BILL ANALYSIS                                                                                                                                                                                                    

                                                                  AB 1743
                                                                  Page  1

          Date of Hearing:  April 20, 2010

                                  Paul Fong, Chair
                  AB 1743 (Hernandez) - As Amended:  March 17, 2010
          SUBJECT  :  Political Reform Act of 1974: placement agents.

          SUMMARY  :  Requires a person who acts as a placement agent in  
          connection with a potential investment made by a state public  
          retirement system to register as a lobbyist pursuant to the  
          Political Reform Act (PRA).  Requires a person who seeks to act  
          as a placement agent in connection with a potential investment  
          made by a local public retirement system to comply with the  
          requirements of any local lobbying ordinance adopted by the  
          local government agency.  Specifically,  this bill  :  

          1)Prohibits a person from acting as a placement agent in  
            connection with any potential investment made by a state  
            public retirement system unless that person is registered as a  
            lobbyist in accordance with the PRA.  

          2)Requires a person acting as a placement agent in connection  
            with any potential investment made by a local retirement  
            system to file any applicable reports with a local government  
            agency that requires lobbyists to register and file reports  
            and to comply with any applicable requirements imposed by a  
            local government agency pursuant to a local lobbying  

          3)Provides that an employee, officer, director, equity holder,  
            partner, member, or trustee of an external manager who spends  
            one-third or more of his or her time, during a calendar year,  
            managing the assets controlled by the external manager is not  
            a placement agent.

          4)Provides that, with respect to placement agents, the decision  
            by a state agency to enter into a contract to invest public  
            retirement system assets on behalf of a public retirement  
            system is an "administrative action" as that term is defined  
            in the PRA.

          5)Provides that for the purposes of the PRA, a placement agent,  
            as defined, is a lobbyist.


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          6)Adds definitions of the terms "external manager" and  
            "placement agent" to the PRA that are similar to the manner in  
            which those terms are defined under existing law.

           EXISTING LAW  :

          1)Creates the Fair Political Practices Commission (FPPC), and  
            makes it responsible for the impartial, effective  
            administration and implementation of the PRA.

          2)Defines a "lobbyist" as an individual who receives $2,000 or  
            more in a calendar month or whose principal duties as an  
            employee are to communicate directly or through his or her  
            agents with an elective state official, agency official, or  
            legislative official for the purpose of influencing  
            legislative or administrative action.

          3)Defines "administrative action" as the proposal, drafting,  
            development, consideration, amendment, enactment, or defeat by  
            any state agency of any rule, regulation, or other action in  
            any ratemaking proceeding or a quasi-legislative proceeding.

          4)Defines "external manager," for the purposes of state laws  
            governing public retirement systems, as an asset management  
            firm that is seeking to be, or has been, retained by a public  
            retirement system in California to manage a portfolio of  
            assets, including securities, for a fee.

          5)Defines "placement agent," for the purposes of state laws  
            governing public retirement systems, as a person or entity  
            hired, engaged, retained by, or acting on behalf of an  
            external manager, or on behalf of another placement agent, as  
            a finder, solicitor, marketer, consultant, broker, or other  
            intermediary to raise money or investment from, or to obtain  
            access to, a public retirement system in California, directly  
            or indirectly, including, without limitation, through an  
            investment vehicle.

          6)Requires the board of every public retirement system in the  
            state to develop policies requiring the disclosure of payments  
            to placement agents in connection with system investments in  
            or through external managers.  Requires the policies to  
            include all of the following requirements:

             a)   Disclosure of the existence of relationships between  


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               external managers and placement agents;

             b)   A description of any and all compensation of any kind  
               provided, or agreed to be provided, to a placement agent;

             c)   A description of the services to be performed by the  
               placement agent;

             d)   A statement whether the placement agent, or any of its  
               affiliates, are registered with the Securities and Exchange  
               Commission or the Financial Industry Regulatory  
               Association, or any similar regulatory agent in a country  
               other than the United States, and the details of that  
               registration or explanation as to why no registration is  
               required; and, 

             e)   A statement whether the placement agent, or any of its  
               affiliates, is registered as a lobbyist with any state or  
               national government.

          7)Prohibits any external manager or placement agent that  
            violates the policies regarding the disclosure of payment to  
            placement agents adopted by a public retirement system from  
            soliciting new investments from the system for five years  
            after the violation was committed. Provides that this  
            prohibition may be reduced by a majority vote of the board at  
            a public session upon a showing of good cause.

          8)Requires a placement agent, prior to acting as a placement  
            agent in connection with any potential investment by a public  
            retirement system, to disclose to the board of that retirement  
            system all campaign contributions made by the placement agent  
            to any elected member of the board, and all gifts given to any  
            member of the board, during the prior 24-month period.    
            Requires any subsequent campaign contribution made by the  
            placement agent to an elected member of the board, and any  
            gift given to any member of the board, during the time the  
            placement agent is receiving compensation in connection with a  
            system investment, to be disclosed.

          9)Requires an individual who is considered a lobbyist, as  
            defined, to register as a lobbyist and to comply with various  
            ethical and reporting rules.

          10)Requires lobbyists to complete a biennial orientation course  


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            on the relevant ethical issues and laws relating to lobbying.

          11)Prohibits lobbyists from receiving any payment that is in any  
            way contingent upon defeat, enactment, or outcome of any  
            proposed legislative or administrative action.

          12)Prohibits a lobbyist from making gifts aggregating more than  
            $10 in a calendar month to any state candidate, elected state  
            officer, legislative official, or an agency official of any  
            agency required to be listed on the registration statement of  
            the lobbying firm or the lobbyist employer of the lobbyist.

          13)Prohibits a lobbyist from doing anything with the purpose of  
            placing any elected state officer, legislative official,  
            agency official, or state candidate under personal obligation  
            to the lobbyist or the lobbyist's employer.

          14)Prohibits a lobbyist from deceiving or attempting to deceive  
            any elected state officer, legislative official, agency  
            official, or state candidate with regard to any material fact  
            pertinent to any pending administrative action.

          15)Prohibits a lobbyist from making a contribution to an elected  
            state officer or candidate for elected state office if the  
            lobbyist is registered to lobby the governmental agency for  
            which the candidate is seeking election or the governmental  
            agency of the elected state officer.

          16)Makes violations of the PRA subject to administrative, civil,  
            and criminal penalties.

           FISCAL EFFECT  :   Unknown.  State-mandated local program;  
          contains a crimes and infractions disclaimer.

           COMMENTS  :

           1)Purpose of the Bill  :  According to the author:

               By requiring placement agents that do business with  
               California's public retirement systems to be subject to the  
               same reporting and ethics rules that govern lobbyists, AB  
               1743 would increase the confidence of retirement system  
               members and the public that public retirement systems'  
               investment decisions are made in an impartial manner, free  
               from any potential bias caused by gifts, campaign  


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               contributions, or the financial interests of placement  
               agents, retirement system officials and third parties who  
               have supported these officials.

               At least five states (New York, New Jersey, Illinois,  
               Connecticut, and New Mexico) and the Securities Exchange  
               Commission have established, augmented, or are in the  
               process of establishing placement agent statutes in order  
               to shield investment decisions from actual or perceived  
               unwarranted influence ranging from increased disclosure to  
               a complete ban.

           2)Arguments in Support  :  According to State Treasurer Bill  
            Lockyer, one of the co-sponsors of this bill:

               AB 1743 would require placement agents to register as  
               lobbyists.  Like lobbyists, placement agents would have to  
               file regular disclosure reports on how much they get paid,  
               and how much they pay, to influence public pension  
               investment decisions.  They would be subject to strict  
               limits on gifts and campaign contributions they could make  
               to pension fund officials.  By applying lobbying laws to  
               placement agents, AB 1743 would impose another critical  
               restriction: a ban on contingency fee compensation. . . .

               Sixty years ago, California cracked down on lobbyists'  
               domination of the Legislature.  A crucial part of the  
               crackdown was the contingency fee ban.  The prohibition is  
               there for a good reason.  Reformers understood if lobbyists  
               have a financial stake in the fate of a bill, they are far  
               more likely to cross legal and ethical lines to win, and  
               the likelihood of widespread corruption of the Legislature  
               greatly increases.  This anti-corruption rationale applies  
               with even greater force to public pension funds, where  
               those who seek to influence investment decisions can have  
               billions of dollars at stake.

               Critics of the prohibition argue small firms need placement  
               agents to pitch their proposals to big pension funds and  
               that a ban on contingency fees would "shut out small  
               firms."  However, CalPERS is making great strides toward  
               making placement agents unnecessary for the managers who  
               supposedly need them.  The fund has hired a skilled  
               investment professional to be its eyes and ears in the  
               marketplace for new and small money managers.   


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               Additionally, CalPERS recently launched a dedicated e-mail  
               account that allows money managers to route proposals  
               directly to CalPERS investment staff.  In the first month  
               alone, more than 100 proposals have been submitted.

               Public pension fund investment decisions should not be  
               based on whether they enrich middlemen and folks with  
               political influence.  They should be based solely on  
               whether they benefit workers, retirees and taxpayers.  AB  
               1743 will protect the integrity of these decisions and help  
               restore public confidence in our public pension funds.

           3)Arguments in Opposition  :  The Securities Industry and  
            Financial Markets Association (SIFMA) opposes this bill unless  
            it is amended to allow placement agents to continue to receive  
            payment on a contingency fee basis.  SIFMA writes:

               SIFMA supports most of the provisions contained in A.B.  
               1743.  For example, we support the bill's registration and  
               reporting requirements.  We also support both the ban on  
               campaign contributions and the strict gift restrictions.   
               Indeed, we would be willing to go further and support a ban  
               on all gifts. We similarly would embrace biennial ethics  

               The Political Reform Act, however, contains a provision  
               which prohibits lobbyists from accepting payment on a  
               contingency fee basis. . . . [P]rofessional placement  
               agents play a vital role in the capital markets and provide  
               substantial benefits both to their private equity fund  
               clients and to potential institutional investors. In  
               connection with the services they provide, placement agents  
               are paid a contingency fee by their clients, which is  
               consistent with the way nearly all securities business is  
               undertaken. We believe that a ban on contingency fee  
               payments would functionally operate as a ban on  
               professional placement agents participating in any private  
               investment transaction by a California retirement system.   
               This would deny both private equity firms and pension and  
               retirement system investors of professional placement  
               agents' valuable services.  We therefore would encourage  
               the legislature to exempt professional placement agents  
               from the contingency fee ban provision. . . .

               Virtually all securities transactions are paid on a  


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               contingency fee basis, including many significant areas of  
               California securities business.  For example, when  
               California undertakes an offering of municipal bonds, it  
               hires a securities firm to act as an underwriter of those  
               bonds - which is essentially the role fulfilled by  
               professional placement agents. A municipal underwriter may  
               work with the State or municipality for months, but they  
               only pay the underwriter if the deal is brought to market  
               and the capital is raised.  Similarly, placement agents for  
               private equity funds are only paid if the money is raised. 

               SIFMA strongly believes that a ban on contingency fees is  
               effectively a ban on professional placement agents selling  
               securities to California pension plans.  Many, if not all,  
               clients of professional placement agents simply do not have  
               the upfront money to pay for professional placement agent  
               services.  Moreover, even if they had the money, they would  
               be unwilling to pay for activity that did not ultimately  
               result in a successful fundraising campaign.  Professional  
               placement agents pick their investment firm clients  
               carefully and then work hard to raise the necessary funds  
               for those clients.  Despite their best efforts, some  
               campaigns are unsuccessful, and eighteen months or more  
               worth of work is then uncompensated or undercompensated.   
               Private equity funds want and need placement agent firms to  
               assume that risk.  
             SIFMA also argues that this bill could be found to violate the  
            Commerce Clause of the United States Constitution,  
            particularly if it forces professional placement agents to  
            stop doing business in California.

            Others who are opposing the bill or who have expressed concern  
            but not taken an official position on the bill are asking for  
            an exemption for those placement agents who are regulated by  
            the Financial Industry Regulatory Authority (FINRA), a  
            division of the Securities and Exchange Commission (SEC),  
            which oversees and enforces compliance of the rules governing  
            the private placement of investment funds.

           4)Contingency Fee Ban  :  As noted above, existing California law  
            prohibits lobbyists from receiving payment that is contingent  
            upon the outcome of any proposed legislative or administrative  
            action.  The ban on lobbyists receiving compensation  
            contingent on the passage or defeat of legislation predates  


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            the PRA; that ban was first enacted during a special session  
            of the Legislature in 1950 that was held (in part) to respond  
            to lobbying scandals in the Legislature in the prior year.   
            That ban remained unchanged until the PRA was approved by  
            voters at the 1974 statewide primary election, when the ban  
            that was enacted in 1950 was repealed and replaced with a  
            similar ban.  Unlike the ban enacted in 1950, however, the  
            contingency fee ban in the PRA was broader, applying not only  
            to payments contingent upon the passage or defeat of  
            legislation, but also to payments contingent on the outcome of  
            any proposed administrative action.  Since the enactment of  
            the PRA, the contingency fee ban has not significantly  

           5)Definition of Placement Agent  :  Although the term "placement  
            agent" is already defined under existing law, this bill adds a  
            similar definition of that term to the PRA.  The definition  
            that would be added to the PRA is not identical, however, to  
            the term in existing law.  Instead, the co-sponsors of this  
            bill worked with the FPPC to develop a definition of  
            "placement agent" that is tailored to the PRA.

          One key difference between the definition of the term "placement  
            agent" in existing law and the proposed definition of that  
            term in the PRA is that the term as defined in the PRA would  
            specify that a placement agent could include an individual who  
            is "acting independently."  According to the co-sponsors, this  
            language was included in the definition at the suggestion of  
            the FPPC to cover individuals who may act as placement agents  
            to procure investments in their own firm.

          Committee staff is concerned that the "acting independently"  
            language could result in relatively minimal and innocuous  
            contact between an individual and a public retirement system  
            resulting in that person being classified as a placement  
            agent.  For instance, if a CalPERS member learned  
            independently of an investment vehicle and that person  
            encouraged CalPERS to invest in that vehicle believing that it  
            will have a high rate of return for CalPERS, that person could  
            be considered to be a "placement agent" even if that person  
            was not being paid and was not acting on any other person or  
            entity's behalf when communicating with CalPERS.  On the other  
            hand, an individual who was acting as a placement agent to  
            procure investments in his or her own firm would seem to be  
            covered in the definition of "placement agent" even in the  


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            absence of the "acting independently" language, because that  
            person would be acting on behalf of an external manager.  To  
            ensure that this bill does not apply to individuals that it is  
            not intended to cover, the author and the committee may wish  
            to consider amending this bill to remove the words "acting  
            independently" from the definition of "placement agent" in the  
           6)Previous Legislation  :  AB 1584 (Public Employees Committee),  
            Chapter 301, Statutes of 2009, required all public pension  
            systems to adopt a policy requiring the disclosure of fees  
            paid to investment placement agents, required the disclosure  
            of campaign contributions and gifts made by placement agents  
            to public retirement board members, prohibited public  
            retirement board members from selling investment products to  
            other public retirement systems, and lengthened  
            post-employment restrictions on influencing retirement board  
            actions for former system executives and board members.  
           7)Double-Referral  :  This bill was heard in the Assembly Public  
            Employees, Retirement, and Social Security Committee on April  
            7, 2010, and was approved by the committee by a 4-1 vote.  
           8)Political Reform Act of 1974  :  California voters passed an  
            initiative, Proposition 9, in 1974 that created the FPPC and  
            codified significant restrictions and prohibitions on  
            candidates, officeholders and lobbyists. That initiative is  
            commonly known as the PRA.  Amendments to the PRA that are not  
            submitted to the voters, such as those contained in this bill,  
            must further the purposes of the initiative and require a  
            two-thirds vote of both houses of the Legislature.


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          CalPERS Board of Administration (co-sponsor)
          State Controller John Chiang (co-sponsor)
          State Treasurer Bill Lockyer (co-sponsor)
          Association of California Water Agencies
          California Common Cause
          California Professional Firefighters
          California Retired Teachers Association
          California Special Districts Association
          California State Association of Counties
          California State Employees Association
          California Taxpayers' Association
          Faculty Association of the California Community Colleges
          Fair Political Practices Commission
          Regional Council of Rural Counties
          Secretary of State Debra Bowen
          Service Employees International Union, California

          Blackstone Group (unless amended)
          Capstone Partners
          Investment Company Institute (unless amended)
          Securities Industry and Financial Markets Association (unless  
          Keystone Capital Corporation
          Analysis Prepared by  :    Ethan Jones / E. & R. / (916) 319-2094