BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 1743
                                                                  Page  1


           REPLACE  - 06/02/2010 Technical change (Member name)
          

          ASSEMBLY THIRD READING
          AB 1743 (Hernandez)
          As Amended May 10, 2010
          2/3 vote 

           PUBLIC EMPLOYEES    4-1         ELECTIONS           7-0         
           
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          |Ayes:|Torrico, Furutani,        |Ayes:|Fong, Adams, Bill         |
          |     |Hernandez, Ma             |     |Berryhill, Coto, Mendoza, |
          |     |                          |     |Saldana, Swanson          |
          |-----+--------------------------+-----+--------------------------|
          |Nays:|Harkey                    |     |                          |
          |     |                          |     |                          |
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           APPROPRIATIONS      11-5                                        
           
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          |Ayes:|Fuentes, Ammiano,         |     |                          |
          |     |Bradford, Coto, Davis,    |     |                          |
          |     |Monning, Ruskin, Skinner, |     |                          |
          |     |Solorio, Torlakson,       |     |                          |
          |     |Torrico                   |     |                          |
          |     |                          |     |                          |
          |-----+--------------------------+-----+--------------------------|
          |Nays:|Conway, Harkey, Miller,   |     |                          |
          |     |Nielsen, Norby            |     |                          |
          |     |                          |     |                          |
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           SUMMARY  :  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, and is in full compliance with, the  
          requirements of the California Political Reform Act (PRA).   
          Requires placement agents connected with investments made by  
          local public retirement systems to comply with any applicable  
          requirements imposed by a local government agency on lobbyists  
          pursuant to the PRA.  Specifically,  this bill  :  

          1)Requires placement agents that do business with the California  
            Public Employees' Retirement System (CalPERS) or the  








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            California State Teachers' Retirement System (CalSTRS) to be  
            subject to the same reporting and ethics rules that govern  
            lobbyists under the PRA.

          2)Requires quarterly activity reports, including any honoraria,  
            gifts, fees or other compensation, as well as attendance at a  
            biennial ethics class.

          3)Prohibits compensation paid to placement agents that is  
            contingent upon defeat, enactment, or the outcome of any  
            proposed investment action.

          4)Prohibits campaign contributions and puts significant limits  
            on gifts.

          5)Requires placement agents connected with investments made by  
            local public retirement systems to file any applicable reports  
            with a local government agency that requires lobbyist to  
            register and file reports and to comply with any additional  
            requirements imposed by those local agencies on lobbyists  
            pursuant to the PRA.

          6)Revises the current definition of "placement agent" to exclude  
            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, as specified, managing the assets  
            controlled by the external manager.

          7)Excludes from the provisions of the bill in-house sales  
            employees, officers, or directors of external investment  
            managers, as specified.

          8)Adds to the PRA definitions of "external manager" and  
            "placement agent." 

           EXISTING LAW  :

          1)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.









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          2)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.

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

          4)Requires any person who makes a payment to influence  
            legislative or administrative action, as defined, to comply  
            with various reporting rules.

          5)Makes a violation of the PRA subject to administrative, civil,  
            and criminal penalties.

          6)Defines "placement agent" as a person or entity hired,  
            engaged, or retained by an external manager to raise money or  
            investment from a public retirement system in California.

          7)Defines "external manager" as an asset management firm that is  
            seeking to be, or has been, retained by a public retirement  
            system to manage a portfolio or assets, including securities,  
            for a fee.

           FISCAL EFFECT  :  According to the Assembly Appropriations  
          Committee:

          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  :  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."

          According to CalPERS, "Like lobbyists, placement agents attempt  
          to influence the decisions of public officials - in this case,  
          state public pension fund officials responsible for investing  
          hundreds of billions of dollars on behalf of California public  
          employers, employees, retirees and their beneficiaries.  While  
          only 20 percent of private investment managers responding to a  
          CalPERS disclosure request indicated they had hired placement  
          agents over the last fifteen years, the disclosures released to  
          the public in late January revealed that the top ten placement  
          agent firms were paid more than $125 million for securing  
          investments from CalPERS. 
           
          "These placement agents owe no contractual or fiduciary  
          obligation to state public pension funds while receiving large  
          payments from private investment managers seeking pension fund  
          money.  The media has reported extensively on the activities of  
          former CalPERS board members and others employed as placement  
          agents.  One former board member, Alfred Villalobos, received  
          almost $59 million from Apollo Global Management, a financial  
          holding company that has benefited from billions in CalPERS  
          investments, including a New York equity investment deal that  
          may cost the state hundreds of millions of dollars. 
           
          "The CalPERS Board of Administration believes its stakeholders  
          and the public should be confident that its investment decisions  
          are made in an impartial manner, free from potential bias or  
          influence caused by the financial interests of placement agents,  
          the pension fund official or third parties who have supported  
          the official.  To that end, it has adopted policies and  
          supported legislation to protect the investment fund from the  
          undocumented influence of placement agents.  However, continuing  
          revelations have underscored the need for full disclosure of the  
          finances and other activities of placement agents, and  








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          additional regulation and enforcement by an independent third  
          party. 
           
          "Many of the policy goals in favor of regulating those who try  
          to influence legislation and regulatory actions or secure  
          government contracts should also apply to placement agents.   
          Extending the existing lobbyist bans on contingency fees,  
          political contributions and the $10 gift limit to placement  
          agents would increase the confidence in state public pension  
          funds' investment decision making processes and reduce the  
          perception of bias and the risk of actual bias.  Under AB 1743,  
          placement agents can still lobby to secure CalPERS and CalSTRS  
          investments on behalf of a client, but they must comply with the  
          California's lobbying laws when they do so."

          While the Securities Industry and Financial Markets Association  
          (SIFMA) has expressed support for the bill's registration and  
          reporting requirements, campaign contribution ban and strict  
          gift limits, they are concerned about the provision that  
          prohibits lobbyists from accepting payment on a contingency fee  
          basis and, therefore, have taken an "oppose unless amended"  
          position on the bill.

          According to SIFMA, "?professional 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." 

          SIFMA further contends, "Professional placement agents are  
          broker-dealers registered with the Securities and Exchange  
          Commission and are subject to federal securities laws,  
          regulation, FINRA registration and supervision, and applicable  
          state law. They perform four primary functions as part of the  








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          placement process: (i) due diligence; (ii) project management;  
          (iii) distribution; and (iv) road show organization." 

          SIFMA is concerned that the current definition of "placement  
          agents" would include not only professional placement agents but  
          persons hired merely as "finders" or for, "?introductory  
          services. A professional placement agent, however, performs a  
          much bigger function than a finder, who generally does not  
          perform - and is not qualified to undertake - many of the due  
          diligence, project management, distribution and road show  
          functions. Rather, a finder may often be unregistered, and he  
          primarily provides his clients with access to a narrow group of  
          potential investors, focusing on personal relationships with  
          high-level officials."

          SIFMA concludes that they would "?not have an issue with banning  
          contingency fees for finders. A finder's limited role of  
          "opening doors" to a small group of California pension funds  
          could presumably be compensated on a flat fee basis. We,  
          however, do not believe that a flat fee structure, hourly or  
          otherwise, works for professional placement agents or the  
          private equity firms they represent. The end result of a  
          contingency fee ban will likely be that many fewer emerging  
          manager and other innovative opportunities get presented to the  
          California pension fund system."

          Others who have registered concern with 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, which oversees and  
          enforces compliance of the rules governing the private placement  
          of investment funds.

          In response to concerns raised in the Assembly Appropriations  
          Committee, the author has agreed to amend the bill in the Senate  
          to include a reporting requirement.


           Analysis Prepared by  :    Karon Green / P.E., R. & S.S. / (916)  
          319-3957 


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