California Requires Solicitors Of State Retirement Systems To Register As Lobbyists: Implications For Investment Managers

Monday, January 31, 2011 - 01:00

As of January 1, 2011, the California Political Reform Act (the "CPRA") requires "placement agents" soliciting business for "external managers" from the state's public retirement systems - currently the California Public Employees' Retirement System ("CalPERS") and the California State Teachers' Retirement System ("CalSTRS") - to register as lobbyists under the CPRA. The recent amendments to the CPRA contained in Assembly Bill 1743 (AB 1743) apply not only to third-party placement agents but also to in-house marketing employees of external investment managers, unless such employees fall within certain exceptions.1The CPRA imposes significant lobbying compliance obligations on individual lobbyists and their employers, including registration, filing disclosure reports, and internal recordkeeping. The CPRA also prohibits certain activities by lobbyists, including the acceptance of contingent fees for work that falls within the definition of lobbying.

In addition, CalPERS has submitted for final administrative review new regulations to update its placement agent disclosure policies and to reflect certain definitions adopted in AB 1743. These regulations are expected to take effect soon after January 28, 2011.

Investment managers seeking business with public retirement funds in California should consider the impact of the new law and the CalPERS regulations on their retention of placement agents and the role of their internal marketing staff.

Definition Of Placement Agent

AB 1743 defines a placement agent broadly to include "any person hired, engaged, or retained by, or serving for the benefit of or on behalf of, an external manager, or on 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," either directly or indirectly.2The definition is intended to cover internal personnel of the investment manager who fall within the definition, subject to certain exceptions. The amendments define an external manager to include (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. The second clause captures investments in funds such as private equity and hedge funds.


Importantly, for purposes of being considered a lobbyist, the CPRA amendment excludes from the definition of placement agent an individual who is an employee, officer, director, equity holder, partner, member, or trustee of an external manager and who spends one-third or more of his or her time, during a calendar year, managing the securities or assets owned, controlled, invested, or held by the external manager. Under this exception, investment professionals who also engage in marketing for their external manager employers would be exempt from the CPRA's lobbying provisions if they meet the required time and activity thresholds.

Also excluded from the definition of placement agent for purposes of being considered a lobbyist are employees, officers, or directors of an external manager, or of an affiliate of an external manager, if the external manager (1) is registered with the SEC or appropriate state securities regulator as an investment adviser or broker-dealer, (2) is selected through a specified competitive bidding process and is providing services through a competitively awarded contract, and (3) has agreed to certain fiduciary standards of care.3This exemption is unlikely to be useful to private fund sponsors, who do not generally obtain state pension investments through a competitive bidding process.

As mentioned above, these exceptions are limited to external managers and their affiliates and are not available to third-party placement agents. Further, the fact that a third-party placement agent is a registered broker-dealer or registered investment adviser does not provide an exemption from AB 1743.4

The Lobbying Requirements

Effective January 1, 2011, any person that cannot rely on the exceptions described above must be registered as a lobbyist pursuant to the CPRA and be in full compliance with the CPRA's provisions to act as a placement agent with respect to any potential investment made by a state public retirement system, currently CalPERS and CalSTRS.5Among other requirements, the lobbyist employer, which would include an external manager whose employees fall within the definition of placement agent, must register with the California Secretary of State within ten days of qualifying as such, provide certain information about the employer firm and each in-house lobbyist, and disclose the identity of its outside lobbyists. Each employee of the external manager expecting to act as a lobbyist must make a separate filing and periodically attend an ethics orientation course. The lobbyist employer is required to file quarterly reports disclosing its lobbying expenses, including the compensation and reimbursed expenses of lobbyist employees, a description of its lobbying interests, and gifts and certain political contributions by the firm and reports of the lobbyist employees regarding their expenses incurred in connection with lobbying activity and certain of their personal political contributions. Both employers and employees must keep for four years detailed records supporting the information disclosed in lobbyist filings.

In addition to prohibiting contingency payments, which is typically the way that placement agents are compensated, the CPRA prohibits lobbyists from: (1) making gifts with an aggregated monthly value of more than $10 to an official of an entity they lobby; (2) making political contributions to officials at agencies they lobby, to candidates for those offices, or to political committees controlled by such officials or candidates; or (3) deceiving an official with regard to a material fact pertinent to a pending or proposed legislative or administrative action. Knowing or willful violation of the CPRA is punishable as a misdemeanor, and administrative fines may be levied for failure to file reports and other administrative violations.

Under the CPRA, a person acting as a placement agent in connection with a potential investment made by a local public retirement system in California is required to comply with the applicable local lobbying and reporting requirements, if any. Prior to soliciting any local California public retirement system ( e.g. , municipal or county), investment managers should ascertain the requirements of the particular system.

Status Of CalPERS Regulations On Disclosure Of Placement Agent Fees, Gifts, And Campaign Contributions

In addition to the lobbying provisions that took effect on January 1, 2011, external managers will be affected by new CalPERS placement agent regulations that were originally proposed to comply with California legislation enacted in 2009 (AB 1584) requiring the retirement boards of each public pension or retirement system in California to develop and implement policies mandating disclosure of payments to placement agents in connection with system investments in or through external managers. The proposed regulations generally adopted the revised definition of placement agent provided in AB 1743 and are expected to become effective soon after the anticipated January 28, 2011 completion date of final review of the regulations by the California Office of Administrative Law.

Under the proposed CalPERS regulations, an external manager would generally be required to provide certain information, and related representations and warranties, with respect to its placement agents within 45 days of the time investment discussions are initiated between CalPERS and the manager. The disclosure is similar in many respects to the disclosure that was already required by CalPERS and includes, among other things, (1) whether any placement agent is being compensated in connection with the offer of assets, securities, or services to CalPERS, (2) details regarding the credentials and experience of individual placements agents or officers, directors, and certain employees of entities that act as placement agents, (3) a copy of the placement agent agreement and a description of the placement agent compensation, and (4) a description of the services performed.

The disclosure would also require a statement that the placement agent is registered with the SEC, FINRA, or the CFTC, or with a recognized non-US financial regulatory authority if the placement agent is located and operates outside the United States.

Therefore, given the broad definition of "placement agent" in AB 1743, unless an exception applies, even in-house personnel at an external manager would be required to be registered with the SEC, FINRA, the CFTC, or a recognized non-US financial regulatory authority if they fall within the definition of placement agent with respect to CalPERS.

However, in line with the exception in AB 1743, the CalPERS regulations exclude from the definition of "placement agent" any individual who is "an employee, officer, director, equity holder, partner, member, or trustee" of an external manager "who spends one-third or more of his or her time, during a calendar year, managing the securities or assets owned, controlled, invested, or held by the external manager."

Similar to the existing CalPERS policy, under the regulations, prior to acting as a placement agent, a person would also be required to disclose to CalPERS all gifts and campaign contributions made by the placement agent during the preceding 24-month period to any member of the CalPERS board or any person having the authority to appoint members of the board. Subsequent gifts and contributions to such officials must also be disclosed.

As is the case in its current policies, under the proposed regulations CalPERS would impose strict penalties on fund managers for misrepresentation or violation of the regulations, including the right to withdraw from the fund, and to obtain reimbursement of: (1) management or advisory fees paid during the prior two years, or (2) the amount paid or promised to a placement agent, whichever is greater.6

CalSTRS adopted policies in April 2010 to implement the placement agent disclosure requirements of AB 1584. However, at this writing, the policies have not been changed as a result of the enactment of AB 1743. 1California AB 1743 amends the California Political Reform Act ("CPRA") and also amends the placement agent statute enacted in 2009, Assembly Bill 1584.

2The definition also covers certain investment vehicles 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.

3The detailed fiduciary standard is set forth in Section 17 of Article XVI of the California Constitution and may be viewed at http://www.leginfo.

4This appears to be in keeping with recent proposals by the Securities and Exchange Commission (the "SEC") to amend the recently adopted Rule 206(4)-5, the "pay-to-play" rule, which generally prohibits an investment adviser or any of its covered associates from agreeing to provide, directly or indirectly, payment to any third party to solicit government entities for investment advisory services on the adviser's behalf. The rule was originally written to permit on and after the September 13, 2011 compliance date the use of third parties that are SEC-registered broker-dealers and SEC-registered investment advisers. However, in a November 19, 2010 release, the SEC proposed instead to allow payments to third parties under the rule only if such third parties are regulated municipal advisers, a new registration category added by the Dodd-Frank Act, provided such municipal advisers are subject to pay-to-play rules to be adopted by the Municipal Securities Rulemaking Board. See Investment Advisers Act Release No. 3110 (Nov. 19, 2010) at Section II.D.1.

5Lobbying registration and reporting disclosures made under the CPRA are publicly available and posted on the Internet. Detailed guidance on the CPRA's requirements is provided in the Lobbying Disclosure Information Manual (July 2005), as updated from time to time, in the advisory opinions of the California Fair Political Practices Commission (the "FPPC"), which administers the CPRA, and in an FPPC Fact Sheet regarding the lobbying requirements for placement agents. The manual, the necessary forms, the Fact Sheet, and other information are available at the FPPC's website:

6In addition, a violation of the regulations can disqualify an external manager or placement agent from soliciting CalPERS investments for a period of five years, unless it can demonstrate that the violation was immaterial or unintentional, among other things.

Adrienne Atkinson is a Partner in the Asset Management Practice Group and Martin Miller is Of Counsel in the Corporate and Financial Services Departmentin the New York office of Willkie Farr & Gallagher LLP. Barbara Block is an Associate in the firm's Government Relations Department in Washington, DC.

Please email the authors at, and with questions about this article.