BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 1743
                                                                  Page  1

          Date of Hearing:   May 28, 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.  








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            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
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               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