BILL ANALYSIS
SENATE COMMITTEE ON ELECTIONS, REAPPORTIONMENT AND
CONSTITUTIONAL AMENDMENTS
Senator Loni Hancock, Chair
BILL NO: AB 1743 HEARING DATE:
6/29/10
AUTHOR: HERNANDEZ ANALYSIS BY:
Darren Chesin
AMENDED: 6/17/10
FISCAL: YES
SUBJECT
Political Reform Act: placement agents
DESCRIPTION
Existing law 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. "Administrative action" is defined 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.
Existing law requires lobbyists to register as such with
the Secretary of State (SOS) and to comply with various
ethical and reporting rules.
Existing law also requires any person who makes a payment
to influence legislative or administrative action, as
defined, to comply with various reporting rules.
Existing law 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 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.
This bill 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 pursuant to the Political
Reform Act (PRA).
This bill 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.
This bill would additionally provide for all of the
following:
a)Exclude from the definition of "placement agent," 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, as specified,
managing the assets controlled by the external manager.
b)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.
c)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.
d)Prohibit compensation paid to placement agents that is
contingent upon defeat, enactment, or the outcome of any
proposed investment action.
e)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.
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f)Add the definitions of "external manager" and "placement
agent" to the PRA.
g)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)Require a report from CalPERS and CalSTRS to the
Legislature by August 1, 2012, on the use of placement
agents in connection with investments, as specified.
BACKGROUND
CalPERS provides retirement and health benefits to more
than 1.6 million public employees, retirees, and their
families and more than 3,000 employers. Membership is
divided approximately in thirds among current and retired
employees of the state, schools, and participating public
agencies. As of January 31, 2010, the market value of
their investment portfolio was approximately $200 billion.
CalPERS is administered by a 13-member Board of
Administration. Members are either elected by members of
the system, appointed, or are designated by law to be on
the Board. The Board's responsibilities include, but are
not limited to, setting employer contribution rates,
determining investment asset allocations, and providing
actuarial valuations. The Board does not have the
authority to add, change, or delete benefits without the
concurrence of the Legislature.
CalSTRS provides retirement related benefits and services
to teachers in public schools and community colleges. It
has approximately 833,000 members and assets of $132.6
billion as of February 28, 2010. CalSTRS is administered
by a 12-member board which sets similar policies.
CalPERS' and CalSTRS' Existing Policies . 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
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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
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."
Contingency Fee Ban . 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 1974 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.
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COMMENTS
1.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 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.
The author further notes that the number of firms affected
is small. There are approximately 50-70 placement agent
firms operating in California today. 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 unleveled 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.
2.Affects of a Contingency Fee Ban on Placement Agents .
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
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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."
PRIOR ACTION
Assembly P.E.,R. & S.S. Committee 4-1
Assembly Elections and Redistricting Committee: 7-0
Assembly Appropriations Committee: 11-5
Assembly Floor: 56-8
Senate P.E. & R. Committee: 4-1
POSITIONS
Sponsors:California Public Employee Retirement System
(CalPERS)
Treasurer Bill Lockyer
Controller John Chiang
Support: American Association of Retired Persons
California Common Cause
California State Employees Association
California State Teachers Retirement System
California Professional Firefighters
California Retired Teachers Association
Cartica Management, LLC
Faculty Association of California Community
Colleges
Fair Political Practices Commission
Secretary of State
Service Employees International Union
Oppose: Investment Company Institute
Securities Industry and Financial Markets
Association
Third Party Marketers Association
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