BILL ANALYSIS
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
1743 (Hernandez)
Hearing Date: 08/02/2010 Amended: 06/17/2010
& as proposed to be amended
Consultant: Maureen Ortiz Policy Vote: PE&R: 4-1
ER&CA:4-0
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BILL SUMMARY: AB 1743 prohibits any 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 with the Secretary of State as a lobbyist. The bill
further requires placement agents to comply with any applicable
requirements imposed by local government agencies.
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Fiscal Impact (in thousands)
Major Provisions 2010-11 2011-12 2012-13 Fund
FPPC
----------minor, absorbable------------- General
SOS
----------minor, absorbable----------- General
PERS report -
---------------minor------------------ Special**
STRS report
----------------minor------------------- Special*
*Teachers' Retirement Fund **Public Employees
Retirement Fund
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STAFF COMMENTS:
The Fair Political Practices Commission (FPPC) and the Secretary
of State (SOS) indicate minor costs for enforcement and the
processing of additional filings of disclosure statements.
CalSTRS and CalPERS both indicated one-time minor costs to
prepare the report by August 1, 2012.
The author's proposed amendments make clarifying changes to
ensure consistent definitions of the terms "external manager"
and "placement agent".
AB 1743 will subject certain placement agents to the provisions
of the Political Reform Act of 1974 (PRA), which prohibits
contingency fees. It will prohibit a person from acting as a
placement agent in connection with any potential system
investment made by a state public retirement system unless that
person is registered with the Secretary of State as a lobbyist.
The person will be required to comply with any other applicable
requirements imposed by the local government agency.
AB 1743 redefines "placement agent" as a person or entity hired,
engaged, or retained by an external manager, or on behalf of
another placement agent, to act as a finder, solicitor,
marketer, consultant, broker, or other intermediary to raise
money or investment from a state public retirement system in
California for compensation.
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AB 1743 (Hernandez)
Excluded from that definition is an employee, officer, director,
equity holder, partner, member, or trustee of an external
manager who spends 1/3 or more of his or her time managing the
assets controlled by the external manager.
Existing law prohibits lobbyists from receiving payment that is
contingent upon the outcome of any proposed legislative or
administrative action. This ban was enacted in 1950 to respond
in part to previous lobbying scandals. The enactment of the
Political Reform Act of 1974 replaced the 1950 ban with similar
but broader prohibitions.
AB 1743 further defines "external manager" as a person 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.
Placement agents are intermediaries hired by private investment
managers, such as hedge funds or private-equity investment
firms, to seek funds from public pension funds for placement
with the investment manager. Following major losses in private
equity investments during the past two years, the activities and
compensation of placement agents have received considerable
scrutiny. For instance, investigations of placement agent
activity in New York resulted in criminal charges against
several state officials, and similar investigations are
occurring in California.
Under the provisions of AB 1743, a placement agent who is
registered with the Securities and Exchange Commission and is
regulated by the Financial Industry Regulatory Authority is
permitted to receive a payment for fees for contractual services
provided to an investment manager, except to the extent that
payment of fees is prohibited by the proscription on contingency
payments to placement agents.
CalPERS and CalSTRS will be required to report to the
Legislature no later than August 1, 2012 on the use of placement
agents in connection with investments made by those retirement
systems. Each report must include the following:
a)The number of, and descriptions of, those investments made by
the retirement system through external managers that have
compensated placement agents in connection with the
investments,
b)A description of those external managers based on the size of
assets under their control.
c)The annual performance of investments secured through
placement agents.
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 its investment portfolio was
approximately $200 billion. CalPERS is administered by a
13-member Board of Administration which is responsible for
setting employer contribution rates, determining investment
asset allocations, and providing actuarial valuations. The
Board can not make benefit changes without approval of the
Legislature.
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AB 1743 (Hernandez)
CalSTRS provides retirement 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.
In 2006, 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 contact to disclose all third party
relationships with persons or entities that assisted with the
solicitation of CalSTRS as a potential client. The policy
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 notes 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."
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 and placement agents and the fees that are paid to
these placement agents.
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.
The SEC's new regulation 206(4)-5, which takes effect September
13, 2010, establishes a regulatory scheme that includes
licensing and registration requirements, examination programs,
and enforcement provisions for violators. These new regulations
ban investment advisors (those who hire placement agents) from
serving public pension funds for two years if they make large
campaign contributions to elected officials.
AB 1743 amends the Political Reform Act and will, therefore,
require a 2/3 floor on the Senate Floor. This bill is similar
to AB 1584, Chapter 301, Statutes of 2009, which requires all
public pension systems in the state to adopt policies requiring
the disclosure of fees paid to investment placement agents, and
requires disclosure of campaign contributions and gifts made by
placement agents to public retirement board members,