California’s New Placement Agent Law

California has become the latest state to regulate the use of placement agents who help investment managers secure government pension fund money. (Or is that placement agents who help government pension fund money find suitable investment managers?)

California Assembly Bill 1743 was backed by the California Public Employees’ Retirement System, the state treasurer and the state controller. Placement agents must register as lobbyists before they can pitch investment proposals to California government investors.

As Keith Paul Bishop notes in the California Corporate & Securities Law Blog

“the proposed rule does not appear to require disclosure of gifts and campaign contributions to losing candidates for positions that have the authority to appoint persons to the CalPERS Board.  This is not consistent with the Securities and Exchange Commission’s recently adopted “time out” Rule 206(4)-5 for investment advisers which appears to cover contributions to both successful and unsuccessful candidates.  Nor is this approach consistent with the Municipal Securities Rulemaking Board’s interpretation of Rule G-37 (See FAQ II.22)”

Meanwhile CalPERS is has its own rules which area bit stricter. Placement agents must report gifts and campaign contributions made to all Board members as well as to persons who have the authority to appoint persons to the CalPERS Board: the Governor, the Speaker of the Assembly, and the members of the Senate Rules Committee.

One point to focus is the definition of “Placement Agent.” An investment manager’s employees, officers, directors, and equityholders who solicit California public retirement systems for compensation may be placement agents under the definition, unless they spend more than one-third  of their time during the calendar year managing securities or assets of the manager. With respect to solicitation of CalPERS and CalSTRS only, if the manager is registered with the Securities and Exchange Commission as an investment adviser or broker-dealer, is selected through a competitive bidding process, and has agreed to a fiduciary standard of care applicable to the retirement board, then the employees, officers, and directors of a manager will not be a placement agent.