BILL ANALYSIS
AB 1743
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB 1743 (Hernandez)
As Amended August 17, 2010
2/3 vote
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|ASSEMBLY: |56-8 |(June 2, 2010) |SENATE: |29-7 |(August 30, |
| | | | | |2010) |
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Original Committee Reference: P.E.,R. & S.S.
SUMMARY : 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, 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. Specifically, this bill :
1)Requires placement agents that do business with the California
Public Employees' Retirement System (CalPERS) or the California
State Teachers' Retirement System (CalSTRS) to be subject to the
same reporting and ethics rules that govern lobbyists under the
PRA.
2)Requires quarterly activity reports, including any honoraria,
gifts, fees or other compensation, as well as attendance at a
biennial ethics class.
3)Prohibits compensation paid to placement agents that is
contingent upon defeat, enactment, or the outcome of any
proposed investment action.
4)Prohibits campaign contributions and puts significant limits on
gifts.
5)Requires placement agents connected with investments made by
local public retirement systems to file any applicable reports
with a local government agency that requires lobbyist to
register and file reports and to comply with any additional
requirements imposed by those local agencies on lobbyists
pursuant to the PRA.
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6)Revises the current definition of "placement agent" to exclude
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 securities or
assets owned, controlled, invested, or held by the external
manager.
7)Excludes from the provisions of the bill employees, officers, or
directors of specified external investment managers or of
affiliates of the external managers.
8)Allows payments of fees for contractual services provided to an
investment manager by a placement agent registered with the
Securities and Exchange Commission (SEC) and regulated by the
Financial Industry Regulatory Authority.
9)Requires 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.
10)Adds to the PRA definitions of "external manager" and
"placement agent."
The Senate amendments :
1)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.
2)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.
3)Make clarifying changes to ensure consistent definitions of the
terms "external manager" and "placement agent".
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.
2)Defines "administrative action" as the proposal, drafting,
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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.
3)Requires an individual who is considered a lobbyist, as defined,
to register as a lobbyist and to comply with various ethical and
reporting rules.
4)Requires any person who makes a payment to influence legislative
or administrative action, as defined, to comply with various
reporting rules.
5)Makes a violation of the PRA subject to administrative, civil,
and criminal penalties.
6)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.
7)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.
AS PASSED BY THE ASSEMBLY , this bill was substantially similar to
the version approved by the Senate.
FISCAL EFFECT : According to the Assembly Appropriations
Committee:
1)Minor and absorbable costs to CalPERS and CalSTRS to revise
policies and notices.
2)Minor and absorbable costs to the Fair Political Practices
Commission and Secretary of State for handling additional
filings of disclosure statements and for enforcement.
3)Local enforcement costs not reimbursable.
COMMENTS : 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
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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."
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.
According to CalPERS, "Like lobbyists, placement agents attempt to
influence the decisions of public officials - in this case, state
public pension fund officials responsible for investing hundreds
of billions of dollars on behalf of California public employers,
employees, retirees and their beneficiaries. While only 20
percent of private investment managers responding to a CalPERS
disclosure request indicated they had hired placement agents over
the last fifteen years, the disclosures released to the public in
late January revealed that the top ten placement agent firms were
paid more than $125 million for securing investments from CalPERS.
"These placement agents owe no contractual or fiduciary obligation
to state public pension funds while receiving large payments from
private investment managers seeking pension fund money. The media
has reported extensively on the activities of former CalPERS board
members and others employed as placement agents. One former board
member, Alfred Villalobos, received almost $59 million from Apollo
Global Management, a financial holding company that has benefited
from billions in CalPERS investments, including a New York equity
investment deal that may cost the state hundreds of millions of
dollars.
"The CalPERS Board of Administration believes its stakeholders and
the public should be confident that its investment decisions are
made in an impartial manner, free from potential bias or influence
caused by the financial interests of placement agents, the pension
fund official or third parties who have supported the official.
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To that end, it has adopted policies and supported legislation to
protect the investment fund from the undocumented influence of
placement agents. However, continuing revelations have
underscored the need for full disclosure of the finances and other
activities of placement agents, and additional regulation and
enforcement by an independent third party.
"Many of the policy goals in favor of regulating those who try to
influence legislation and regulatory actions or secure government
contracts should also apply to placement agents. Extending the
existing lobbyist bans on contingency fees, political
contributions and the $10 gift limit to placement agents would
increase the confidence in state public pension funds' investment
decision making processes and reduce the perception of bias and
the risk of actual bias. Under AB 1743, placement agents can
still lobby to secure CalPERS and CalSTRS investments on behalf of
a client, but they must comply with the California's lobbying laws
when they do so."
While the Securities Industry and Financial Markets Association
(SIFMA) has expressed support for the bill's registration and
reporting requirements, campaign contribution ban and strict gift
limits, they are concerned about the provision that prohibits
lobbyists from accepting payment on a contingency fee basis and,
therefore, have taken an "oppose unless amended" position on the
bill.
According to SIFMA, "?professional 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."
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
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perform four primary functions as part of the placement process:
(i) due diligence; (ii) project management; (iii) distribution;
and (iv) road show organization."
SIFMA is concerned that the current definition of "placement
agents" would include not only professional placement agents but
persons hired merely as "finders" or for, "?introductory services.
A professional placement agent, however, performs a much bigger
function than a finder, who generally does not perform - and is
not qualified to undertake - many of the due diligence, project
management, distribution and road show functions. Rather, a finder
may often be unregistered, and he primarily provides his clients
with access to a narrow group of potential investors, focusing on
personal relationships with high-level officials."
SIFMA concludes that they would "?not have an issue with banning
contingency fees for finders. A finder's limited role of "opening
doors" to a small group of California pension funds could
presumably be compensated on a flat fee basis. We, however, do not
believe that a flat fee structure, hourly or otherwise, works for
professional placement agents or the private equity firms they
represent. The end result of a contingency fee ban will likely be
that many fewer emerging manager and other innovative
opportunities get presented to the California pension fund
system."
Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916)
319-3957
FN: 0006838