BILL ANALYSIS
AB 1743
Page 1
Date of Hearing: April 7, 2010
ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT AND SOCIAL
SECURITY
Alberto Torrico, Chair
AB 1743 (Hernandez) - As Amended: March 17, 2010
SUBJECT : Political Reform Act of 1974: placement agents.
SUMMARY : 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 California Political Reform Act (PRA).
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. Specifically, this bill :
1)Requires placement agents that do business with the California
Public Employees' Retirement System (CalPERS) or the
California State Teachers' Retirement System (CalSTRS) to be
subject to the same reporting and ethics rules that govern
lobbyists under the PRA.
2)Requires quarterly activity reports, including any honoraria,
gifts, fees or other compensation, as well as attendance at a
biennial ethics class.
3)Prohibits compensation paid to placement agents that is
contingent upon defeat, enactment, or the outcome of any
proposed investment action.
4)Prohibits campaign contributions and puts significant limits
on gifts.
5)Requires placement agents connected with investments made by
local public retirement systems to file any applicable reports
with a local government agency that requires lobbyist to
register and file reports and to comply with any additional
requirements imposed by those local agencies on lobbyists
pursuant to the PRA.
6)Revises the current definition of "placement agent" to exclude
an employee, officer, director, equity holder, partner,
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member, or trustee of an external manager who spends one-third
or more of his or her time, as specified, managing the assets
controlled by the external manager.
7)Adds to the PRA definitions of "external manager" and
"placement agent".
EXISTING LAW :
1)Defines a "lobbyist" as an individual who receives $2,000 or
more in a calendar month or whose principal duties as an
employee are to communicate directly or through his or her
agents with an elective state official, agency official, or
legislative official for the purpose of influencing
legislative or administrative action.
2)Defines "administrative action" as the proposal, drafting,
development, consideration, amendment, enactment, or defeat by
any state agency of any rule, regulation, or other action in
any ratemaking proceeding or a quasi-legislative proceeding.
3)Requires an individual who is considered a lobbyist, as
defined, to register as a lobbyist and to comply with various
ethical and reporting rules.
4)Requires any person who makes a payment to influence
legislative or administrative action, as defined, to comply
with various reporting rules.
5)Makes a violation of the PRA subject to administrative, civil,
and criminal penalties.
6)Defines "placement agent" as a person or entity hired,
engaged, or retained by an external manager to raise money or
investment from a public retirement system in California.
7)Defines "external manager" as an asset management firm that is
seeking to be, or has been, retained by a public retirement
system to manage a portfolio or assets, including securities,
for a fee.
FISCAL EFFECT : Unknown.
COMMENTS : According to the author, "By requiring placement
agents that do business with California's public retirement
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systems to be subject to the same reporting and ethics rules
that govern lobbyists, AB 1743 would increase the confidence of
retirement system members and the public that public retirement
systems' investment decisions are made in an impartial manner,
free from any potential bias caused by gifts, campaign
contributions, or the financial interests of placement agents,
retirement system officials and third parties who have supported
these officials.
"At least five states (New York, New Jersey, Illinois,
Connecticut, and New Mexico) and the Securities Exchange
Commission have established, augmented, or are in the process of
establishing placement agent statutes in order to shield
investment decisions from actual or perceived unwarranted
influence ranging from increased disclosure to a complete ban."
According to CalPERS, "Like lobbyists, placement agents attempt
to influence the decisions of public officials - in this case,
state public pension fund officials responsible for investing
hundreds of billions of dollars on behalf of California public
employers, employees, retirees and their beneficiaries. While
only 20 percent of private investment managers responding to a
CalPERS disclosure request indicated they had hired placement
agents over the last fifteen years, the disclosures released to
the public in late January revealed that the top ten placement
agent firms were paid more than $125 million for securing
investments from CalPERS.
"These placement agents owe no contractual or fiduciary
obligation to state public pension funds while receiving large
payments from private investment managers seeking pension fund
money. The media has reported extensively on the activities of
former CalPERS board members and others employed as placement
agents. One former board member, Alfred Villalobos, received
almost $59 million from Apollo Global Management, a financial
holding company that has benefited from billions in CalPERS
investments, including a New York equity investment deal that
may cost the state hundreds of millions of dollars.
"The CalPERS Board of Administration believes its stakeholders
and the public should be confident that its investment decisions
are made in an impartial manner, free from potential bias or
influence caused by the financial interests of placement agents,
the pension fund official or third parties who have supported
the official. To that end, it has adopted policies and
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supported legislation to protect the investment fund from the
undocumented influence of placement agents. However, continuing
revelations have underscored the need for full disclosure of the
finances and other activities of placement agents, and
additional regulation and enforcement by an independent third
party.
"Many of the policy goals in favor of regulating those who try
to influence legislation and regulatory actions or secure
government contracts should also apply to placement agents.
Extending the existing lobbyist bans on contingency fees,
political contributions and the $10 gift limit to placement
agents would increase the confidence in state public pension
funds' investment decision making processes and reduce the
perception of bias and the risk of actual bias. Under AB 1743,
placement agents can still lobby to secure CalPERS and CalSTRS
investments on behalf of a client, but they must comply with the
California's lobbying laws when they do so."
While the Securities Industry and Financial Markets Association
(SIFMA) has expressed support for the bill's registration and
reporting requirements, campaign contribution ban and strict
gift limits, they are concerned about the provision that
prohibits lobbyists from accepting payment on a contingency fee
basis and, therefore, have taken an "oppose unless amended"
position on the bill.
According to SIFMA, "?professional placement agents play a vital
role in the capital markets and provide substantial benefits
both to their private equity fund clients and to potential
institutional investors. In connection with the services they
provide, placement agents are paid a contingency fee by their
clients, which is consistent with the way nearly all securities
business is undertaken. We believe that a ban on contingency fee
payments would functionally operate as a ban on professional
placement agents participating in any private investment
transaction by a California retirement system. This would deny
both private equity firms and pension and retirement system
investors of professional placement agents' valuable services.
We therefore would encourage the legislature to exempt
professional placement agents from the contingency fee ban
provision."
SIFMA further contends, "Professional placement agents are
broker-dealers registered with the Securities and Exchange
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Commission and are subject to federal securities laws,
regulation, FINRA registration and supervision, and applicable
state law. They perform four primary functions as part of the
placement process: (i) due diligence; (ii) project management;
(iii) distribution; and (iv) road show organization."
SIFMA is concerned that the current definition of "placement
agents" would include not only professional placement agents but
persons hired merely as "finders" or for, "?introductory
services. A professional placement agent, however, performs a
much bigger function than a finder, who generally does not
perform - and is not qualified to undertake - many of the due
diligence, project management, distribution and road show
functions. Rather, a finder may often be unregistered, and he
primarily provides his clients with access to a narrow group of
potential investors, focusing on personal relationships with
high-level officials."
SIFMA concludes that they would "?not have an issue with banning
contingency fees for finders. A finder's limited role of
"opening doors" to a small group of California pension funds
could presumably be compensated on a flat fee basis. We,
however, do not believe that a flat fee structure, hourly or
otherwise, works for professional placement agents or the
private equity firms they represent. The end result of a
contingency fee ban will likely be that many fewer emerging
manager and other innovative opportunities get presented to the
California pension fund system."
Others who have registered concern with the bill are asking for
an exemption for those placement agents who are regulated by the
Financial Industry Regulatory Authority (FINRA), a division of
the Securities and Exchange Commission (SEC), which oversees and
enforces compliance of the rules governing the private placement
of investment funds.
REGISTERED SUPPORT / OPPOSITION :
Support
CalPERS Board of Administration (Sponsor)
John Chiang, California State Controller (Sponsor)
Bill Lockyer, California State Treasurer (Sponsor)
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Debra Bowen, California Secretary of State
AARP
Association of California Water Agencies
California Common Cause
California Professional Firefighters
California Retired Teachers Association
California State Association of Counties
California State Employees Association
California Taxpayers' Association
Faculty Association of California Community Colleges
Fair Political Practices Commission
Service Employees International Union, California
Opposition
Securities Industry and Financial Markets Association (Unless
amended)
Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916)
319-3957