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.
How Broad is the New Law?
Primary portions of the new legislation amend the California Political Reform Act of 1974 (“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 require-ments on lobbyists, then placement agents will be subject to those requirements, including, if relevant, any local ban on contingent compen-sation.
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 behalf of another placement agent, who acts or has acted for compensation as a finder, solicitor, marketer, consultant, broker, or other intermedi-ary 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 invest-ment 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 “invest-ment 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
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 excep-tion 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 (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 legisla-tive 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 Commis-sion (“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 summa-rized 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
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.
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.
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 pro-posed 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 non-contingent 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
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.
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 procure-ment lobbyists seeking business from government agencies are not uncommon, but until recently gener-ally 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.