BILL ANALYSIS �
SENATE COMMITTEE ON ELECTIONS
AND CONSTITUTIONAL AMENDMENTS
Senator Lou Correa, Chair
BILL NO: SB 398 HEARING DATE: 5/3/11
AUTHOR: HERNANDEZ ANALYSIS BY: Frances Tibon
Estoista
AMENDED: 3/24/11
FISCAL: YES
SUBJECT
Retirement: placement agents
DESCRIPTION
Existing law requires all public pension systems to adopt a
policy, on or before June 30, 2010, requiring the
disclosure of fees paid to investment placement agents.
Existing law defines "placement agent" as a person or
entity hired, engaged, or retained by an external manager
or another placement agent to raise money or investments
from a public retirement system in California.
Existing law excludes from the definition of "placement
agent" employees, officers, or directors of specified
external investment managers, or of affiliates of the
external managers.
Existing law 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 Political Reform
Act (PRA).
Existing law 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, as defined, pursuant to the
PRA.
Existing law prohibits compensation paid to placement
agents that is contingent upon defeat, enactment, or the
outcome of any proposed investment action.
Existing law 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.
Existing law defines "external manager" as a person or
entity, as specified, who is seeking to be, or is, retained
by a state public retirement system to invest, hold or
trade securities or other assets, or manage a portfolio of
securities or other assets for a fee.
Existing law requires a report from the California Public
Employees' Retirement System (CalPERS) and California State
Teachers' Retirement System (CalSTRS) to the Legislature by
August 1, 2012, on the use of placement agents in
connection with investments, as specified; and makes a
violation of the PRA subject to administrative, civil, and
criminal penalties.
This bill would revise the definition of "external manager"
to include a person who seeks, or is retained by a board or
investment vehicle to manage a portfolio of securities or
other assets for a fee, or a person who manages an
investment fund who offers, sells, or has offered and sold
an ownership interest in the investment fund to a board or
investment vehicle.
This bill would define "investment fund" to mean a private
equity and public equity fund, venture capital fund, hedge
fund, fixed income fund, real estate fund, infrastructure
fund, or other pooled investment entity that is primarily
engaged in the business of investing, owning, holding, or
trading securities and other assets;
This bill would exempt investment companies registered with
the SEC, as specified, that make a public offering of their
securities.
This bill would define "investment vehicle" as a
corporation, partnership, limited partnership, limited
liability company, association, or other domestic or
SB 398 (HERNANDEZ) Page
2
foreign entity that is managed by an external manager, as
specified.
This bill would revise the definition of "placement agent"
to include a person or an investment fund managed by an
external manager directly or indirectly hired, engaged, or
retained for a fee by an external manager to raise money
for investment from a public retirement system or an
investment vehicle in California.
This bill would revise the exemption to local government
reporting and registration requirements for placement
agents to include an employee, officer, director, or
affiliate of an external manager if the external manager is
registered with the SEC, as specified, or any appropriate
state securities regulator; the external manager is
participating in a competitive bidding process, or has been
awarded a contract for services and has agreed to a
fiduciary standard of care, as specified.
This bill would make conforming changes to the definitions
of "external manager" and "placement agent" for purposes of
the PRA.
BACKGROUND
What are Placement Agents ? Placement agents are persons
that are hired by outside investment managers in connection
with an investment transaction as a finder, solicitor,
marketer, or consultant to raise money from, or to obtain
access to, an institutional investor such as a public
retirement system.
In light of growing allegations nationwide that placement
agents may have improperly attempted to sway the investment
decisions of public retirement systems, the Governor signed
legislation (AB 1743, Hernandez, Ch. 668 Statutes of 2010)
co-sponsored by CalPERS, the Controller and the Treasurer
that requires placement agents that do business with
CalPERS or CalSTRS to be subject to the same reporting and
ethics rules that govern lobbyists under the PRA.
COMMENTS
SB 398 (HERNANDEZ) Page
3
1. According to the author , the goal of AB 1743 was to
identify and regulate the activities of individuals
soliciting investments for external managers. However,
some in the financial community have raised concerns
that AB 1743 could be interpreted to include all broker
dealers engaged in general secondary and primary
securities transactions with state retirement systems.
AB 1743 was never intended to cover the routine trading
and sales of securities (such as stocks in publicly
traded companies) by a brokerage firm.
SB 398 revises the definitions of placement agents,
investment funds and external managers to clarify that
the new law applies to placement agents who solicit
investments for external managers, not to broker-dealers
and underwriters of typical securities, i.e., stocks,
bonds, and commodities that are executing transactions
on the retirement systems' behalf as originally intended
by AB 1743 (Hernandez).
PRIOR ACTION
Senate Public Employment and Retirement Committee:5-0
POSITIONS
Sponsor: Author
Support: Cal PERS
Security Industry and Financial Markets
Association
State Treasurer
Oppose: None received
SB 398 (HERNANDEZ) Page
4