November 2010 / Issue 28
A legal update from Dechert’s Financial Services Group
Pay-to-Play: New Restrictions for Placement
Agents Soliciting Public Pension Funds in
California
California Governor Arnold Schwarzenegger
recently signed into law Assembly Bill 1743
(“AB 1743”), a broad bill that will require
placement agents and others who solicit a
state public pension plan in the State of
California on behalf of investment advisers,
including advisers to private equity and hedge
funds, to register as lobbyists. 1 The new law
also will subject both external placement
agents and internal sales staff of investment
advisers to limits on the receipt of contingent
compensation and other requirements that
apply to legislative lobbyists, including ethics
laws, limitations on gifts to public officials, and
periodic reporting requirements. 2 The new law
was enacted in large part due to high-profile
civil and criminal investigations in California
and elsewhere involving allegations of attempts
by money managers to improperly influence
decisions of state pension and retirement
funds.
(“Reform Act”) and apply only to those persons
who solicit business from plans that are part of
the State retirement system, including
CalPERS and CalSTRS. However, the new law
also requires placement agents who solicit
local retirement funds within the State to
comply with any applicable local lobbying laws
that require lobbyists to register. 3 Thus, if a
municipality or county requires the registration
of lobbyists, or imposes any other requirements on lobbyists, then placement agents will
be subject to those requirements, including, if
relevant, any local ban on contingent compensation.
Placement Agents
AB 1743 amends the definition of “lobbyist”
under the Reform Act to include “placement
agents,” 4 a term that is broadly defined as:
an individual hired, engaged, or retained
by, or serving for the benefit of or on
behalf of, an external manager, 5 or on
How Broad is the New Law?
Primary portions of the new legislation amend
the California Political Reform Act of 1974
1
2
d
See California Assembly Bill 1743, available
at http://www.leginfo.ca.gov/pub/0910/bill/asm/ab_17011750/ab_1743_bill_20100930_chaptered.pdf.
Recently adopted amendments to the California
Government Code, which became effective on
June 30, 2010, require placement agents seeking business from CalPERS to provide detailed
disclosure regarding their compensation, campaign contributions, gifts to board members,
and whether or not they were registered with the
Securities and Exchange Commission (“SEC”) as
broker-dealers. Cal. Code §§ 7513.85, 7513.9.
3
Cal. Code § 7513.87.
4
Cal. Code § 82047.3(a).
5
An “external manager” means either of the
following: (1) a person who is seeking to be, or
is, retained by a state public retirement system
in California to manage a portfolio of securities
or other assets for compensation; or (2) a person who is engaged, or proposes to be engaged,
in the business of investing, reinvesting, owning,
holding, or trading securities or other assets and
who offers or sells, or has offered or sold, securities to a state public retirement system in
California. Cal. Code § 82025.3
d
behalf of another placement agent, who acts or
has acted for compensation as a finder, solicitor,
marketer, consultant, broker, or other intermediary in connection with the offer or sale of the
securities, assets, or services of an external
manager to a state public retirement system in
California or an investment vehicle, either directly
or indirectly.
The definition thus includes both third-party placement
agents, as well as individual employees of an investment adviser who solicit state retirement funds on
behalf of the adviser. The definition will apply to
persons soliciting separate account investments, as
well as private equity and other alternative investments.
In addition, persons who solicit business from “investment vehicles” in which a State public retirement
system is the “majority investor” also will be covered –
even if the investment vehicle is managed by an
external adviser and has other non-governmental
investors. 6
Exceptions
As noted above, the definition of a placement agent
includes internal sales staff of an adviser that solicit
public pension plans in California. However, an exception is provided where the persons involved in the
lobbying activity on behalf of the money manager spend
one-third or more of their time during a calendar year,
“managing the securities or assets owned, controlled,
invested or held by the external manager.”
A second exception from the definition of a placement
agent, which relates only to persons lobbying State
retirement funds, is provided in instances in which
(i) the adviser is registered with the SEC or a state
securities regulator; (ii) the adviser has been selected
through a competitive bidding process (subject to
California law) and is providing services pursuant to a
contract executed as a result of that process; and
6
An “investment vehicle” means a corporation, partnership, limited partnership, limited liability company, association, or other entity, either domestic or foreign, constituting or managed by an external manager in which a
state public retirement system in California is the majority
investor and that is organized in order to invest with, or
retain the investment management services of, other
external managers. Cal. Code § 82047.3(d).
It is unclear at this point, however, how the law will be
interpreted in the context of the many different investment vehicles that are offered – particularly where an
external manager may be solicited directly by brokers and
other managers to offer investments or provide services,
as for example with a fund-of-funds.
(iii) the adviser has agreed to a fiduciary standard of
care (as defined by California law) when managing the
assets of a California state public retirement system.
Requirements for Placement Agents,
Including Internal Sales Staff, Under
California Lobbying Law
Placement agents, and others, who fall within the
definition of a lobbyist as a result of the new law will be
subject to the same restrictions that pertain to legislative lobbyists under the Reform Act. The Reform Act is
administered by the Political Reform Division of the
California Secretary of State (“Reform Division”), which
registers lobbyists and receives periodic reports. In
addition, the California Fair Political Practices Commission (“FPPC”) is responsible for adopting regulations,
providing interpretations, and enforcing provisions of
the Reform Act. Major requirements imposed on
placement agents under the Reform Act are summarized below.
Registration as Lobbyists
There are multiple categories of persons who must
register with the State as lobbyists. These include
“lobbyist firms,” “lobbyist employees” and “lobbyist
employers.” Forms for registration are available on the
website of the Reform Division. 7
Reporting
Lobbyist firms and their employees are required to file
quarterly reports, or disclosure statements, listing fees
received for lobbying activity as well as lobbying-related
payments and campaign contributions in excess of
$100, among other items.
Ethics Training
Individuals registering as lobbyists must complete an
ethics education course and also are required to certify
on an annual basis that they have attended a required
course on ethical issues and laws relating to lobbying
within the previous 12 months.
7
Information, including forms and regulations, can be
found on the website of the Reform Division at
www.sos.ca.gov/prd/. Information about the FPPC is
found at www.fppc.ca.gov. General information regarding
the lobbying disclosure requirements is found in the
FPPC’s Lobbying Disclosure Information Manual (2005).
November 2010 / Issue 28
2
d
Prohibition on Contingent Compensation
The Reform Act states that no lobbyist shall: “[a]ccept
or agree to accept any payment in any way contingent
upon the defeat, enactment, or outcome of any proposed legislative or administrative action.” 8 The
limitation applies both to external placement agents
and their employees and the internal sales staff of
advisers. However, the new law expressly permits noncontingent fees to be paid to broker-dealers registered
with the SEC, and members of the Financial Industry
Regulatory Authority.
Limits on Political Contributions and Other Provisions
In addition to the provisions that are described above,
lobbyists are subject to laws limiting their political
contributions, 9 establishing limits on gifts, 10 and
prohibiting deceptive statements in connection with
lobbying activity. 11
8
Cal. Code § 86205(f).
9
Cal. Code § 85702.
10
Cal. Code § 86203.
11
Cal. Code § 86205(b).
Effective Date and Penalties for
Non-Compliance
The effective date for the registration provisions under
AB 1743 is January 1, 2011. At that time, managers
and third-party placement agents should have in effect
policies to ensure compliance. Violations of the Reform
Act may result in fines, criminal actions, and a ban on
lobbying.
Conclusion
AB 1743 has received a lot of attention in the press
because of its sponsorship by CalPERS and CalSTRS,
and the high profile scandals involving former directors
and employees of CalPERS and other pension funds.
State and local laws requiring registration of procurement lobbyists seeking business from government
agencies are not uncommon, but until recently generally have not been applied to the financial services
industry. There still are interpretive questions and other
issues relating to AB 1743 that may need to be
resolved by the FPPC. However, firms that do business
with pension funds in California should be careful that
they comply with any State or local lobbying laws.
„
„
„
This update was authored by Edward L. Pittman (+1 202
261 3387; [email protected]) and Brenden P.
Carroll (+1 202 261 3458; [email protected]).
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November 2010 / Issue 28
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M. Holland West
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Jennifer Wood
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Anthony H. Zacharski
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