A year-old law enabling Tennessee colleges and universities to keep secret the “proprietary” fees they pay money managers for handling risky investments is likely to be reviewed this year.

A special committee appointed by House Speaker Beth Harwell and Lt. Gov. Randy McNally is set to start digging in to more than 530 exemptions to the Tennessee Open Records Act, possibly before the August primary election, and they say this will be one of them.

Passed at the request of the University of Tennessee, according to a Memphis Commercial Appeal report, to soothe the nerves of hedge fund managers and keep confidential the information related to fee structures for alternative investments in places such as the Cayman Islands, the law is drawing bad reviews from key legislators.

“I can see where the investment information might be secret but not what they pay the money managers,” McNally says.

The lieutenant governor adds the law would “definitely” fall under the long list of Open Records Act exemptions the special committee will look at this year. He has appointed Sen. Mike Bell, a Riceville Republican, and Sen. Ken Yager, a Kingston Republican, to serve on the panel. Harwell appointed Republican Reps. Jeremy Faison of Cosby and Bob Ramsey of Maryville.

Harwell spokeswoman Kara Owen confirmed the speaker’s office would expect the law to be reviewed by the committee as it makes recommendations on open records exemptions for the 111th General Assembly to consider in 2019.

Though the legislation was discussed in committees at Legislative Plaza, the matter didn’t catch many people’s attention until a German newspaper obtained documents showing numerous investments in areas such as the Cayman Islands, which are attractive because they’re exempt from U.S. tax laws.

The news organization shared the information with the International Consortium of Investigative Journalists, which led to the Commercial Appeal report, showing about a third of UT’s $1 billion in endowments is put into alternative investments, with nearly $200 million going into the Caymans.

UT endowment funds come from donations, ranging from financial gifts to liquidated farms and estates, not tuition or state appropriations. The law also allows state universities and community colleges to use this method for alternative investments.

The international investments caught the attention of Rep. Ryan Williams, a Cookeville Republican who chairs the House Republican Caucus. He recalled committee discussion focusing on whether making the fees public would give competing money managers proprietary information and hurt fairness in requests for proposals. He adds caps could be used to ensure everyone knows how the money’s being handled without giving away an investor’s competitive edge.

Likewise, he and several other legislators acknowledge the matter should be up for reconsideration later this summer or fall. It will sunset July 1, 2021.

“Based upon what I heard, I would have some concerns, and it’s something we probably ought to look at, if not in (the Government Operations Committee), but legislatively next year because transparency’s extremely important, particularly when more than half of this money is in an offshore account that we know not what’s going on with it,” Williams says.

The name of the investment manager, as well as the investment fund, and the total investment would be public information. But other records are closed if they contain information “that could be commercially reasonably expected to be kept confidential when provided to or by the public institution of higher education, or any analysis or evaluation of an alternative investment by the public institution” or if disclosure could hurt the university’s investment program, the value of the alternative investment or the “person or entity that provided the information” for the university’s investment, the law states.

That sounds reasonable – to a degree – catching many legislators off guard.

House Majority Leader Glen Casada admits he “did not understand” how the bill would be used when it passed.

But while he won’t go as far as to say the University of Tennessee misled the Legislature, he wishes the measure had been explained with more clarity.

“I think transparency is the key, and this smacks opposite of transparency,” Casada says, adding the Legislature needs to look into the situation.

Casada would not be alone.

The Senate voted 31-0 for the bill, and the House let it roll 83-11.

Democratic Sen. Jeff Yarbro of Nashville agrees the Legislature needs to review the law and see where “potential problems arise” so it can correct the situation if necessary

“When we’re talking about public money, there has to be significant oversight, and if you’re not going to have transparency, you need to ensure there is still a robust manner to ensure that the people’s money is being invested wisely and for their benefit,” adds Yarbro, who chairs the Senate Minority Caucus.

House Minority Caucus Chairman Mike Stewart, a Nashville Democrat, agrees, saying the law “obviously needs to be reversed.”

“I think under the Haslam administration, we’ve seen a consistent movement toward secrecy, toward lack of inclusiveness,” Stewart explains. “One of the first things the governor did was dramatically reduce our ethical requirements in terms of transparency for his own money. I think this is just part and parcel of that.

“It’s a way of slowly cutting the people off from their own government.”

Open records outlook

The University of Tennessee contends it wasn’t trying to hide anything when it pushed the legislation in 2017 and needed a caption bill to move the matter through the Legislature, an effort to protect the strategies of the people managing the money.

Rep. Harry Brooks, a Knoxville Republican, and Sen. Dolores Gresham, a Somerville Republican, carried the bill, which was needed in a last-minute effort dealing with UT investments.

A big part of the secrecy deals with providing confidentiality for fees when investments hit certain returns. In other words, investment managers don’t want their competition to know what they’re charging for making bigger gains.

The Tennessee Coalition for Open Government, nevertheless, explains the law needs to be closed – or at least re-examined.

“This is an example of an exemption passing that may have had an effect that lawmakers didn’t intend, and it would be a good one to amend because, while there might be some things that should be confidential, how much you can pay someone to manage the investment shouldn’t be,” says Deborah Fisher, executive director of the TCOG.

Fisher points out caption bills are broad placeholders, opening up a “caption” of the Tennessee Code for a measure unrelated to the wording in the initial bill. Such legislation is hard for the public to follow because the amendment isn’t placed on the legislation or the Legislature’s website until after a committee passes it.

In reviewing discussion in a 2017 House Education and Administration Committee meeting, Fisher found only Republican Rep. Roger Kane of Knoxville and House Minority Leader Craig Fitzhugh of Ripley questioned the matter.

Kane, who is leaving the Legislature this year, pointed out the committee didn’t have the “expertise” needed to make a decision dealing with high finance.

And even though Rep. Brooks pointed out the donated funds are private, Fitzhugh noted once the money is donated it becomes public. Fitzhugh also is leaving the Legislature in a run for governor.

UT lobbyist Carey Whitworth told lawmakers the exemption was necessary because of an investment manager who didn’t like the requirements of the Open Records Act.

“If we’re working with a third-party investor, for example, their investment analysis, the research they’ve done on an investment so that information is not discoverable to a competitor,” Whitworth said in the committee.

Under questioning by Fitzhugh, she said UT was “excluded” from an investment the university believed would be beneficial because the money manager “believed these weren’t terms they could live by.”

Fitzhugh, however, argued, “There are other investments if this one doesn’t work. … I just don’t know that we’ve done this before to privatize information about investments (of donations) to universities once they’ve been made.”

In reviewing the video, TCOG’s Fisher notes the UT lobbyist failed to tell committee members portions of the fee information would be confidential, thus the lack of questions from lawmakers.

“Frankly, I don’t think lawmakers all the time have the information,” Fisher points out. And if she’s not in a committee to listen to the debate, it’s also difficult for her to ask questions.

One of the problems with open government is that more and more information is being considered “proprietary” and legislators are going along with it, Fisher adds. She points out proprietary information is “whatever they say is proprietary.”

Another example, she says, deals with a trade secrets law and the economic incentives Montgomery County provided for Google to set up shop in the $1.2 billion former Hemlock Semiconductor facility. Google wasn’t enthused about that type of information being publicized, according to Fisher.

“This whole class of exemptions on proprietary information is getting out of hand because what it does is it hands the keys to a company to say, in their relationship with government, what’s confidential. And that’s not right when they extend it to things like how much they get paid to manage a fund,” Fisher adds.

The analysis

UT invests with several firms holding domestic registered funds, mainly in Delaware, and Cayman Islands registered funds, similarly to other nonprofit entities that feel the Caymans tax structure “better aligns” with its tax-exempt status, according to a statement from the university’s chief financial officer.

The managers aren’t located in the Caymans, which is one of the world’s largest financial centers, the statement says. Neither are the securities or companies in which it invests, since most hedge funds are in stocks, bonds and futures in major markets.

UT sought the legislative protection after receiving a records request seeking a “broad range” of information about a specific investment manager, including the investment process, according to the statement.

“The manager believed this information was part of its competitive advantage and desired to keep it confidential. Divulging that information could have forced UT to terminate an investment with (a) long-standing, successful fund,” the statement says. The university wasn’t asked to seek the legislation by an outside party, the statement notes.

As Fisher points out, though, this type of exemption takes Tennessee down an even longer path of secrecy, letting hedge fund managers – people who borrow large amounts of money to bet on investments – decide not only how endowment funds will be used but how state law will shake out. No doubt, they are making a pretty penny on UT and don’t want competitors to move in on their market.

Based on the comments of state lawmakers, they feel just a little used. It’s almost as if they’re on the outside of a process when they’re the insiders.

Another problem lies with the mountains of legislation state lawmakers contend with each session.

Too often, they’re overwhelmed with information on complex matters, and increasingly, they waste time dealing with social issues beyond their control. For instance, they spend hours trying to punish Memphis for taking down Confederate monuments and only a few minutes on a critical piece of legislation giving hedge fund managers a green light.

Even with House members limited to 15 bills a year, plus exemptions for chairmen of key committees, they’re looking at 1,500-plus pieces of legislation. God Almighty can’t keep up with that many bills, so how can we expect a bunch of politicians to handle the public’s business?

The answer is: We can’t, especially when many of them spend the second year of the session trying to get elected in the fall.

Human nature aside, this law is in dire need of review before it sunsets in 2021. But considering it’s just one of 538 exemptions to the Open Records Act, the special committee assigned to this task faces hours of work, thanks in large part to the efforts of the Legislature – and the lobbyists who tell them what to do.

Sam Stockard is a Nashville-based reporter covering the Legislature for the Nashville Ledger, Memphis Daily News, Knoxville Ledger and Hamilton County Herald. He can be reached at [email protected].