BILL ANALYSIS
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|SENATE RULES COMMITTEE | AB 1743|
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THIRD READING
Bill No: AB 1743
Author: Hernandez (D), et al
Amended: 8/17/10 in Senate
Vote: 27
SENATE ELEC., REAP. & CONST. AMEND. COMMITTEE : 4-0, 6/29/10
AYES: Hancock, DeSaulnier, Liu, Strickland
NO VOTE RECORDED: Denham
SENATE PUBLIC EMP. & RET. COMMITTEE : 4-1, 6/23/10
AYES: Correa, Corbett, Ducheny, Liu
NOES: Hollingsworth
NO VOTE RECORDED: Ashburn
SENATE APPROPRIATIONS COMMITTEE : 8-0, 8/2/10
AYES: Kehoe, Alquist, Ashburn, Corbett, Emmerson, Wolk,
Wyland, Yee
NO VOTE RECORDED: Leno, Price, Walters
ASSEMBLY FLOOR : 56-8, 6/2/10 - See last page for vote
SUBJECT : Political Reform Act of 1974: placement agents
SOURCE : California Public Employees Retirement System
Treasurer Bill Lockyer
Controller John Chiang
DIGEST : This bill 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
CONTINUED
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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.
Senate Floor Amendments 8/17/10 make a minor technical
change in order to clarify the definition of who is not to
be included in the definition of "placement agent" under
this bill.
ANALYSIS :
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.
"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.
2.Requires lobbyists to register as such with the Secretary
of State (SOS) and to comply with various ethical and
reporting rules.
3.Requires any person who makes a payment to influence
legislative or administrative action, as defined, to
comply with various reporting rules.
4.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.
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This bill:
1. Subjects 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 (SOS) as a lobbyist. The person is
required to comply with any other applicable
requirements imposed by the local government agency.
2. 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.
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.
3. 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 PRA replaced the 1950 ban with similar but
broader prohibitions.
4. 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,
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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 this bill, 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.
The California Public Employees' Retirement System
(CalPERS) and the California State Teachers' Retirement
System (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, and (c) the annual performance of investments
secured through placement agents.
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
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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
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
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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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: Yes
According to the Senate Appropriations Committee analysis,
the Fair Political Practice Commission and the SOS indicate
minor costs for enforcement and the processing of
additional filings of disclosure statements. CalSTRS and
CalPERS both indicate one-time minor costs to prepare the
report by August 1, 2012.
SUPPORT : (Verified 8/6/10)
California Public Employees' Retirement System (co-source)
Treasurer Bill Lockyer (co-source)
Controller John Chiang (co-source)
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
National Association for the Advancement of Colored People
Secretary of State
Service Employees International Union
OPPOSITION : (Verified 8/6/10)
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Investment Company Institute
Securities Industry and Financial Markets Association
Third Party Marketers Association
ARGUMENTS IN SUPPORT : According to the author's office,
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, this
bill increases 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's office 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
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
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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 California's
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.
ASSEMBLY FLOOR :
AYES: Adams, Ammiano, Arambula, Bass, Beall, Block,
Blumenfield, Bradford, Brownley, Buchanan, Caballero,
Charles Calderon, Carter, Chesbro, Coto, Davis, De La
Torre, De Leon, Eng, Evans, Feuer, Fletcher, Fong,
Fuentes, Furutani, Gaines, Galgiani, Gilmore, Hayashi,
Hernandez, Hill, Huber, Huffman, Jones, Logue, Bonnie
Lowenthal, Ma, Mendoza, Monning, Nava, Nestande, Nielsen,
V. Manuel Perez, Portantino, Ruskin, Salas, Saldana,
Skinner, Solorio, Swanson, Torlakson, Torres, Torrico,
Villines, Yamada, John A. Perez
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NOES: Anderson, Conway, Hagman, Harkey, Knight, Niello,
Norby, Silva
NO VOTE RECORDED: Bill Berryhill, Tom Berryhill,
Blakeslee, Cook, DeVore, Emmerson, Fuller, Garrick, Hall,
Jeffries, Lieu, Miller, Smyth, Audra Strickland, Tran,
Vacancy
DLW:do 8/18/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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