KENTUCKY LEGISLATURE

HB 376

2025 Regular Session

AN ACT relating to state financial practices.

Be it enacted by the General Assembly of the Commonwealth of Kentucky:

Section 1. KRS 42.500 is amended to read as follows:

(1) There shall be a State Investment Commission composed of:

(a) The State Treasurer who shall be chairman;

(b) The secretary of the Finance and Administration Cabinet;

(d) Two (2) persons appointed by the Governor.

(2) The individuals appointed by the Governor shall be selected as follows:

(a) One (1) to be selected from a list of five (5) submitted to the Governor by the Kentucky Bankers Association; , and

(b) One (1) to be selected from a list of five (5) submitted to the Governor by the Independent Community Bankers Association.

(3) (a) The State Investment Commission shall meet at least quarterly to review investment performance and conduct other business.

(b) This subsection ~~provision~~ shall not prohibit the commission from meeting more frequently as the need arises.

(4) (a) The State Treasurer and secretary of the Finance and Administration Cabinet shall each have the authority to designate, by an instrument in writing over his or her signature and filed with the secretary of the commission as a public record of the commission, an alternate with full authority to:

1. ~~(a)~~ Attend in the member's absence, for any reason, any properly convened meeting of the commission; and

2. ~~(b)~~ Participate in the consideration of, and vote upon, business and transactions of the commission.

(b) Each alternate designated under this subsection shall be a person on the staff of the appointing member or in the employ of the appointing member's state agency or department.

(5) Any designation of an alternate under subsection (4) of this section may, at the appointing member's direction:

(a) Be limited upon the face of the appointing instrument to be effective for only a specific meeting or specified business;

(b) Be shown on the face of the appointing instrument to be a continuing designation, for a period of no more than four (4) years, whenever the appointing member is unable to attend; or

(c) Be revoked at any time by the appointing member in an instrument in writing, over his or her signature, filed with the secretary of the commission as a public record of the commission.

(6) (a) Any person transacting business with, or materially affected by, the business of the commission may accept and rely upon a joint certificate of the secretary of the commission and any member of the commission concerning the designation of any alternate, the time and scope of the designation, and, if it is of a continuing nature, whether and when the designation has been revoked.

(b) The joint certificate shall be made and delivered to the person requesting it within a reasonable time after it has been requested in writing, with acceptable identification of the business or transaction to which it refers and the requesting person's interest in the business or transaction.

(7) (a) Any three (3) persons who are members of the commission or alternates authorized under subsections (4) and (5) of this section shall constitute a quorum and may, by majority vote, transact any business of the commission.

(b) Any three (3) members of the commission may call a meeting.

(8) The provisions of KRS 61.070 shall not apply to members of the commission.

(9) Subject to subsection (11) of this section, the commission shall have authority and may, if in its opinion the cash in the State Treasury is in excess of the amount required to meet current expenditures, invest any and all of the excess cash in:

(a) Obligations and contracts for future delivery of obligations backed by the full faith and credit of the United States or a United States government agency, including but not limited to:

1. United States Treasury;

2. Export-Import Bank of the United States;

3. ~~Farmers Home Administration;~~

4. Government National Mortgage Corporation; and

4. 5. Merchant Marine bonds;

(b) Obligations of any corporation of the United States government or government-sponsored enterprise, including but not limited to:

1. Federal Home Loan Mortgage Corporation;

2. Federal Farm credit banks and :

a. Bank for cooperatives;

~~b. Federal Intermediate Credit Banks; and~~

~~c. Federal Land Banks;~~

3. Federal Home Loan Banks;

4. Federal National Mortgage Association; and

5. Tennessee Valley Authority obligations;

(c) Collateralized or uncollateralized certificates of deposit, issued by banks rated in one (1) of the three (3) highest categories by a nationally recognized statistical rating organization or other interest-bearing accounts in depository institutions chartered by this state or by the United States, except for shares in mutual savings banks;

(d) Bankers acceptances for banks rated in the highest short-term category by a nationally recognized statistical rating organization;

(e) Commercial paper rated in the highest short-term category by a nationally recognized statistical rating organization;

(f) Securities issued by a state or local government, or any instrumentality or agency thereof, in the United States, and rated in one (1) of the three (3) highest long-term categories by a nationally recognized statistical rating organization;

(g) United States denominated corporate, Yankee, and Eurodollar securities, excluding corporate stocks, issued by foreign and domestic issuers, including sovereign and supranational governments, rated in one (1) of the three (3) highest long-term categories by a nationally recognized statistical rating organization;

(h) Asset-backed securities rated in the highest category by a nationally recognized statistical rating organization;

(i) Shares of mutual funds, each of which shall have the following characteristics:

1. The mutual fund shall be an open-end diversified investment company registered under the federal Investment Company Act of 1940, as amended;

2. The management company of the investment company shall have been in operation for at least five (5) years;

3. The mutual fund shall be rated in the highest category by a nationally recognized statistical rating organization;and

4. All of the securities in the mutual fund shall be eligible investments pursuant to this section;~~and~~

(j) State and local delinquent property tax claims which upon purchase shall become certificates of delinquency secured by interests in real property not to exceed twenty-five million dollars ($25,000,000) in the aggregate. For any certificates of delinquency that have been exonerated pursuant to KRS 132.220(5), the Department of Revenue shall offset the loss suffered by the Finance and Administration Cabinet against subsequent local distributions to the affected taxing districts as shown on the certificate of delinquency; .

(k) Digital assets, other than stablecoins, that:

1. Have a market capitalization of over seven hundred fifty billion dollars ($750,000,000,000) averaged over the previous calendar year; and

2. Are held:

a. Directly by the commission or the commission's designee through the use of a secure custody solution;

b. On behalf of the state by a qualified custodian; or

c. In the form of an exchange traded product issued by an investment company registered under the federal Investment Company Act of 1940, as amended;

(l) Stablecoins that have received appropriate regulatory approval or authorization from the competent authorities of the United States or any state of the United States; and

(m) Bullion that is held:

1. In the form of an exchange traded product; or

2. In physical form by:

a. A qualified custodian;

b. The state; or

c. The state in conjunction with another state in accordance with an administrative regulation promulgated by the commission under Section 2 of this Act.

(10) As used in this section:

(a) "Bullion":

1. Means bars, ingots, or coins, which are:

a. Made of gold, silver, platinum, palladium, or a combination of these metals;

b. Valued based on the content of the metal and not its form; and

c. Used, or have been used, as a medium of exchange, security, or commodity by any state, the United States government, or a foreign nation; and

2. Does not include medallions or coins that are incorporated into a pendant or other jewelry;

(b) "Central bank digital currency":

1. Means a digital currency, digital medium of exchange, or digital monetary unit of account that is:

a. Issued and made directly available to the public; or

b. Processed or validated; by the United States Federal Reserve System, a federal agency, or a foreign government; and

2. Does not include a digital asset that is:

a. Backed by legal tender or government treasuries; and

b. Issued by a qualified entity;

a. Except as provided in subdivision b. of this subparagraph, means virtual currency, cryptocurrencies, natively electronic assets, or other digital-only assets that confer economic, proprietary, or access rights or powers; and

b. Does not include central bank digital currency.

2. As used in this paragraph, "natively electronic asset" includes a stablecoin and a nonfungible token;

(d) "Exchange traded product" means any financial instrument that:

1. Is approved or registered:

a. By the Securities and Exchange Commission or Commodity Futures Trading Commission; or

b. Under KRS Chapter 292;

2. Is traded on a United States-regulated exchange; and

3. Derives its value from an underlying pool of assets including but not limited to stocks, bonds, commodities, and indexes;

(e) "Qualified custodian" means any:

1. Federal or state-chartered bank, trust company, or special purpose depository institution; or

2. State-regulated company that provides custody of digital assets for an exchange traded product;

(f) "Qualified entity" means an entity that is not:

1. The United States Federal Reserve System;

2. A federal agency;

3. A foreign government; or

4. An instrumentality or agent of an entity referenced in subparagraph1., 2., or 3. of this paragraph;

(g) 1. "Secure custody solution" means a technological product or blended technological product and service:

a. That secures digital assets with cryptographic private keys that are:

i. Exclusively known and accessible by the commission or the commission's designee;

ii. Exclusively contained within an encrypted environment and accessible only via end-to-end encrypted channels;

iii. Never contained or accessible by or controllable via a smartphone; and

iv. Stored on hardware that is maintained in at least two (2) geographically diversified specially designated secure data centers; and

b. Where the provider of the product, or blended product and service, complies with or ensures compliance with the following protocols for the product or blended product and service:

i. Enforces a multiparty governance structure for authorizing transactions;

ii. Enforces user access controls;

iii. Logs all user-initiated actions;

iv. Has implemented a disaster recovery protocol that ensures access to assets in the event the provider becomes unavailable;

v. Undergoes regular code audits and penetration testing from audit firms; and

vi. Remedies any vulnerabilities identified in an audit or test referenced in subpart v. of this subdivision promptly.

2. As used in this paragraph, "private key" means a unique element of cryptographic data that is:

a. Used for signing transactions on a blockchain; and

b. Known to the owner of the unique element; and

(h) "Stablecoin" means a natively electronic asset that is:

1. Issued by a qualified entity that is backed by United States dollars or high-quality liquid assets; and

2. Redeemable on demand by the holder at par for a fixed monetary value in equivalent United States dollars ~~The State Investment Commission shall promulgate administrative regulations for the investment and reinvestment of state funds in shares of mutual funds, and the regulations shall specify:~~

~~(a) The long and short term goals of any investment;~~

~~(b) The specification of moneys to be invested;~~

~~(c) The amount of funds which may be invested per instrument;~~

~~(d) The qualifications of instruments; and~~

~~(e) The acceptable maturity of investments~~.

(11) (a) The total amount of excess cash invested under subsection (9)(k), (l), and (m) of this section shall not, at the time of the investment is made, exceed ten percent (10%) of the total amount of excess cash invested under subsection (9) of this section.

(b) Notwithstanding any other provision of this section or any other law, the commission shall not invest any excess cash or other funds in central bank digital currency.

(12) Any investment in obligations and securities pursuant to ~~subsection (9) of~~ this section may be ~~shall satisfy this section if these obligations are~~ subject to repurchase agreements, provided that delivery of these obligations is taken either directly or through an authorized custodian.

(13) ~~(12)~~ (a) Income earned from investments made pursuant to this section shall accrue to the credit of the investment income account of the general fund, except that interest from investments of excess cash in the road fund shall be credited to the surplus account of the road fund and interest from investments of excess cash in the game and fish fund shall be credited to the game and fish fund, interest earned from investments of imprest cash funds and funds in the trust and revolving fund for each state public university shall be credited to the appropriate institutional account, and interest earned from the investment of funds accumulated solely by means of contributions and gifts shall not be diverted to any purpose other than that stipulated by the donor, when the donor shall have designated the use to which the interest shall be placed.

(b) Except as otherwise provided by law, or by the obligations and covenants contained in resolutions and trust indentures adopted or entered into for state bond issues, interest earned from the investment of moneys appropriated to the capital construction accounts, trust and agency accounts, and trust and agency revolving accounts shall accrue to the capital construction investment income account.

(c) 1. If there is a revenue shortfall, as defined in KRS 48.010, of five percent (5%) or less, the secretary of the Finance and Administration Cabinet, upon the recommendation of the state budget director, may direct the transfer of excess unappropriated capital construction investment income to the general fund investment income account.

2. The amount of the transfer shall not exceed the amount of the shortfall in general fund revenues.

(d) 1. If the capital construction investment income is less than that amount appropriated by the General Assembly, the secretary of the Finance and Administration Cabinet may, upon recommendation of the state budget director, direct the transfer of excess unappropriated general fund investment income to the capital construction investment income account.

2. The transfer of general fund investment income revenues to the capital construction investment income account shall be made only when the actual general fund revenues are in excess of the enacted estimates under KRS 48.120 and shall be limited to the amount of the excess general fund revenues.

3. The amount of the transfer shall not exceed the amount of the shortfall in the capital construction fund revenues.

(14) ~~(13)~~ The authority granted by this section to the ~~State Investment~~ commission shall not extend to any funds that are specifically provided by law to be invested by some other officer or agency of the state government.

(15) ~~(14)~~ The authority granted by this section to the ~~State Investment~~ commission shall only be exercised pursuant to the administrative regulations mandated by KRS 42.525.

(16) ~~(15)~~ Each member of the ~~State Investment~~ commission shall post bond for his or her acts or omissions as a member thereof identical in amount and kind to that posted by the State Treasurer.

Section 2. KRS 42.525 is amended to read as follows:

(1) The State Investment Commission shall promulgate administrative regulations for the investment and reinvestment of state funds and the acquisition, retention, management, and disposition of investments.

(2) The administrative regulations required under subsection (1) of this section shall:

(a) Specify:

1. ~~(a)~~ The long and short term goals of any investment;

2. ~~(b)~~ The specification of moneys to be invested;

3. ~~(c)~~ The amount of funds which may be invested per instrument;

4. ~~(d)~~ The qualifications of instruments;

5. ~~(e)~~ The acceptable maturity of investments;

6. ~~(f)~~ The investment procedure with respect to in-state and out-of-state depositories provided that funds available for investment shall be offered first to qualified Kentucky depositories consistent with the investment guidelines; and

7. ~~(g)~~ The distribution method of funds among types of institutions; and

(b) Set forth the requirements provided in paragraph (a)1. to 5. of this subsection for the investment and reinvestment of state funds in shares of mutual funds.

(3) The commission may promulgate any other administrative regulations to carry out and effectuate subsections (9)(k), (l), and (m), (10), and (11) of Section 1 of this Act.

SECTION 3. A NEW SECTION OF KRS CHAPTER 42 IS CREATED TO READ AS FOLLOWS:

(1) As used in this section, "exchange traded product" has the same meaning as in of Section 1 of this Act.

(2) Notwithstanding any other law:

(a) Any state retirement fund may invest, or be invested, in exchange traded products; and

(b) Any deferred compensation plan offered by the state or any state agency may offer participants of the plan the option to invest in exchange traded products.

Section 4. KRS 45.345 is amended to read as follows:

(1) As used in this section, the following terms have the same meaning as in Section 1 of this Act:

(a) "Bullion";

(b) "Central bank digital currency";

(d) "Exchange traded product."

(2) In addition to any payment method authorized by law, and notwithstanding any statute to the contrary, except as otherwise provided in this section and Section 5 of this Act, any state agency may accept the following methods of payment to secure funds for deposit into the State Treasury:

(a) Credit card;

(b) Debit card;

(d) Automated clearinghouse (ACH) debit;or

(e) Digital assets;

(f) Bullion, when in the form of an exchange traded product; or

(g) Any other electronic payment method not prohibited under subsection (4) of this section, upon the prior written approval of both the Finance and Administration Cabinet and the Office of the State Treasurer.

(3) ~~(2)~~ Any fees charged to a state agency by the provider of the payment services listed in subsection (1) of this section shall be deemed to represent collection expenses and may be considered normal operating expenses of the agency, or the agency may collect convenience fees from users to supplement agency costs of delivering services.

(4) A state agency shall not, either directly or through any of the methods listed in subsection (2)(a), (b), (c), or (d) of this section or through another method, accept central bank digital currency as payment to secure funds for deposit into the State Treasury or for any other purpose.

SECTION 5. A NEW SECTION OF KRS CHAPTER 131 IS CREATED TO READ AS FOLLOWS:

(1) As used in this section, the following terms have the same meaning as in Section 1 of this Act:

(a) "Bullion";

(b) "Central bank digital currency";

(d) "Exchange traded product."

(2) (a) Except as otherwise provided in paragraph (b) of this subsection, in addition to any payment method authorized by law, the department may accept any method of payment authorized under Section 4 of this Act to secure funds for payment of any tax bill issued by the department.

(b) The department shall accept all of the following as a method of payment to secure funds for payment of any tax bill issued by the department:

1. Digital assets; and

2. Bullion, when in the form of an exchange traded product.

(3) This section shall not apply to sheriffs, county clerks, or any other local government entity that collects payments on behalf of the department.

(4) When accepting payments in accordance with this section, the department may collect convenience fees in accordance with subsection (3) of Section 4 of this Act.

Section 6. KRS 41.070 is amended to read as follows:

(1) As used in this section, the following terms have the same meaning as in Section 1 of this Act:

(a) "Central bank digital currency";

(b) "Digital asset"; and

(2) Unless otherwise expressly provided by law, no receipts from any source of state money or money for which the state is responsible shall be held, used, or deposited in any personal or special bank account, temporarily or otherwise, by any agent or employee of any budget unit, to meet expenditures or for any other purpose.

(3) ~~(2)~~ (a) All receipts of any character of any budget unit, all revenue collected for the state, and all public money and dues to the state shall be deposited in state depositories in the most prompt and cost-efficient manner available.

(b) However, in the case of state departments or agencies located outside Frankfort, and all state institutions, the Finance and Administration Cabinet may permit temporary deposits to be made to the accounts maintained by the agency, department, or institution in a state depository for a period not to exceed thirty (30) days, and may require that the money be forwarded to the State Treasury at the time and in the manner and form prescribed by the cabinet.

(c) ~~Nothing in~~ This section shall not be construed as authorizing any representative of any agency, department, or institution to enforce or cash, even for the purpose of a deposit, any check or other instrument of value payable to the Commonwealth or any agency thereof.

(4) ~~(3)~~ Each agency depositing its receipts directly with the State Treasurer shall do so in the manner approved by the State Treasurer as agent in charge of public fund deposits.

(5) ~~(4)~~ (a) The Department of Revenue may deposit receipts to the credit of the State Treasury directly with a state depository utilized by the Commonwealth for its primary banking services.

(b) 1. The State Treasurer, with the approval of the Finance and Administration Cabinet, may authorize other agencies to deposit receipts directly with a state depository to the credit of the State Treasury if the Treasurer prescribes the manner in which the deposit is to be made, and the forms and reports to be filed with the Treasury Department.

2. The Finance and Administration Cabinet shall prescribe the forms and reports to be filed with it when this type of deposit is made.

(6) ~~(5)~~ Each department, agency, or other budget unit which receives funds to be deposited into the State Treasury shall maintain records to report adequately each amount received, from whom received, and date received. Agency records shall be easily reconcilable with the information forwarded to the State Treasurer.

(7) (a) When a department, agency, or other budget unit deposits a receipt of the following with a state depository, the State Treasurer, or to the credit of the State Treasury, the State Treasurer shall transfer the digital assets, including stablecoins, to the budget reserve trust fund account established in Section 7 of this Act, which shall reimburse the fund to which the digital assets, including stablecoins, were designated with United States currency:

1. Digital assets, other than stablecoins, having a market capitalization of over seven hundred fifty billion dollars ($750,000,000,000) averaged over the previous calendar year; or

2. Stablecoins.

(b) When a department, agency, or other budget unit deposits a receipt of digital assets other than those referenced in paragraph (a)1. and 2. of this subsection with a state depository, the State Treasurer, or to the credit of the State Treasury, the State Treasurer shall:

1. Immediately convert the digital assets to United States currency; and

2. Transfer the United States currency to the fund to which the digital assets were designated.

(8) The State Treasurer shall not, under this section or any other law:

(a) Accept or authorize receipts or deposits of central bank digital currency; or

(b) Convert digital assets or any other receipts or deposits to central bank digital currency.

Section 7. KRS 48.705 is amended to read as follows:

(1) A budget reserve trust fund account is hereby created in the general fund, pursuant to KRS 45.305. The budget reserve trust fund account shall be funded through direct appropriations, and surplus amounts as provided in subsection (2) of this section. Moneys in the account shall remain unallotted unless required by the provisions of this section.

(2) (a) Each fiscal year, except as provided in subsection (3) of this section, within thirty (30) days of the end of the fiscal year, the secretary of the Finance and Administration Cabinet shall cause to be deposited to the budget reserve trust fund account the lesser of the following amounts:

1. Fifty percent (50%) of the general fund surplus; or

2. The amount necessary from the general fund surplus to make the balance of the budget reserve trust fund account equal to five percent (5%) of the actual general fund receipts collected during the fiscal year just ended, as determined by the Finance and Administration Cabinet.

(b) Any amounts to be deposited to the budget reserve trust fund account from the general fund surplus shall be determined after the surplus has been reduced by the amount necessary to implement the provisions of any surplus expenditure plan authorized by KRS 48.140 and enacted as a part of a branch budget bill.

(3) If, at the close of any fiscal year, the budget reserve trust fund account has a balance equal to or greater than five percent (5%) of the actual general fund receipts collected during the fiscal year just ended, as determined by the Finance and Administration Cabinet, the deposits required under subsection (2) of this section shall be suspended for that year.

(4) Moneys in the budget reserve trust fund account may be appropriated by the General Assembly in a regular or special session.

(5) Before authorizing any allotments from the budget reserve trust fund account, the secretary of the Finance and Administration Cabinet shall notify in writing the Interim Joint Committee on Appropriations and Revenue. The notice shall include the amount and purpose for the proposed allotment.

(6) Within thirty (30) days of the close of each fiscal year, the secretary of the Finance and Administration Cabinet shall report to the Interim Joint Committee on Appropriations and Revenue the general fund receipts collected for the fiscal year just ended, the balance of the budget reserve trust fund account, and any amounts deposited to the budget reserve trust fund account pursuant to the provisions of subsection (2) of this section.

(7) All sums appropriated or deposited to the budget reserve trust fund account shall not lapse at the close of the fiscal year but shall carry forward into the next fiscal year.

(8) Notwithstanding any other provision of this section or any other law, the budget reserve trust fund account shall make reimbursements in accordance with subsection (7)(a) of Section 6 of this Act.

Section 8. KRS 16.642 is amended to read as follows:

(1) The board shall be the trustee of funds created by KRS 16.505 to 16.652 and KRS 61.701 and shall have full power to invest and reinvest such assets in accordance with federal law.

(2) The board, through adopted written policies, shall maintain ownership and control over its assets held in its unitized managed custodial account.

(3) The board, in keeping with its responsibility as trustee and wherever feasible, shall give priority to the investment of funds in obligations calculated to improve the industrial development and enhance the economic welfare of the Commonwealth.

(4) The investment committee established pursuant to KRS 61.650 shall serve as the investment committee of the funds established by KRS 16.505 to 16.652.

(5) (a) Based upon market value at the time of purchase, the board shall limit the amount of assets managed by any one (1) active or passive investment manager to fifteen percent (15%) of the assets in the pension and insurance funds.

(b) The board may invest fund assets in exchange traded products as defined in Section 1 of this Act.

Section 9. KRS 18A.255 is amended to read as follows:

(1) (a) Notwithstanding any other provision of KRS 18A.230 to 18A.275, funds held for the State of Kentucky public employees deferred compensation trust fund pursuant to agreement between the state and participating employees may be invested in such investments as are deemed appropriate by the trustees, including but not limited to:

1. Annuity contracts; and

2. Exchange traded products as defined in Section 1 of this Act.

(b) Agreements may be made in writing or by electronic record, signature, or contract as determined by the authority in accordance with the provisions of KRS 369.101 to 369.120 and shall not be denied legal effect or enforceability if made electronically to the extent permitted by the authority.

(2) (a) Funds deposited to the credit of the trust fund from payroll deductions made pursuant to KRS 18A.250 shall be temporarily invested as provided in KRS 42.500 until such funds are invested pursuant to the deferred compensation agreements between the state and participating employees and actually credited to accounts for plan participants.

(b) Notwithstanding KRS 42.500, interest earned from such temporary investments shall be used to defray the expenses of administering the deferred compensation system.

(3) (a) Neither the authority nor the board shall be liable for any losses or claims due to a participant's actions in connection with the investment advice or financial planning provided to the participant by operation of KRS 18A.245(7)(f) or otherwise.

(b) The authority and board shall have no duty or obligation to monitor, review, or assess the specific investment advice or financial planning provided to a participant.

Section 10. KRS 21.550 is amended to read as follows:

(1) (a) Those members of the board of trustees of the Judicial Form Retirement System who are appointed by the Supreme Court, together with the members appointed by the Governor, shall constitute an investment committee for the Judicial Retirement Plan, and as such shall have full and sole authority over the judicial retirement fund and the investment thereof, including the prescribing of funding standards, the adoption of actuarial methods and assumptions, and the making of employments or contracts for required personal services, including administrative, actuarial, and investment counseling services.

(b) The committee shall be considered trustee of the judicial retirement fund and shall have the sole authority to make investment transactions or obtain insurance contracts for funding purposes.

(c) The fund shall be invested in securities which, at the time of making the investment, are by law permitted for the investment of funds by fiduciaries in this state. ~~, or~~

(d) Funding may be accomplished in part by contract with a reputable life insurance company authorized to do business in this state.

(e) To the extent that funding is provided through insurance contract, no contributions, payments, or premiums shall be subject to any tax on insurance premiums or annuity considerations.

(f) The committee may invest fund assets in exchange traded products as defined in Section 1 of this Act.

(2) (a) The investment committee for the judicial retirement fund shall appoint one (1) or more custodians of the securities acquired under authority of this section, each of whom shall be responsible for the safekeeping of the securities in his or her custody.

(b) All registered securities shall be registered in the name "Kentucky Judicial Retirement Fund" (securities heretofore registered in the name "Kentucky Judicial Retirement System" may continue in that name), or in nominee name as provided comparably in KRS 286.3-225, and every change in registration, by reason of sale or assignment of such securities, shall be accomplished by the signatures of the chairman of the investment committee or a member of that committee appointed by the chairman, and by the secretary-treasurer of the fund.

Section 11. KRS 61.650 is amended to read as follows:

(1) (a) The board shall be the trustee of funds created by KRS 16.510, 61.515, and 61.701 pertaining to the accounts for the Kentucky Employees Retirement System or State Police Retirement System, notwithstanding the provisions of any other statute to the contrary, and shall have exclusive power to invest and reinvest such assets in accordance with federal law.

(b) 1. The board shall establish an investment committee whose membership shall be composed of the following:

a. The three (3) trustees of the Kentucky Retirement Systems board appointed by the Governor pursuant to KRS 61.645 who have investment experience; and

b. Additional trustees appointed by the board chair.

2. The investment committee shall have authority to implement the investment policies adopted by the board and act on behalf of the board on all investment-related matters and to acquire, sell, safeguard, monitor, and manage the assets and securities of the several funds.

a. "Solely in the interest of the members and beneficiaries" shall be determined using only pecuniary factors and shall not include any purpose to further a nonpecuniary interest;

b. "Pecuniary factor" means a consideration having a direct and material connection to the financial risk or financial return of an investment;

c. A "material connection" is established if there is a substantial likelihood that a reasonable investor would consider it important in determining the financial risk or the financial return of an investment;

d. "Nonpecuniary interest" includes but is not limited to an environmental, social, political, or ideological interest which does not have a direct and material connection to the financial risk or financial return of an investment; and

e. "Investment manager" shall have the same definition attributed to "investment adviser" under the federal Investment Advisers Act of 1940, 15 U.S.C. sec. 80b-2.

2. A trustee, officer, employee, employee of the Kentucky Public Pensions Authority, investment manager, or other fiduciary, or proxy adviser shall discharge duties with respect to the retirement system:

a. Solely in the interest of the members and beneficiaries;

b. For the exclusive purpose of providing benefits to members and beneficiaries and paying reasonable expenses of administering the system;

c. With the care, skill, and caution under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with those matters would use in the conduct of an activity of like character and purpose;

d. Impartially, taking into account any differing interests of members and beneficiaries;

e. Incurring any costs that are appropriate and reasonable; and

f. In accordance with a good-faith interpretation of the federal, state, and common law governing the system and fiduciaries.

3. Evidence that a fiduciary has considered or acted on a nonpecuniary interest shall include but is not limited to:

a. Statements, explanations, reports, or correspondence;

b. Communications with portfolio companies;

c. Statements of principles or policies, whether made individually or jointly;

d. Votes of shares or proxies; or

e. Coalitions, initiatives, agreements, or commitments to which the fiduciary is a participant, affiliate, or signatory.

(d) In addition to the standards of conduct prescribed by paragraph (c) of this subsection:

1. All internal investment staff of the Kentucky Public Pensions Authority, and investment consultants shall adhere to the Code of Ethics and Standards of Professional Conduct, and all board trustees shall adhere to the Code of Conduct for Members of a Pension Scheme Governing Body. All codes cited in this subparagraph are promulgated by the CFA Institute;

2. Investment managers shall comply with all applicable provisions of the federal Investment Advisers Act of 1940, as amended, and the rules and regulations promulgated thereunder, and shall comply with all other applicable federal securities statutes and related rules and regulations that apply to investment managers; and

3. Proxy advisers and proxy voting services shall comply with all applicable provisions of the Investment Advisers Act of 1940, as amended, and the rules and regulations promulgated thereunder, and shall comply with all other federal statutes and related rules and regulations that apply to proxy advisers and proxy voting services.

(e) No contract or agreement, whether made in writing or not, shall in any manner waive, restrict, or limit a fiduciary's liability as to any of the duties imposed by this section. Any agreement shall specify that it is made in the Commonwealth and governed by the laws of the Commonwealth.

(2) The board, through adopted written policies, shall maintain ownership and control over its assets held in its unitized managed custodial account.

(3) The board, in keeping with its responsibility as trustee and wherever consistent with its fiduciary responsibilities, shall give priority to the investment of funds in obligation calculated to improve the industrial development and enhance the economic welfare of the Commonwealth.

(4) The contents of real estate appraisals, engineering or feasibility estimates, and evaluations made by or for the system relative to the acquisition or disposition of property, until such time as all of the property has been acquired or sold, shall be excluded from the application of KRS 61.870 to 61.884 and shall be subject to inspection only upon order of a court of competent jurisdiction.

(b) The board may invest fund assets in exchange traded products as defined in Section 1 of this Act.

(6) All contracts for the investment or management of assets of the systems shall not be subject to KRS Chapters 45, 45A, 56, and 57. Instead, the board shall conduct the following process to develop and adopt an investment procurement policy with which all prospective contracts for the investment or management of assets of the systems shall comply:

(a) On or before July 1, 2017, the board shall consult with the secretary of the Finance and Administration Cabinet or his or her designee to develop an investment procurement policy, which shall be written to meet best practices in investment management procurement;

(b) Thirty (30) days prior to adoption, the board shall tender the preliminary investment procurement policy to the secretary of the Finance and Administration Cabinet or his or her designee for review and comment;

(c) Upon receipt of comments from the secretary of the Finance and Administration Cabinet or his or her designee, the board shall choose to adopt or not adopt any recommended changes;

(d) Upon adoption, the board shall tender the final investment procurement policy to the secretary of the Finance and Administration Cabinet or his or her designee;

(e) No later than thirty (30) days after receipt of the investment procurement policy, the secretary or his or her designee shall certify whether the board's investment procurement policy meets or does not meet best practices for investment management procurement; and

(f) Any amendments to the investment procurement policy shall adhere to the requirements set forth by paragraphs (b) to (e) of this subsection.

(7) (a) The board shall adopt written proxy voting guidelines which are consistent with the fiduciary duties and other requirements of this section.

(b) The board shall not adopt the recommendations of a proxy adviser or proxy voting service and shall not allow such proxy adviser or proxy voting service to vote on behalf of the system, unless the proxy adviser or proxy voting service acknowledges in writing and accepts under contract its duties under this section and commits to follow the board-adopted proxy voting guidelines when voting the system's shares in order to comply with the board's fiduciary duties and other responsibilities under this section.

(c) All shares held by or on behalf of the system, and which the system is entitled to vote under state, federal, or common laws, shall be voted according to the proxy voting guidelines adopted by the board and subject to the fiduciary duties and other requirements of this section by:

1. The board, the investment committee of the board, or an employee or employees of the Authority who are fiduciaries under subsection (1) of this section and are appointed or otherwise authorized by the board; or

2. A proxy adviser or proxy voting service that acknowledges in writing and accepts under contract its duties under this section and commits to follow the board-adopted proxy voting guidelines when voting the system's shares in order to comply with the board's fiduciary duties and other responsibilities under this section.

(d) All proxy votes shall be reported at least quarterly to the board. For each vote, the report shall provide:

1. The vote caption;

2. The date of the vote;

3. The company's name;

4. The vote cast for the system;

5. The recommendation of the company's management; and

6. If applicable, the recommendation of the proxy adviser or proxy voting service.

Section 12. KRS 78.790 is amended to read as follows:

(1) (a) The board shall be the trustee of funds pertaining to the County Employees Retirement System created by KRS 78.510 to 78.852, and KRS 61.701, and shall have full and exclusive power to invest and reinvest such assets in accordance with federal law.

(b) 1. The board shall establish an investment committee that shall include members of the board with investment experience, elected members, or other members as determined by the board chair, and may also include nonvoting members who have investment expertise.

2. The investment committee shall have authority to implement the investment policies adopted by the board and act on behalf of the board on all investment-related matters.

a. "Solely in the interest of the members and beneficiaries" shall be determined using only pecuniary factors and shall not include any purpose to further a nonpecuniary interest;

b. "Pecuniary factor" means a consideration having a direct and material connection to the financial risk or financial return of an investment;

e. "Investment manager" shall have the same definition attributed to "investment adviser" under the federal Investment Advisers Act of 1940, 15 U.S.C. sec. 80b-2.

2. A trustee, officer, employee, employee of the Kentucky Public Pensions Authority, investment manager, or other fiduciary, or proxy adviser shall discharge duties with respect to the system:

a. Solely in the interest of the members and beneficiaries;

b. For the exclusive purpose of providing benefits to members and beneficiaries and paying reasonable expenses of administering the system;

d. Impartially, taking into account any differing interests of members and beneficiaries;

e. Incurring any costs that are appropriate and reasonable; and

f. In accordance with a good-faith interpretation of the federal, state, and common law governing the system and fiduciaries.

3. Evidence that a fiduciary has considered or acted on a nonpecuniary interest shall include but is not limited to:

a. Statements, explanations, reports, or correspondence;

b. Communications with portfolio companies;

c. Statements of principles or policies, whether made individually or jointly;

d. Votes of shares or proxies; or

e. Coalitions, initiatives, agreements, or commitments to which the fiduciary is a participant, affiliate, or signatory.

(d) In addition to the standards of conduct prescribed by paragraph (c) of this subsection:

(2) The board, through adopted written policies, shall maintain ownership and control over its assets held in its unitized managed custodial account.

(3) The board, in keeping with its responsibility as the trustee and wherever feasible, shall give priority to the investment of funds in obligations calculated to improve the industrial development and enhance the economic welfare of the Commonwealth.

(b) The board may invest fund assets in exchange traded products as defined in Section 1 of this Act.

(6) All contracts for the investment or management of assets of the system shall not be subject to KRS Chapters 45, 45A, 56, and 57. Instead, the board shall conduct the following process to develop and adopt an investment procurement policy with which all prospective contracts for the investment or management of assets of the system shall comply:

(a) The board shall consult with the secretary of the Finance and Administration Cabinet or his or her designee to develop an investment procurement policy, which shall be written to meet best practices in investment management procurement;

(c) Upon receipt of comments from the secretary of the Finance and Administration Cabinet or his or her designee, the board shall choose to adopt or not adopt any recommended changes;

(d) Upon adoption, the board shall tender the final investment procurement policy to the secretary of the Finance and Administration Cabinet or his or her designee;

(f) Any amendments to the investment procurement policy shall adhere to the requirements set forth by paragraphs (b) to (e) of this subsection.

(7) (a) The board shall adopt written proxy voting guidelines, which are consistent with the fiduciary duties and other requirements of this section.

(d) All proxy votes shall be reported at least quarterly to the board. For each vote, the report shall provide:

1. The vote caption;

2. The date of the vote;

3. The company's name;

4. The vote cast for the system;

5. The recommendation of the company's management; and

6. If applicable, the recommendation of the proxy adviser or proxy voting service.

Section 13. KRS 161.430 is amended to read as follows:

(1) (a) The board of trustees shall be the trustee of the funds of the retirement system and shall have full power and responsibility for the purchase, sale, exchange, transfer, or other disposition of the investments and moneys of the retirement system. The board shall, by administrative regulation, establish investment policies and procedures to carry out their responsibilities.

(b) 1. The board shall contract with experienced competent investment managers to invest and manage assets of the system. The board may also employ qualified investment staff to advise it on investment matters and to invest and manage assets of the system not to exceed fifty percent (50%) of the system's assets. The board may contract with one (1) or more general investment consultants, as well as specialized investment consultants, to advise it on investment matters.

2. All internal investment staff and investment consultants shall adhere to the Code of Ethics and Standards of Professional Conduct, and all board trustees shall adhere to the Code of Conduct for Members of a Pension Scheme Governing Body, promulgated by the CFA Institute. Investment managers shall comply with the federal Investment Advisers Act of 1940, as amended, and the rules and regulations promulgated thereunder and shall comply with all other applicable federal securities statutes and related rules and regulations that apply to investment managers.

3. No investment manager shall manage more than forty percent (40%) of the funds of the retirement system.

4. The board may invest assets of the system in exchange traded products as defined in Section 1 of this Act.

(c) The board may appoint an investment committee to act for the board in all matters of investment, subject to the approval of the board of trustees. The board of trustees, in keeping with their responsibilities as trustees and wherever consistent with their fiduciary responsibilities, shall give priority to the investment of funds in obligations calculated to improve the industrial development and enhance the economic welfare of the Commonwealth. Toward this end, the board shall develop procedures for informing the business community of the potential for in-state investments by the retirement fund, accepting and evaluating applications for the in-state investment of funds, and working with members of the business community in executing in- state investments which are consistent with the board's fiduciary responsibilities. The board shall include in the criteria it uses to evaluate in- state investments their potential for creating new employment opportunities and adding to the total job pool in Kentucky. The board may cooperate with the board of trustees of Kentucky Retirement Systems in developing its program and procedures, and shall report to the Legislative Research Commission annually on its progress in placing in-state investments. The first report shall be submitted by October 1, 1991, and subsequent reports shall be submitted by October 1 of each year thereafter. The report shall include the number of applications for in-state investment received, the nature of the investments proposed, the amount requested, the amount invested, and the percentage of applications which resulted in investments.

(2) (a) For the purposes of this subsection:

1. "Solely in the interest of the members and beneficiaries" shall be determined using only pecuniary factors and shall not include any purpose to further a nonpecuniary interest;

2. "Pecuniary factor" means a consideration having a direct and material connection to the financial risk or financial return of an investment;

3. A "material connection" is established if there is a substantial likelihood that a reasonable investor would consider it important in determining the financial risk or the financial return of an investment;

4. "Nonpecuniary interest" includes but is not limited to an environmental, social, political, or ideological interest which does not have a direct and material connection to the financial risk or financial return of an investment; and

5. "Investment manager" and "investment consultant" shall have the same definition attributed to "investment adviser" under the federal Investment Advisers Act of 1940, 15 U.S.C. sec. 80b-2.

(b) The board members, investment managers, investment consultants, or other fiduciaries, and proxy advisers shall discharge their duties with respect to the assets of the system solely in the interests of the active contributing members and annuitants and:

1. For the exclusive purpose of providing benefits to members and annuitants and defraying reasonable expenses of administering the system;

2. 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;

3. By diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and

4. In accordance with the federal, state, and common laws, administrative regulations, and other instruments governing the system and fiduciaries.

1. Statements, explanations, reports, or correspondence;

2. Communications with portfolio companies;

3. Statements of principles or policies, whether made individually or jointly;

4. Votes of shares or proxies; or

5. Coalitions, initiatives, agreements, or commitments to which the fiduciary is a participant, affiliate, or signatory.

(3) (a) In choosing and contracting for professional investment management and consulting services, the board shall do so prudently and in the interest of the members and annuitants. Any contract that the board makes with an investment manager shall set forth policies and guidelines of the board with reference to standard rating services and specific criteria for determining the quality of investments. Expenses directly related to investment management and consulting services shall be financed from the guarantee fund in amounts approved by the board.

(b) An investment manager or consultant appointed under this section shall acknowledge in writing his or her fiduciary responsibilities to the fund. To be eligible for appointment, an investment manager, consultant, or an affiliate, shall be:

1. Registered under the Federal Investment Advisers Act of 1940; or

2. A bank as defined by that Act; or

3. An insurance company qualified to perform investment services under the laws of more than one (1) state.

(c) Proxy advisers and proxy voting services shall comply with all applicable provisions of the Investment Advisers Act of 1940, as amended, and the rules and regulations promulgated thereunder, and shall comply with all other federal statutes and related rules and regulations that apply to proxy advisers and proxy voting services.

(d) No contract or agreement, whether made in writing or not, shall in any manner waive, restrict, or limit a fiduciary's liability as to any of the duties imposed by this section. Any agreement shall specify that it is made in the Commonwealth and governed by the laws of the Commonwealth.

(4) No investment or disbursement of funds shall be made unless authorized by the board of trustees, except that the board, in order to ensure timely market transactions, shall establish investment guidelines and may permit its staff and investment managers who are employed or under contract with the board pursuant to this section to execute purchases and sales of investment instruments within those guidelines without prior board approval.

(5) In discharging his or her administrative duties under this section, a trustee shall strive to administer the retirement system in an efficient and cost-effective manner for the taxpayers of the Commonwealth of Kentucky.

(6) Notwithstanding any other provision of KRS 161.220 to 161.716, no funds of the Teachers' Retirement System, including fees and commissions paid to an investment manager, private fund, or company issuing securities, who manages systems assets, shall be used to pay fees and commissions to placement agents. For purposes of this subsection, "placement agent" means a third-party individual, who is not an employee, or firm, wholly or partially owned by the entity being hired, who solicits investments on behalf of an investment manager, private fund, or company issuing securities.

(7) All contracts for the investment or management of assets of the system shall not be subject to KRS Chapters 45, 45A, 56, and 57. Instead, the board shall conduct the following process to develop and adopt an investment procurement policy with which all prospective contracts for the investment or management of assets of the system shall comply:

(c) Upon receipt of comments from the secretary of the Finance and Administration Cabinet or his or her designee, the board shall choose to adopt or not adopt any recommended changes;

(d) Upon adoption, the board shall tender the final investment procurement policy to the secretary of the Finance and Administration Cabinet or his or her designee;

(f) Any amendments to the investment procurement policy shall adhere to the requirements set forth by paragraphs (b) to (e) of this subsection.

(8) (a) The board shall adopt written proxy voting guidelines which are consistent with the fiduciary duties and other requirements of this section.

1. The board, the investment committee of the board, or an employee or employees of the system who are fiduciaries under this section and are appointed or otherwise authorized by the board; or

(d) All proxy votes shall be reported at least quarterly to the board. For each vote, the report shall provide:

1. The vote caption;

2. The date of the vote;

3. The company's name;

4. The vote cast for the system;

5. The recommendation of the company's management; and

6. If applicable, the recommendation of the proxy adviser or proxy voting service.

Section 14. This Act may be cited as the Inflation Protection Act of 2025.

Kentucky H 376

State Financial Practices

2025 KE H 376

Kentucky H 376

State Financial Practices

2025 KE H 376