Attorney General's Opinion 2002 #149
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).
