HF4953

Purpose

The bill aims to broaden how Minnesota state funds are invested by requiring the State Board of Investment to create a formal policy and goals to include diverse and emerging investment managers. It also authorizes limited waivers and seed-stage funding for certain start-up and franchise investment funds, and it sets up new reporting requirements to track progress. It aligns the board’s activities with existing investment standards and oversight.

Main provisions

• State Board of Investment duties and operations (11A.04 amendments)
  • The board acts as trustee for funds it invests, following the standard of care for state assets and pension assets.
  • The board must formulate policies and ensure fund beneficiaries and the public can learn about proposed actions.
  • The board hires an executive director and investment advisors; it sets policies to prevent conflicts of interest for employees.
  • The board keeps a record of proceedings and can form advisory committees.
  • It cannot use state funds to underwrite or directly buy municipal securities from issuers or their agents.
  • The board can direct the budget to sell escheated property when it’s in the state’s best interest, with sales to the highest bidder under board terms.
  • It must establish formulas to measure investment performance; public pension funds in Minnesota should use these formulas.
  • The board may hire private investment managers and must annually report, by January 15, the costs and performance of each manager to the governor and legislature.
  • It adopts and may revise an investment policy statement that includes objectives and asset allocation; it may consult the council for advice.
  • It may adopt a compensation plan for board staff and contract with other institutions (e.g., Minnesota State Colleges and Universities) for investment review services.
  • It creates an operating account funded from fund assets to cover administration costs.
• Emerging Diverse Startup and Franchise Investment Managers policy (11A.238)
  • Key definitions:
  • Diverse investment manager: majority-owned by women, racial minorities, or people with substantial disability.
  • Emerging investment manager: a registered or exempt adviser managing less than $1 billion in assets and with professional experience and governance that meet 11A.09.
  • Franchise equity/franchise investment: equity-like investment in a franchise model.
  • Manager of managers: an adviser who allocates capital among multiple emerging/diverse/startup/franchise managers.
  • Startup fund: a new investment fund whose principals have experience but haven’t yet raised a fund under their own company.
  • Policy and goals (by Jan 1, 2027)
  • The board must adopt a written policy with quantitative, asset-class-specific goals to include diverse and startup/franchise managers across all asset classes.
  • The policy must outline outreach, open application periods, regular pipeline reviews, and the use of manager-of-managers structures to achieve scale and diversification.
  • Goals are aspirational and not binding; board decisions still follow the prudent person standard (see next item).
  • Waiver and seed-stage commitments
  • The board may waive minimum fund-size or prior-track-record requirements for diverse managers if credentials and risk-management capacity meet standards.
  • The board may make seed-stage or first-time capital commitments to startup funds or Regulation A or Regulation D funds, as long as allocations stay within prudent limits and are independently due-diligenced.
  • Reporting and transparency
  • Beginning July 1, 2027 and each year after, the board must report publicly and to the Legislative Commission on Pensions and Retirement:
    • The number of emerging, diverse, franchising, and startup funds/managers engaged.
    • Total state assets managed by these managers/funds.
    • Relative performance.
    • A narrative on outreach and pipeline development.
  • Coordination
  • The board may coordinate with national or state certification/technical assistance entities to verify ownership status and support startup funds, as long as this does not create undue administrative burden.
• Relationship to existing statutes (cross-reference)
  • The policy created under 11A.238 subdivision 2 must be carried out when the board exercises investment authority under 11A.24 (added subdivision 6a: applicable policy).

Definitions and key terms (from the new policy)

• Diverse investment manager
• Emerging investment manager
• Franchise equity/franchising investment
• Manager of managers
• Startup fund
• Regulation A and Regulation D exemptions
• Prudent person standard (11A.09)

Implementation timeline and reporting

• By January 1, 2027: Adopt the emerging diverse startup and franchise investment manager policy with quantitative goals.
• By July 1, 2027 and each year thereafter: Publish reports on the number of managers funded, assets managed, performance, and outreach/pipeline details.
• Ongoing: Align investment decisions with the policy and the prudent person standard; report annually on costs and performance of private investment managers (by January 15 each year).

Notable changes and safeguards

• Codifies a formal, aspirational but non-binding policy to diversify investment management across asset classes.
• Allows limited waivers of size or track record for diverse/emerging managers, subject to credentials and risk management standards.
• Enables seed-stage investments in startup and franchise funds, with caps and due diligence requirements.
• Requires increased transparency through public and legislative reporting.
• Ensures coordination with existing policy (11A.24) to implement the new framework.

Potential implications

• Broadens access for women, racial minorities, and people with disabilities to participate in state investment management.
• Could increase the share of assets managed by emerging and startup funds, including franchise-related investments, with appropriate risk controls.
• Improves accountability through annual reporting and public disclosure.
• Maintains safety nets via prudent investor standards and independent due diligence.

Related entities and oversight

• Legislative Commission on Pensions and Retirement (receives the reporting).
• Governor and Legislature (receive the annual cost and performance reports).
• Advisory councils and potential private or public partners for investment review.

Relevant Terms - State Board of Investment - 11A.04 Duties and Powers - 11A.09 prudent person standard - 11A.24 investment authority - 11A.238 Emerging Diverse Startup and Franchise Investment Managers - diverse investment manager - emerging investment manager - startup fund - franchise equity/franchising investment - manager of managers - Regulation A - Regulation D - escheated property - open application window - pipeline review - aspirational goals - due diligence - reporting to Legislative Commission on Pensions and Retirement - public reporting and transparency - private investment manager costs and performance