NORTH CAROLINA DEPARTMENT OF STATE TREASURER INVESTMENT POLICY PAYDAY LENDING DIVESTMENT POLICY

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1 I. Background NORTH CAROLINA DEPARTMENT OF STATE TREASURER INVESTMENT POLICY PAYDAY LENDING DIVESTMENT POLICY The North Carolina General Assembly has determined that companies may not make loans exceeding thirty-six percent (36%) per annum on loans up to six hundred dollars ($600.00). N.C.G.S As a result, certain payday lenders are prohibited from operating in the State. North Carolina was the first state in the country to institute this prohibition. Payday loans are transactions whereby customers receive cash advances in exchange for a check or authorization for future payment for the advanced amount plus a fixed fee, which are typically for two weeks. Payday loans with interest rates above thirty-six percent (36%) are considered to be predatory. According to the North Carolina Commissioner of Banks, in 2000, the payday loan industry in North Carolina made 3.5 million loans to 413,214 customers for an average of 8.4 loans per customer per store. This totaled almost seven percent (7%) of the State s adult population. Consistent with G.S , the North Carolina State Treasurer ( Treasurer ) has determined as a matter of policy that it will not invest assets of the North Carolina Retirement Systems ( NCRS ) in companies engaging in payday lending. Collectively, NCRS refers to the Teachers and State Employees Retirement System, the Consolidated Judicial Retirement System, the Firemen s and Rescue Workers Pension Fund, the Local Governmental Employees Retirement System, the Legislative Retirement System, the North Carolina National Guard Pension Fund, and the Legislative Retirement Fund. Accordingly, the Treasurer hereby adopts this Payday Lending Divestment Policy ( Policy ) to guide the implementation of such divestments. II. Purpose This document sets forth the Payday Lending Divestment Policy. The Treasurer has the fiduciary duty under N.C.G.S to invest and manage the entrusted funds in a manner consistent with statutes, regulations, and policies, and is required to manage the program solely in the interest of the participants and beneficiaries of NCRS. The implementation of this Policy shall be accomplished in a manner that fulfills this fiduciary duty and in keeping with the State s provisions on payday lending prohibitions. In addition, the State Treasurer has concluded that it is in the interest of North Carolina beneficiaries and participants to fully divest investment in payday lending companies with this Policy. III. Identification of Companies A. Identify Scrutinized Companies. No later than 120 days from implementation 1

2 of this Policy, the Investment Management Division and the Office of the General Counsel shall make their best efforts to identify all Scrutinized Companies in which NCRS has Direct Holdings. Such efforts shall include reviewing and relying, as appropriate on the Investment Management Division and Office of the General Counsel staff s judgment, on publicly available information, including information issued by non-profit organizations, research firms, international organizations, and government entities, including, but not limited to the Center for Responsible Lending. B. List of Scrutinized Companies. Following the 120-day period described above, NCRS shall assemble all Scrutinized Companies identified into a Scrutinized Companies List. C. Updates to Scrutinized Companies List. NCRS shall update the Scrutinized Companies List on a quarterly basis based on evolving information from the sources described in Section III (A) of this Policy. IV. Engagement A. Determine Companies. The Investment Management Division and Office of General Counsel shall determine the Companies on the Scrutinized Companies List in which NCRS owns Direct Holdings. B. Inactive Scrutinized Operations. For each Company identified in Section IV (A) of this Policy with solely Inactive Scrutinized Operations, NCRS shall send a written notice informing the Company of this Policy and encouraging it to continue to refrain from initiating Active Scrutinized Operations. NCRS shall continue such correspondence on a semiannual basis. C. Active Scrutinized Operations. For each Company identified in Section IV (A) of this Policy with Active Scrutinized Operations, NCRS shall send a written notice informing the Company of its Scrutinized Company status and that it may become subject to divestment by NCRS. The notice shall offer the Company the opportunity to clarify its payday lending activities and shall encourage the Company within 90 days to either cease its Scrutinized Business Operations or convert the activities to Inactive Scrutinized Operations in order to avoid qualifying for divestment by NCRS. D. Compliance. If, following NCRS s first engagement with a Company pursuant to this Section that Company ceases Scrutinized Business Operations, the Company shall be removed from the Scrutinized Companies List and the provisions of this Policy shall cease to apply to it unless it resumes Scrutinized Business Operations. If the Company converts its Active Scrutinized Operations to Inactive Scrutinized Operations, the Company shall be subject to semiannual notices under Section IV (B) of this Policy. 2

3 V. Divestment A. Time for Divestment. If, following NCRS s engagement with a Company pursuant to Section IV (C) of this Policy, the Company continues to have Active Scrutinized Operations, and only while such Company continues to have Active Scrutinized Operations, NCRS shall sell, redeem, divest, or withdraw all publicly traded securities of the Company within 15 months after the Company s most recent appearance on the Scrutinized Companies List. B. Resumption of Active Scrutinized Operations. If a Company that ceased Active Scrutinized Operations following engagement pursuant to Section IV (C) of this Policy resumes such operations, NCRS shall send a written notice to the Company pursuant to Section IV (C) of this Policy, and Section V (A) shall apply with the date for divestment running from the date on which the Company resumed Active Scrutinized Operations. The Company shall also be immediately reintroduced onto the Scrutinized Companies List. VI. Prohibition At no time shall NCRS acquire Direct Holdings of securities of Companies on the Scrutinized Companies List that have Active Scrutinized Operations, except as provided in this Policy. For Companies placed on the Scrutinized Companies List before July 19, 2012, this prohibition shall be effective on the date the Company was placed on the Scrutinized Companies List. For Companies placed on the Scrutinized Companies List on or after July 19, 2012, this prohibition shall become effective 90 days after NCRS sends that Company the written notice described in Section IV of this Policy. VII. [Intentionally left blank.] VIII. Excluded Securities Notwithstanding anything in this Policy, Sections V and VI of this Policy shall not apply to (1) securities of a Company held by NCRS in index funds or other passively managed funds; and (2) securities of a Company held by NCRS in an account or fund, such as a private equity fund, private debt fund, venture fund, real estate fund, hedge fund, or absolute return fund, managed by one or more persons not employed by the NCRS, in which NCRS owns shares or interest together with other investors not subject to the provisions of this Policy. NCRS shall, however, submit letters to the managers of such index funds or investment funds containing companies with Active Scrutinized Operations requesting that they consider removing such companies from the fund or create a similar fund devoid of such companies. If the manager creates a similar fund devoid of such companies, but with similar fees, costs, and performance (an Payday Lending Alternative Fund ), and if there are no other factors which would make the Payday Lending Alternative Fund a less prudent investment than its counterpart containing companies with Active Scrutinized 3

4 Operations, NCRS shall replace the applicable fund with its Payday Lending Alternative Fund in an expedited time frame consistent with prudent investing standards. IX. Reporting NCRS shall annually publish on its web site a publicly available report that includes: (1) the Scrutinized Companies List; (2) a summary of correspondence with Companies engaged by NCRS under this Policy; (3) all investments sold, redeemed, divested, or withdrawn in compliance with this Policy; (4) any Direct Holdings by NCRS in Companies with Active Scrutinized Operations; and (5) any progress made under Section IV (C) of this Policy. X. [Intentionally left blank.] XI. Prudent Investor Rule NCRS shall not take any action under this Policy which conflicts with the standard of care stated by N.C.G.S XII. Reinvestment in certain companies with Active Scrutinized Operations Notwithstanding anything in this article, NCRS is permitted to cease divesting from certain Scrutinized Companies and/or reinvest in certain Scrutinized Companies from which it divested if clear and convincing evidence shows that the value for all assets under management by NCRS becomes equal to or less than 99.50% (50 basis points) of the hypothetical value of all assets under management by NCRS assuming no divestment for any Company had occurred under this Policy. Cessation of divestment, reinvestment, and/or any subsequent ongoing investment authorized by this section shall be strictly limited to the minimum steps necessary to avoid the contingency set forth in the preceding sentence. For any cessation of divestment, reinvestment, and/or subsequent ongoing investment authorized by this section, NCRS shall provide a written report in advance of initial reinvestment, updated semiannually thereafter as applicable, setting forth the reasons and justification, supported by clear and convincing evidence, for its decisions to cease divestment, reinvest, and/or remain invested in Companies with Active Scrutinized Operations. This section has no application to reinvestment in companies on the ground that they have ceased to have Active Scrutinized Operations. 4

5 XIII. Definitions The following terms when used in this policy shall have meaning set forth below unless the Policy specifically states otherwise: A. "Company" means any sole proprietorship, organization, association, corporation, partnership, joint venture, limited partnership, limited liability partnership, limited liability company or other entity or business association that exists for the purpose of making a profit. B. Direct Holdings in a Company means all securities of that Company held directly by NCRS or in an account or fund in which NCRS owns all shares or interests. C. Scrutinized Business Operations means any of the following business activities that have been identified as: (1) Violating N.C.G.S within the State of North Carolina; or (2) Engaging, inside or outside North Carolina but within the United States, in transactions with retail customers whereby natural persons receive shortterm cash advances, typically for two weeks or less, in exchange for that natural person s check or authorization for future payment for the advanced amount plus a fixed fee. The Treasurer may, at his or her discretion, identify particular activities as not being Scrutinized Business Operations if the Treasurer determines those activities are not payday lending, as that term is understood by the general public, to ordinary retail individuals. D. Scrutinized Company means a Company engaged in Scrutinized Business Operations. E. Inactive Scrutinized Operations means Scrutinized Business Operations that are entirely the mere continued holding or renewal of rights to property previously operated for the purpose of generating revenues, but not presently deployed for such purpose. F. Active Scrutinized Operations means Scrutinized Business Operations that are not Inactive Scrutinized Operations. Policy Number: OST-POL-3003-IMD Approved by State Treasurer Richard Moore in March 2007 Amended by State Treasurer Janet Cowell on July 19,