BILL ANALYSIS �
SB 398
Page 1
Date of Hearing: July 5, 2011
ASSEMBLY COMMITTEE ON ELECTIONS AND REDISTRICTING
Paul Fong, 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 is seeking to be, or is, retained by an investment
vehicle to manage a portfolio of securities or other assets
for compensation, or a person who manages an investment fund
and who offers, sells, or has offered and sold, an ownership
interest in the investment fund to an investment vehicle.
2)Defines "investment fund" to mean a private equity or public
equity fund, venture capital fund, hedge fund, fixed income
fund, real estate fund, infrastructure fund, or other similar
pooled investment entity that is primarily engaged in the
business of investing, owning, holding, or trading securities
or other assets.
3)Excludes investment companies registered with the Securities
and Exchange Commission (SEC), as specified that make public
offerings of their securities, from the definition of
"investment fund."
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 mean a person
directly or indirectly hired, engaged, or retained by, an
external manager or an investment fund managed by an external
manager, and who acts for compensation as a finder, solicitor,
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marketer, consultant, broker or other intermediary in
connection with the offer or sale to a board or investment
vehicle the investment management services of the external
manager or an ownership interest in an investment fund managed
by the external manager, as specified.
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 other conforming changes.
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;
contains a crimes and infractions disclaimer.
COMMENTS :
1)Purpose of the Bill : According to the author: "SB 398 revises
the definitions of Placement Agents, Investment Funds and
External Managers to clarify that the new law �AB 1743
(Hernandez), Chapter 668, Statutes of 2010] 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)."
2)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.
3)Clean-up Legislation : Following allegations and
investigations nationwide regarding placement agents that may
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have improperly attempted to sway the investment decisions of
public retirement systems, the Legislature passed, and the
Governor signed, legislation (AB 1743 (Hernandez), Chapter
668, Statutes of 2010) to require 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.
According to information provided by the author's office, the
intent of AB 1743 was to identify and regulate the activities
of individuals soliciting investments for external managers.
However, as implemented, there is concern that this new law
also regulates the routine trading and sales of securities by
a brokerage firm. This bill revises several definitions in
current law and in the PRA to clarify that the requirements
put into statute via AB 1743 only apply to placement agents
who solicit investments for external managers.
4)Previous Legislation : 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.
5)Arguments in Support : In support of this bill, the CalPERS
Board of Administration writes:
A drafting error in the last amended version of �AB 1743]
that was eventually chaptered into law has raised concerns
by our partners in the investment industry that
broker-dealers engaged in general secondary and primary
securities transactions may have inadvertently been
captured in the definition of placement agent. It was
never the intent of AB 1743 to have broker-dealers involved
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in these types of transactions to register as lobbyists.
Applying the definition of Placement Agent to
broker-dealers who execute transactions on public
retirement systems' behalf could impair CalPERS ability to
buy and sell securities in the public markets. SB 398
clarifies existing law to ensure we are able to conduct
business in a timely manner with our investment industry
partners.
6)Double-Referral : This bill was heard in the Assembly Public
Employees, Retirement, and Social Security Committee on June
22, 2011, and was approved by the committee by a 6-0 vote.
7)Political Reform Act of 1974 : California voters passed an
initiative, Proposition 9, in 1974 that created the FPPC and
codified significant restrictions and prohibitions on
candidates, officeholders and lobbyists. That initiative is
commonly known as the PRA. Amendments to the PRA that are not
submitted to the voters, such as those contained in this bill,
must further the purposes of the initiative and require a
two-thirds vote of both houses of the Legislature.
REGISTERED SUPPORT / OPPOSITION :
Support
California Public Employees' Retirement System Board of
Administration
California State Controller John Chiang
California State Treasurer Bill Lockyer
Fair Political Practices Commission
Securities Industry and Financial Markets Association
Opposition
None on file.
Analysis Prepared by : Maria Garcia / E. & R. / (916) 319-2094