2. What is Divestment? Divesting a plan’s portfolio of certain investments based in part on a consideration of non-economic or social factors. Also referred to as “social investing” Current Issues Relating to Divestment Targeted companies doing business in Sudan Targeted companies doing business in Iran Terror Free Investing – Cuba, Syria and North Korea

3. Fiduciary Standards California Constitution, Art. XVI, Section 17 Public pension fund trustees have strict fiduciary obligations, including: The Board has “sole and exclusive fiduciary responsibility” over the assets of the system. (subdivision (a)); Board members shall act “solely in the interest of, and for the exclusive purposes of providing benefits to, participants and their beneficiaries, minimizing employer contributions thereto, and defraying reasonable expenses of administering the system”. Further, “[a] retirement board’s duty to its participants and their beneficiaries shall take precedence over any other duty.” (subdivision (b));

4. Fiduciary Standards, continued California Constitution, Art. XVI, Section 17 Board members must act “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with these matters would use in the conduct of an enterprise of a like character and with like aims.” (subdivision (c)); The Board shall “diversify the investments of the system so as to minimize the risk of loss and to maximize the rate of return, unless under the circumstances it is clearly not prudent to do so. (subdivision (d))

5. Legal requirements when considering a divestment program Duty of Loyalty Requirement to use assets of the retirement fund for the exclusive benefit of plan participants is commonly referred to as the “duty of loyalty” Prohibits a fiduciary from making an investment decision solely to accomplish collateral objective if investment provides the plan with less returns for same amount of risk or same return with additional risks

6. Duty of Prudence Analyze the investment solely on economic merits: risk, return, diversification, liquidity Fiduciaries should conduct a thorough review of all aspects of the investment, seek up to date and accurate reports and information, hire outside experts where necessary, and thoroughly document the analysis Industry-wide factors may be considered such as: Regulatory and/or legislative actions, policy actions in the institutional investor community, industry shares common exposure to judgments, settlements and ongoing litigation that have potential to exceed industry’s net worth, significant threat of industry-wide bankruptcy

7. US Department of Labor Guidance Under ERISA– Everything being equal test Non-economic factors (such as societal harm or benefit) may not considered in an investment decision unless it has been determined that proposed investment alternatives available to the plan have equivalent economic features, including risk and return characteristics A decision to make an investment that was economically inferior in order to advance come other goal (social goal) would violate this rule Decision to divest must be grounded initially in financial-investment considerations, with non-economic factors being considered only after competing investment alternatives have been deemed at least equal from an exclusively financial risk return perspective

8. State Retirement Systems Cal. Const. Article XVI, Section 17(g) provides that “the Legislature may continue to prohibit certain investments where it is in the public interest to do so, and provided that the prohibition satisfies the standards of fiduciary care and loyalty required of a retirement board.” Sudan Divestment California Legislation mandates Sudan divestment over a certain period of time, unless divestment is “inconsistent with the fiduciary responsibilities of the board” under Cal. Const. Art. XVI, Section 17. Government Code Section 7513.6(i)(4).

9. State Retirement Systems, continued Iran Divestment October 14, 2007, Governor signed a law that prohibits CalPERS system and CalSTRS from investing in companies that do business in Iran, subject to satisfying the Board’s fiduciary duties.

10. Federal Legislation H.R. Bill 2347, Iran Sanctions Enabling Act of 2007, passed House of Representatives and has been introduced in the Senate Authorizes state and local governments to divest in Iran energy sector, companies that sell arms to the Government of Iran, and financial institutions that extend $20 million or more in credit to the Government of Iran for 45 days or more Requires the President to publish in the Federal Register a list of each person or entity who has an investment in Iran’s energy sector worth more than $20 million Allows state and local governments to divest their assets from any entity included in the published list. And prohibits lawsuits against companies that divest themselves from investments in companies included on the published list

11. Federal Legislation, continued The intent of legislation is to provide a list of companies operating in Iran and to support, but not mandate, divestiture by state and local government. Also, provides liability protection for fiduciaries and other responsible parties of employees benefit plans if they were to divest assets from certain companies that invest $20 million or more in Iran’s energy sector.

12. Recent Litigation Related to Divestment On February 23, 2007, Illinois District Court struck down the Illinois Sudan Divestment Act requirement that public pension plans (state, city and municipal), divest from companies doing business with or in Sudan violates the Foreign Commerce Clause, and “market participant” exception does not apply because local agencies are covered by the Act. Illinois passed legislation that replaced the law invalidated by the Illinois District Court decision. The new law became effective August 28, 2007.