BILL ANALYSIS Ó SB 398 Page 1 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 SB 398 Page 2 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 SB 398 Page 3 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 SB 398 Page 4 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 SB 398 Page 5