BILL ANALYSIS                                                                                                                                                                                                    



                                                                       



           ------------------------------------------------------------ 
          |SENATE RULES COMMITTEE            |                  AB 1743|
          |Office of Senate Floor Analyses   |                         |
          |1020 N Street, Suite 524          |                         |
          |(916) 651-1520         Fax: (916) |                         |
          |327-4478                          |                         |
           ------------------------------------------------------------ 
           
                                         
                                 THIRD READING


          Bill No:  AB 1743
          Author:   Hernandez (D), et al
          Amended:  8/17/10 in Senate
          Vote:     27

           
           SENATE ELEC., REAP. & CONST. AMEND. COMMITTEE  : 4-0, 6/29/10
          AYES:  Hancock, DeSaulnier, Liu, Strickland
          NO VOTE RECORDED:  Denham

           SENATE PUBLIC EMP. & RET. COMMITTEE  :  4-1, 6/23/10
          AYES:  Correa, Corbett, Ducheny, Liu
          NOES:  Hollingsworth
          NO VOTE RECORDED:  Ashburn

           SENATE APPROPRIATIONS COMMITTEE  :  8-0, 8/2/10
          AYES:  Kehoe, Alquist, Ashburn, Corbett, Emmerson, Wolk,  
            Wyland, Yee
          NO VOTE RECORDED:  Leno, Price, Walters

           ASSEMBLY FLOOR  :  56-8, 6/2/10 - See last page for vote


           SUBJECT  :    Political Reform Act of 1974:  placement agents

            SOURCE  :     California Public Employees Retirement System 
                      Treasurer Bill Lockyer
                      Controller John Chiang


           DIGEST  :    This bill 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  
                                                           CONTINUED





                                                               AB 1743
                                                                Page  
          2

          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.

           Senate Floor Amendments  8/17/10 make a minor technical  
          change in order to clarify the definition of who is not to  
          be included in the definition of "placement agent" under  
          this bill.

           ANALYSIS  :    

           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.   
            "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.

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

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

          4.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.







                                                               AB 1743
                                                                Page  
          3


          This bill:

          1. Subjects 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 (SOS) as a lobbyist.  The person is  
             required to comply with any other applicable  
             requirements imposed by the local government agency.

          2. 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.  
              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.

          3. 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 PRA replaced the 1950 ban with similar but  
             broader prohibitions.

          4. 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,  







                                                               AB 1743
                                                                Page  
          4

          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 this bill, 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.

          The California Public Employees' Retirement System  
          (CalPERS) and the California State Teachers' Retirement  
          System (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, and (c) the annual performance of investments  
          secured through placement agents.

           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  







                                                               AB 1743
                                                                Page  
          5

          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  
          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  







                                                               AB 1743
                                                                Page  
          6

          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.

           FISCAL EFFECT  :    Appropriation:  No   Fiscal Com.:  Yes    
          Local:  Yes

          According to the Senate Appropriations Committee analysis,  
          the Fair Political Practice Commission and the SOS indicate  
          minor costs for enforcement and the processing of  
          additional filings of disclosure statements.  CalSTRS and  
          CalPERS both indicate one-time minor costs to prepare the  
          report by August 1, 2012.

           SUPPORT  :   (Verified  8/6/10)

          California Public Employees' Retirement System (co-source)
          Treasurer Bill Lockyer (co-source)
          Controller John Chiang (co-source)
          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
          National Association for the Advancement of Colored People
          Secretary of State
          Service Employees International Union

           OPPOSITION  :    (Verified  8/6/10)








                                                               AB 1743
                                                                Page  
          7

          Investment Company Institute
          Securities Industry and Financial Markets Association
          Third Party Marketers Association

           ARGUMENTS IN SUPPORT  :    According to the author's office,  
          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, this  
          bill increases 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's office 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

           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  







                                                               AB 1743
                                                                Page  
          8

          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  
          organization.

          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 California's  
          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.  
           
           ASSEMBLY FLOOR  : 
          AYES:  Adams, Ammiano, Arambula, Bass, Beall, Block,  
            Blumenfield, Bradford, Brownley, Buchanan, Caballero,  
            Charles Calderon, Carter, Chesbro, Coto, Davis, De La  
            Torre, De Leon, Eng, Evans, Feuer, Fletcher, Fong,  
            Fuentes, Furutani, Gaines, Galgiani, Gilmore, Hayashi,  
            Hernandez, Hill, Huber, Huffman, Jones, Logue, Bonnie  
            Lowenthal, Ma, Mendoza, Monning, Nava, Nestande, Nielsen,  
            V. Manuel Perez, Portantino, Ruskin, Salas, Saldana,  
            Skinner, Solorio, Swanson, Torlakson, Torres, Torrico,  
            Villines, Yamada, John A. Perez







                                                               AB 1743
                                                                Page  
          9

          NOES:  Anderson, Conway, Hagman, Harkey, Knight, Niello,  
            Norby, Silva
          NO VOTE RECORDED:  Bill Berryhill, Tom Berryhill,  
            Blakeslee, Cook, DeVore, Emmerson, Fuller, Garrick, Hall,  
            Jeffries, Lieu, Miller, Smyth, Audra Strickland, Tran,  
            Vacancy


          DLW:do  8/18/10   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE

                                ****  END  ****