BILL ANALYSIS                                                                                                                                                                                                    

          Lou Correa, Chair            Hearing date:  June 23, 2010
          AB 1743 (Hernandez)    as amended  6/17/10   FISCAL:  YES

           HISTORY  :            

              Sponsor:  Honorable John Chiang, California State  
                   Honorable Bill Lockyer, California State Treasurer
                   California Public Employees' Retirement System  
                    (CalPERS), Board of Administration

              Prior legislation:  AB 1584 (Hernandez),
                         Chapter 301, Statutes of 2009
          ASSEMBLY VOTES  :

              PER & SS             4-1       4/07/10
              Assembly E&R         7-0       4/20/10
              Appropriations  11-5           5/28/10
              Assembly Floor  56-8           6/02/10

          SUMMARY  : 

            1)  Would prohibit 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).  

            2)  Would require 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.  

          Michael Bolden
          Date:  6/17/10                                         Page 1  


           1)Existing law  :  

              a)   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  

             b)   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;

             c)   requires an individual who is considered a lobbyist,  
               as defined, to register as a lobbyist and to comply with  
               various ethical and reporting rules;

             d)   requires any person who makes a payment to influence  
               legislative or administrative action, as defined, to  
               comply with various reporting rules;

             e)   makes a violation of the PRA subject to  
               administrative, civil, and criminal penalties;

             f)   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, and

             g)   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.
          1)This bill  :

             a)   would exclude from the definition of "placement  
               agent," an employee, officer, director, equity holder,  
          Michael Bolden
          Date:  6/17/10                                         Page 2  


               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;

               i)     would also exclude an in-house employee; officer;  
                 or a director of an external manager, or affiliate of  
                 an external manager regulated or operating under an  
                 exemption from the Securities and Exchange Commission  
                 (SEC), selected by a competitive bidding process, and  
                 bound by standards of conduct set forth in Article XVI  
                 of the California Constitution when managing a  
                 portfolio of assets in a public retirement system in  
                 the State;

             b)   would add the definition of "investment vehicle" to  
               mean a partnership, limited partnership, limited  
               liability company, or other investment vehicle managed  
               by an external manager in which a public retirement  
               system in the State is a majority shareholder;

             c)   would require placement agents connected to potential  
               business with the California Public Employees'  
               Retirement System (CalPERS) or the California State  
               Teachers' Retirement System (CalSTRS) to be subject to  
               the same registration, reporting and ethics rules that  
               govern lobbyists under the PRA;

             d)   would require placement agents connected with  
               potential investments made by local public retirement  
               systems to file any applicable reports, and comply with  
               any applicable local regulations regarding lobbyists  
               pursuant to the PRA;

             e)   would expand the definition of "administrative  
               action" in the PRA to include, specifically related to  
               placement agents, decisions by any state agency to enter  
               into a contract to invest state public retirement system  
               assets on behalf of a state retirement system;

             f)   would add the definitions of "external manager" and  
               "placement agent" to the PRA;

          Michael Bolden
          Date:  6/17/10                                         Page 3  


             g)   would allow payments of fees for contractual services  
               provided to an investment manager by a placement agent  
               registered with the SEC and regulated by the Financial  
               Industry Regulatory Authority;

             h)   would prohibit compensation paid to placement agents  
               that is contingent upon defeat, enactment, or the  
               outcome of any proposed investment action, and

             i)   would require a report from CalPERS and CalSTRS to  
               the chairpersons of the Assembly Public Employees,  
               Retirement and Social Security, and Senate Public  
               Employment and Retirement Committees by August 1, 2012,  
               on the use of placement agents in connection with  
               investments, as specified.

          FISCAL  :
          According to the Assembly Appropriations Committee, this bill  
          would have minor and absorbable costs to both CalPERS and  
          CalSTRS to revise policies and notices, minor and absorbable  
          costs to the Fair Political Practices Commission and  
          Secretary of State for handling additional filings of  
          disclosure statements and for enforcement, and local  
          enforcement costs would not be reimbursable.

          COMMENTS  :

          1)   CalPERS' and CalSTRS' Existing Policies Regarding  
          Placement Agents or Third Party Relationships and Payments  

          In May 2009, the CalPERS Board Investment Committee adopted a  
          policy for disclosure of placement agent fees to add  
          transparency to the investment decision-making process.  The  
          policy requires the disclosure of relationships between  
          CalPERS managers (defined as External Managers in the Policy)  
          and placement agents and the fees that are paid to these  
          placement agents.  According to CalPERS, the policy was  
          "adopted to help ensure that CalPERS' investment decisions  
          are consistent with investment policy and fiduciary  
          responsibilities; to increase the pool of information  
          Michael Bolden
          Date:  6/17/10                                         Page 4  


          available to CalPERS board members, staff, and consultants  
          when evaluating an investment opportunity; to help prevent  
          impropriety and the appearance of impropriety; and to provide  
          transparency and confidence in CalPERS' investment  
          decision-making processes."

          In 2006, as part of its policy governing ethical and  
          fiduciary conduct, the CalSTRS Board adopted a policy for the  
          disclosure of third party relationships and payments.  The  
          policy requires a person or entity involved with any  
          investment transaction or investment management contract to  
          disclose all third party relationships with persons or  
          entities that assisted with the solicitation of CalSTRS as a  
          potential client or the retention of CalSTRS as an existing  
          client.  The policy also requires the disclosure of any fees  
          paid or payable to the third party for assisting with the  
          solicitation, which includes placement agent fees.  CalSTRS  
          also has regulations in place to add transparency and  
          eliminate potential conflicts of interest in investments and  
          to prevent "pay-for-play" activities.

          CalSTRS has noted that it does not engage in, or make  
          payments to placement agents.  Fees to placement agents as a  
          result of a CalSTRS investment are "the result of an  
          arrangement between an outside investment manager and the  
          placement agent." 

          2)   Contingency Fee Ban and the Political Reform Act
          Existing law prohibits lobbyists from receiving payment that  
          is contingent upon the outcome of any proposed legislative or  
          administrative action.  The contingency fee ban on the  
          passage or defeat of legislation predates the PRA.  The ban  
          was enacted in 1950 to respond in part to lobbying scandals  
          in the legislature in the prior year.  That ban remained  
          unchanged until the PRA was approved by voters in the 1974  
          statewide primary election which repealed the ban enacted in  
          1950, replacing it with a similar and broader ban which  
          prohibited contingency fee payments based on the outcome of  
          legislation and any proposed administrative action.

          3)   Affects of a Contingency Fee Ban on Placement Agents in  
          Michael Bolden
          Date:  6/17/10                                         Page 5  


          The ban on contingency fees as proposed by this measure would  
          only apply to placement agents that work with CalPERS and  
          CalSTRS.  Placement agents who work with other public and  
          private investors in California will be unaffected by this  
          bill.  The bill is constrained to investment decisions "by  
          any state agency to enter into a contract to invest state  
          public retirement system assets on behalf of a public  
          retirement system."

          According to the author, "a small part of [Cal]PERS and  
          [Cal]STRS investments would be impacted.  Historically,  
          roughly 20 percent of CalPERS investments have been made  
          through placement agents.  At CalSTRS, the share is even  
          smaller:  only two placement agent deals were made in all of  

          4)   Will Minority and Women-Owned Firms ("Emerging Managers")  
          be Disadvantaged by the Bill  ?
          According to the author, "No emerging managers (or managers)  
          have suggested that CalPERS and CalSTRS investment strategies  
          and emerging manager outreach is inadequate.  On the  
          contrary, the sponsors have discussed the bill with emerging  
          managers and learned that placement agents favor larger firms  
          over the smaller ones, creating an unlevel playing field for  
          smaller emerging firms, and in addition to the contingency  
          fee commitment, many placement agents require a substantial  
          retainer before they'll do business."  

          The author further notes that "The number of firms affected  
          is small.  There are approximately 50-70 placement agent  
          firms operating in California today." 

          5)   Double-Referral  :  This bill is also referred to the  
          Senate Elections, Reapportionment and Constitutional  
          Amendments Committee.

          6)   Arguments in Support
          According to the author, "By requiring placement agents that  
          do business with California's public retirement systems to be  
          Michael Bolden
          Date:  6/17/10                                         Page 6  


          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 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 SEC have established,  
          augmented, or are in the process of establishing placement  
          agent statutes ranging from increased disclosure to a  
          complete ban in order to shield investment decisions from  
          actual or perceived unwarranted influence."

          Bill Lockyer, State Treasurer and a sponsor of the bill  
          states that this measure "provides a crucial remedy to the  
          pay-to-play scandal that has infected public pensions from  
          New York to California" and would "keep corruption out of  
          California's public pension funds, safeguard benefits  
          promised to workers and protect taxpayers from unfair  
          financial burdens.

          "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 managers who supposedly need  
          them."  Finally, the Treasurer contends that the investment  
          of public pension funds "should not be based on whether they  
          enrich middlemen and folks with political influence."   
          Rather, "They should be based solely on whether they benefit  
          workers, retirees and taxpayers."

          The State Controller, John Chiang also a sponsor of the bill,  

              "Recent accounts of questionable influence-peddling  
              practices by placement agents and concerns about the  
              long-term sustainability of the public pension funds  
              demand the utmost transparency and attention into how  
              public pension investment decisions are made.  Just as  
          Michael Bolden
          Date:  6/17/10                                         Page 7  


              lobbyists who attempt to influence legislative or  
              administrative decisions are subject to the Political  
              Reform Act, so too, should be placement agents who  
              attempt to influence the investment of state pension  
              funds.  By enacting AB 1743, the State's employees,  
              employers, and the public will be better assured that all  
              who serve the system do so with complete transparency,  
              ethics, and accountability.

              "This proposal follows in the footsteps of the  
              now-chaptered Assembly Bill 1584 (Hernandez, 2009), which  
              requires all  public pension systems in the state to  
              adopt policies requiring the disclosure of fees paid to  
              investment placement agents, forces disclosure of  
              campaign contributions and gifts made by placement agents  
              to public retirement board members, prohibits public  
              retirement board members from selling investment products  
              to other public retirement systems, and lengthens  
              post-employment restrictions on influencing retirement  
              board actions for former system executives and board  

              "The State's investment portfolio could benefit  
              significantly from this legislation.  Greater  
              transparency by individuals and firms who seek to  
              influence investment decisions should make it harder for  
              these entities to leverage personal relationships to gain  
              unequal access to public funds.  AB 1743 will enable the  
              public and private sector to identify who is attempting  
              to influence the State's investment decisions and assess  
              their influence on the funds' overall performance."

          CalPERS, also a sponsor of the bill contends that this bill  
          "enhances transparency and ensures accountability regarding  
          the investment decisions of public pension funds."  Further,  
          "AB 1743 will increase the confidence of retirement system  
          members and the public, without limiting investment  
          opportunities, that retirement systems' investment decisions  
          are made in an impartial manner, free from any potential bias  
          caused by gifts, campaign contributions, or the financial  
          interests of placements agents, retirement system officials  
          and third parties who have supported these officials."
          Michael Bolden
          Date:  6/17/10                                         Page 8  


          6)   Arguments in Opposition

           According to the Securities Industry and Financial Markets  
          Association (SIFMA), "SIFMA supports most of the provisions  
          contained in AB 1743" such as registration and reporting  
          requirements, and both the ban on campaign contributions and  
          gifts restrictions.  However, "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."  SIFMA  
          further adds, that this "would deny both private equity firms  
          and pension and retirement system investors of professional  
          placement agents' valuable services."  SIFMA suggests  
          exempting 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 placement process:  (i) due diligence; (ii)  
          project management; (iii) distribution; and (iv) road show  

          SIFMA, 3PM and others who have expressed opposition to this  
          bill contend that small managers, i.e., emerging managers,  
          who typically are newer and lack the resources to present  
          their products, themselves and to pay advisory fees to  
          placement agents on a noncontingent basis, would suffer  
          severe impairment of access to capital from Californias  
          public pension plans.

          3PM has suggested that the registration and disclosure  
          process should be modified so that it would correctly reflect  
          the information relevant to placement agents and that a  
          statewide or on-line ethics course could be an important  
          registration enhancement so long as the course requirements  
          are specific to the work and responsibilities of placement  
          agents, and specifically in identifying situations where  
          conflicts of interest are likely to occur.

          7)   SUPPORT  :
          Michael Bolden
          Date:  6/17/10                                         Page 9  


            Honorable John Chiang, State Controller (Sponsor)
            Honorable Bill Lockyer, State Treasurer (Sponsor)
            CalPERS Board of Administration (Sponsor)
            Honorable Debra Bowen, Secretary of State
            Association of California Water Agencies (ACWA)
            California Special Districts Association (CSDA)
            California State Association of Counties (CSAC)
            California State Employees Association (CSEA)
            California State Teachers' Retirement System (CalSTRS)
            Cartica Management, LLC
            Department of Personnel Administration (DPA)
            Faculty Association of California Community Colleges  
            League of California Cities (Support if Amended)
            Regional Council of Rural Counties (RCRC)

          8)   OPPOSITION  :

            Securities Industry and Financial Markets Association,  
          (Oppose Unless Amended)
            California Bankers Association, (Oppose Unless Amended)
            Champlain Advisers, LLC
            Investment Company Institute, (Oppose Unless Amended)
            Third Party Marketers Association, (Oppose Unless Amended)
            1 Individual


          Michael Bolden
          Date:  6/17/10                                         Page 10