California Pay-To-Play Rule: SB 398 signed into law and is effective immediately
Written by Jay B. Gould and Michael Wu
On October 9, 2011 Governor Brown signed into law Senate Bill 398 which is intended to clarify the current law regarding placement agents and lobbyist requirements.
In 2009, AB 1584 was enacted. AB 1584 imposed disclosure requirements for investment placement agents associated with public pension funds in California. It required public employee pension funds to adopt a disclosure policy requiring the disclosure of fees paid to investment placement agents and contributions and gifts made by placement agents to board and staff members.
In 2010, AB 1743 was passed. That bill subjected investment managers and placement agents to lobbyist registration. It also defined “placement agents” and revised the definition of “lobbyist” to include a placement agent. A placement agent includes employees of an external manager unless the employee spends more than 1/3 of his time managing assets for the external manager. AB 1743 also exempts from lobbyist registration requirements those advisers and broker-dealers who are registered with the SEC, obtained the business through competitive bidding process, and agreed to the California fiduciary standard imposed on public employee pension fund trustees.
The newly enacted and immediately effective SB 398 changes the current law to this extent:
1. It revises the definition of “external manager” to mean a person or an investment vehicle managing a portfolio of securities or other assets, or a person managing an investment fund offering an ownership interest in the investment fund to a board or an investment vehicle.
2. It revises the definition of “placement agent” to include an investment fund managed by an external manager offering investment management services of the external manager and an ownership interest in an investment fund managed by the external manager.
3. It defines “investment fund” and includes private equity fund, public equity fund, venture capital fund, hedge fund, fixed income fund, real estate fund, infrastructure fund, or similar pooled investment entity. It excludes an investment company that is registered with the SEC pursuant to the Investment Company Act of 1940 and that makes a public offering of its securities.
4. It defines “investment vehicle” to mean a “corporation, partnership, limited partnership, limited liability company, association, or other entity, either domestic or foreign, managed by an external manager in which a board is the majority investor and that is organized in order to invest with, or retain the investment management services of, other external managers.”
5. The exemptions from lobbyist registration for managers of local retirement system funds are extended to include the three exemptions similarly available to managers of state retirement system funds.