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PENSIONS, BENEFITS, AND RETIREMENT: VIRGINIA RETIREMENT
SYSTEM.
ADMINISTRATION OF GOVERNMENT: VIRGINIA FREEDOM
OF INFORMATION ACT.
Information provided to Retirement
System regarding underlying investments of limited partnership not
traded on governmentally regulated securities exchange is exempt
from public disclosure. Information regarding name of limited
partnership, amount and present value of investment is not
exempt.
Mr. W. Forrest Matthews, Jr.
Director, Virginia Retirement System
January 27, 2003
Issue Presented
You ask whether confidential information, including information
regarding underlying assets, provided to the Virginia Retirement
System by limited partnerships in the private equity market and
upon which the Retirement System relies to make investment
decisions regarding those partnerships, is subject to disclosure
under The Virginia Freedom of Information Act.
Response
It is my opinion that the described confidential information
provided to the Virginia Retirement System by limited partnerships
in the private equity market may be exempt from disclosure under
The Virginia Freedom of Information Act, provided such information
meets the requirements of § 2.2-3705(A)(47) of the Act.
Even though the Retirement System may deny public access to such
confidential information, the Retirement System is required to
provide to a valid requester under the Act the identity of any
private equity limited partnership in which it invests and the
amount and present value of such investments.
Background
You relate that the Virginia Retirement System has a diversified
investment portfolio.1 The Retirement
System considers a vast amount of information in determining the
allocation of assets and the assets in which to invest within the
asset groups. You relate that private equity is a growing and
important asset class that is not traded on any governmentally
regulated exchange.
You advise that the Retirement System typically invests in
private equity as a limited partner in a limited partnership. In
many instances, the general partner is a management firm that
manages a specific fund or funds in which the limited partners
invest. While the limited partnership may own interests in several
investments, the Retirement System holds only an investment
position in the limited partnership and not in the underlying
investments of the partnership. The general partner, whether a
management fund or otherwise, provides detailed information to the
Retirement System regarding the partnership’s underlying
investments. This information is provided on a confidential basis
so that the Retirement System may monitor current investments and
make informed investment decisions. You also relate that the
confidentiality of both the initial and the ongoing analyses
regarding these underlying investments is critical, because
disclosure of such confidential investment information would affect
adversely the value of the investment being acquired, held or
disposed of by the Retirement System. Participation in these
private equity investments is at the discretion of the general
partner. You also indicate that the limited partnerships rely on
the Retirement System to keep the information regarding the
underlying investments confidential, because disclosure of such
information would have an adverse impact on private equity
investment acquired, held or disposed of by the Retirement System.
Additionally, you indicate that the Retirement System’s
disclosure of the confidential information may result in limiting
the Retirement System’s access to the private equity market,
because general partners seeking equity investors do not want to
risk disclosure of the confidential analysis.2
You advise that, as of August 31, 2002, 7.1% of the
Retirement System portfolio consists of private equity, which has
performed favorably compared to other asset classes. You also
advise that it would not be in the best interest of Retirement
System members and beneficiaries if the Retirement System’s
access to private equity investments were reduced or
eliminated.
Applicable Law and Discussion
Section 2.2-3704(A) of The Virginia Freedom of Information
Act3 sets forth the general policy of
the Commonwealth that governmental records be open to the public.
Section 2.2-3704(A) provides, in part, that "[e]xcept as otherwise
specifically provided by law, all public records shall be open to
inspection and copying by any citizens of the Commonwealth during
the regular office hours of the custodian of such records." Section
2.2-3705 of the Act provides various exclusions from the mandatory
disclosure provisions of § 2.2-3704(A). Section
2.2-3705(A)(47) provides:
Records of the Virginia Retirement System, acting pursuant to
§ 51.1-124.30, or of the Rector and Visitors of
the University of Virginia, relating to the acquisition,
holding or disposition of a security or other ownership interest in
an entity, where such security or ownership interest is not
traded on a governmentally regulated securities exchange, to
the extent that: (i) such records contain confidential
analyses prepared by the retirement system or
provided to the retirement system under a promise of
confidentiality, of the future value of such ownership interest or
the future financial performance of the entity, and
(ii) disclosure of such confidential analyses would have an
adverse effect on the value of the investment to be acquired, held
or disposed of by the retirement system or the Rector and
Visitors of the University of Virginia. Nothing in this subdivision
shall be construed to prevent the disclosure of records relating to
the identity of any investment held, the amount invested, or the
present value of such investment. [Emphasis added.]
Essentially, § 2.2-3705(A)(47) sets three conditions
in order for the exclusion from disclosure to apply. First, the
security or ownership interest in an entity must not be traded on a
governmentally regulated securities exchange. Generally, private
equity of the nature you describe is not traded on a governmentally
regulated securities exchange.4 Second,
the records at issue must contain confidential analyses of the
future value of such ownership interest or the future financial
performance of the entity prepared by or provided to the Retirement
System under a promise that the information be kept confidential.
Finally, the Retirement System must determine that disclosure of
the confidential information would have an adverse effect on the
value of such investments. To the extent the confidential
information you describe meets these criteria,
§ 2.2-3705(A)(47) authorizes the Retirement System to
exclude such information from the mandatory disclosure requirements
of the Act.
This exclusion is consistent with the constitutional and
statutory provisions relative to the Retirement System’s
investment responsibilities. Article X, § 11 of the
Constitution of Virginia provides that Retirement System funds
"shall be deemed separate and independent trust funds, and
shall be invested and administered solely in the interests of
the members and beneficiaries thereof." (Emphasis added.) This
provision of the Constitution originated during the 1969 Special
Session of the General Assembly due to concerns over the practice
of allowing state and local government borrowing from the
Retirement System at low interest rates.5 While this practice was favorable for state
and local governments as borrowers, it was not in the best interest
of the beneficiaries of the fund.6
During debate of the issue in the Senate, it was observed
". . .retirement funds are a trust and should be invested at the
highest and best rate consistent with trust obligations’ and
that it was unfair to public employees . . .to permit their funds
to be invested at less than the best interest rate
available.’"7
Section 51.1-124.30(C) emphasizes the importance of investing
Retirement System funds in a manner that is in the best interests
of Retirement System members and beneficiaries:
The Board [of Trustees of the Virginia Retirement System] shall
discharge its duties with respect to the Retirement System
solely in the interest of the beneficiaries thereof and
shall invest the assets of the Retirement System with the care,
skill, prudence, and diligence under the circumstances then
prevailing that a prudent person acting in a like capacity and
familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims. The Board
shall also diversify such investments so as to minimize the risk of
large losses unless under the circumstances it is clearly prudent
not to do so. [Emphasis added.]
These provisions clearly provide that the Retirement System
should diversify its assets as part of its responsibility to make
decisions in the interests of its members and beneficiaries. The
exclusion in § 2.2-3705(A)(47) recognizes the need for
the Retirement System to invest in an array of assets that benefit
its members and beneficiaries. In the context of the Retirement
System investing in the private equity market, disclosure may have
an adverse effect not only on the investment acquired, held and
disposed of, but also on the Retirement System’s overall
portfolio. If the Retirement System were required to breach
confidentiality agreements with those in the private equity markets
that provide investment information, the Retirement System may not
continue to be invited to participate in that market.
Conclusion
Accordingly, it is my opinion that the described confidential
information provided to the Virginia Retirement System by limited
partnerships in the private equity market may be exempt from
disclosure under The Virginia Freedom of Information Act, provided
such information meets the requirements of
§ 2.2-3705(A)(47) of the Act. Even though the Retirement
System may deny public access to such confidential information, the
Retirement System is required to provide to a valid requester under
the Act the identity of any private equity limited partnership in
which it invests and the amount and present value of such
investments.
Footnotes:
1The portfolio includes fixed income
investments; domestic, international and private equity
investments; real estate and other investments.
2You advise that the execution of a
confidentiality agreement is required to participate in each of the
private equity market limited partnerships.
3Va. Code Ann.
§§ 2.2-3700 to 2.2-3714 (LexisNexis Repl. Vol. 2001
& Supp. 2002).
4See generally Vance H.
Fried, New Approaches to Minority Media Ownership Columbia
Institute for TeleInformation, Columbia University: Private Equity
Funding for Minority Media Ownership, 51 Fed. Comm. L.J.
609, 610 (1999) ("The two defining characteristics of the private
equity market are in its name. First, it is structured as equity or
near equity (e.g., subordinated debt with warrants) investment, not
debt. Second, it is an investment in an unregistered
(private) security that cannot be purchased or sold in the public
market.").
52 A.E. Dick Howard,
Commentaries on the Constitution of Virginia 1135 (1974).
6Id.
7Id. at 1135-36 (citation
omitted).
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