BILL ANALYSIS AB 1743 Page 1 Date of Hearing: May 19, 2010 ASSEMBLY COMMITTEE ON APPROPRIATIONS Felipe Fuentes, Chair AB 1743 (Hernandez) - As Amended: May 10, 2010 Policy Committee: P.E.R. & S.S.Vote: 4-1 Elections and Redistricting 7-0 Urgency: No State Mandated Local Program: Yes Reimbursable: No SUMMARY This bill requires placement agents dealing with state public pension systems to register as lobbyists with the Secretary of State and, for those dealing with local pensions, to comply with the requirements of local lobbying ordinances. As registered lobbyists, placement agents dealing with state pension funds would, among other things, be prohibited from accepting payments from external fund managers that are contingent on investment dollars placed with the funds, and from making contributions to retirement fund board members. The bill does not apply to in-house employees of investment managers. FISCAL EFFECT 1)Minor and absorbable costs to CalPERS and CalSTRS to revise policies and notices. 2)Minor and absorbable costs to The Fair Political Practices Commission and Secretary of State for handling additional filings of disclosure statements and for enforcement. 3)Local enforcement costs not reimbursable. COMMENTS 1)Purpose . The bill, co-sponsored by the CalPERs Board, State Treasurer, and State Controller, is intended to increase transparency and accountability of placement agent activity, and reduce the corrupting influence that large contingency fees can have on public pension investment decisions. AB 1743 Page 2 According to proponents, public pension fund investment decisions should not be based on whether they enrich middlemen and others, but rather on whether they benefit workers, retirees and taxpayers. 2)Background . Placement agents are intermediaries hired by private investment managers, such as hedge funds or private-equity investment firms, to seek funds from public pension funds for placement with the investment manager. Following major losses in private equity investments during the past two years, the activities and compensation of placement agents have received considerable scrutiny. Investigations of placement agent activity in New York resulted in criminal charges against several state officials. Similar investigations of placement agent activity are occurring in California, including scrutiny of more than $70 million in fees paid by fund managers to a former CalPERS board member for helping private equity and real estate investment funds to secure billions of dollars in commitments from CalPERS. While current law requires various income and contribution disclosure statements from placement agents soliciting business from public pension funds, it does not place limits on gifts or contributions, or on contingency arrangements between outside investment managers and placement agents. Registered lobbyists are required to file annual disclosure statements showing sources of their income and contributions and their contributions to various officials. Current law also prohibits lobbyists from: a) Receiving payments that are contingent upon defeat, enactment, or outcome of any proposed legislative or administrative action. b) 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. c) Making a contribution to an elected state officer or candidate for elected state office if the lobbyist is AB 1743 Page 3 registered to lobby the governmental agency for which the candidate is seeking election or the governmental agency of the elected state officer. 3)Opposition . The Securities Industry and Financial Markets Association (SIFMA) oppose this bill unless it is amended to allow placement agents to continue to receive payment on a contingency fee basis. They note that virtually all securities transactions are paid on a contingency fee basis, citing the way underwriters are paid to sell California public debt. They assert that contingency fees make sense given the time and uncertainties involved in securing public investments. Analysis Prepared by : Brad Williams / APPR. / (916) 319-2081