BILL ANALYSIS
SENATE PUBLIC EMPLOYMENT & RETIREMENT BILL NO: AB 1743
Lou Correa, Chair Hearing date: June 23, 2010
AB 1743 (Hernandez) as amended 6/17/10 FISCAL: YES
PUBLIC RETIREMENT SYSTEMS: PLACEMENT AGENT REGISTRATION AS A
LOBBYIST AND PROHIBITION ON CONTINGENCY FEES CONNECTED WITH
POTENTIONAL INVESTMENT ASSETS FROM CALPERS AND CALSTRS
HISTORY :
Sponsor: Honorable John Chiang, California State
Controller
Honorable Bill Lockyer, California State Treasurer
California Public Employees' Retirement System
(CalPERS), Board of Administration
Prior legislation: AB 1584 (Hernandez),
Chapter 301, Statutes of 2009
ASSEMBLY VOTES :
PER & SS 4-1 4/07/10
Assembly E&R 7-0 4/20/10
Appropriations 11-5 5/28/10
Assembly Floor 56-8 6/02/10
SUMMARY :
1) Would prohibit 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).
2) Would require 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.
Michael Bolden
Date: 6/17/10 Page 1
BACKGROUND AND ANALYSIS :
1)Existing law :
a) 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;
b) 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;
c) requires an individual who is considered a lobbyist,
as defined, to register as a lobbyist and to comply with
various ethical and reporting rules;
d) requires any person who makes a payment to influence
legislative or administrative action, as defined, to
comply with various reporting rules;
e) makes a violation of the PRA subject to
administrative, civil, and criminal penalties;
f) 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, and
g) 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.
1)This bill :
a) would exclude from the definition of "placement
agent," an employee, officer, director, equity holder,
Michael Bolden
Date: 6/17/10 Page 2
partner, 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;
i) would also exclude an in-house employee; officer;
or a director of an external manager, or affiliate of
an external manager regulated or operating under an
exemption from the Securities and Exchange Commission
(SEC), selected by a competitive bidding process, and
bound by standards of conduct set forth in Article XVI
of the California Constitution when managing a
portfolio of assets in a public retirement system in
the State;
b) would add the definition of "investment vehicle" to
mean a partnership, limited partnership, limited
liability company, or other investment vehicle managed
by an external manager in which a public retirement
system in the State is a majority shareholder;
c) would require placement agents connected to potential
business with the California Public Employees'
Retirement System (CalPERS) or the California State
Teachers' Retirement System (CalSTRS) to be subject to
the same registration, reporting and ethics rules that
govern lobbyists under the PRA;
d) would require placement agents connected with
potential investments made by local public retirement
systems to file any applicable reports, and comply with
any applicable local regulations regarding lobbyists
pursuant to the PRA;
e) would expand the definition of "administrative
action" in the PRA to include, specifically related to
placement agents, decisions by any state agency to enter
into a contract to invest state public retirement system
assets on behalf of a state retirement system;
f) would add the definitions of "external manager" and
"placement agent" to the PRA;
Michael Bolden
Date: 6/17/10 Page 3
g) would allow 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;
h) would prohibit compensation paid to placement agents
that is contingent upon defeat, enactment, or the
outcome of any proposed investment action, and
i) would require a report from CalPERS and CalSTRS to
the chairpersons of the Assembly Public Employees,
Retirement and Social Security, and Senate Public
Employment and Retirement Committees by August 1, 2012,
on the use of placement agents in connection with
investments, as specified.
FISCAL :
According to the Assembly Appropriations Committee, this bill
would have minor and absorbable costs to both CalPERS and
CalSTRS to revise policies and notices, minor and absorbable
costs to the Fair Political Practices Commission and
Secretary of State for handling additional filings of
disclosure statements and for enforcement, and local
enforcement costs would not be reimbursable.
COMMENTS :
1) CalPERS' and CalSTRS' Existing Policies Regarding
Placement Agents or Third Party Relationships and Payments
In May 2009, the CalPERS Board Investment Committee adopted a
policy for disclosure of placement agent fees to add
transparency to the investment decision-making process. The
policy requires the disclosure of relationships between
CalPERS managers (defined as External Managers in the Policy)
and placement agents and the fees that are paid to these
placement agents. According to CalPERS, the policy was
"adopted to help ensure that CalPERS' investment decisions
are consistent with investment policy and fiduciary
responsibilities; to increase the pool of information
Michael Bolden
Date: 6/17/10 Page 4
available to CalPERS board members, staff, and consultants
when evaluating an investment opportunity; to help prevent
impropriety and the appearance of impropriety; and to provide
transparency and confidence in CalPERS' investment
decision-making processes."
In 2006, as part of its policy governing ethical and
fiduciary conduct, the CalSTRS Board adopted a policy for the
disclosure of third party relationships and payments. The
policy requires a person or entity involved with any
investment transaction or investment management contract to
disclose all third party relationships with persons or
entities that assisted with the solicitation of CalSTRS as a
potential client or the retention of CalSTRS as an existing
client. The policy also requires the disclosure of any fees
paid or payable to the third party for assisting with the
solicitation, which includes placement agent fees. CalSTRS
also has regulations in place to add transparency and
eliminate potential conflicts of interest in investments and
to prevent "pay-for-play" activities.
CalSTRS has noted that it does not engage in, or make
payments to placement agents. Fees to placement agents as a
result of a CalSTRS investment are "the result of an
arrangement between an outside investment manager and the
placement agent."
2) Contingency Fee Ban and the Political Reform Act
Existing law prohibits lobbyists from receiving payment that
is contingent upon the outcome of any proposed legislative or
administrative action. The contingency fee ban on the
passage or defeat of legislation predates the PRA. The ban
was enacted in 1950 to respond in part to lobbying scandals
in the legislature in the prior year. That ban remained
unchanged until the PRA was approved by voters in the 1974
statewide primary election which repealed the ban enacted in
1950, replacing it with a similar and broader ban which
prohibited contingency fee payments based on the outcome of
legislation and any proposed administrative action.
3) Affects of a Contingency Fee Ban on Placement Agents in
California
Michael Bolden
Date: 6/17/10 Page 5
The ban on contingency fees as proposed by this measure would
only apply to placement agents that work with CalPERS and
CalSTRS. Placement agents who work with other public and
private investors in California will be unaffected by this
bill. The bill is constrained to investment decisions "by
any state agency to enter into a contract to invest state
public retirement system assets on behalf of a public
retirement system."
According to the author, "a small part of [Cal]PERS and
[Cal]STRS investments would be impacted. Historically,
roughly 20 percent of CalPERS investments have been made
through placement agents. At CalSTRS, the share is even
smaller: only two placement agent deals were made in all of
2009."
4) Will Minority and Women-Owned Firms ("Emerging Managers")
be Disadvantaged by the Bill ?
According to the author, "No emerging managers (or managers)
have suggested that CalPERS and CalSTRS investment strategies
and emerging manager outreach is inadequate. On the
contrary, the sponsors have discussed the bill with emerging
managers and learned that placement agents favor larger firms
over the smaller ones, creating an unlevel playing field for
smaller emerging firms, and in addition to the contingency
fee commitment, many placement agents require a substantial
retainer before they'll do business."
The author further notes that "The number of firms affected
is small. There are approximately 50-70 placement agent
firms operating in California today."
5) Double-Referral : This bill is also referred to the
Senate Elections, Reapportionment and Constitutional
Amendments Committee.
6) Arguments in Support
According to the author, "By requiring placement agents that
do business with California's public retirement systems to be
Michael Bolden
Date: 6/17/10 Page 6
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 SEC have established,
augmented, or are in the process of establishing placement
agent statutes ranging from increased disclosure to a
complete ban in order to shield investment decisions from
actual or perceived unwarranted influence."
Bill Lockyer, State Treasurer and a sponsor of the bill
states that this measure "provides a crucial remedy to the
pay-to-play scandal that has infected public pensions from
New York to California" and would "keep corruption out of
California's public pension funds, safeguard benefits
promised to workers and protect taxpayers from unfair
financial burdens.
"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 managers who supposedly need
them." Finally, the Treasurer contends that the investment
of public pension funds "should not be based on whether they
enrich middlemen and folks with political influence."
Rather, "They should be based solely on whether they benefit
workers, retirees and taxpayers."
The State Controller, John Chiang also a sponsor of the bill,
states:
"Recent accounts of questionable influence-peddling
practices by placement agents and concerns about the
long-term sustainability of the public pension funds
demand the utmost transparency and attention into how
public pension investment decisions are made. Just as
Michael Bolden
Date: 6/17/10 Page 7
lobbyists who attempt to influence legislative or
administrative decisions are subject to the Political
Reform Act, so too, should be placement agents who
attempt to influence the investment of state pension
funds. By enacting AB 1743, the State's employees,
employers, and the public will be better assured that all
who serve the system do so with complete transparency,
ethics, and accountability.
"This proposal follows in the footsteps of the
now-chaptered Assembly Bill 1584 (Hernandez, 2009), which
requires all public pension systems in the state to
adopt policies requiring the disclosure of fees paid to
investment placement agents, forces disclosure of
campaign contributions and gifts made by placement agents
to public retirement board members, prohibits public
retirement board members from selling investment products
to other public retirement systems, and lengthens
post-employment restrictions on influencing retirement
board actions for former system executives and board
members.
"The State's investment portfolio could benefit
significantly from this legislation. Greater
transparency by individuals and firms who seek to
influence investment decisions should make it harder for
these entities to leverage personal relationships to gain
unequal access to public funds. AB 1743 will enable the
public and private sector to identify who is attempting
to influence the State's investment decisions and assess
their influence on the funds' overall performance."
CalPERS, also a sponsor of the bill contends that this bill
"enhances transparency and ensures accountability regarding
the investment decisions of public pension funds." Further,
"AB 1743 will increase the confidence of retirement system
members and the public, without limiting investment
opportunities, that 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 placements agents, retirement system officials
and third parties who have supported these officials."
Michael Bolden
Date: 6/17/10 Page 8
6) Arguments in Opposition
According to the Securities Industry and Financial Markets
Association (SIFMA), "SIFMA supports most of the provisions
contained in AB 1743" such as registration and reporting
requirements, and both the ban on campaign contributions and
gifts restrictions. However, "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." SIFMA
further adds, that this "would deny both private equity firms
and pension and retirement system investors of professional
placement agents' valuable services." SIFMA suggests
exempting professional placement agents from the contingency
fee ban provision.
SIFMA further contends, "Professional placement agents are
broker-dealers registered with the Securities and Exchange
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, 3PM and others who have expressed opposition to this
bill contend that small managers, i.e., emerging managers,
who typically are newer and lack the resources to present
their products, themselves and to pay advisory fees to
placement agents on a noncontingent basis, would suffer
severe impairment of access to capital from Californias
public pension plans.
3PM has suggested that the registration and disclosure
process should be modified so that it would correctly reflect
the information relevant to placement agents and that a
statewide or on-line ethics course could be an important
registration enhancement so long as the course requirements
are specific to the work and responsibilities of placement
agents, and specifically in identifying situations where
conflicts of interest are likely to occur.
7) SUPPORT :
Michael Bolden
Date: 6/17/10 Page 9
Honorable John Chiang, State Controller (Sponsor)
Honorable Bill Lockyer, State Treasurer (Sponsor)
CalPERS Board of Administration (Sponsor)
Honorable Debra Bowen, Secretary of State
Association of California Water Agencies (ACWA)
California Special Districts Association (CSDA)
California State Association of Counties (CSAC)
California State Employees Association (CSEA)
California State Teachers' Retirement System (CalSTRS)
Cartica Management, LLC
Department of Personnel Administration (DPA)
Faculty Association of California Community Colleges
(FACCC)
League of California Cities (Support if Amended)
Regional Council of Rural Counties (RCRC)
8) OPPOSITION :
Securities Industry and Financial Markets Association,
(Oppose Unless Amended)
California Bankers Association, (Oppose Unless Amended)
Champlain Advisers, LLC
Investment Company Institute, (Oppose Unless Amended)
Third Party Marketers Association, (Oppose Unless Amended)
1 Individual
####
Michael Bolden
Date: 6/17/10 Page 10