BILL ANALYSIS                                                                                                                                                                                                    

                                                                  AB 1743
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          AB 1743 (Hernandez)
          As Amended August 17, 2010
          2/3 vote
          |ASSEMBLY:  |56-8 |(June 2, 2010)  |SENATE: |29-7 |(August 30,    |
          |           |     |                |        |     |2010)          |
           Original Committee Reference:    P.E.,R. & S.S.  

           SUMMARY  :  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 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.  Specifically,  this bill  :  

          1)Requires placement agents that do business with the California  
            Public Employees' Retirement System (CalPERS) or the California  
            State Teachers' Retirement System (CalSTRS) to be subject to the  
            same reporting and ethics rules that govern lobbyists under the  

          2)Requires quarterly activity reports, including any honoraria,  
            gifts, fees or other compensation, as well as attendance at a  
            biennial ethics class.

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

          4)Prohibits campaign contributions and puts significant limits on  

          5)Requires placement agents connected with investments made by  
            local public retirement systems to file any applicable reports  
            with a local government agency that requires lobbyist to  
            register and file reports and to comply with any additional  
            requirements imposed by those local agencies on lobbyists  
            pursuant to the PRA.


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          6)Revises the current definition of "placement agent" to exclude  
            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 securities or  
            assets owned, controlled, invested, or held by the external  

          7)Excludes from the provisions of the bill employees, officers, or  
            directors of specified external investment managers or of  
            affiliates of the external managers.

          8)Allows payments of fees for contractual services provided to an  
            investment manager by a placement agent registered with the  
            Securities and Exchange Commission (SEC) and regulated by the  
            Financial Industry Regulatory Authority.

          9)Requires 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.

          10)Adds to the PRA definitions of "external manager" and  
            "placement agent." 

           The Senate amendments  :

          1)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.

          2)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.

          3)Make clarifying changes to ensure consistent definitions of the  
            terms "external manager" and "placement agent".

           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.

          2)Defines "administrative action" as the proposal, drafting,  


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            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.

          3)Requires an individual who is considered a lobbyist, as defined,  
            to register as a lobbyist and to comply with various ethical and  
            reporting rules.

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

          5)Makes a violation of the PRA subject to administrative, civil,  
            and criminal penalties.

          6)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.

          7)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.

           AS PASSED BY THE ASSEMBLY  , this bill was substantially similar to  
          the version approved by the Senate.

           FISCAL EFFECT  :  According to the Assembly Appropriations  

          1)Minor and absorbable costs to CalPERS and CalSTRS to revise  
            policies and notices.

          2)Minor and absorbable costs to the Fair Political Practices  
            Commission and Secretary of State for handling additional  
            filings of disclosure statements and for enforcement.

          3)Local enforcement costs not reimbursable.

           COMMENTS  :  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  


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          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 Securities Exchange  
          Commission have established, augmented, or are in the process of  
          establishing placement agent statutes in order to shield  
          investment decisions from actual or perceived unwarranted  
          influence 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.

          According to CalPERS, "Like lobbyists, placement agents attempt to  
          influence the decisions of public officials - in this case, state  
          public pension fund officials responsible for investing hundreds  
          of billions of dollars on behalf of California public employers,  
          employees, retirees and their beneficiaries.  While only 20  
          percent of private investment managers responding to a CalPERS  
          disclosure request indicated they had hired placement agents over  
          the last fifteen years, the disclosures released to the public in  
          late January revealed that the top ten placement agent firms were  
          paid more than $125 million for securing investments from CalPERS.  

          "These placement agents owe no contractual or fiduciary obligation  
          to state public pension funds while receiving large payments from  
          private investment managers seeking pension fund money.  The media  
          has reported extensively on the activities of former CalPERS board  
          members and others employed as placement agents.  One former board  
          member, Alfred Villalobos, received almost $59 million from Apollo  
          Global Management, a financial holding company that has benefited  
          from billions in CalPERS investments, including a New York equity  
          investment deal that may cost the state hundreds of millions of  
          "The CalPERS Board of Administration believes its stakeholders and  
          the public should be confident that its investment decisions are  
          made in an impartial manner, free from potential bias or influence  
          caused by the financial interests of placement agents, the pension  
          fund official or third parties who have supported the official.   


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          To that end, it has adopted policies and supported legislation to  
          protect the investment fund from the undocumented influence of  
          placement agents.  However, continuing revelations have  
          underscored the need for full disclosure of the finances and other  
          activities of placement agents, and additional regulation and  
          enforcement by an independent third party. 
          "Many of the policy goals in favor of regulating those who try to  
          influence legislation and regulatory actions or secure government  
          contracts should also apply to placement agents.  Extending the  
          existing lobbyist bans on contingency fees, political  
          contributions and the $10 gift limit to placement agents would  
          increase the confidence in state public pension funds' investment  
          decision making processes and reduce the perception of bias and  
          the risk of actual bias.  Under AB 1743, placement agents can  
          still lobby to secure CalPERS and CalSTRS investments on behalf of  
          a client, but they must comply with the California's lobbying laws  
          when they do so."

          While the Securities Industry and Financial Markets Association  
          (SIFMA) has expressed support for the bill's registration and  
          reporting requirements, campaign contribution ban and strict gift  
          limits, they are concerned about the provision that prohibits  
          lobbyists from accepting payment on a contingency fee basis and,  
          therefore, have taken an "oppose unless amended" position on the  

          According to SIFMA, "?professional placement agents play a vital  
          role in the capital markets and provide substantial benefits both  
          to their private equity fund clients and to potential  
          institutional investors. In connection with the services they  
          provide, placement agents are paid a contingency fee by their  
          clients, which is consistent with the way nearly all securities  
          business is undertaken. We believe that 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. This would deny  
          both private equity firms and pension and retirement system  
          investors of professional placement agents' valuable services. We  
          therefore would encourage the legislature to exempt 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  


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          perform four primary functions as part of the placement process:  
          (i) due diligence; (ii) project management; (iii) distribution;  
          and (iv) road show organization." 

          SIFMA is concerned that the current definition of "placement  
          agents" would include not only professional placement agents but  
          persons hired merely as "finders" or for, "?introductory services.  
          A professional placement agent, however, performs a much bigger  
          function than a finder, who generally does not perform - and is  
          not qualified to undertake - many of the due diligence, project  
          management, distribution and road show functions. Rather, a finder  
          may often be unregistered, and he primarily provides his clients  
          with access to a narrow group of potential investors, focusing on  
          personal relationships with high-level officials."

          SIFMA concludes that they would "?not have an issue with banning  
          contingency fees for finders. A finder's limited role of "opening  
          doors" to a small group of California pension funds could  
          presumably be compensated on a flat fee basis. We, however, do not  
          believe that a flat fee structure, hourly or otherwise, works for  
          professional placement agents or the private equity firms they  
          represent. The end result of a contingency fee ban will likely be  
          that many fewer emerging manager and other innovative  
          opportunities get presented to the California pension fund  

           Analysis Prepared by  :    Karon Green / P.E., R. & S.S. / (916)  

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