BILL ANALYSIS �
SB 398
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Date of Hearing: June 22, 2011
ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT AND SOCIAL
SECURITY
Warren T. Furutani, Chair
SB 398 (Hernandez) - As Amended: March 24, 2011
SENATE VOTE : 39-0
SUBJECT : Retirement: placement agents.
SUMMARY : Revises the definition of placement agent and
external manager, makes conforming changes to the definition of
"placement agent" and "external manager" in the Political Reform
Act of 1974 (PRA), and exempts placement agents, as specified,
from local government reporting and registration requirements.
Specifically, this bill :
1)Revises 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.
2)Defines "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.
3)Exempts investment companies registered with the Securities
and Exchange Commission (SEC), as specified, and make a public
offering of their securities.
4)Defines "investment vehicle" as a corporation, partnership,
limited partnership, limited liability company, association,
or other domestic or foreign entity that is managed by an
external manager, as specified.
5)Revises 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
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California.
6)Revises 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.
7)Makes conforming changes to the definition of "external
manager" and "placement agent" for purposes of the PRA.
8)Imposes a state-mandated local program by changing or creating
additional crimes, infractions, or penalties.
EXISTING LAW :
1)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.
2)Defines "placement agent" as a person or entity hired,
engaged, or retained by an external manager or other placement
agent to raise money or investments from a public retirement
system in California.
3)Excludes from the definition of "placement agent" employees,
officers, or directors of specified external investment
managers, or of affiliates of the external managers.
4)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 PRA.
5)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.
6)Prohibits compensation paid to placement agents that is
contingent upon defeat, enactment, or the outcome of any
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proposed investment action.
7)Allows 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.
8)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.
9)Requires a report from the California Public Employees'
Retirement System (CalPERS) and the 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.
10)Makes a violation of the PRA subject to administrative, civil
and criminal penalties.
FISCAL EFFECT : According to the Senate Appropriations
Committee, pursuant to Senate Rule 28.8, negligible state costs.
COMMENTS : 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), Chapter 668, Statutes of 2010, co-sponsored
by CalPERS, the State Controller and the Treasurer that requires
placement agents that do business with CalPERS and CalSTRS to be
subject to the same reporting and ethics rules that govern
lobbyists under the PRA.
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
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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).
AB 1743 (Hernandez), Chapter 668, Statutes of 2010, 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
PRA, and 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.
AB 1584 (Assembly Public Employees, Retirement and Social
Security Committee), Chapter 301, Statutes of 2009, makes
numerous changes aimed at increasing disclosure and
accountability of investment placement agents, board members,
and others associated with public pension funds in California.
REGISTERED SUPPORT / OPPOSITION :
Support
John Chiang, California State Controller
Bill Lockyer, California State Treasurer
California Public Employees' Retirement System
Securities Industry and Financial Markets Association
Opposition
None on file
Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916)
319-3957
SB 398
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