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   
          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
          ----------minor, absorbable-------------          General

          ----------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.  
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          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  
          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  

          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,