November 12, 2009

California Enacts Legislation To Address Recent Scandals Involving Placement Agents

On October 11, 2009, California enacted Assembly Bill 1584 (“AB 1584”) which imposes new disclosure and other requirements upon the involvement of a “Placement Agent” in the investment activities of a California public pension or retirement system (“Public Plan”).

Key requirements of AB 1584 include:

  • The development by each Public Plan board (“Board”) of a “Policy” mandating that any fund manager using a Placement Agent in connection with investments by such Public Plan disclose the Placement Agent’s identity, qualifications, services and compensation.
  • Specific penalties for fund managers that violate a Policy.
  • Disclosure by Placement Agents of certain gifts and campaign contributions to Board members.

This Client Alert briefly describes AB 1584 and its implications for fund managers of private investment funds. (AB 1584 also imposes new limitations on the activities of current and former government officials. Those limitations are not addressed in this Client Alert.)

Disclosure by Fund Managers

Under AB 1584, a Public Plan’s Board has broad discretion to establish its Policy but the Policy must require, at a minimum, disclosure or delivery by a fund manager of the following:

  • The existence of any relationship between the fund manager and a Placement Agent, as well as a description of the services to be performed by the Placement Agent.
  • A description of the compensation provided, or agreed to be provided, to the Placement Agent.
  • A resume for each officer, partner or principal of the Placement Agent detailing such person’s education, professional designations, regulatory licenses, and investment and work experience.
  • A statement as to whether the Placement Agent, or any of its affiliates, is registered with the Securities and Exchange Commission or the Financial Industry Regulatory Association, or any similar regulatory agent in a country other than the United States, and the details of such registration – or an explanation as to why no such registration is required.
  • A statement as to whether the Placement Agent, or any of its affiliates, is registered as a lobbyist with any state or national government.

Enforcement and Penalties

Under AB 1584, a Public Plan is not permitted to enter into any agreement with a fund manager unless the fund manager agrees in writing to comply with such Plan's Policy. A fund manager that violates a Public Plan's Policy is prohibited from soliciting new investments from the Public Plan for a period of five years. However:

  • A Board may reduce this prohibition, by majority vote, at a public session upon a showing of good cause.
  • A Board is not obligated to take any action unless the Board determines, in good faith, that such action is consistent with the Board’s fiduciary duties. It appears that this rule permits a Board to decline to include within a Policy an otherwise mandated requirement. It is unclear whether this rule also permits a Board to decline to enforce a prohibition on soliciting investments, due to violation of a Policy as actually adopted by the Board, in the absence of a public session.
  • As noted above, AB 1584 specifies only the minimum requirements of a Policy. Thus, it appears that a Policy may provide for additional methods of enforcement or for additional penalties in the case of a violation.

Some Boards (such as the CalPERS Board) adopted policies prior to the enactment of AB 1584 that include requirements, methods of enforcement and penalties not mandated by AB 1584. It is unclear whether the Policies adopted by those Boards under AB 1584 will include those additional requirements, methods and penalties.

Disclosure of Campaign Contributions and Gifts

AB 1584 requires that, prior to acting as a Placement Agent in connection with a Public Plan investment, a Placement Agent must disclose to the applicable Board all campaign contributions and gifts to members of the Board during the preceding 24-month period. AB 1584 also requires disclosure of any subsequent campaign contribution or gift made while the Placement Agent is receiving compensation in connection with such investment.

Important Open Question:  Who Is a Placement Agent?

AB 1584 defines a Placement Agent as “any person or entity hired, engaged, or retained by, or acting on behalf of, an external manager, or on behalf of another placement agent, as a finder, solicitor, marketer, consultant, broker, or other intermediary to raise money or investment from, or to obtain access to, a public retirement system in California….”

It appears that this definition is intended to target only third parties engaged for the purpose of making introductions or otherwise soliciting investments. However, the definition is not without ambiguity. For example, it is unclear whether attorneys who are engaged to perform legal services in connection with a fundraising, but who also make introductions to prospective investors, could be deemed Placement Agents. Similarly, it is not entirely clear that individual members or employees of a fund manager who play a major role in fundraising would always be excluded from Placement Agent status. It is possible that definitive Policies, as adopted by Boards, will clarify these issues.

Effective Dates

AB 1584 generally became effective on October 11, 2009. However, Boards are not required to adopt Policies prior to June 30, 2010.