BILL ANALYSIS
AB 1743
Page 1
Date of Hearing: April 20, 2010
ASSEMBLY COMMITTEE ON ELECTIONS AND REDISTRICTING
Paul Fong, Chair
AB 1743 (Hernandez) - As Amended: March 17, 2010
SUBJECT : Political Reform Act of 1974: placement agents.
SUMMARY : Requires a person who acts as a placement agent in
connection with a potential investment made by a state public
retirement system to register as a lobbyist pursuant to the
Political Reform Act (PRA). Requires a person who seeks to act
as a placement agent in connection with a potential investment
made by a local public retirement system to comply with the
requirements of any local lobbying ordinance adopted by the
local government agency. Specifically, this bill :
1)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 the PRA.
2)Requires a person acting as a placement agent in connection
with any potential investment made by a local retirement
system to file any applicable reports with a local government
agency that requires lobbyists to register and file reports
and to comply with any applicable requirements imposed by a
local government agency pursuant to a local lobbying
ordinance.
3)Provides that an employee, officer, director, equity holder,
partner, member, or trustee of an external manager who spends
one-third or more of his or her time, during a calendar year,
managing the assets controlled by the external manager is not
a placement agent.
4)Provides that, with respect to placement agents, the decision
by a state agency to enter into a contract to invest public
retirement system assets on behalf of a public retirement
system is an "administrative action" as that term is defined
in the PRA.
5)Provides that for the purposes of the PRA, a placement agent,
as defined, is a lobbyist.
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6)Adds definitions of the terms "external manager" and
"placement agent" to the PRA that are similar to the manner in
which those terms are defined under existing law.
EXISTING LAW :
1)Creates the Fair Political Practices Commission (FPPC), and
makes it responsible for the impartial, effective
administration and implementation of the PRA.
2)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.
3)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.
4)Defines "external manager," for the purposes of state laws
governing public retirement systems, as an asset management
firm that is seeking to be, or has been, retained by a public
retirement system in California to manage a portfolio of
assets, including securities, for a fee.
5)Defines "placement agent," for the purposes of state laws
governing public retirement systems, as a person or entity
hired, engaged, retained by, or acting on behalf of an
external manager, or on behalf of another placement agent, as
a finder, solicitor, marketer, consultant, broker, or other
intermediary to raise money or investment from, or to obtain
access to, a public retirement system in California, directly
or indirectly, including, without limitation, through an
investment vehicle.
6)Requires the board of every public retirement system in the
state to develop policies requiring the disclosure of payments
to placement agents in connection with system investments in
or through external managers. Requires the policies to
include all of the following requirements:
a) Disclosure of the existence of relationships between
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external managers and placement agents;
b) A description of any and all compensation of any kind
provided, or agreed to be provided, to a placement agent;
c) A description of the services to be performed by the
placement agent;
d) A statement whether the placement agent, or any of its
affiliates, are registered with the Securities and Exchange
Commission or the Financial Industry Regulatory
Association, or any similar regulatory agent in a country
other than the United States, and the details of that
registration or explanation as to why no registration is
required; and,
e) A statement whether the placement agent, or any of its
affiliates, is registered as a lobbyist with any state or
national government.
7)Prohibits any external manager or placement agent that
violates the policies regarding the disclosure of payment to
placement agents adopted by a public retirement system from
soliciting new investments from the system for five years
after the violation was committed. Provides that this
prohibition may be reduced by a majority vote of the board at
a public session upon a showing of good cause.
8)Requires a placement agent, prior to acting as a placement
agent in connection with any potential investment by a public
retirement system, to disclose to the board of that retirement
system all campaign contributions made by the placement agent
to any elected member of the board, and all gifts given to any
member of the board, during the prior 24-month period.
Requires any subsequent campaign contribution made by the
placement agent to an elected member of the board, and any
gift given to any member of the board, during the time the
placement agent is receiving compensation in connection with a
system investment, to be disclosed.
9)Requires an individual who is considered a lobbyist, as
defined, to register as a lobbyist and to comply with various
ethical and reporting rules.
10)Requires lobbyists to complete a biennial orientation course
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on the relevant ethical issues and laws relating to lobbying.
11)Prohibits lobbyists from receiving any payment that is in any
way contingent upon defeat, enactment, or outcome of any
proposed legislative or administrative action.
12)Prohibits a lobbyist from making gifts aggregating more than
$10 in a calendar month to any state candidate, elected state
officer, legislative official, or an agency official of any
agency required to be listed on the registration statement of
the lobbying firm or the lobbyist employer of the lobbyist.
13)Prohibits a lobbyist from doing anything with the purpose of
placing any elected state officer, legislative official,
agency official, or state candidate under personal obligation
to the lobbyist or the lobbyist's employer.
14)Prohibits a lobbyist from deceiving or attempting to deceive
any elected state officer, legislative official, agency
official, or state candidate with regard to any material fact
pertinent to any pending administrative action.
15)Prohibits a lobbyist from making a contribution to an elected
state officer or candidate for elected state office if the
lobbyist is registered to lobby the governmental agency for
which the candidate is seeking election or the governmental
agency of the elected state officer.
16)Makes violations of the PRA subject to administrative, civil,
and criminal penalties.
FISCAL EFFECT : Unknown. State-mandated local program;
contains a crimes and infractions disclaimer.
COMMENTS :
1)Purpose of the Bill : According to the author:
By requiring placement agents that do business with
California's public retirement 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
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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.
2)Arguments in Support : According to State Treasurer Bill
Lockyer, one of the co-sponsors of this bill:
AB 1743 would require placement agents to register as
lobbyists. Like lobbyists, placement agents would have to
file regular disclosure reports on how much they get paid,
and how much they pay, to influence public pension
investment decisions. They would be subject to strict
limits on gifts and campaign contributions they could make
to pension fund officials. By applying lobbying laws to
placement agents, AB 1743 would impose another critical
restriction: a ban on contingency fee compensation. . . .
Sixty years ago, California cracked down on lobbyists'
domination of the Legislature. A crucial part of the
crackdown was the contingency fee ban. The prohibition is
there for a good reason. Reformers understood if lobbyists
have a financial stake in the fate of a bill, they are far
more likely to cross legal and ethical lines to win, and
the likelihood of widespread corruption of the Legislature
greatly increases. This anti-corruption rationale applies
with even greater force to public pension funds, where
those who seek to influence investment decisions can have
billions of dollars at stake.
Critics of the prohibition argue small firms need placement
agents to pitch their proposals to big pension funds and
that a ban on contingency fees would "shut out small
firms." However, CalPERS is making great strides toward
making placement agents unnecessary for the managers who
supposedly need them. The fund has hired a skilled
investment professional to be its eyes and ears in the
marketplace for new and small money managers.
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Additionally, CalPERS recently launched a dedicated e-mail
account that allows money managers to route proposals
directly to CalPERS investment staff. In the first month
alone, more than 100 proposals have been submitted.
Public pension fund investment decisions should not be
based on whether they enrich middlemen and folks with
political influence. They should be based solely on
whether they benefit workers, retirees and taxpayers. AB
1743 will protect the integrity of these decisions and help
restore public confidence in our public pension funds.
3)Arguments in Opposition : The Securities Industry and
Financial Markets Association (SIFMA) opposes this bill unless
it is amended to allow placement agents to continue to receive
payment on a contingency fee basis. SIFMA writes:
SIFMA supports most of the provisions contained in A.B.
1743. For example, we support the bill's registration and
reporting requirements. We also support both the ban on
campaign contributions and the strict gift restrictions.
Indeed, we would be willing to go further and support a ban
on all gifts. We similarly would embrace biennial ethics
training.
The Political Reform Act, however, contains a provision
which prohibits lobbyists from accepting payment on a
contingency fee basis. . . . [P]rofessional 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. . . .
Virtually all securities transactions are paid on a
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contingency fee basis, including many significant areas of
California securities business. For example, when
California undertakes an offering of municipal bonds, it
hires a securities firm to act as an underwriter of those
bonds - which is essentially the role fulfilled by
professional placement agents. A municipal underwriter may
work with the State or municipality for months, but they
only pay the underwriter if the deal is brought to market
and the capital is raised. Similarly, placement agents for
private equity funds are only paid if the money is raised.
SIFMA strongly believes that a ban on contingency fees is
effectively a ban on professional placement agents selling
securities to California pension plans. Many, if not all,
clients of professional placement agents simply do not have
the upfront money to pay for professional placement agent
services. Moreover, even if they had the money, they would
be unwilling to pay for activity that did not ultimately
result in a successful fundraising campaign. Professional
placement agents pick their investment firm clients
carefully and then work hard to raise the necessary funds
for those clients. Despite their best efforts, some
campaigns are unsuccessful, and eighteen months or more
worth of work is then uncompensated or undercompensated.
Private equity funds want and need placement agent firms to
assume that risk.
SIFMA also argues that this bill could be found to violate the
Commerce Clause of the United States Constitution,
particularly if it forces professional placement agents to
stop doing business in California.
Others who are opposing the bill or who have expressed concern
but not taken an official position on 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.
4)Contingency Fee Ban : As noted above, existing California law
prohibits lobbyists from receiving payment that is contingent
upon the outcome of any proposed legislative or administrative
action. The ban on lobbyists receiving compensation
contingent on the passage or defeat of legislation predates
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the PRA; that ban was first enacted during a special session
of the Legislature in 1950 that was held (in part) to respond
to lobbying scandals in the Legislature in the prior year.
That ban remained unchanged until the PRA was approved by
voters at the 1974 statewide primary election, when the ban
that was enacted in 1950 was repealed and replaced with a
similar ban. Unlike the ban enacted in 1950, however, the
contingency fee ban in the PRA was broader, applying not only
to payments contingent upon the passage or defeat of
legislation, but also to payments contingent on the outcome of
any proposed administrative action. Since the enactment of
the PRA, the contingency fee ban has not significantly
changed.
5)Definition of Placement Agent : Although the term "placement
agent" is already defined under existing law, this bill adds a
similar definition of that term to the PRA. The definition
that would be added to the PRA is not identical, however, to
the term in existing law. Instead, the co-sponsors of this
bill worked with the FPPC to develop a definition of
"placement agent" that is tailored to the PRA.
One key difference between the definition of the term "placement
agent" in existing law and the proposed definition of that
term in the PRA is that the term as defined in the PRA would
specify that a placement agent could include an individual who
is "acting independently." According to the co-sponsors, this
language was included in the definition at the suggestion of
the FPPC to cover individuals who may act as placement agents
to procure investments in their own firm.
Committee staff is concerned that the "acting independently"
language could result in relatively minimal and innocuous
contact between an individual and a public retirement system
resulting in that person being classified as a placement
agent. For instance, if a CalPERS member learned
independently of an investment vehicle and that person
encouraged CalPERS to invest in that vehicle believing that it
will have a high rate of return for CalPERS, that person could
be considered to be a "placement agent" even if that person
was not being paid and was not acting on any other person or
entity's behalf when communicating with CalPERS. On the other
hand, an individual who was acting as a placement agent to
procure investments in his or her own firm would seem to be
covered in the definition of "placement agent" even in the
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absence of the "acting independently" language, because that
person would be acting on behalf of an external manager. To
ensure that this bill does not apply to individuals that it is
not intended to cover, the author and the committee may wish
to consider amending this bill to remove the words "acting
independently" from the definition of "placement agent" in the
PRA.
6)Previous Legislation : AB 1584 (Public Employees Committee),
Chapter 301, Statutes of 2009, required all public pension
systems to adopt a policy requiring the disclosure of fees
paid to investment placement agents, required the disclosure
of campaign contributions and gifts made by placement agents
to public retirement board members, prohibited public
retirement board members from selling investment products to
other public retirement systems, and lengthened
post-employment restrictions on influencing retirement board
actions for former system executives and board members.
7)Double-Referral : This bill was heard in the Assembly Public
Employees, Retirement, and Social Security Committee on April
7, 2010, and was approved by the committee by a 4-1 vote.
8)Political Reform Act of 1974 : California voters passed an
initiative, Proposition 9, in 1974 that created the FPPC and
codified significant restrictions and prohibitions on
candidates, officeholders and lobbyists. That initiative is
commonly known as the PRA. Amendments to the PRA that are not
submitted to the voters, such as those contained in this bill,
must further the purposes of the initiative and require a
two-thirds vote of both houses of the Legislature.
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REGISTERED SUPPORT / OPPOSITION :
Support
CalPERS Board of Administration (co-sponsor)
State Controller John Chiang (co-sponsor)
State Treasurer Bill Lockyer (co-sponsor)
AARP
Association of California Water Agencies
California Common Cause
California Professional Firefighters
California Retired Teachers Association
California Special Districts Association
California State Association of Counties
California State Employees Association
California Taxpayers' Association
Faculty Association of the California Community Colleges
Fair Political Practices Commission
Regional Council of Rural Counties
Secretary of State Debra Bowen
Service Employees International Union, California
Opposition
Blackstone Group (unless amended)
Capstone Partners
Investment Company Institute (unless amended)
Securities Industry and Financial Markets Association (unless
amended)
Keystone Capital Corporation
Analysis Prepared by : Ethan Jones / E. & R. / (916) 319-2094