California Imposes Registration Requirement On Placement Agents Seeking Investments From Local And State Public Retirement Systems

Real Estate Alert

On September 30, 2010, Governor Arnold Schwarzenegger signed into law Assembly Bill No. 1743, which will impose significant restrictions on placement agents seeking investments from California's local and state public retirement systems, including CalPERS and CalSTRS, two of the nation's largest public pension funds. The law is likely to have wide-ranging effects on both traditional placement agents, operating as independent consultants to private equity and hedge funds, as well as such funds' in-house investor relations and marketing staff, who may find themselves obligated to register as lobbyists based on the new law's broad provisions.

When it becomes effective on January 1, 2011, AB 1743 will require placement agents who solicit investments from California's state public retirement systems to register as lobbyists in accordance with the California Political Reform Act of 1974. In addition, the law will require placement agents soliciting investments from California's local (as opposed to state) public retirement systems to register as lobbyists if required by local government agencies. Significant issues relating to this law germane to real estate professionals include:

Broad Definition of "Placement Agent" May Sweep Up In-House Employees

The new law broadly defines "placement agent" as "any person hired, engaged or retained by, or serving for the benefit of or on behalf of" an investment manager 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" such investment manager to a state or local public retirement system or an investment vehicle in which such a retirement system is a majority investor. 

If they satisfy the elements of this definition, an investment manager's own employees, officers, and directors are "placement agents" – required to register as lobbyists and subject to the limitations placed on lobbyist activities under existing law – unless: (i) they spend one-third or more of their time, during a calendar year, managing the securities or assets invested by the investment manager; or (ii) with respect to CalPERS or CalSTRS investments only, the investment manager on behalf of which the individual is working has (a) registered as an investment advisor or broker dealer if required by the Securities and Exchange Commission, or, if exempt from such registration, registered with any appropriate state securities regulator, (b) been selected through a competitive bidding process and is providing services under a contract resulting from that process, and (c) agreed to meet a fiduciary standard of care with respect to its CalPERS or CalSTRS investment.

Lobbyist Registration Requirement Bans Contingency Fees Paid to Placement Agents, as Well as Certain Other Activities

By requiring placement agents to register as lobbyists, AB 1743 prevents placement agents from receiving compensation contingent on the "defeat, enactment or outcome of any legislative or administrative action." The new law amends the definition of "administrative action" to include the decision by any state agency to enter into a contract to invest state public retirement system assets on behalf of a state public retirement system. Thus, the common market practice of paying placement agents based on the success or failure of their solicitation of investment capital is effectively banned with respect to CalPERS and CalSTRS investments. Other limitations now placed on placement agents as a result of this new legislation include restrictions on gifts and political contributions to state candidates and officeholders.

Failure to Satisfy the Requirements of the Political Reform Act Applicable to Placement Agents Can Result in Civil and Criminal Penalties

Any knowing or willful violation of the Political Reform Act is a misdemeanor, punishable by, among other things, a fine of up to the greater of $10,000 and three times any amount unlawfully contributed, paid or received. In addition, placement agents may be civilly liable for up to three times the value of their unlawful contributions, gifts or expenditures. 

Due to this new regulation, investment managers will need to carefully analyze the activities of their in-house employees to determine if these carve-outs exempt them from lobbyist registration obligations, and then satisfy the various administrative requirements of the Political Reform Act with respect to any placement agents they do employ, including annual reporting obligations and mandatory state ethics course attendance.

If you would like additional information or would like to discuss this new law further, please contact any member of the Orrick Real Estate Group, Private Investment Funds Group or Bill Murray at [email protected] or (415) 773-5807.