PRIOR PRINTER'S NO. 1540 PRINTER'S NO. 2636
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, SEMMEL, RYBAK, JAROLIN AND
RICHARDSON, APRIL 26, 1989
AS REPORTED FROM COMMITTEE ON LOCAL GOVERNMENT, HOUSE OF
REPRESENTATIVES, AS AMENDED, OCTOBER 17, 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.
1 Section 202. Engaging in fiduciary activity.
2 Section 203. Named fiduciaries.
3 Section 204. Persons excluded from definition of fiduciary.
4 Section 205. Persons prohibited from being fiduciaries.
5 Subchapter B. General Standards of Fiduciary Conduct
6 Section 211. To whom fiduciary duty is owed.
7 Section 212. Fiduciary standards.
8 Section 213. Sole interest and exclusive purpose.
9 Section 214. Expert and nonexpert fiduciaries.
10 Subchapter C. Specific, Supplemental Standards of Fiduciary
11 Conduct
12 Section 221. Retirement system trust.
13 Section 222. Title to retirement system assets.
14 Section 223. Diversifying investments.
15 Section 224. Prohibited transactions by retirement systems.
16 Section 225. Prohibited activities by fiduciary.
17 Section 226. Certain transactions and activities permitted.
18 Section 227. Certain interfund transactions.
19 Section 228. Statement of financial interest.
20 Section 229. Prohibitions in procuring bonds and insurance.
21 Subchapter D. Nonexpert Fiduciaries Investments
22 Section 231. Authorized investments by nonexpert fiduciaries
23 in general.
24 Section 232. Liquidity.
25 Section 233. United States Government obligations.
26 Section 234. Other government obligations.
27 Section 235. Corporate obligations.
28 Section 236. Certificates of deposit.
29 Section 237. Savings accounts.
30 Section 238. Insurance products.
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1 Section 239. Shares of an investment company.
2 Subchapter E. Delegation and Allocation of Fiduciary
3 Activities
4 Section 241. Cofiduciary responsibility in general.
5 Section 242. Liability for breach of fiduciary duty by
6 another fiduciary.
7 Section 243. Limitation on responsibility and liability for
8 fiduciary breach of another fiduciary.
9 Section 244. Allocation of fiduciary activities.
10 Section 245. Delegation of fiduciary activities.
11 Subchapter F. Fiduciary Bonding and Fiduciary Insurance
12 Section 251. General prohibition of indemnification.
13 Section 252. Indemnified fiduciaries.
14 Section 253. Required indemnification.
15 Section 254. Bonding and alternative security arrangements.
16 Section 255. Insurance.
17 Subchapter G. Special Asset Rules
18 Section 261. Investment company security.
19 Section 262. Insurance contract or policy.
20 Section 263. Indirect investment in local government
21 securities.
22 Section 264. Investments that become unauthorized.
23 Chapter 3. Administrative Provisions
24 Section 301. Open meetings.
25 Section 302. Inspection and copying of records.
26 Section 303. Plan document.
27 Section 304. Contracting for investment advice permitted.
28 Section 305. Contracting for investment management permitted.
29 Section 306. Contracting for retirement system administration
30 permitted.
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1 Section 307. Disclosure of business placed or commissions
2 allocated.
3 Section 308. Administrative remedies.
4 Chapter 4. Penalties
5 Section 401. Compensatory damages.
6 Section 402. Other equitable or remedial relief.
7 Section 403. Criminal penalties.
8 Section 404. No limitation on other penalties.
9 Chapter 5. Savings Clause; Repeals; Effective Date
10 Section 501. Savings clause.
11 Section 502. Repeals.
12 Section 503. Effective date.
13 The General Assembly of the Commonwealth of Pennsylvania
14 hereby enacts as follows:
15 CHAPTER 1
16 GENERAL PROVISIONS
17 Section 101. Short title.
18 This act shall be known and may be cited as the Local
19 Government Employee Retirement System Fiduciary Act.
20 Section 102. Findings of fact.
21 The various statutory provisions that govern the wide variety
22 of local government employee retirement systems in Pennsylvania
23 do not adequately provide for fiduciary responsibility and
24 fiduciary liability.
25 Section 103. Declaration of purpose.
26 (a) Policy.--To protect the interest of members and
27 beneficiaries in local government employee retirement systems
28 and the interests of the Commonwealth and local governments and
29 the general public in the operation of these retirement systems
30 and to minimize the possible adverse impact of the operations of
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1 these retirement systems on government revenues and
2 expenditures, it is hereby declared to be a public policy of
3 this Commonwealth that the assets of a local government employee
4 retirement system are pension trust funds and shall be held for
5 the exclusive purposes of providing benefits to members in the
6 retirement system and their beneficiaries and defraying
7 reasonable expenses of administering the retirement system.
8 (b) Legislative intent.--It is the intent of the General
9 Assembly to:
10 (1) provide a statute comprehensively regulating the
11 fiduciary affairs of all local government employee retirement
12 systems;
13 (2) encourage valuable service on management boards and
14 advisory committees by qualified individuals who receive no
15 compensation or minimum compensation for their services;
16 (3) enable retirement systems to obtain the best
17 possible investment, management and other professional
18 expertise; and
19 (4) enable retirement systems to obtain bonds and
20 fiduciary insurance at reasonable costs.
21 Section 104. Definitions.
22 The following words and phrases when used in this act shall
23 have the meanings given to them in this section unless the
24 context clearly indicates otherwise:
25 "Active member." A local government employee or officer, or
26 a local government employee on leave without pay:
27 (1) for whom at any time during the retirement system
28 year benefits are accrued under the pension plan on the
29 individual's behalf;
30 (2) for whom contributions are being made to a
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1 retirement system;
2 (3) for whom the local government is obligated to
3 contribute to the retirement system or under the pension plan
4 on the individual's behalf; or
5 (4) whom the local government would have been obligated
6 to contribute to the retirement system or under the pension
7 plan on the individual's behalf if any contributions were
8 made to the retirement system or under the pension plan.
9 "Adequate consideration."
10 (1) In the case of a security for which there is
11 generally recognized market, either:
12 (i) the price of the security prevailing on a
13 national securities exchange that is registered under
14 section 6 of the Securities Exchange Act of 1934 (48
15 Stat. 881, 15 U.S.C. § 78f); or
16 (ii) if the security is not traded on a national
17 securities exchange that is registered under section 6 of
18 the Securities Exchange Act of 1934, a price not less
19 favorable to the retirement system that the offering
20 price for the security as established by the current bid
21 and asked prices quoted by persons independent of the
22 issuer and of any party in interest.
23 (2) In the case of an asset other than a security for
24 which there is a generally recognized market, the fair market
25 value of the asset as determined in good faith by the
26 managing board or named fiduciary under the terms of the
27 pension plan.
28 "Assets." Probable future economic benefits obtained or
29 controlled by a particular entity, such as a retirement system
30 or a local government, as a result of past transactions or
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1 events. The term includes, but is not limited to, current assets
2 such as cash and cash equivalents, short-term investments,
3 receivables, inventories and prepaid expenses; investment and
4 funds such as long-term investments in securities, advances to
5 other funds, long-term savings deposits, cash surrender value of
6 life insurance policies, and long-term investments in tangible
7 assets that are not used in current operations; tangible
8 operational assets such as land, buildings, improvements other
9 than buildings, machinery and equipment, and construction work
10 in progress; intangible operational assets such as patents,
11 copyrights, franchises and trademarks; other assets such as
12 long-term receivables from employees and idle operational
13 assets; and deferred charges such as machinery rearrangement
14 costs, deferred income taxes, pension costs paid in advance,
15 long-term prepaid insurance and prepaid leasehold costs.
16 "Bank." A bank, banking and trust company, savings bank,
17 trust company or private bank, as defined in the act of November
18 30, 1965 (P.L.847, No.356), known as the Banking Code of 1965,
19 or any savings and loan association, as defined in the act of
20 December 14, 1967 (P.L.746, No.345), known as the Savings
21 Association Code of 1967, or any successor statutes to these
22 statutes, or any banking institution, trust company or savings
23 and loan association organized under the laws of the United
24 States or of any state, or a receiver, conservator or other
25 liquidating agent of any of the foregoing.
26 "Beneficiary." A person designated by a member, or by the
27 terms of a pension plan, who is or may become entitled to a
28 benefit under the pension plan, or the estate or person who, as
29 the result of the death of a member, qualifies for or is
30 receiving some right or benefit under a pension plan.
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1 "Business entity." An association, business trust,
2 corporation, group or two or more persons having a joint or
3 common interest, partnership, trust or other legal or commercial
4 enterprise.
5 "Chief administrative officer." The individual who has the
6 primary responsibility for the execution of the administrative
7 or management affairs of a local government in the case of a
8 local government, or of the retirement system in the case of a
9 retirement system, or the designee of that person.
10 "Discretionary activity." A retirement system activity not
11 required by law or pension plan or undertaken without the
12 direction of a person in a superior position or of a superior
13 rank or, if required or directed, the time, manner or extent of
14 execution of which is left to the person's prudence and
15 judgment.
16 "Employee organization." An organization of any kind, or any
17 agency or employee representation committee or plan in which
18 membership includes public employees, and that exists for the
19 purpose, in whole or in part, of dealing with employers
20 concerning grievances, employee-employer disputes, wages, rates
21 of pay, hours of employment, or conditions of work; that has
22 been certified as an exclusive bargaining representative of a
23 bargaining unit of public employees under the act of June 24,
24 1968 (P.L.237, No.111), referred to as the Policemen and Firemen
25 Collective Bargaining Act, or the act of July 23, 1970 (P.L.563,
26 No.195), known as the Public Employe Relations Act, or both; and
27 that does not practice discrimination in membership because of
28 race, color, creed, national origin, political affiliation or
29 sex.
30 "Exercise of discretion." Acting or failing to act in
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1 accordance with the dictates of the person's own judgment or
2 conscience uncontrolled by the judgment or conscience of another
3 person in a superior position.
4 "Fiduciary." A person described in Subchapter A of Chapter
5 2.
6 "Function." When used in connection with a fiduciary, any
7 duty, obligation, power, authority, responsibility, right,
8 privilege, activity or program.
9 "General-scope fiduciary activity." A retirement system
10 activity that reflects broad or original policymaking powers and
11 duties and that requires broad exercise of discretion by a
12 fiduciary.
13 "Governing body." The body or board of a local government
14 designated to exercise the chief policymaking or legislative
15 powers of the local government.
16 "Inactive member." A local government employee or officer,
17 or former local government employee or officer, who is a former
18 active member and for whom no contributions are being made but
19 who has accumulated contributions standing to that individual's
20 credit in the retirement system and who is not eligible to
21 become or has not elected to become vestee or has not filed an
22 application for a retirement benefit.
23 "Investment adviser." A person registered as an investment
24 adviser with the Securities and Exchange Commission under the
25 Investment Advisers Act of 1940 (54 Stat. 847, 15 U.S.C. § 80b-1
26 et seq.) or a person registered as an investment adviser with
27 the Pennsylvania Securities Commission under the act of December
28 5, 1972 (P.L.1280, No.284), known as the Pennsylvania Securities
29 Act of 1972, who has acknowledged in writing that the person is
30 a fiduciary of the retirement system.
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1 "Investment manager." A fiduciary (other than a member of a
2 governing body, a member of a managing board or a named
3 fiduciary):
4 (1) who has the power to manage, acquire or dispose of
5 any asset of a retirement system; or
6 (2) who is an investment adviser, a bank, or an
7 insurance company qualified to perform services described in
8 paragraph (1) under the laws of a state; and
9 (3) has acknowledged in writing that the person is a
10 fiduciary of the retirement system.
11 "Local government." A local authority; a municipality,
12 however constituted, whether operating under a legislative
13 charter, municipal code, optional charter, home rule charter,
14 optional plan or other arrangement; an association of these
15 local authorities, or these municipalities, or both cooperating
16 under the act of July 12, 1972 (P.L.762, No.180), referred to as
17 the Intergovernmental Cooperation Law; or a Commonwealth-created
18 authority or governmental entity whose employees are not members
19 of the State Employes' Retirement System or the Public SChool
20 Employes' Retirement System.
21 "Local government employee retirement system." An entity,
22 whether a separate entity or part of a local government entity,
23 that collects retirement and other employee benefit
24 contributions from local government employees and local
25 governments; holds and manages the resulting assets as reserves
26 for present and future retirement benefit payments; and makes
27 provision for these payments to qualified retirees and
28 beneficiaries. The term does not include a plan, program or
29 arrangement that is financed solely with local government
30 employee earnings or compensation reported as local government
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1 employee earnings or compensation to the Internal Revenue
2 Service, United States Department of the Treasury, on Form W-2,
3 Wage and Tax Statement, or established under sections 8.1
4 through 8.3 of the act of March 30, 1811 (P.L.145, 5 Sm.L. 228),
5 or established under section 408 of the Internal Revenue Code of
6 1986 (Public Law 99-514, 26 U.S.C. § 408 et seq.).
7 "Managing board." Body or board of a retirement system that
8 is appointed or assigned, or undertakes to jointly exercise the
9 chief policymaking powers and management duties of the
10 retirement system or, if this body or board does not exist, the
11 governing body of the retirement system.
12 "Member." An active member, inactive member, retiree or
13 vestee.
14 "Ministerial activity." A retirement system activity
15 required by law or pension plan or undertaken at the direction
16 of a person in a superior position or of a superior rank the
17 execution of which is prescribed without regard to or the
18 exercise of the person's own judgment upon the propriety of the
19 act being done.
20 "Particular-scope fiduciary activity." A retirement system
21 activity that reflects limited or derivative policymaking powers
22 and duties and that requires a narrow exercise of discretion by
23 a fiduciary.
24 "Party in interest."
25 (1) Except as provided in paragraph (2), the term
26 includes:
27 (i) a fiduciary, counsel or employee of a retirement
28 system;
29 (ii) a person providing services to a retirement
30 system;
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1 (iii) a local government any of whose employees or
2 officers are covered by the retirement system;
3 (iv) an employee organization any of whose members
4 are covered by the retirement system;
5 (v) a relative of any individual described in
6 subparagraphs (i) or (ii); or
7 (vi) an employee, officer, director (or an
8 individual having powers or responsibilities similar to
9 those of officers or directors), or a 10% or more
10 shareholder directly or indirectly, of:
11 (A) a person described in subparagraphs (ii),
12 (iii) or (iv); or
13 (B) the retirement system.
14 (2) If any assets of a retirement system are invested in
15 securities issued by an investment company registered under
16 the Investment Company Act of 1940 (54 Stat. 789, 15 U.S.C. §
17 80a-1 et seq.) the investment shall not by itself cause the
18 investment company or the investment company's investment
19 adviser or principal underwriter to be a party in interest
20 except insofar as the investment company or its investment
21 adviser or principal underwriter acts in connection with a
22 retirement system covering employees of the investment
23 company, the investment adviser or its principal underwriter.
24 Nothing contained in this definition shall limit the duties
25 imposed on an investment company, investment adviser or
26 principal underwriter by any other law.
27 "Pension plan." All aspects of an arrangement between a
28 public employer and its employees concerning the retirement
29 benefit coverage provided to the employees. The term does not
30 include a plan, program or arrangement that is financed solely
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1 with local government employee earnings or compensation reported
2 as local government employee earnings or compensation to the
3 Internal Revenue Service, United States Department of the
4 Treasury, on Form W-2, Wage and Tax Statement, or established
5 under sections 8.1 through 8.3 of the act of March 30, 1811
6 (P.L.145, 5 Sm.L.228), or established under section 408 of the
7 Internal Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. §
8 408).
9 "Pension trust fund." A fiscal and accounting entity with a
10 self-balancing set of accounts recording cash and other
11 financial resources, together with all related liabilities, and
12 residual equities or balances, and changes therein, that is
13 segregated for the purpose of accounting for assets held by a
14 governmental unit in a trustee capacity for the members and
15 beneficiaries of a public employee retirement system.
16 "Plan document." The written document the managing board is
17 required to compile and file under section 303.
18 "Relative." A spouse, brother, sister, spouse of a brother
19 or sister, ancestor, lineal descendant or spouse of a lineal
20 descendant.
21 "Retiree." A former local government employee or officer who
22 is a former active member with vested rights in a retirement
23 system on or after the effective date of retirement until that
24 individual's retirement benefit is terminated.
25 "Retirement benefit." Annuity, pension, pension benefit,
26 retirement pay, disability benefit, or other employee benefit
27 payment from a retirement system.
28 "Retirement system." A local government employee retirement
29 system.
30 "Security."
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1 (1) The term includes any note; stock; treasury stock;
2 bond; debenture; evidence of indebtedness; share of a
3 beneficial interest in a business trust; certificate of
4 interest or participation in any profit-sharing agreement;
5 collateral trust certificate; preorganization certificate of
6 subscription; transferable share; investment contract; voting
7 trust certificate; certificate of deposit for a security;
8 limited partnership interest; certificate of interest or
9 participation in an oil, gas or mining title or lease or in
10 payments out of production under such a title or lease, or
11 other mineral rights; or, in general, any interest or
12 instrument commonly known as or having the incidents of a
13 "security," including a "security" as defined in section 2(1)
14 of the Securities Act of 1933 (48 Stat 74, 15 U.S.C. § 77a et
15 seq.), or as defined in section 102(t) of the act of December
16 5, 1972 (P.L.1280, No.284), known as the Pennsylvania
17 Securities Act of 1972;, or any certificate of interest or
18 participation in, temporary or interim certificate for,
19 receipt for, guarantee of, or warrant or right to subscribe
20 to or purchase any of the foregoing. All of the foregoing are
21 securities whether or not evidenced by written document.
22 (2) The term does not include:
23 (i) Any beneficial interest in any voluntary inter
24 vivos trust that is not created for the purpose of
25 carrying on any business.
26 (ii) Any beneficial interest in any testamentary
27 trust.
28 (iii) Any insurance or endowment policy or annuity
29 contract under which an insurance company admitted in
30 this Commonwealth promises to pay a sum of money (whether
19890H1332B2636 - 14 -
1 or not based upon the investment performance of a
2 segregated fund) either in a lump sum or periodically for
3 life or some other specified period.
4 (iv) Any certificate issued under section 809 of the
5 act of May 17, 1921 (P.L.682, No.284), known as The
6 Insurance Company Law of 1921.
7 "Separate account." An account established or maintained by
8 an insurance company under which income, gains and losses,
9 whether or not realized, from assets allocated to such account,
10 are, in accordance with the applicable contract, credited to or
11 charged against such accounts without regard to other income,
12 gains or losses of the insurance company.
13 "Vestee." A former local government employee or officer who
14 is a former active member with vested rights in a retirement
15 system and who has terminated local government service and has
16 elected to leave that individual's accumulated contributions in
17 the retirement system and to defer receipt of a retirement
18 benefit.
19 CHAPTER 2
20 SUBSTANTIVE PROVISIONS
21 SUBCHAPTER A
22 DESIGNATION OF AFFECTED FIDUCIARIES AND ACTIVITIES
23 Section 201. Fiduciary positions and functions.
24 (a) Fiduciary.--A person is a fiduciary of a retirement
25 system:
26 (1) if the individual serves in one or more of the
27 following positions:
28 (i) a member of the governing body when that
29 governing body is exercising its authority, if any, to
30 approve modifications in the pension plan of the
19890H1332B2636 - 15 -
1 retirement system;
2 (ii) a member of the managing board; or
3 (iii) the chief administrative officer of a
4 retirement system or a person who has actual or apparent
5 authority to act on behalf of the chief administrative
6 officer;
7 (2) if the individual is an employee of a retirement
8 system whose employment position includes the power to spend
9 system assets, approve the expenditure of assets, or approve
10 the incurring of a liability;
11 (3) if the individual is designated a fiduciary under
12 Subchapter E of this chapter; or
13 (4) except as otherwise provided in subsections (b) and
14 (c), if:
15 (i) the person exercises any discretionary authority
16 or discretionary control with respect to management of a
17 retirement system or exercises any authority or control
18 with respect to its assets;
19 (ii) the person renders investment advice for a fee
20 or other compensation, direct or indirect, with respect
21 to any assets of a retirement system or has any authority
22 or responsibility to do so; or
23 (iii) the person has any discretionary authority or
24 discretionary responsibility in the administration of a
25 retirement system.
26 (b) Certain investment companies not fiduciaries.--If any
27 asset of a retirement system is invested in securities issued by
28 an investment company registered under the Investment Company
29 Act of 1940 (54 Stat. 789, 15 U.S.C. § 80a-1 et seq.), that
30 investment shall not by itself cause the investment company or
19890H1332B2636 - 16 -
1 the investment company's investment adviser or principal
2 underwriter to be deemed to be a fiduciary except insofar as the
3 investment company or its investment adviser or principal
4 underwriter acts in connection with a retirement system covering
5 employees of the investment company, the investment adviser or
6 its principal underwriter. Nothing contained in this subsection
7 shall limit the duties imposed on the investment company,
8 investment adviser or principal underwriter by any other law.
9 (c) Certain corporate personnel not fiduciaries.--If the
10 corporation assumes responsibility and liability for the actions
11 taken or responsibilities assumed by its director, officer or
12 employee, no director, officer or employee of a corporation that
13 is itself a fiduciary shall be a fiduciary solely by reason of
14 actions taken or responsibilities assumed in the course of that
15 individual's employment or office with the corporation.
16 Section 202. Engaging in fiduciary activity.
17 A person engages in a fiduciary activity if that activity is:
18 (1) assigned to the person by law or pension plan;
19 (2) undertaken by the person, even if the person by so
20 doing is exceeding the person's actual or apparent authority;
21 or
22 (3) an undertaking the person could reasonably be
23 expected to undertake as a fiduciary.
24 Section 203. Named fiduciaries.
25 Except when a statute of this Commonwealth designates a
26 fiduciary for a retirement system, the governing body shall
27 provide for the designation of one or more named fiduciaries, in
28 a pension plan instrument or under a procedure specified in a
29 pension plan instrument, who shall have authority to control and
30 manage the operation and administration of the retirement
19890H1332B2636 - 17 -
1 system. This named fiduciary may be the governing body or the
2 managing board.
3 Section 204. Persons excluded from definition of fiduciary.
4 (a) General rule.--Persons who have no power to make any
5 decisions as to retirement system policy, interpretations,
6 practices or procedures, who do not have discretionary authority
7 or discretionary control respecting management of a retirement
8 system, who do not exercise any authority or control respecting
9 management or disposition of the assets of a retirement system,
10 and who do not render investment advice with respect to any
11 asset of the retirement system and have no authority or
12 responsibility to do so, but who perform the following purely
13 ministerial activities for a retirement system within a
14 framework of policies, interpretations, rules, practices and
15 procedures made by other persons are not fiduciaries but may be
16 subject to the bonding requirements under section 254:
17 (1) Application of rules to determine eligibility for
18 membership or benefits.
19 (2) Calculation of service and compensation for benefit
20 purposes.
21 (3) Preparation of employee communications material.
22 (4) Maintenance of members' service and employment
23 records.
24 (5) Preparation of reports required by government
25 agencies.
26 (6) Calculation of benefit.
27 (7) Orientation of new members and advising members of
28 their rights and options under the pension plan.
29 (8) Collection of contributions and application of
30 contributions as provided in the pension plan.
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1 (9) Preparation of reports concerning members' benefits.
2 (10) Processing of claims.
3 (11) Making recommendations to others for decisions with
4 respect to retirement system administration.
5 (b) Applicability.--This statute applies to all persons
6 except a person who is a fiduciary of a private retirement
7 system that provides retirement benefit coverage to a local
8 government employee and which is subject to fiduciary regulation
9 under the Employee Retirement Income Security Act of 1974
10 (Public Law 93-406, 88 Stat. 829, 29 U.S.C. Ch. 18).
11 Section 205. Persons prohibited from being fiduciaries.
12 (a) Individuals.--A person may not be a fiduciary of a
13 retirement system, engage in a fiduciary activity or accept a
14 position that is connected with a retirement system, including
15 that of employee, consultant, manager or advisor if that person:
16 (1) has been removed from a fiduciary position for
17 violating a provision of this statute for five years
18 beginning on the day following removal from fiduciary
19 position;
20 (2) has been removed from office under the act of August
21 14, 1963 (P.L.1048, No.452), entitled "An act providing for
22 the forfeiture of office of public officers convicted of
23 certain crimes," for five years beginning on the day
24 following removal from office; or
25 (3) has been convicted of one of the following criminal
26 offenses for five years beginning on the day following
27 conviction or, if the person convicted is then incarcerated,
28 for five years beginning on the day following release from
29 incarceration:
30 (i) a violation of Pennsylvania law that is murder
19890H1332B2636 - 19 -
1 of the first or second degree, a felony of the first,
2 second or third degree, or a misdemeanor of the first or
3 second degree;
4 (ii) a violation of Federal law specified in section
5 411 of the Employee Retirement Income Security Act of
6 1974 (Public Law 93-406, 88 Stat. 829, 29 U.S.C. § 1111);
7 or
8 (iii) a violation of the law of another state,
9 United States possession, federally recognized Indian
10 tribal government, 10 U.S.C. Ch. 47 (relating to Uniform
11 Code of Military Justice), law in effect in a foreign
12 nation, or international law that would be a criminal
13 offense listed in subparagraph (i).
14 (b) Business entities.--No business entity of which more
15 than 5% of the equity or ownership interest is held by an
16 individual who is prohibited from being a fiduciary under
17 subsection (a) may provide consulting, management or advisory
18 service to a retirement system unless the business entity is a
19 publicly held corporation.
20 SUBCHAPTER B
21 GENERAL STANDARD OF FIDUCIARY CONDUCT
22 Section 211. To whom fiduciary duty is owed.
23 A fiduciary, in performing a fiduciary activity or serving in
24 a fiduciary position, owes a fiduciary duty to:
25 (1) the members and beneficiaries;
26 (2) the government that established the retirement
27 system and its revenue payers; and
28 (3) the Commonwealth and its revenue payers:
29 (i) if intergovernmental revenue from the
30 Commonwealth is provided to a local government for its
19890H1332B2636 - 20 -
1 retirement system under the General Municipal Pension
2 System State Aid Program or the Supplemental State
3 Assistance Program, or both, provided for in the act of
4 December 18, 1984 (P.L.1005, No.205), known as the
5 Municipal Pension Plan Funding Standard and Recovery Act;
6 or
7 (ii) if the retirement system is required to file an
8 actuarial valuation report with the Public Employee
9 Retirement Study Commission under either the act of
10 December 6, 1972 (P.L.1383, No.293), entitled "An act
11 requiring municipal pension systems to have an actuarial
12 investigation of the fund made by an actuary who shall
13 report his findings to the Department of Community
14 Affairs," or the Municipal Pension Plan Funding Standard
15 and Recovery Act.
16 Section 212. Fiduciary standards.
17 (a) Nonexpert (prudent person) standard.--A fiduciary who
18 does not have, professes not to have or cannot reasonably be
19 expected to have special expertise in the fiduciary activity in
20 which the fiduciary is engaged shall exercise that degree of
21 judgment and care, under the circumstances then prevailing, that
22 persons of prudence, discretion and intelligence would exercise
23 in the management of their own affairs and, if the fiduciary
24 activity involves the investment of retirement system assets, as
25 they would act for the purpose of investment, not in regard to
26 speculation, but in regard to the permanent disposition of their
27 funds, considering the probable revenue to be derived from the
28 assets as well as the probable safety of their capital.
29 (b) Expert (prudent expert) standard.--A fiduciary who has,
30 professes to have or can reasonably be expected to have special
19890H1332B2636 - 21 -
1 expertise in the fiduciary activity in which the fiduciary is
2 engaged shall act in good faith and shall exercise that degree
3 of judgment, prudence, skill, diligence and care, under the
4 circumstances then prevailing, that persons of prudence,
5 discretion and intelligence acting in a similar capacity and
6 familiar with that activity would exercise in the conduct of an
7 enterprise of a similar character and with similar aims.
8 Section 213. Sole interest and exclusive purpose.
9 To protect the interest of members and beneficiaries in a
10 retirement system and the interests of the Commonwealth, or
11 local government, or both, and the general public in the
12 operation of the retirement system and to minimize the possible
13 adverse impact of the operation of the retirement system on
14 government revenues and expenditures, a fiduciary shall
15 discharge that fiduciary's duties with respect to a retirement
16 system in accordance with the pension plan, the plan document,
17 and law solely in the ECONOMIC AND FINANCIAL interest of the <--
18 members and beneficiaries and for the exclusive purposes of:
19 (1) providing ECONOMIC AND FINANCIAL benefits to members <--
20 and beneficiaries; and
21 (2) defraying reasonable expenses of administering the
22 retirement system.
23 IN SEEKING TO PROVIDE FOR THESE ECONOMIC AND FINANCIAL BENEFITS, <--
24 A FIDUCIARY SHALL NOT BASE DECISIONS CONCERNING DIVESTITURE ON
25 CRITERIA INTENDED TO EFFECT SOCIAL OR POLITICAL POLICIES BUT ON
26 CRITERIA ENCOMPASSING SOUND ECONOMIC AND FINANCIAL MANAGEMENT
27 PRINCIPLES.
28 Section 214. Expert and nonexpert fiduciaries.
29 (a) Expert or nonexpert.--A governing body and its members,
30 managing board and its members, chief administrative officer,
19890H1332B2636 - 22 -
1 local government employee, or retirement system employee making
2 investments in accordance with investment advice from an
3 investment adviser, making and managing investments in
4 accordance with investment advice from, and investment
5 management by, an investment manager, or administering a
6 retirement system through a retirement system administrator with
7 whom the local government or the retirement system has
8 contracted under Subchapter E and section 304, 305, or 306 is an
9 expert under section 212(b) only for investing and is otherwise
10 a nonexpert under section 212(a).
11 (b) Expert--An investment adviser with whom the local
12 government or retirement system has contracted under section
13 304, an investment manager with whom the local government or
14 retirement system has contracted under section 305, or a
15 retirement system administrator with whom the local government
16 or retirement system has contracted under section 306 is an
17 expert under section 212(b).
18 (c) Nonexpert.--Except as provided in subsection (a), a
19 governing body member, managing board member or chief
20 administrative officer, as such, is a nonexpert under section
21 212(a), even if the individual is an accountant, actuary,
22 attorney at law, banker, broker-dealer in securities, insurance
23 agent, insurance broker, investment adviser, investment manager,
24 retirement system administrator, etc. for another retirement
25 system.
26 SUBCHAPTER C
27 SPECIFIC, SUPPLEMENTAL STANDARDS OF FIDUCIARY CONDUCT
28 Section 221. Retirement system trust.
29 Unless the pension plan is contained entirely within law, the
30 governing body of the local government of which the retirement
19890H1332B2636 - 23 -
1 system is a part, or the managing board, shall establish a trust
2 to be managed and controlled by the governing body, the managing
3 board or a separate board established for that purpose.
4 Section 222. Title to retirement system assets.
5 (a) General rule.--Except as provided in subsection (b), all
6 assets of a retirement system shall be held in trust for all
7 persons with beneficial interests in these assets by the
8 trustee. The trustee shall hold legal title to all assets of the
9 retirement system, however constituted, in the name of the
10 retirement system, the local government of which the retirement
11 system is a part, or a nominee. The trustee shall be named in
12 the trust instrument described in section 221, named in the plan
13 document described in section 303, or appointed by a person who
14 is a named fiduciary, and, upon acceptance of being named or
15 appointed, the trustee shall have exclusive authority and
16 discretion to manage and control the assets of the retirement
17 system, except to the extent that:
18 (1) the pension plan expressly provides that the trustee
19 is subject to the direction of a named fiduciary who is not a
20 trustee, in which case the trustee shall be subject to proper
21 directions of the named fiduciary that are made in accordance
22 with the terms of the pension plan and that are not contrary
23 to this statute; or
24 (2) the authority to manage, acquire or dispose of
25 assets of the plan is delegated to an investment manager
26 under section 305 or a retirement system administrator under
27 section 306.
28 (b) Exception.--The requirements of subsection (a) do not
29 apply to the assets of:
30 (1) a retirement system that consists of insurance
19890H1332B2636 - 24 -
1 contracts or policies issued by an insurance company
2 qualified to do business in the Commonwealth; or
3 (2) an insurance company or any assets of a retirement
4 system that are held by an insurance company.
5 Section 223. Diversifying investments.
6 Fiduciaries shall diversify the investments of the retirement
7 system so as to minimize the risk of large losses and to
8 maximize the rate of return, unless under the circumstances it
9 is clearly prudent not to do so.
10 Section 224. Prohibited transactions by retirement systems.
11 A fiduciary shall not cause a retirement system to engage in
12 a transaction if the fiduciary knows or should know that the
13 transaction constitutes a direct or indirect:
14 (1) sale, or exchange, or leasing of any asset from the
15 retirement system to a party in interest for less than
16 adequate consideration, or from a party in interest to a
17 retirement system for more than adequate consideration;
18 (2) lending of money or other extension of credit from
19 the retirement system to a party in interest without the
20 receipt of adequate security and a rate of interest that is
21 consistent with the requirements relating to fiduciary
22 functions under sections 211, 212 and 213, or from a party in
23 interest to a retirement system with the provision of
24 excessive security or a rate of interest that is inconsistent
25 with the requirements relating to fiduciary functions under
26 sections 211, 212 and 213;
27 (3) furnishing of goods, services or facilities from the
28 retirement system to a party in interest for less than
29 adequate consideration, or from a party in interest to a
30 retirement system for more than adequate consideration;
19890H1332B2636 - 25 -
1 (4) transfer to, or use by or for the benefit of, a
2 party in interest of any assets of the retirement system for
3 less than adequate consideration; or
4 (5) except as provided in sections 227 and 263,
5 acquisition, on behalf of the retirement system, of any
6 security, real property or loan of the local government of
7 which the retirement system is a part or any of whose
8 employees or officers are covered by the retirement system.
9 Section 225. Prohibited activities by fiduciary.
10 A fiduciary shall not:
11 (1) deal with the assets of the retirement system in
12 that fiduciary's own interest or for that fiduciary's own
13 account;
14 (2) in that fiduciary's individual or in another
15 capacity, act in a transaction involving the retirement
16 system on behalf of a party, or represent a party, whose
17 interests are adverse to the interests of the retirement
18 system or the interests of its members and beneficiaries; or
19 (3) receive consideration for that fiduciary's personal
20 account from a party dealing with the retirement system in
21 connection with a transaction involving the assets of the
22 retirement system.
23 Section 226. Certain transactions and activities permitted.
24 Nothing in section 224 or 225 shall be construed to prohibit:
25 (1) Contracting or making reasonable arrangements with a
26 party in interest for office space, or for accounting,
27 actuarial, legal or other services necessary for the
28 establishment or operation of the retirement system, if no
29 more than reasonable compensation is paid therefor.
30 (2) The investment of all or part of a retirement
19890H1332B2636 - 26 -
1 system's assets in deposits that bear an interest rate that
2 is consistent with the fiduciary duties under sections 211,
3 212 and 213, in a bank or similar institution supervised by
4 the United States or a state, if the bank or other
5 institution is a fiduciary of the retirement system and if
6 the investment is expressly authorized by a provision of the
7 pension plan or by a fiduciary, other than the bank or other
8 institution or an affiliate thereof, who is expressly
9 empowered by the pension plan to authorize the investment.
10 (3) The providing of any ancillary service by a bank or
11 similar financial institution supervised by the United States
12 or a state, if the bank or other institution is a fiduciary
13 of the retirement system, and if:
14 (i) the bank or other institution has adopted
15 adequate internal safeguards that assure that the
16 providing of the ancillary service is consistent with
17 sound banking and financial practice, as determined by
18 Federal or State supervisory authority; and
19 (ii) the extent to which the ancillary service is
20 provided is subject to specific guidelines issued by the
21 bank or similar financial institution, as approved by
22 Federal or State supervisory authority, and adherence to
23 these guidelines would reasonably preclude the bank or
24 other institution from providing the ancillary services:
25 (A) in an excessive or unreasonable manner; and
26 (B) in a manner that would be inconsistent with
27 the best interests of members and beneficiaries of
28 the retirement system.
29 These ancillary services shall not be provided at more than
30 reasonable compensation.
19890H1332B2636 - 27 -
1 (4) Any transaction between a retirement system and a
2 common or collective trust fund or pooled investment fund
3 maintained by a party in interest that is a bank supervised
4 by a Federal or State agency or a pooled investment fund of
5 an insurance company qualified to do business in this
6 Commonwealth, if:
7 (i) the transaction is a sale or purchase of an
8 interest in the fund;
9 (ii) the bank or insurance company receives not more
10 than reasonable compensation; and
11 (iii) the transaction is expressly permitted by the
12 pension plan under which the retirement system is
13 maintained, or by a fiduciary, other than the bank or
14 insurance company, or an affiliate thereof, who has
15 authority to manage and control the assets of the
16 retirement system.
17 (5) A fiduciary or party in interest from receiving any
18 benefit to which the fiduciary or party in interest may be
19 entitled as a member or beneficiary of the retirement system,
20 or paying any benefit to any member or beneficiary, so long
21 as the benefit is computed and paid on the basis that is
22 consistent with the terms of the pension plan as generally
23 applied to all members and beneficiaries.
24 (6) A fiduciary or party in interest from receiving any
25 reasonable compensation for services rendered, or for the
26 reimbursement of expenses properly and actually incurred, in
27 the performance of the functions of the fiduciary or party in
28 interest with respect to the retirement system, except that
29 no individual so serving who already receives full-time pay
30 from a local government whose officers or employees are
19890H1332B2636 - 28 -
1 members in the retirement system or an employee organization
2 whose members are members in the retirement system shall
3 receive compensation from the retirement system, except for
4 reimbursements of expenses properly and actually incurred.
5 (7) A fiduciary from serving as a fiduciary in addition
6 to being an officer, employee, agent or other representative
7 of a party in interest.
8 (8) A merger of retirement systems or the aggregation of
9 public employee pension trust funds under section 607(b) of
10 the act of December 18, 1984 (P.L.1005, No.205), known as the
11 Municipal Pension Plan Funding Standard and Recovery Act.
12 (9) A return of a contribution that was made by a
13 mistake of fact or law within one year after the chief
14 administrative officer determines that the contribution was
15 made by such a mistake.
16 Section 227. Certain interfund transactions.
17 (a) Interfund receivables and advances to other funds.--A
18 fiduciary shall not cause a public employee pension trust fund
19 to engage in a transaction if the fiduciary knows or should know
20 that the transaction constitutes a direct or indirect loan of
21 the retirement system assets to another fund of the local
22 government.
23 (b) Due from and due to other funds.--Nothing in subsection
24 (a) shall prevent a public employee pension trust fund from
25 purchasing goods or services in a quasi-external transaction
26 from another fund of the local government for adequate
27 consideration, or another fund of the local government making
28 routine employer contributions to the public employee pension
29 trust fund in a quasi-external transaction, provided that the
30 amount due from or to the public employee pension trust fund for
19890H1332B2636 - 29 -
1 the goods, services or contributions is paid on the normal
2 fiscal cycle payment date for such transactions (at the end of
3 the week, month, quarter, etc.) or sooner, and provided that the
4 amount due is paid within one year.
5 (c) Interfund reimbursements.--Nothing in subsection (a)
6 shall prevent a public employee pension trust from reimbursing
7 another fund of the local government or another fund of the
8 local government from reimbursing the public employee pension
9 trust fund for expenditures or expenses that are initially made
10 from the one fund but that properly apply to the other fund or
11 clearing-account payments made for expediency in a controlled
12 environment, provided that the reimbursement from or to the
13 public employee pension trust fund is made on the normal fiscal
14 cycle payment date for such transactions (at the end of the
15 week, month, quarter, etc.) or sooner, and provided that the
16 reimbursement is made within one year.
17 Section 228. Statement of financing interest.
18 A fiduciary shall file a statement of financial interest as
19 though the fiduciary were a public employee or public official
20 required to file a statement of financial interest under the act
21 of October 4, 1978 (P.L.883, No.170), referred to as the Public
22 Official and Employee Ethics Law. A fiduciary who has filed this
23 statement of financial interest as a public employee or public
24 official of the retirement system does not have to file another
25 statement.
26 Section 229. Prohibitions in procuring bonds and insurance.
27 A person shall not procure any bond required by section
28 254(a) or any insurance permitted by section 255 from any
29 surety, insurance company or other company or through any agent
30 or broker in whose business operations the retirement system or
19890H1332B2636 - 30 -
1 any party in interest in the retirement system has any control
2 or significant financial interest, directly or indirectly.
3 SUBCHAPTER D
4 NONEXPERT FIDUCIARIES INVESTMENTS
5 Section 231. Authorized investments by nonexpert fiduciaries in
6 general.
7 A fiduciary who does not have, professes not to have or
8 cannot reasonably be expected to have special expertise in the
9 fiduciary activity in which the fiduciary is engaged, subject
10 only to the provisions of the pension plan and plan document, if
11 any, may accept, hold, invest in and retain the investments
12 authorized by this subchapter and shall not be liable for loss
13 on these investments so long as the fiduciary exercises the due
14 care and prudence required by this statute in the performance of
15 that fiduciary's duties in regard to them. "Legal investment" or
16 "authorized investment" or words of similar import used in the
17 pension plan or the plan document shall be construed to mean an
18 investment authorized by this subchapter.
19 Section 232. Liquidity.
20 A fiduciary investing under section 231 shall invest that
21 portion of the assets of the retirement system that equals the
22 total potential benefit amounts payable in the succeeding year
23 in authorized short-term debt obligations that can be
24 immediately liquidated without incurring any substantial,
25 determinable penalty or that have an average maturity of no more
26 than 30 days.
27 Section 233. United States Government obligations.
28 Bills, notes, bonds, mortgages and other fixed obligations
29 issued and guaranteed by the United States, its agencies or its
30 instrumentalities shall be authorized investments.
19890H1332B2636 - 31 -
1 Section 234. Other government obligations.
2 Except for the obligations of the local government that
3 created the retirement system or of which the retirement system
4 is a part, bonds, notes, bills, mortgages and other fixed
5 obligations issued by a state municipality, special district,
6 state agency or state instrumentality shall be authorized
7 investments, if the investment is made at the taxable-equivalent
8 yields available in the marketplace at the time the investment
9 is made, and:
10 (1) if the obligation is backed by the full faith and
11 credit of the state of applicable taxing jurisdiction;
12 (2) if the obligation is other than a revenue bond and
13 if the issuer has not been in default in the payment of
14 principal and interest within the past ten years; or
15 (3) if the obligation is a revenue debt security and if
16 the obligor has been completely self-supporting for the
17 immediately prior five-year period.
18 Section 235. Corporate obligations.
19 Bonds, notes, debentures or other evidences of indebtedness
20 issued by a corporation organized under the laws of the United
21 States or of any state, if the obligations has been rated among
22 the top two quality categories by a nationally recognized rating
23 agency, shall be authorized investments.
24 Section 236. Certificates of deposit.
25 Certificates of deposit issued by a bank, if rated in the
26 highest quality category by a nationally recognized rating
27 agency or if they meet the minimum collateral requirements
28 applicable to banks authorized for the deposit of Commonwealth
29 funds, shall be authorized investments.
30 Section 237. Savings accounts.
19890H1332B2636 - 32 -
1 Savings accounts in a bank, if fully insured by the Federal
2 Deposit Insurance Corporation or the Federal Savings and Loan
3 Insurance Corporation, shall be authorized investments.
4 Section 238. Insurance products.
5 (a) Contracts.--Contracts that provide a guarantee of
6 principal and a fixed rate of return issued by an insurance
7 company that has qualified and is authorized by the Insurance
8 Department of the Commonwealth to transact business in the
9 Commonwealth shall be authorized investments.
10 (b) Separate accounts.--Separate accounts of an insurance
11 company that has qualified and is authorized by the Insurance
12 Department of the Commonwealth to transact business in the
13 Commonwealth shall be authorized investments, provided that the
14 only investments of these separate accounts are in the
15 authorized investments for retirement systems listed in sections
16 233 through 237. This subsection shall not limit the authority
17 of nonexpert fiduciaries to provide for the investment of
18 retirement system assets in other separate accounts of insurance
19 companies using the advice of an investment advisor or
20 investment manager under section 304 or 305.
21 Section 239. Shares of an investment company.
22 Shares of an investment company registered under the
23 Investment Company Act of 1940 (54 Stat. 789, 15 U.S.C. § 80a-1
24 et seq.), whose shares are registered under the Securities Act
25 of 1933 (48 Stat. 74, 15 U.S.C. § 77a et seq.), shall be
26 authorized investments provided that the only investments of
27 that company are in the authorized investments for retirement
28 systems listed in sections 233 through 237.
29 SUBCHAPTER E
30 DELEGATION AND ALLOCATION OF FIDUCIARY ACTIVITIES
19890H1332B2636 - 33 -
1 Section 241. Cofiduciary responsibility in general.
2 A fiduciary has a general responsibility to oversee the
3 fiduciary activities of all other fiduciaries unless the
4 activity has been allocated in accordance with section 244 or
5 delegated in accordance with section 245. A fiduciary also has a
6 general responsibility to correct or remedy fiduciary breach of
7 which the fiduciary has knowledge.
8 Section 242. Liability for breach of fiduciary duty by another
9 fiduciary.
10 A fiduciary is liable for a fiduciary breach committed by
11 another fiduciary when the fiduciary has a responsibility to
12 oversee the other fiduciary or to correct or alleviate a breach
13 by the other fiduciary. In the following circumstances, in
14 addition to the liability that the fiduciary may have under
15 another provision of this statute, a fiduciary is jointly and
16 severally liable for a breach of fiduciary duty by another
17 fiduciary of the same retirement system, but the fiduciary has
18 the right to recover the compensatory damages the fiduciary paid
19 from the responsible fiduciary:
20 (1) if the fiduciary allocates a fiduciary activity
21 contrary to section 244;
22 (2) if the fiduciary delegates a fiduciary activity
23 contrary to section 245;
24 (3) if, by the fiduciary's failure to comply with this
25 statute, the fiduciary enables the other fiduciary to commit
26 a breach;
27 (4) if the fiduciary knowingly participates in or
28 knowingly undertakes to conceal an act or omission by the
29 other fiduciary knowing that act or omission is a breach; or
30 (5) if the fiduciary has knowledge of a breach by the
19890H1332B2636 - 34 -
1 other fiduciary, unless the fiduciary makes reasonable
2 efforts under the circumstances to remedy the breach.
3 Section 243. Limitation on responsibility and liability for
4 fiduciary breach by another fiduciary.
5 (a) General rule.--A fiduciary may limit that fiduciary's
6 responsibility and liability for a fiduciary breach committed by
7 another fiduciary through the allocation or delegation of
8 fiduciary activities if:
9 (1) the allocation or delegation:
10 (i) follows appropriate procedures;
11 (ii) is made to an appropriate person or persons;
12 and
13 (iii) is subject to continued monitoring of
14 performance; and
15 (2) the fiduciary does not violate section 242.
16 (b) Particular-scope fiduciary activities.--Particular-scope
17 fiduciary activities may be allocated.
18 (c) General-scope fiduciary activities.--General-scope
19 fiduciary activities may not be allocated.
20 (d) Ministerial activities.--Ministerial activities may be
21 delegated.
22 (e) Discretionary activities.--Discretionary activities may
23 be delegated.
24 Section 244. Allocation of fiduciary activities.
25 Fiduciaries of similar rank and responsibility may allocate a
26 particular-scope fiduciary activity:
27 (1) in writing, by action of the managing board, the
28 governing body of the government of which the retirement
29 system is a part, or the appropriate fiduciaries with
30 notification to and approval by the managing board;
19890H1332B2636 - 35 -
1 (2) with the agreement of the affected fiduciaries; and
2 (3) in conformance with any additional procedural
3 requirements specified by the managing board.
4 Section 245. Delegation of fiduciary activities.
5 (a) Ministerial activity.--A fiduciary may delegate a
6 ministerial activity, but not fiduciary liability for that
7 ministerial activity, to another fiduciary of lesser rank or
8 responsibility or to a person who, but for the delegation, would
9 not be a fiduciary. The fiduciary shall make this delegation in
10 accordance with procedures established by the managing board.
11 (b) Discretionary activity.--A fiduciary may delegate a
12 discretionary activity and, except in the circumstances listed
13 in section 242, fiduciary liability for that discretionary
14 activity to another person:
15 (1) if the extent of the delegation and the conditions
16 or limitations on the delegation are clearly specified;
17 (2) with the agreement of the person to whom the
18 activity is delegated;
19 (3) for a specified time that may not exceed the term or
20 the remaining period of fiduciary status of the person making
21 the delegation;
22 (4) subject to termination in the event of a material
23 change in the circumstances applicable to the delegation;
24 (5) with the filing of a written summary of the
25 delegation with the managing board; and
26 (6) in conformance with the additional procedural
27 requirements specified by the managing board.
28 SUBCHAPTER F
29 FIDUCIARY BONDING AND FIDUCIARY INSURANCE
30 Section 251. General prohibition of indemnification.
19890H1332B2636 - 36 -
1 A fiduciary shall be exculpated, indemnified or otherwise
2 relieved of liability for a fiduciary breach only by a bond,
3 fiduciary insurance, or as provided either in section 252 or
4 under 42 Pa.C.S. Ch. 85 Subch. C (relating to actions against
5 local parties). An arrangement or plan document provision
6 providing other exculpation, indemnification or relief from
7 liability for a fiduciary breach is prohibited as a practice
8 contrary to public policy.
9 Section 252. Indemnified fiduciaries.
10 The governing body or managing board may indemnify from
11 liability for an unintentional fiduciary breach a fiduciary who
12 receives no compensation or compensation of not more than $600 a
13 year for that fiduciary's services.
14 Section 253. Required indemnification.
15 An indemnified fiduciary of a retirement system shall be held
16 harmless from reasonable costs or expenses incurred as a result
17 of actual or threatened litigation or other proceedings arising
18 from the good faith performance of fiduciary duties, except for
19 litigation or other proceedings brought by the local government
20 of which the retirement system is a part or by the retirement
21 system arising from the failure of the fiduciary to act in
22 accordance with this statute.
23 Section 254. Bonding and alternative security arrangements.
24 (a) Bonding.--
25 (1) Every fiduciary and every person who handles assets
26 of a retirement system (hereinafter in this section referred
27 to as a system official) shall be bonded as provided in this
28 subsection, except as provided in subsection (b).
29 (2) The amount of the bond shall be fixed by the
30 governing body or managing board at the beginning of each
19890H1332B2636 - 37 -
1 retirement system year. The minimum amount of this bond shall
2 be the greater of 10% of the assets handled or $2,000. The
3 maximum amount of this bond need not exceed $500,000. The
4 governing body or managing board may require the minimum
5 amount, or the maximum amount, or both, of the bond to be a
6 larger amount.
7 (3) For purposes of fixing the amount of the bond, the
8 amount of assets handled shall be determined by the assets
9 handled by the person, group or class to be covered by the
10 bond and by their predecessor or predecessors, if any, during
11 the preceding retirement system year, or, if the retirement
12 system has no preceding year, the amount of assets
13 anticipated to be handled during the current retirement
14 system year by this person, group or class.
15 (4) The bond shall provide protection to the retirement
16 system against loss by reason of acts of fraud or dishonesty
17 on the party of the system official, directly or through
18 connivance with others.
19 (b) Alternative arrangements in lieu of bonding.--The
20 following alternative arrangements are acceptable in lieu of the
21 bond required by subsection (a):
22 (1) A public official who is covered by a bond in that
23 official's capacity as a public official and whose fiduciary
24 function is within that official capacity under the terms of
25 that bond.
26 (2) An officer, director or employee of a corporation,
27 or a corporation, that:
28 (i) is organized and doing business under the laws
29 of a state or the United States;
30 (ii) is authorized by the applicable law to exercise
19890H1332B2636 - 38 -
1 trust powers or to conduct an insurance business;
2 (iii) is subject to applicable supervision or
3 examination by a Federal or a state governmental agency;
4 and
5 (iv) has, on an ongoing basis, a combination of
6 contributed capital and retained earnings of at least
7 $1,000,000; or
8 (3) If the retirement system is one under which the only
9 assets from which benefits are paid are the general assets of
10 an employee organization.
11 (c) Purchase of bonds authorized.--A governing body or
12 managing board is authorized to spend the amount necessary to
13 purchase the bond required by subsection (a).
14 Section 255. Insurance.
15 (a) Retirement system insurance.--A governing body or
16 managing board may purchase insurance for its retirement system
17 to cover the liability or loss resulting from a fiduciary act or
18 omission. This insurance must be obtained from an insurance
19 company authorized to do business in this Commonwealth or, if
20 established and functioning, a government-established fiduciary
21 insurance pool or similar mechanism. This insurance must permit
22 recourse by the insurer against the fiduciary in the case of an
23 intentional breach of a fiduciary obligation by the fiduciary.
24 (b) Individual fiduciary insurance.--
25 (1) A governing body or managing board may buy insurance
26 for its fiduciary who receives no compensation or
27 compensation of not more than $600 a year for that
28 fiduciary's services to cover liability or loss incurred
29 individually by the fiduciary by reason of fiduciary acts or
30 omissions. This insurance must permit recourse by the insurer
19890H1332B2636 - 39 -
1 against a fiduciary who is responsible for an intentional
2 fiduciary breach.
3 (2) A fiduciary or an employee organization may buy
4 fiduciary insurance to cover liability or loss incurred
5 individually by a fiduciary by reason of a fiduciary act or
6 omission.
7 (3) The governing body, managing board, fiduciary or
8 employee organization buying insurance under this subsection
9 shall but it from an insurance company authorized to do
10 business in this Commonwealth.
11 (c) Expenditure authorized.--A governing body or managing
12 board is authorized to spend the amount necessary to buy
13 reasonable amounts of fiduciary insurance under subsections (a)
14 and (b).
15 SUBCHAPTER G
16 SPECIAL ASSET RULES
17 Section 261. Investment company security.
18 When a retirement system invests in a security issued by an
19 investment company registered under the Investment Company Act
20 of 1940 (54 Stat. 789, 15 U.S.C. § 80a-1 et seq.), the assets of
21 the retirement system include the security but do not, solely by
22 reason of the investment, include any assets of the investment
23 company.
24 Section 262. Insurance contract or policy.
25 When a retirement system is financed in whole or in part by a
26 contract or policy of insurance issued by an insurance company
27 that is qualified and is authorized by the Insurance Department
28 to transact business in the Commonwealth, the assets of the
29 retirement system include the contract or policy but do not,
30 solely by reason of the issuance of the contract or policy,
19890H1332B2636 - 40 -
1 include the assets of the insurance company issuing the contract
2 or policy except to the extent that the assets are maintained by
3 the insurance company in a separate account and do not
4 constitute surplus in the account.
5 Section 263. Indirect investment in local government
6 securities.
7 A prudent expert fiduciary may invest retirement system
8 assets in a pooled investment fund of a bank, a pooled separate
9 account of an insurance company, or the securities of an
10 investment company registered under the Investment Company Act
11 of 1940 (54 Stat. 789, 15 U.S.C. § 80a-1 et seq.), whose shares
12 are registered under the Securities Act of 1933 (48 Stat. 74, 15
13 U.S.C. § 77a et seq.), provided that not more than 5% of the
14 fair market value of the assets of the pooled investment fund,
15 pooled separate account or investment company are invested in
16 the debt securities of the local government that created the
17 retirement system or of which the retirement system is a part.
18 Section 264. Investments that become unauthorized.
19 A fiduciary may retain without liability for resulting loss
20 any investment that was authorized when received or made
21 although that investment no longer qualifies as an authorized
22 investment, provided that the fiduciary exercises the due care
23 and prudence required by this statute in the disposition or
24 retention of that nonlegal investment. A retirement system shall
25 dispose of an investment that was authorized when received or
26 made but that no longer qualifies as an authorized investment
27 within five years of the investment ceasing to qualify as an
28 authorized investment at the disposition rate of not less than
29 20% of the unauthorized investment a year.
30 CHAPTER 3
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1 ADMINISTRATIVE PROVISIONS
2 Section 301. Open meetings.
3 A managing board is an agency under the act of July 3, 1986
4 (P.L.388, No.84), known as the Sunshine Act.
5 Section 302. Inspection and copying of records.
6 A retirement system is an agency under the act of June 21,
7 1957 (P.L.390, No.212), referred to as the Right-to-Know Law.
8 Section 303. Plan document.
9 (a) Compilation and filing.--Unless the pension plan of the
10 retirement system is contained wholly in law, the managing board
11 shall compile one written plan document and file it with the
12 chief administrative officer of the retirement system. The
13 managing board shall include in this plan document all
14 applicable, relevant provisions of the pension plan, including
15 eligibility requirements and entitlement provisions constituting
16 the benefit coverage of the retirement system. The managing
17 board shall compile this plan document from whatever documents
18 in which it is contained, including, but not limited to, the
19 articles of incorporation, bylaws, governing body rules and
20 policies, local government charter provisions, local government
21 ordinance or resolution provisions, general or special
22 Commonwealth law, and collective bargaining agreements. The
23 managing board shall revise this plan document whenever there is
24 a material change in the pension plan.
25 (b) Public record.--This plan document is a public record
26 under the act of June 21, 1957 (P.L.390, No.212), referred to as
27 the Right-to-Know Law.
28 Section 304. Contracting for investment advice permitted.
29 The managing board may contract with an investment adviser
30 that agrees to conduct itself as a fiduciary in accordance with
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1 this statute to be designated as an investment adviser of the
2 retirement system. Under Subchapter E of Chapter 2, in the
3 contract, the investment adviser may limit its fiduciary
4 liability to the portfolio of assets under its control and over
5 which it has assumed fiduciary responsibility.
6 Section 305. Contracting for investment management permitted.
7 The managing board may contract with an investment manager
8 that agrees to conduct itself as a fiduciary in accordance with
9 this statute to be designated as an investment manager of the
10 retirement system. The contract shall require the investment
11 manager annually to disclose to the retirement system all
12 expenses of managing the investments of the retirement system.
13 Under Subchapter E of Chapter 2, in the contract, the investment
14 manager may limit its fiduciary liability to the portfolio of
15 assets under its control and over which it has assumed fiduciary
16 responsibility.
17 Section 306. Contracting for retirement system administration
18 permitted.
19 The managing board may contract with an insurance company
20 that has qualified and is authorized by the Insurance Department
21 to transact business in the Commonwealth, or with any bank
22 approved by the Department of Banking, or with any investment
23 adviser registered under the Investment Advisers Act of 1940 (54
24 Stat. 847, 15 U.S.C. § 80b-1 et seq.), that is registered as an
25 investment adviser by the Pennsylvania Securities Commission, or
26 with the Pennsylvania Municipal Retirement System to be
27 designated as the retirement system administrator. Under
28 Subchapter E of Chapter 2, the managing board may delegate the
29 power to administer the retirement system in its entirety,
30 including the power to receive and invest all moneys deposited
19890H1332B2636 - 43 -
1 into the pension trust fund and such other delegable powers as
2 are vested in the managing board. The contract shall require the
3 retirement system administrator annually to disclose to the
4 retirement system all expenses of operating and administering
5 the retirement system.
6 Section 307. Disclosure of business placed or commissions
7 allocated.
8 The managing board annually shall issue a public document in
9 which is discloses the recipients of any business placed or
10 commissions allocated among any commercial banks, investment
11 bankers, insurance companies or brokerage organizations used by
12 that retirement system.
13 Section 308. Administrative remedies.
14 Unless the pension plan of the retirement system is contained
15 wholly in law, the managing board shall provide in the plan
16 document for an appeals procedure for benefit determinations
17 that are adverse to the interests of a member or beneficiary.
18 This appeals procedure shall be under 2 Pa.C.S. (relating to
19 administrative law and procedure). An aggrieved person can only
20 appeal to the courts in accordance with 2 Pa.C.S. Ch. 7 Subch. B
21 (relating to judicial review of local agency action) after
22 exhausting the administrative remedies required by this section
23 under 2 Pa.C.S. Ch.5 Subch. B (relating to practice and
24 procedure of local agencies).
25 CHAPTER 4
26 PENALTIES
27 Section 401. Compensatory damages.
28 A fiduciary who violates a provision of this statute is
29 personally liable to pay an amount equal to the loss, or the
30 profits made using the assets, or both, to the retirement
19890H1332B2636 - 44 -
1 system, member, beneficiary, or some combination of these,
2 whichever suffered the loss or was entitled to the assets.
3 Section 402. Other equitable or remedial relief.
4 (a) Negligence beyond simple negligence or inadvertence.--A
5 fiduciary whose violation of a provision of this statute is the
6 result of negligence beyond simple negligence or inadvertence
7 but less severe than gross negligence is subject to other
8 equitable or remedial relief as the court may deem appropriate,
9 including:
10 (1) an injunction requiring the fiduciary to perform or
11 refrain from performing an act or acts; and
12 (2) a writ of mandamus requiring the fiduciary to
13 perform a fiduciary act or duty.
14 (b) Gross negligence or willful or malicious acts.--A
15 fiduciary whose violation of a provision of this statute is the
16 result of gross negligence or is willful or malicious shall be
17 removed from that fiduciary's fiduciary position and is subject
18 to other equitable or remedial relief as the court may deem
19 appropriate.
20 Section 403. Criminal penalties.
21 A fiduciary who participates in the investment or management
22 of retirement system assets, the disbursement of money from a
23 retirement system, or the formulation or approval of a contract
24 on behalf of the retirement system and who is not covered by the
25 bond or alternative security arrangement specified in section
26 254 is guilty of a misdemeanor of the third degree.
27 Section 404. No limitation on other penalties.
28 The penalties prescribed in this statute do not limit:
29 (1) the power of the Commonwealth, a Commonwealth
30 retirement system, a local government or a local government
19890H1332B2636 - 45 -
1 retirement system to discipline its officials or employees;
2 (2) the power of the State Ethics Commission under the
3 act of October 4, 1978 (P.L.883, No.170), referred to as the
4 Public Official and Employee Ethics Law;
5 (3) the power of the court under the act of August 14,
6 1963 (P.L.1048, No.452), entitled "An act providing for the
7 forfeiture of office of public officers convicted of certain
8 crimes,";
9 (4) the power of either House of the General Assembly to
10 discipline its own members or impeach a public official; or
11 (5) the power of removal under section 7 of Article VI
12 of the Constitution of Pennsylvania.
13 CHAPTER 5
14 SAVINGS CLAUSE; REPEALS; EFFECTIVE DATE
15 Section 501. Savings clause.
16 The provisions of this act shall not affect an act done,
17 liability incurred, or right accrued or vested, or affect a suit
18 or prosecution pending or be instituted to enforce a right or
19 penalty or punish an offense under the authority of an act or
20 part thereof repealed by this act.
21 Section 502. Repeals.
22 All acts and parts of acts are repealed insofar as they are
23 inconsistent with this act.
24 Section 503. Effective date.
25 This act shall take effect on the first day of January that
26 occurs 60 days after the date of final enactment of this act.
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