7 cycle payment date for such transactions (at the end of the
8 week, month, quarter, etc.) or sooner, and provided that the
9 reimbursement is made within one year.
10 Section 228. Statement of financing interest.
11 A fiduciary shall file a statement of financial interest as
12 though the fiduciary were a public employee or public official
13 required to file a statement of financial interest under the act
14 of October 4, 1978 (P.L.883, No.170), referred to as the Public
15 Official and Employee Ethics Law. A fiduciary who has filed this
16 statement of financial interest as a public employee or public
17 official of the retirement system does not have to file another
18 statement.
19 Section 229. Prohibitions in procuring bonds and insurance.
20 A person shall not procure any bond required by section
21 254(a) or any insurance permitted by section 255 from any
22 surety, insurance company or other company or through any agent
23 or broker in whose business operations the retirement system or
24 any party in interest in the retirement system has any control
25 or significant financial interest, directly or indirectly.
26 SUBCHAPTER D
27 NONEXPERT FIDUCIARIES INVESTMENTS
28 Section 231. Authorized investments by nonexpert fiduciaries in
29 general.
30 A fiduciary who does not have, professes not to have or
19890H1332B1540 - 30 -
1 cannot reasonably be expected to have special expertise in the
2 fiduciary activity in which the fiduciary is engaged, subject
3 only to the provisions of the pension plan and plan document, if
4 any, may accept, hold, invest in and retain the investments
5 authorized by this subchapter and shall not be liable for loss
6 on these investments so long as the fiduciary exercises the due
7 care and prudence required by this statute in the performance of
8 that fiduciary's duties in regard to them. "Legal investment" or
9 "authorized investment" or words of similar import used in the
10 pension plan or the plan document shall be construed to mean an
11 investment authorized by this subchapter.
12 Section 232. Liquidity.
13 A fiduciary investing under section 231 shall invest that
14 portion of the assets of the retirement system that equals the
15 total potential benefit amounts payable in the succeeding year
16 in authorized short-term debt obligations that can be
17 immediately liquidated without incurring any substantial,
18 determinable penalty or that have an average maturity of no more
19 than 30 days.
20 Section 233. United States Government obligations.
21 Bills, notes, bonds, mortgages and other fixed obligations
22 issued and guaranteed by the United States, its agencies or its
23 instrumentalities shall be authorized investments.
24 Section 234. Other government obligations.
25 Except for the obligations of the local government that
26 created the retirement system or of which the retirement system
27 is a part, bonds, notes, bills, mortgages and other fixed
28 obligations issued by a state municipality, special district,
29 state agency or state instrumentality shall be authorized
30 investments, if the investment is made at the taxable-equivalent
19890H1332B1540 - 31 -
1 yields available in the marketplace at the time the investment
2 is made, and:
3 (1) if the obligation is backed by the full faith and
4 credit of the state of applicable taxing jurisdiction;
5 (2) if the obligation is other than a revenue bond and
6 if the issuer has not been in default in the payment of
7 principal and interest within the past ten years; or
8 (3) if the obligation is a revenue debt security and if
9 the obligor has been completely self-supporting for the
10 immediately prior five-year period.
11 Section 235. Corporate obligations.
12 Bonds, notes, debentures or other evidences of indebtedness
13 issued by a corporation organized under the laws of the United
14 States or of any state, if the obligations has been rated among
15 the top two quality categories by a nationally recognized rating
16 agency, shall be authorized investments.
17 Section 236. Certificates of deposit.
18 Certificates of deposit issued by a bank, if rated in the
19 highest quality category by a nationally recognized rating
20 agency or if they meet the minimum collateral requirements
21 applicable to banks authorized for the deposit of Commonwealth
22 funds, shall be authorized investments.
23 Section 237. Savings accounts.
24 Savings accounts in a bank, if fully insured by the Federal
25 Deposit Insurance Corporation or the Federal Savings and Loan
26 Insurance Corporation, shall be authorized investments.
27 Section 238. Insurance products.
28 (a) Contracts.--Contracts that provide a guarantee of
29 principal and a fixed rate of return issued by an insurance
30 company that has qualified and is authorized by the Insurance
19890H1332B1540 - 32 -
1 Department of the Commonwealth to transact business in the
2 Commonwealth shall be authorized investments.
3 (b) Separate accounts.--Separate accounts of an insurance
4 company that has qualified and is authorized by the Insurance
5 Department of the Commonwealth to transact business in the
6 Commonwealth shall be authorized investments, provided that the
7 only investments of these separate accounts are in the
8 authorized investments for retirement systems listed in sections
9 233 through 237. This subsection shall not limit the authority
10 of nonexpert fiduciaries to provide for the investment of
11 retirement system assets in other separate accounts of insurance
12 companies using the advice of an investment advisor or
13 investment manager under section 304 or 305.
14 Section 239. Shares of an investment company.
15 Shares of an investment company registered under the
16 Investment Company Act of 1940 (54 Stat. 789, 15 U.S.C. § 80a-1
17 et seq.), whose shares are registered under the Securities Act
18 of 1933 (48 Stat. 74, 15 U.S.C. § 77a et seq.), shall be
19 authorized investments provided that the only investments of
20 that company are in the authorized investments for retirement
21 systems listed in sections 233 through 237.
22 SUBCHAPTER E
23 DELEGATION AND ALLOCATION OF FIDUCIARY ACTIVITIES
24 Section 241. Cofiduciary responsibility in general.
25 A fiduciary has a general responsibility to oversee the
26 fiduciary activities of all other fiduciaries unless the
27 activity has been allocated in accordance with section 244 or
28 delegated in accordance with section 245. A fiduciary also has a
29 general responsibility to correct or remedy fiduciary breach of
30 which the fiduciary has knowledge.
19890H1332B1540 - 33 -
1 Section 242. Liability for breach of fiduciary duty by another
2 fiduciary.
3 A fiduciary is liable for a fiduciary breach committed by
4 another fiduciary when the fiduciary has a responsibility to
5 oversee the other fiduciary or to correct or alleviate a breach
6 by the other fiduciary. In the following circumstances, in
7 addition to the liability that the fiduciary may have under
8 another provision of this statute, a fiduciary is jointly and
9 severally liable for a breach of fiduciary duty by another
10 fiduciary of the same retirement system, but the fiduciary has
11 the right to recover the compensatory damages the fiduciary paid
12 from the responsible fiduciary:
13 (1) if the fiduciary allocates a fiduciary activity
14 contrary to section 244;
15 (2) if the fiduciary delegates a fiduciary activity
16 contrary to section 245;
17 (3) if, by the fiduciary's failure to comply with this
18 statute, the fiduciary enables the other fiduciary to commit
19 a breach;
20 (4) if the fiduciary knowingly participates in or
21 knowingly undertakes to conceal an act or omission by the
22 other fiduciary knowing that act or omission is a breach; or
23 (5) if the fiduciary has knowledge of a breach by the
24 other fiduciary, unless the fiduciary makes reasonable
25 efforts under the circumstances to remedy the breach.
26 Section 243. Limitation on responsibility and liability for
27 fiduciary breach by another fiduciary.
28 (a) General rule.--A fiduciary may limit that fiduciary's
29 responsibility and liability for a fiduciary breach committed by
30 another fiduciary through the allocation or delegation of
19890H1332B1540 - 34 -
1 fiduciary activities if:
2 (1) the allocation or delegation:
3 (i) follows appropriate procedures;
4 (ii) is made to an appropriate person or persons;
5 and
6 (iii) is subject to continued monitoring of
7 performance; and
8 (2) the fiduciary does not violate section 242.
9 (b) Particular-scope fiduciary activities.--Particular-scope
10 fiduciary activities may be allocated.
11 (c) General-scope fiduciary activities.--General-scope
12 fiduciary activities may not be allocated.
13 (d) Ministerial activities.--Ministerial activities may be
14 delegated.
15 (e) Discretionary activities.--Discretionary activities may
16 be delegated.
17 Section 244. Allocation of fiduciary activities.
18 Fiduciaries of similar rank and responsibility may allocate a
19 particular-scope fiduciary activity:
20 (1) in writing, by action of the managing board, the
21 governing body of the government of which the retirement
22 system is a part, or the appropriate fiduciaries with
23 notification to and approval by the managing board;
24 (2) with the agreement of the affected fiduciaries; and
25 (3) in conformance with any additional procedural
26 requirements specified by the managing board.
27 Section 245. Delegation of fiduciary activities.
28 (a) Ministerial activity.--A fiduciary may delegate a
29 ministerial activity, but not fiduciary liability for that
30 ministerial activity, to another fiduciary of lesser rank or
19890H1332B1540 - 35 -
1 responsibility or to a person who, but for the delegation, would
2 not be a fiduciary. The fiduciary shall make this delegation in
3 accordance with procedures established by the managing board.
4 (b) Discretionary activity.--A fiduciary may delegate a
5 discretionary activity and, except in the circumstances listed
6 in section 242, fiduciary liability for that discretionary
7 activity to another person:
8 (1) if the extent of the delegation and the conditions
9 or limitations on the delegation are clearly specified;
10 (2) with the agreement of the person to whom the
11 activity is delegated;
12 (3) for a specified time that may not exceed the term or
13 the remaining period of fiduciary status of the person making
14 the delegation;
15 (4) subject to termination in the event of a material
16 change in the circumstances applicable to the delegation;
17 (5) with the filing of a written summary of the
18 delegation with the managing board; and
19 (6) in conformance with the additional procedural
20 requirements specified by the managing board.
21 SUBCHAPTER F
22 FIDUCIARY BONDING AND FIDUCIARY INSURANCE
23 Section 251. General prohibition of indemnification.
24 A fiduciary shall be exculpated, indemnified or otherwise
25 relieved of liability for a fiduciary breach only by a bond,
26 fiduciary insurance, or as provided either in section 252 or
27 under 42 Pa.C.S. Ch. 85 Subch. C (relating to actions against
28 local parties). An arrangement or plan document provision
29 providing other exculpation, indemnification or relief from
30 liability for a fiduciary breach is prohibited as a practice
19890H1332B1540 - 36 -
1 contrary to public policy.
2 Section 252. Indemnified fiduciaries.
3 The governing body or managing board may indemnify from
4 liability for an unintentional fiduciary breach a fiduciary who
5 receives no compensation or compensation of not more than $600 a
6 year for that fiduciary's services.
7 Section 253. Required indemnification.
8 An indemnified fiduciary of a retirement system shall be held
9 harmless from reasonable costs or expenses incurred as a result
10 of actual or threatened litigation or other proceedings arising
11 from the good faith performance of fiduciary duties, except for
12 litigation or other proceedings brought by the local government
13 of which the retirement system is a part or by the retirement
14 system arising from the failure of the fiduciary to act in
15 accordance with this statute.
16 Section 254. Bonding and alternative security arrangements.
17 (a) Bonding.--
18 (1) Every fiduciary and every person who handles assets
19 of a retirement system (hereinafter in this section referred
20 to as a system official) shall be bonded as provided in this
21 subsection, except as provided in subsection (b).
22 (2) The amount of the bond shall be fixed by the
23 governing body or managing board at the beginning of each
24 retirement system year. The minimum amount of this bond shall
25 be the greater of 10% of the assets handled or $2,000. The
26 maximum amount of this bond need not exceed $500,000. The
27 governing body or managing board may require the minimum
28 amount, or the maximum amount, or both, of the bond to be a
29 larger amount.
30 (3) For purposes of fixing the amount of the bond, the
19890H1332B1540 - 37 -
1 amount of assets handled shall be determined by the assets
2 handled by the person, group or class to be covered by the
3 bond and by their predecessor or predecessors, if any, during
4 the preceding retirement system year, or, if the retirement
5 system has no preceding year, the amount of assets
6 anticipated to be handled during the current retirement
7 system year by this person, group or class.
8 (4) The bond shall provide protection to the retirement
9 system against loss by reason of acts of fraud or dishonesty
10 on the party of the system official, directly or through
11 connivance with others.
12 (b) Alternative arrangements in lieu of bonding.--The
13 following alternative arrangements are acceptable in lieu of the
14 bond required by subsection (a):
15 (1) A public official who is covered by a bond in that
16 official's capacity as a public official and whose fiduciary
17 function is within that official capacity under the terms of
18 that bond.
19 (2) An officer, director or employee of a corporation,
20 or a corporation, that:
21 (i) is organized and doing business under the laws
22 of a state or the United States;
23 (ii) is authorized by the applicable law to exercise
24 trust powers or to conduct an insurance business;
25 (iii) is subject to applicable supervision or
26 examination by a Federal or a state governmental agency;
27 and
28 (iv) has, on an ongoing basis, a combination of
29 contributed capital and retained earnings of at least
30 $1,000,000; or
19890H1332B1540 - 38 -
1 (3) If the retirement system is one under which the only
2 assets from which benefits are paid are the general assets of
3 an employee organization.
4 (c) Purchase of bonds authorized.--A governing body or
5 managing board is authorized to spend the amount necessary to
6 purchase the bond required by subsection (a).
7 Section 255. Insurance.
8 (a) Retirement system insurance.--A governing body or
9 managing board may purchase insurance for its retirement system
10 to cover the liability or loss resulting from a fiduciary act or
11 omission. This insurance must be obtained from an insurance
12 company authorized to do business in this Commonwealth or, if
13 established and functioning, a government-established fiduciary
14 insurance pool or similar mechanism. This insurance must permit
15 recourse by the insurer against the fiduciary in the case of an
16 intentional breach of a fiduciary obligation by the fiduciary.
17 (b) Individual fiduciary insurance.--
18 (1) A governing body or managing board may buy insurance
19 for its fiduciary who receives no compensation or
20 compensation of not more than $600 a year for that
21 fiduciary's services to cover liability or loss incurred
22 individually by the fiduciary by reason of fiduciary acts or
23 omissions. This insurance must permit recourse by the insurer
24 against a fiduciary who is responsible for an intentional
25 fiduciary breach.
26 (2) A fiduciary or an employee organization may buy
27 fiduciary insurance to cover liability or loss incurred
28 individually by a fiduciary by reason of a fiduciary act or
29 omission.
30 (3) The governing body, managing board, fiduciary or
19890H1332B1540 - 39 -
1 employee organization buying insurance under this subsection
2 shall but it from an insurance company authorized to do
3 business in this Commonwealth.
4 (c) Expenditure authorized.--A governing body or managing
5 board is authorized to spend the amount necessary to buy
6 reasonable amounts of fiduciary insurance under subsections (a)
7 and (b).
8 SUBCHAPTER G
9 SPECIAL ASSET RULES
10 Section 261. Investment company security.
11 When a retirement system invests in a security issued by an
12 investment company registered under the Investment Company Act
13 of 1940 (54 Stat. 789, 15 U.S.C. § 80a-1 et seq.), the assets of
14 the retirement system include the security but do not, solely by
15 reason of the investment, include any assets of the investment
16 company.
17 Section 262. Insurance contract or policy.
18 When a retirement system is financed in whole or in part by a
19 contract or policy of insurance issued by an insurance company
20 that is qualified and is authorized by the Insurance Department
21 to transact business in the Commonwealth, the assets of the
22 retirement system include the contract or policy but do not,
23 solely by reason of the issuance of the contract or policy,
24 include the assets of the insurance company issuing the contract
25 or policy except to the extent that the assets are maintained by
26 the insurance company in a separate account and do not
27 constitute surplus in the account.
28 Section 263. Indirect investment in local government
29 securities.
30 A prudent expert fiduciary may invest retirement system
19890H1332B1540 - 40 -
1 assets in a pooled investment fund of a bank, a pooled separate
2 account of an insurance company, or the securities of an
3 investment company registered under the Investment Company Act
4 of 1940 (54 Stat. 789, 15 U.S.C. § 80a-1 et seq.), whose shares
5 are registered under the Securities Act of 1933 (48 Stat. 74, 15
6 U.S.C. § 77a et seq.), provided that not more than 5% of the
7 fair market value of the assets of the pooled investment fund,
8 pooled separate account or investment company are invested in
9 the debt securities of the local government that created the
10 retirement system or of which the retirement system is a part.
11 Section 264. Investments that become unauthorized.
12 A fiduciary may retain without liability for resulting loss
13 any investment that was authorized when received or made
14 although that investment no longer qualifies as an authorized
15 investment, provided that the fiduciary exercises the due care
16 and prudence required by this statute in the disposition or
17 retention of that nonlegal investment. A retirement system shall
18 dispose of an investment that was authorized when received or
19 made but that no longer qualifies as an authorized investment
20 within five years of the investment ceasing to qualify as an
21 authorized investment at the disposition rate of not less than
22 20% of the unauthorized investment a year.
23 CHAPTER 3
24 ADMINISTRATIVE PROVISIONS
25 Section 301. Open meetings.
26 A managing board is an agency under the act of July 3, 1986
27 (P.L.388, No.84), known as the Sunshine Act.
28 Section 302. Inspection and copying of records.
29 A retirement system is an agency under the act of June 21,
30 1957 (P.L.390, No.212), referred to as the Right-to-Know Law.
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1 Section 303. Plan document.
2 (a) Compilation and filing.--Unless the pension plan of the
3 retirement system is contained wholly in law, the managing board
4 shall compile one written plan document and file it with the
5 chief administrative officer of the retirement system. The
6 managing board shall include in this plan document all
7 applicable, relevant provisions of the pension plan, including
8 eligibility requirements and entitlement provisions constituting
9 the benefit coverage of the retirement system. The managing
10 board shall compile this plan document from whatever documents
11 in which it is contained, including, but not limited to, the
12 articles of incorporation, bylaws, governing body rules and
13 policies, local government charter provisions, local government
14 ordinance or resolution provisions, general or special
15 Commonwealth law, and collective bargaining agreements. The
16 managing board shall revise this plan document whenever there is
17 a material change in the pension plan.
18 (b) Public record.--This plan document is a public record
19 under the act of June 21, 1957 (P.L.390, No.212), referred to as
20 the Right-to-Know Law.
21 Section 304. Contracting for investment advice permitted.
22 The managing board may contract with an investment adviser
23 that agrees to conduct itself as a fiduciary in accordance with
24 this statute to be designated as an investment adviser of the
25 retirement system. Under Subchapter E of Chapter 2, in the
26 contract, the investment adviser may limit its fiduciary
27 liability to the portfolio of assets under its control and over
28 which it has assumed fiduciary responsibility.
29 Section 305. Contracting for investment management permitted.
30 The managing board may contract with an investment manager
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1 that agrees to conduct itself as a fiduciary in accordance with
2 this statute to be designated as an investment manager of the
3 retirement system. The contract shall require the investment
4 manager annually to disclose to the retirement system all
5 expenses of managing the investments of the retirement system.
6 Under Subchapter E of Chapter 2, in the contract, the investment
7 manager may limit its fiduciary liability to the portfolio of
8 assets under its control and over which it has assumed fiduciary
9 responsibility.
10 Section 306. Contracting for retirement system administration
11 permitted.
12 The managing board may contract with an insurance company
13 that has qualified and is authorized by the Insurance Department
14 to transact business in the Commonwealth, or with any bank
15 approved by the Department of Banking, or with any investment
16 adviser registered under the Investment Advisers Act of 1940 (54
17 Stat. 847, 15 U.S.C. § 80b-1 et seq.), that is registered as an
18 investment adviser by the Pennsylvania Securities Commission, or
19 with the Pennsylvania Municipal Retirement System to be
20 designated as the retirement system administrator. Under
21 Subchapter E of Chapter 2, the managing board may delegate the
22 power to administer the retirement system in its entirety,
23 including the power to receive and invest all moneys deposited
24 into the pension trust fund and such other delegable powers as
25 are vested in the managing board. The contract shall require the
26 retirement system administrator annually to disclose to the
27 retirement system all expenses of operating and administering
28 the retirement system.
29 Section 307. Disclosure of business placed or commissions
30 allocated.
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1 The managing board annually shall issue a public document in
2 which is discloses the recipients of any business placed or
3 commissions allocated among any commercial banks, investment
4 bankers, insurance companies or brokerage organizations used by
5 that retirement system.
6 Section 308. Administrative remedies.
7 Unless the pension plan of the retirement system is contained
8 wholly in law, the managing board shall provide in the plan
9 document for an appeals procedure for benefit determinations
10 that are adverse to the interests of a member or beneficiary.
11 This appeals procedure shall be under 2 Pa.C.S. (relating to
12 administrative law and procedure). An aggrieved person can only
13 appeal to the courts in accordance with 2 Pa.C.S. Ch. 7 Subch. B
14 (relating to judicial review of local agency action) after
15 exhausting the administrative remedies required by this section
16 under 2 Pa.C.S. Ch.5 Subch. B (relating to practice and
17 procedure of local agencies).
18 CHAPTER 4
19 PENALTIES
20 Section 401. Compensatory damages.
21 A fiduciary who violates a provision of this statute is
22 personally liable to pay an amount equal to the loss, or the
23 profits made using the assets, or both, to the retirement
24 system, member, beneficiary, or some combination of these,
25 whichever suffered the loss or was entitled to the assets.
26 Section 402. Other equitable or remedial relief.
27 (a) Negligence beyond simple negligence or inadvertence.--A
28 fiduciary whose violation of a provision of this statute is the
29 result of negligence beyond simple negligence or inadvertence
30 but less severe than gross negligence is subject to other
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1 equitable or remedial relief as the court may deem appropriate,
2 including:
3 (1) an injunction requiring the fiduciary to perform or
4 refrain from performing an act or acts; and
5 (2) a writ of mandamus requiring the fiduciary to
6 perform a fiduciary act or duty.
7 (b) Gross negligence or willful or malicious acts.--A
8 fiduciary whose violation of a provision of this statute is the
9 result of gross negligence or is willful or malicious shall be
10 removed from that fiduciary's fiduciary position and is subject
11 to other equitable or remedial relief as the court may deem
12 appropriate.
13 Section 403. Criminal penalties.
14 A fiduciary who participates in the investment or management
15 of retirement system assets, the disbursement of money from a
16 retirement system, or the formulation or approval of a contract
17 on behalf of the retirement system and who is not covered by the
18 bond or alternative security arrangement specified in section
19 254 is guilty of a misdemeanor of the third degree.
20 Section 404. No limitation on other penalties.
21 The penalties prescribed in this statute do not limit:
22 (1) the power of the Commonwealth, a Commonwealth
23 retirement system, a local government or a local government
24 retirement system to discipline its officials or employees;
25 (2) the power of the State Ethics Commission under the
26 act of October 4, 1978 (P.L.883, No.170), referred to as the
27 Public Official and Employee Ethics Law;
28 (3) the power of the court under the act of August 14,
29 1963 (P.L.1048, No.452), entitled "An act providing for the
30 forfeiture of office of public officers convicted of certain
19890H1332B1540 - 45 -
1 crimes,";
2 (4) the power of either House of the General Assembly to
3 discipline its own members or impeach a public official; or
4 (5) the power of removal under section 7 of Article VI
5 of the Constitution of Pennsylvania.
6 CHAPTER 5
7 SAVINGS CLAUSE; REPEALS; EFFECTIVE DATE
8 Section 501. Savings clause.
9 The provisions of this act shall not affect an act done,
10 liability incurred, or right accrued or vested, or affect a suit
11 or prosecution pending or be instituted to enforce a right or
12 penalty or punish an offense under the authority of an act or
13 part thereof repealed by this act.
14 Section 502. Repeals.
15 All acts and parts of acts are repealed insofar as they are
16 inconsistent with this act.
17 Section 503. Effective date.
18 This act shall take effect on the first day of January that
19 occurs 60 days after the date of final enactment of this act.
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