BILL ANALYSIS
SENATE PUBLIC EMPLOYMENT & RETIREMENT BILL NO: AB 1584
Lou Correa, Chair Hearing date: August 24, 2009
AB 1584 (Asm. PER&SS Comm) as amended 6/18/09
FISCAL: YES
PUBLIC RETIREMENT SYSTEMS: DISCLOSURE OF CONTRIBUTIONS MADE
BY INVESTMENT PLACEMENT AGENTS
HISTORY :
Sponsor: John Chiang, California State Controller John
Chiang
California State Treasurer Bill Lockyer
Prior legislation: AB 246 (Torrico)
Chapter 315 of 2007
SB 269 (Soto)
Chapter 856 of 2003
ASSEMBLY VOTES :
PER & SS 6-0 7/01/09
Appropriations 15-0 7/08/09
Assembly Floor 72-0 7/16/09
SUMMARY :
Would:
a) require all public pension systems to adopt a policy
requiring the disclosure of fees paid to investment
placement agents, requires the disclosure of campaign
contributions and gifts made by placement agents to public
retirement board members, as specified,
b) prohibit public retirement board members from selling
investment products to other public retirement systems,
c) lengthen post-employment restrictions on influencing
retirement board actions for former system executives and
board members that currently apply to the California Public
David Felderstein
Date: 8/18/09 Page 1
Employees Retirement System (PERS) and to the California
State Teachers Retirement System (STRS), and
d) extend those expanded provisions to apply to all public
retirement systems in California.
David Felderstein
Date: 8/18/09 Page 2
BACKGROUND :
1) The Political Reform Act (PRA) and Pension System
employees and Boards of Administration
The committee is advised that the PRA restricts former
pension system employees and Board members from being paid to
appear before or communicate with their former agency to
influence the agency's actions for a period of one year
following the end of their employment or term.
The PRA also prohibits state officials from making,
participating in, or influencing government decisions
directly relating to a prospective employer with whom they
are negotiating employment or after they have reached an
employment arrangement.
A knowing or willful violation of these PRA provisions
constitutes a misdemeanor, subject to civil liability and
administrative fines, up to $5,000 per occurrence.
2) The Public Contract Code and Pension System employees and
Boards of Administration
The committee is advised that the Public Contract Code
prohibits a covered former state official from entering into
a contract for which he or she engaged in any of the
negotiations, transactions, planning, arrangements, or any
part of the decision-making process while in state service
for a two-year period after separation.
Also, the Public Contract Code provides that a covered
former state official may not enter into a contract with the
former agency if he or she was in a policy-making position in
that agency in the same general subject area as the proposed
contract for a one-year period after separation.
Any contract entered in violation of these provisions is
void, and a willful violation of these provisions is a
misdemeanor .
3) The Government Code and Pension System employees and
Boards of Administration
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Date: 8/18/09 Page 3
The committee is advised that the Government Code:
a) prohibits a state officer from having a financial
interest in any contract he or she makes in his or her
official capacity, and
b) prohibits a state officer or employee from engaging in
any employment, activity, or enterprise which is
inconsistent, incompatible, or in conflict with his or her
duties as a state officer or employee.
David Felderstein
Date: 8/18/09 Page 4
4) Chapter 856 of 2003, which permitted PERS and STRS to
establish higher compensation for certain retirement system
employees
SB 269 (Soto), Chapter 856 of 2003 :
a) allowed the PERS and STRS Boards of Administration to
establish the compensation and terms of employment for
senior investment personnel,
b) provided that key system executives and individuals
serving in these positions for less than five years are
prohibited from influencing the actions of retirement
boards or retirement systems on behalf of any person, other
than the state, within two years after leaving that
position, and
c) created a stricter conflict of interest standard for
retirement system employees in the designated positions,
rather than one-year statutory prohibition that applies to
all other state employees.
The committee is advised that Chapter 856 of 2003 was
intended to address the "revolving door" issue, i.e. when
PERS and STRS hire high-level executives or investment
managers who may use their new positions to find other
opportunities in the private sector.
ANALYSIS :
1) Existing law
AB 246 (Torrico), Chapter 315 of 2007 put limits on the
activities of members of the Boards of Retirement of the
twenty counties providing pension benefits to their employees
under the County Employees Retirement Law of 1937 ('37 Act ).
Chapter 315, Statutes of 2007 prohibits any member of '37 Act
county Boards of Retirement from selling investment products
that would be considered an asset to their own, or any other,
'37 Act retirement system .
David Felderstein
Date: 8/18/09 Page 5
2) This bill
This bill would:
a) require public retirement system boards to develop and
implement, on or before June 30, 2010, a policy requiring
the disclosure of payments to placement agents in
connection with system investments with external investment
managers,
b) prohibit an external investment manager or placement
agent that violates the board's disclosure policy from
soliciting new investments from the system for 5 years from
the time of violation but allows the board to reduce this
by a majority vote, in open session, upon the showing of
good cause,
c) prohibit a public retirement system from entering into
any agreement with an external investment manager that does
not provide written consent to comply with the disclosure
policy,
d) provide that the board does not have to take action as
described above unless the board determines, in good faith,
that the action described above is consistent with the
fiduciary responsibilities of the board as described in
Section 17 of Article XVI of the California Constitution,
e) require placement agents to disclose to the retirement
board all campaign contributions he or she has made to any
elected member of the board during the prior 24-month
period before attempting to place any system investments,
and to disclose any subsequent campaign contribution during
the time the placement agent is receiving compensation in
connection with a system investment,
f) require placement agents to disclose all gifts he or
she has made to any member of the board during the prior
24-month period before attempting to place any system
investments, and to disclose any subsequent gifts given
during the time the placement agent is receiving
compensation in connection with a system investment,
David Felderstein
Date: 8/18/09 Page 6
g) prohibit a member or employee of the board from,
directly or indirectly, by himself or herself, or as an
agent, partner, or employee of a person or entity other
than the board, selling or providing any investment product
that would be considered an asset of the fund to any public
retirement system in California,
h) expand current provisions that apply to PERS and STRS
that prohibit high level officers and investment staff, who
have been in those positions for less than five years, from
acting as agents before the boards or staff for a period of
two years after leaving the retirement system, by removing
the five year limitation and including board members,
deputy executive officers and assistant officers to the
list of staff subject to these provisions, and
i) apply these expanded provisions to all public pension
plans in California.
COMMENTS :
1) Arguments in support
The committee is advised that recently, federal and state
investigators have alleged that certain placement agents may
have paid bribes or kickbacks in "pay-to-play" arrangements
to help their investment firm clients obtain capital
commitments from public pension funds.
Placement agents are persons that are hired in connection
with an investment transaction as a finder, solicitor,
marketer, consultant, broker or other intermediary to raise
money or investments from, or to obtain access to, an
investor such as public pension fund.
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Date: 8/18/09 Page 7
According to the author,
"This proposal is intended to ensure that public pension
board members, employees and consultants conduct business
to the highest ethical standard, comply with all fiduciary
responsibilities and actively work to eliminate actual or
perceived conflicts of interest."
According to one of the co-sponsors, the California State
Controller,
"This bill would shed sunlight into the role played by
placement agents in state investment decisions and prohibit
activities that may expose CalPERS, CalSTRS, and local
retirement systems to undue influence by those agents.
With the recent scandal involving placement agents and the
New York Pension Fund, it is important to ensure that such
activity cannot happen in California. The public also
needs to be assured that California's public pension funds
operate under the highest ethical standards. By
strengthening current revolving door laws and requiring
full transparency of any dealings with placement agents,
this bill provides that public assurance."
2) Arguments in opposition
In their letter of opposition to this bill , the Orange County
Employees Retirement System (OCERS) states:
"OCERS is opposed to this measure for three primary
reasons:
First, OCERS does not directly hire placement agents;
they are hired, if at all, through the investment
managers with whom we conduct business. Mandating that
OCERS adopt a placement agent disclosure policy will not
ensure that fraudulent conduct, which this bill is aimed
at avoiding, will be discovered and disclosed.
Second, in our experience, the investment professionals
who serve on our Board bring a specific expertise to our
deliberations that enhance the management of our
David Felderstein
Date: 8/18/09 Page 8
retirement system assets, and losing those Board members
would diminish our ability to obtain the level of
investment returns needed to avoid placing an undue
burden on the taxpayers of Orange County.
"Finally, the language added to our governing law (the
County Employees' Retirement Law of 1937, or "CERL") by
last year's AB 246 has created confusion among CERL
retirement systems, and has resulted in wholesale board
member resignations across the state."
David Felderstein
Date: 8/18/09 Page 9
2) SUPPORT :
American Federation of State, County and Municipal
Employees (AFSCME)
Association for Los Angeles Deputy Sheriffs (ALADS)
California Public Employees' Retirement System (CalPERS)
California School Employees Association (CSEA)
Los Angeles County Employees Retirement Association
(LACERA)
Los Angeles Police Protective League
Riverside Sheriffs' Association
Service Employees International Union (SEIU)
State Association of County Retirement Systems (SACRS),
support if amended
3) OPPOSITION :
Orange County Employees Retirement System (OCERS)
David Felderstein
Date: 8/18/09 Page 10
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Date: 8/18/09 Page 11