BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 398|
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CONSENT
Bill No: SB 398
Author: Hernandez (D)
Amended: 3/24/11
Vote: 27 - Urgency
SEN. PUB. EMPLOYMENT & RETIREMENT COMM. : 5-0, 4/11/11
AYES: Negrete McLeod, Walters, Gaines, Padilla, Vargas
SEN.ELECTIONS & CONSTITUTIONAL AMEND. COMM. : 5-0, 5/3/11
AYES: Correa, La Malfa, De León, Gaines, Lieu
SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8
SUBJECT : Retirement: placement agents
SOURCE : Author
DIGEST : This bill makes declarations that (1) furthers
the purpose of the Political Reform Act (PRA) of 1974, (2)
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
(3) exempts placement agents, as specified, from local
government reporting and registration requirements, as
specified.
ANALYSIS :
Existing Law
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1.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.
2.Defines "placement agent" as a person or entity hired,
engaged, or retained by an external manager or other
placement agent to raise money or investments from a
public retirement system in California.
3,Excludes from the definition of "placement agent"
employees, officers, or directors of specified external
investment managers, or of affiliates of the external
managers.
4.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.
5.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.
6.Prohibits compensation paid to placement agents that is
contingent upon defeat, enactment, or the outcome of any
proposed investment action.
7.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.
8.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.
9.Require3s a report from the California Public Employees'
Retirement System (CalPERS) and the California State
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Teachers' Retirement System (CalSTRS) to the Legislature
by August 1, 2012, on the use of placement agents in
connection with investments, as specified.
10.Makes a violation of the PRA subject to administrative,
civil and criminal penalties.
This bill:
1.Revises 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.
2.Defines "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.
3.Exempts investment companies registered with the SEC, as
specified, and make a public offering of their
securities.
4.Defines "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.
5.Revises 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.
6.Revises 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
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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 specified.
7.Makes conforming changes to the definition of "external
manager" and "placement agent" for purposes of the PRA.
8.Imposes a state-mandated local program by changing or
creating additional crimes, infractions, or penalties.
Comments
What are Placement Agents ? Placement agents are persons
that are hired by outside investment managers in connection
with an investment transaction as a finder, solicitor,
marketer, or consultant to raise money from, or to obtain
access to, an institutional investor such as a public
retirement system.
In light of growing allegations nationwide that placement
agents may have improperly attempted to sway the investment
decisions of public retirement systems, the Governor signed
legislation, AB 1743 (Hernandez), Chapter 668, Statutes of
2010, co-sponsored by the California Public Employees'
Retirement System, the State Controller and the Treasurer
that requires placement agents that do business with
CalPERS and CalSTRS to be subject to the same reporting and
ethics rules that govern lobbyists under the PRA.
Prior Legislation
AB 1743 (Hernandez), Chapter 668, Statutes of 2010,
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, and 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.
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AB 1584 (Assembly Public Employees, Retirement and Social
Security Committee), Chapter 301, Statutes of 2009, makes
numerous changes aimed at increasing disclosure and
accountability of investment placement agents, board
members, and others associated with public pension funds in
California.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: Yes
SUPPORT : (Verified 5/16/11)
Honorable Bill Lockyer, State Treasurer
Honorable John Chiang, State Controller
California Public Employees' Retirement System Board of
Administration
Security Industry and Financial Markets Association
ARGUMENTS IN SUPPORT : According to the Securities
Industry and Financial Markets Association, "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 applying to those selected in the
competitive bidding process but not those who competed but
were not selected."
CPM:cm 5/18/11 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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