BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  SB 398
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          Date of Hearing:   June 22, 2011

            ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT AND SOCIAL 
                                      SECURITY
                              Warren T. Furutani, Chair
                   SB 398 (Hernandez) - As Amended:  March 24, 2011
           SENATE VOTE  :   39-0
           
          SUBJECT  :   Retirement: placement agents.

           SUMMARY  :   Revises the definition of placement agent and 
          external manager, makes conforming changes to the definition of 
          "placement agent" and "external manager" in the Political Reform 
          Act of 1974 (PRA), and exempts placement agents, as specified, 
          from local government reporting and registration requirements.  
          Specifically,  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 Securities 
            and Exchange Commission (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 








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            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 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.

           EXISTING LAW  :

          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 








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            proposed investment action.

          7)Allows 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.

          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)Requires a report from the California Public Employees' 
            Retirement System (CalPERS) and the 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.

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

           FISCAL EFFECT  :   According to the Senate Appropriations 
          Committee, pursuant to Senate Rule 28.8, negligible state costs.

           COMMENTS  :   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 CalPERS, 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.

          According to the author, 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 








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          primary securities transactions with state retirement systems.  
          AB 1743 was never intended to cover the routine trading and 
          sales of securities (such as stocks in publicly traded 
          companies) by a brokerage firm.

          SB 398 revises the definitions of placement agents, investment 
          funds and external managers to clarify that the new law applies 
          to placement agents who solicit investments for external 
          managers, not to broker-dealers and underwriters of typical 
          securities, i.e., stocks, bonds, and commodities that are 
          executing transactions on the retirement systems' behalf as 
          originally intended by AB 1743 (Hernandez).

          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.

          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.

           REGISTERED SUPPORT / OPPOSITION  :

           Support 
           
          John Chiang, California State Controller
          Bill Lockyer, California State Treasurer
          California Public Employees' Retirement System
          Securities Industry and Financial Markets Association
           
            Opposition 
           
          None on file

           Analysis Prepared by  :    Karon Green / P.E., R. & S.S. / (916) 
          319-3957 









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