BILL ANALYSIS Senate Appropriations Committee Fiscal Summary Senator Christine Kehoe, Chair 1743 (Hernandez) Hearing Date: 08/02/2010 Amended: 06/17/2010 & as proposed to be amended Consultant: Maureen Ortiz Policy Vote: PE&R: 4-1 ER&CA:4-0 _________________________________________________________________ ____ BILL SUMMARY: AB 1743 prohibits any 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 with the Secretary of State as a lobbyist. The bill further requires placement agents to comply with any applicable requirements imposed by local government agencies. _________________________________________________________________ ____ Fiscal Impact (in thousands) Major Provisions 2010-11 2011-12 2012-13 Fund FPPC ----------minor, absorbable------------- General SOS ----------minor, absorbable----------- General PERS report - ---------------minor------------------ Special** STRS report ----------------minor------------------- Special* *Teachers' Retirement Fund **Public Employees Retirement Fund _________________________________________________________________ ____ STAFF COMMENTS: The Fair Political Practices Commission (FPPC) and the Secretary of State (SOS) indicate minor costs for enforcement and the processing of additional filings of disclosure statements. CalSTRS and CalPERS both indicated one-time minor costs to prepare the report by August 1, 2012. The author's proposed amendments make clarifying changes to ensure consistent definitions of the terms "external manager" and "placement agent". AB 1743 will subject certain placement agents to the provisions of the Political Reform Act of 1974 (PRA), which prohibits contingency fees. It will prohibit a person from acting as a placement agent in connection with any potential system investment made by a state public retirement system unless that person is registered with the Secretary of State as a lobbyist. The person will be required to comply with any other applicable requirements imposed by the local government agency. AB 1743 redefines "placement agent" as a person or entity hired, engaged, or retained by an external manager, or on behalf of another placement agent, to act as a finder, solicitor, marketer, consultant, broker, or other intermediary to raise money or investment from a state public retirement system in California for compensation. Page 2 AB 1743 (Hernandez) Excluded from that definition is an employee, officer, director, equity holder, partner, member, or trustee of an external manager who spends 1/3 or more of his or her time managing the assets controlled by the external manager. Existing law prohibits lobbyists from receiving payment that is contingent upon the outcome of any proposed legislative or administrative action. This ban was enacted in 1950 to respond in part to previous lobbying scandals. The enactment of the Political Reform Act of 1974 replaced the 1950 ban with similar but broader prohibitions. AB 1743 further defines "external manager" as a person that is seeking to be, or has been, retained by a public retirement system in California to manage a portfolio of assets, including securities, for a fee. 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. For instance, investigations of placement agent activity in New York resulted in criminal charges against several state officials, and similar investigations are occurring in California. Under the provisions of AB 1743, a placement agent who is registered with the Securities and Exchange Commission and is regulated by the Financial Industry Regulatory Authority is permitted to receive a payment for fees for contractual services provided to an investment manager, except to the extent that payment of fees is prohibited by the proscription on contingency payments to placement agents. CalPERS and CalSTRS will be required to report to the Legislature no later than August 1, 2012 on the use of placement agents in connection with investments made by those retirement systems. Each report must include the following: a)The number of, and descriptions of, those investments made by the retirement system through external managers that have compensated placement agents in connection with the investments, b)A description of those external managers based on the size of assets under their control. c)The annual performance of investments secured through placement agents. 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 its investment portfolio was approximately $200 billion. CalPERS is administered by a 13-member Board of Administration which is responsible for setting employer contribution rates, determining investment asset allocations, and providing actuarial valuations. The Board can not make benefit changes without approval of the Legislature. Page 3 AB 1743 (Hernandez) CalSTRS provides retirement 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. In 2006, 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 contact to disclose all third party relationships with persons or entities that assisted with the solicitation of CalSTRS as a potential client. The policy 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 notes 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." 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 and placement agents and the fees that are paid to these placement agents. 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. The SEC's new regulation 206(4)-5, which takes effect September 13, 2010, establishes a regulatory scheme that includes licensing and registration requirements, examination programs, and enforcement provisions for violators. These new regulations ban investment advisors (those who hire placement agents) from serving public pension funds for two years if they make large campaign contributions to elected officials. AB 1743 amends the Political Reform Act and will, therefore, require a 2/3 floor on the Senate Floor. This bill is similar to AB 1584, Chapter 301, Statutes of 2009, which requires all public pension systems in the state to adopt policies requiring the disclosure of fees paid to investment placement agents, and requires disclosure of campaign contributions and gifts made by placement agents to public retirement board members,