BILL ANALYSIS                                                                                                                                                                                                    






               SENATE COMMITTEE ON ELECTIONS, REAPPORTIONMENT AND  
                           CONSTITUTIONAL AMENDMENTS
                          Senator Loni Hancock, Chair


          BILL NO:   AB 1743                            HEARING DATE:  
          6/29/10
          AUTHOR:    HERNANDEZ                          ANALYSIS BY:   
            Darren Chesin
          AMENDED:   6/17/10
          FISCAL:    YES
          
                                     SUBJECT
           
          Political Reform Act: placement agents

                                   DESCRIPTION  
          
           Existing law  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.  "Administrative action" is defined 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.

           Existing law  requires lobbyists to register as such with  
          the Secretary of State (SOS) and to comply with various  
          ethical and reporting rules.

           Existing law  also requires any person who makes a payment  
          to influence legislative or administrative action, as  
          defined, to comply with various reporting rules.

           Existing law  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 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.










           This bill  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 pursuant to the Political  
          Reform Act (PRA).  

           This bill  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.  
                          
           This bill  would additionally provide for all of the  
          following:

          a)Exclude from the definition of "placement agent," 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.

          b)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.

          c)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.

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

          e)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.
          AB 1743 (HERNANDEZ)                                    Page  
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          f)Add the definitions of "external manager" and "placement  
            agent" to the PRA.

          g)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)Require a report from CalPERS and CalSTRS to the  
            Legislature by August 1, 2012, on the use of placement  
            agents in connection with investments, as specified.
                        
                                    BACKGROUND  
          
           CalPERS  provides retirement and health benefits to more  
          than 1.6 million public employees, retirees, and their  
          families and more than 3,000 employers.  Membership is  
          divided approximately in thirds among current and retired  
          employees of the state, schools, and participating public  
          agencies.  As of January 31, 2010, the market value of  
          their investment portfolio was approximately $200 billion.   
          CalPERS is administered by a 13-member Board of  
          Administration.  Members are either elected by members of  
          the system, appointed, or are designated by law to be on  
          the Board.  The Board's responsibilities include, but are  
          not limited to, setting employer contribution rates,  
          determining investment asset allocations, and providing  
          actuarial valuations.  The Board does not have the  
          authority to add, change, or delete benefits without the  
          concurrence of the Legislature.

           CalSTRS  provides retirement related benefits and services  
          to teachers in public schools and community colleges.  It  
          has approximately 833,000 members and assets of $132.6  
          billion as of February 28, 2010.   CalSTRS is administered  
          by a 12-member board which sets similar policies.  

           CalPERS' and CalSTRS' Existing Policies  .  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  
          AB 1743 (HERNANDEZ)                                    Page  
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          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  
          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." 

           Contingency Fee Ban  .  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 1974 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.

          AB 1743 (HERNANDEZ)                                    Page  
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                                     COMMENTS  
          
           1.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 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.

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

           2.Affects of a Contingency Fee Ban on Placement Agents  .   
            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  
          AB 1743 (HERNANDEZ)                                    Page  
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            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  
            2009."  

                                   PRIOR ACTION
           
          Assembly P.E.,R. & S.S. Committee    4-1
          Assembly Elections and Redistricting Committee:  7-0
          Assembly Appropriations Committee: 11-5
          Assembly Floor:                         56-8
          Senate P.E. & R. Committee:          4-1
                                         


                                   POSITIONS  

          Sponsors:California Public Employee Retirement System  
          (CalPERS)
                   Treasurer Bill Lockyer
                   Controller John Chiang

           Support: American Association of Retired Persons
                    California Common Cause
                    California State Employees Association 
                    California State Teachers Retirement System
                    California Professional Firefighters
                    California Retired Teachers Association
                    Cartica Management, LLC
                    Faculty Association of California Community  
                   Colleges
                    Fair Political Practices Commission
                    Secretary of State 
                    Service Employees International Union
                    
           Oppose:  Investment Company Institute
                    Securities Industry and Financial Markets  
                   Association
                    Third Party Marketers Association

          AB 1743 (HERNANDEZ)                                    Page  
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