BILL ANALYSIS Ó
SENATE PUBLIC EMPLOYMENT & RETIREMENT BILL NO: SB 398
Gloria Negrete McLeod, Chair
Hearing date: April 11, 2011
SB 398 (Hernandez) as amended 3/24/11 FISCAL: YES
PUBLIC RETIREMENT SYSTEMS: MAKES CHANGES TO EXISTING LAW
REGARDING PLACEMENT AGENTS AND EXTERNAL MANAGERS
HISTORY :
Sponsor: Author
Prior legislation: AB 1743 (Hernandez)
Chapter 668, Statutes of 2010
AB 1584 (Asm. PER & SS Committee)
Chapter 301, Statutes of 2009
SUMMARY :
SB 398 makes declarations that it furthers the purposes of
the Political Reform Act (PRA) of 1974; revises the
definition of "placement agent" and "external manager"; makes
conforming changes to the definition of "placement agent" and
"external manager" in the PRA, and exempts placement agents,
as specified, from local government reporting and
registration requirements, as specified. This is an URGENCY
BILL .
BACKGROUND AND ANALYSIS :
1)Existing law :
a) requires all public pension systems to adopt a
policy, on or before June 30, 2010, requiring the
disclosure of fees paid to investment placement agents;
b) defines "placement agent" as a person or entity
hired, engaged, or retained by an external manager or
another placement agent to raise money or investments
from a public retirement system in California;
Michael Bolden
Date: 4/5/11 Page 1
c) excludes from the definition of "placement agent"
employees, officers, or directors of specified external
investment managers, or of affiliates of the external
managers;
d) 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 PRA;
e) 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, as defined, pursuant to
the PRA;
f) prohibits compensation paid to placement agents that
is contingent upon defeat, enactment, or the outcome of
any proposed investment action;
g) 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;
h) defines "external manager" as a person or entity, as
specified, who is seeking to be, or is, retained by a
state public retirement system to invest, hold or trade
securities or other assets, or manage a portfolio of
securities or other assets for a fee;
i) requires a report from the California Public
Employees' Retirement System (CalPERS) and California
State Teachers' Retirement System (CalSTRS) to the
Legislature by August 1, 2012, on the use of placement
agents in connection with investments, as specified; and
j) makes a violation of the PRA subject to
administrative, civil, and criminal penalties;
Michael Bolden
Date: 4/5/11 Page 2
1)This bill would :
a) revise the definition of "external manager" to
include a person who seeks, or is retained by a board or
investment vehicle to manage a portfolio of securities
or other assets for a fee, or a person who manages an
investment fund who offers, sells, or has offered and
sold an ownership interest in the investment fund to a
board or investment vehicle;
b) define "investment fund" to mean a private equity and
public equity fund, venture capital fund, hedge fund,
fixed income fund, real estate fund, infrastructure
fund, or other pooled investment entity that is
primarily engaged in the business of investing, owning,
holding, or trading securities and other assets;
c) exempt investment companies registered with the
Securities and Exchange Commission (SEC), as specified,
that make a public offering of their securities;
d) define "investment vehicle" as a corporation,
partnership, limited partnership, limited liability
company, association, or other domestic or foreign
entity that is managed by an external manager, as
specified;
e) revise the definition of "placement agent" to include
a person or an investment fund managed by an external
manager directly or indirectly hired, engaged, or
retained for a fee by an external manager to raise money
for investment from a public retirement system or an
investment vehicle in California;
f) revise the exemption to local government reporting
and registration requirements for placement agents to
include an employee, officer, director, or affiliate of
an external manager if the external manager is
registered with the SEC, as specified, or any
appropriate state securities regulator; the external
manager is participating in a competitive bidding
process, or has been awarded a contract for services and
has agreed to a fiduciary standard of care, as
Michael Bolden
Date: 4/5/11 Page 3
specified;
g) make conforming changes to the definitions of
"external manager" and "placement agent" for purposes of
the PRA, and
h) impose a state-mandated local program by changing or
creating additional crimes, infractions, or penalties.
COMMENTS :
1)Arguments in support
According to the author regarding AB 1743 (Hernandez) -
Chapter 668, Statutes of 2010:
"The goal of AB 1743 was to identify and regulate the
activities of individuals soliciting investments for
external managers. However, some in the financial
community have raised concerns that AB 1743 could be
interpreted to include all broker dealers engaged in
general secondary and primary securities transactions
with state retirement systems. That bill was never
intended to cover the routine trading and sales of
securities (such as stocks in publicly traded companies)
by a brokerage firm."
According to the Securities Industry and Financial Markets
Association (SIFMA):
"As entities sought to comply with the new law, several
questions were raised as to how the language was to be
interpreted. For example, there was concern that the
final definition of external manager could be
interpreted in a way that virtually all securities
transactions between a broker-dealer and a California
state retirement system - including the routine trading
and sales of securities - would be subject to the Act's
provisions. This was not what was intended when the
bill was enacted. In addition, the competitive bidding
language in Section 82047.3(c)(2) was in the past tense,
raising concerns that the exception could be read as
Michael Bolden
Date: 4/5/11 Page 4
applying to those selected in the competitive bidding
process but not those who competed but were not
selected."
2)Double Referral : This bill is also referred to the Senate
Elections and Constitutional Amendments Committee.
3) SUPPORT :
Honorable Bill Lockyer, State Treasurer
Honorable John Chiang, State Controller
California Public Employees' Retirement System (CalPERS)
Board of Administration
Security Industry and Financial Markets Association
(SIFMA)
4) OPPOSITION :
None to date
#####
Michael Bolden
Date: 4/5/11 Page 5