Assessing the Impact of Proposed California Assembly Bill No on "Pay to Play"

Transcription

1 Assessing the Impact f Prpsed Califrnia Assembly Bill N n "Pay t Play" Cntributed by: Kenneth Muller, Thmas Devaney, and Seth Chertk, Mrrisn & Ferster LLP Califrnia Assembly Bill N (Bill) passed the Califrnia Senate n August 30, 2010, and the Califrnia Assembly n August 31, The Bill was enacted by the Califrnia Gvernr n September 30, The Bill amends the Califrnia Gvernment Cde (Gvernment Cde) in several imprtant respects. Bradly speaking, the prpsed amendments t the Gvernment Cde fall int tw categries: (1) amendments t the prvisins f the Gvernment Cde that relate t "placement agents;" and (2) amendments t the lbbyist prvisins f the Gvernment Cde that relate t the Plitical Refrm Act f 1974 (Lbbyist Act). Califrnia's prpsed amendments t the Gvernment Cde are imprtant because they are part f a series f natinwide respnses t allegatins f imprper "pay t play" tactics by certain placement agents. Califrnia's prpsed amendments first fcus n expanding the existing regulatin f placement agents wh act as intermediaries with respect t public retirement systems in Califrnia. General means f regulating placement agents will include, withut limitatin, increased transparency, restrictins n cntributins, certain prhibitins, and audit requirements. While placement agents were previusly regulated under the prvisins f the Gvernment Cde that specifically applied t "placement agents," they were nt regulated under the Lbbyist Act. The framewrk f the Lbbyist Act was initially designed t regulate lbbyists, and, as a result, applicatin f the Lbbyist Act t placement agents is smewhat cnvluted. This article attempts t prvide a cncise summary f the Bill's prpsed amendments t the Gvernment Cde as they relate t placement agents. Nte that this article is nt an exhaustive discussin f all aspects f the Bill. Prpsed Amendments t Gvernment Cde The Bill expands the cncept f "placement agent" (defined belw) t cver a situatin where a placement agent acts as an intermediary n behalf f investment managers, brker-dealers, and institutinal investrs in cnnectin with the ffer r sale f the securities, assets, r services f an "external manager," and therefre ges beynd nly situatins where a "placement agent" acts n behalf f a fund manager. In additin, certain assciated persns f "external managers," that d nt N. 40 editin f the Blmberg Law Reprts Securities Law. Reprinted with permissin. Blmberg Law Reprts is a registered trademark and service mark f Blmberg Finance L.P. The discussins set frth in this reprt are fr infrmatinal purpses nly. They d nt take int accunt the qualificatins, exceptins and ther cnsideratins that may be relevant t particular situatins. These discussins shuld nt be cnstrued as legal advice, which has t be addressed t particular facts and circumstances invlved in any given situatin. Any tax infrmatin cntained in this reprt is nt intended t be used, and cannt be used, fr purpses f aviding penalties impsed under the United States Internal Revenue Cde. The pinins expressed are thse f the authr. Blmberg Finance L.P. and its affiliated entities d nt take respnsibility fr the cntent cntained in this reprt and d nt make any representatin r warranty as t its cmpleteness r accuracy.

2 devte sufficient time managing the assets cntrlled by the "external manager," culd be cnsidered "placement agents" when they apprach certain bard investment vehicles as well as a bard. The amendments t the placement agent prvisins f the Gvernment Cde result in greater transparency fr "placement agents." In the event there are payments t "placement agents" in cnnectin with system investments in r thrugh "external managers," "external managers" will generally be frced t adpt a plicy that requires certain disclsures abut the placement agent relatinship.1 In general, any "external manager" r "placement agent" that vilates such plicy will be prhibited frm sliciting new investments frm the system fr five years after the vilatin was cmmitted.2 The Bill adds Sectin , which will prvide generally that if a persn acts as a "placement agent" in cnnectin with any ptential system investment made by a state public retirement system, that persn must register as a "lbbyist" under the Lbbyist Act and be in full cmpliance with the Lbbyist Act. Certain persns assciated with an "external manager" and its affiliates will nt be required t register as a "lbbyist" and be in full cmpliance with the Lbbyist Act if certain cnditins are met. In additin, the Bill adds Sectin , which will prvide that "placement agents" in cnnectin with any ptential system investment made by a lcal public retirement system must (1) file applicable reprts with a lcal gvernment agency that requires "lbbyists" t register and file reprts, and (2) cmply with applicable requirements impsed by a lcal gvernment agency pursuant t Sectin The Bill als affects Sectin , since the new definitin f "placement agent" will apply t that sectin. Sectin currently prvides that a "placement agent," prir t acting as a "placement agent" in cnnectin with any ptential system investment, must make certain disclsures t a bard abut certain aspects that culd taint the disinterestedness f the bard and lead t cnflicts f interest, such as certain cntributins and gifts. Prpsed Amendments t Lbbyist Act The Bill either amends r affects the definitins f several key terms in the Lbbyist Act. The changes t these key terms frm the backbne f hw the Lbbyist Act will subject many "placement agents" t lbbyist regulatin. Several f the Lbbyist Act's cmpliance bligatins discussed belw relate t attempts t influence "administrative actins" and "agency fficials." Under the Bill, such prvisins will generally apply when "placement agents" seek t influence the decisin by any state agency t enter int a cntract t invest state public retirement assets n behalf f a state public retirement system. Prir t the Bill, the term "lbbyist" did nt include "placement agents" as defined in Sectin f the Lbbyist Act. Under the Bill, these "placement agents" will be subject t the cmpliance bligatins relating t "lbbyists" under Sectin Unlike the definitin f "placement agent" in Sectin (d) f the Gvernment Cde, the definitin f "placement agent" fr purpses f the Lbbyist Act (1) may ptentially exclude entities, and (2) will nly include "placement agents" wh raise

3 investments frm r btain access t state public retirement systems in Califrnia, as ppsed t any public pensin r retirement system. Outside intermediaries, certain assciated persns f "external managers" that d nt devte sufficient time t the "external manager" and its affiliates culd be cnsidered "placement agents" when they apprach state public retirement system investment vehicles, in additin t appraching a state public retirement system directly. Many f the Lbbyist Act prvisins refer t "lbbying firms" and "lbbyist emplyers." Under the Bill, a "lbbying firm" will include any business entity (including an individual cntract lbbyist) that, ther than reimbursement fr reasnable travel expenses, receives r becmes entitled t receive cmpensatin as "placement agent" (1) fr the purpses f influencing the decisin by any state agency t enter int a cntract t invest state public retirement assets n behalf f a state public retirement system; r (2) t cmmunicate directly with any elective state fficial, legislative fficial, r any member, fficer, emplyee r cnsultant f any state agency wh as part f his fficial respnsibilities participates in any decisin by any state agency t enter int a cntract t invest state public retirement assets n behalf f a state public retirement system. "Lbbyist emplyers" will include any "placement agent" ther than a "lbbying firm" wh (1) emplys ne r mre "lbbyists" fr ecnmic cnsideratin, ther than reimbursement fr reasnable travel expenses, fr the purpse f influencing the decisin by any state agency t enter int a cntract t invest state public retirement assets n behalf f a state public retirement system; r (2) cntracts fr the services f a "lbbying firm" fr the purpse f influencing the decisin by any state agency t enter int a cntract t invest state public retirement assets n behalf f a state public retirement system. Since "placement agents" as defined in Sectin f the Lbbyist Act will becme "lbbyists" under the Lbbyist Act, they, their firms, and emplyers will be subject t the prvisins f the Lbbyist Act relating t "lbbyists," "lbbying firms," and "lbbyist emplyers," respectively. The Lbbyist Act subjects "lbbyists," "lbbying firms," and "lbbyist emplyers" t regulatin in several respects that include: (1) certain imprprieties with respect t the Fair Plitical Practices Cmmissin (Sectin 83105, et seq.); (2) certain limitatins n cntributins t elected state fficers (Sectin 85702, et seq.); (3) certain registratin, disclsure, and transparency requirements (Sectin 86100, et seq.); (4) general prhibitins (Sectin 86201, et seq.); (5) certain prhibitins against certain relatinships subject t cnflicts f interest between "lbbyist emplyers" n the ne hand and public fficials and elected state fficers n the ther hand (Sectin 87100, et seq.); (6) certain audits that "lbbying firms" and "lbbyist emplyers" may be subject t; and (7) a time-ut prvisin under Sectin that prvides that n persn cnvicted f a misdemeanr under the Lbbyist Act shall be a candidate fr any elective ffice r act as a "lbbyist" fr a perid f fur years fllwing the date f the cnvictin. The prhibitins f Sectins t include the fllwing: It shall be unlawful fr a "lbbyist," r "lbbying firm," t make "gifts" t ne persn aggregating mre than ten dllars ($10) in a calendar mnth, r t act as an agent r intermediary in the making f any "gift," r t arrange fr the making f any "gift"

4 by any ther persn.3 The term "gift" fr purpses f the abve prhibitins is defined t include a gift made directly r indirectly t any state candidate, elected state fficer, r legislative fficial, r t an "agency fficial" f any agency required t be listed n the registratin statement f the "lbbying firm" r the "lbbyist emplyer" f the "lbbyist."4 It shall be unlawful fr any persn knwingly t receive any "gift" that is made unlawful by Sectin The term "gift" fr purpses f the abve prhibitins is defined t include a gift made directly r indirectly t any state candidate, elected state fficer, r legislative fficial, r t an "agency fficial" f any agency required t be listed n the registratin statement f the "lbbying firm" r the "lbbyist emplyer" f the "lbbyist."6 N "lbbyist" r "lbbying firm" shall:7 D anything fr the purpse f placing any elected state fficer, legislative fficial, "agency fficial," r state candidate under persnal bligatin t the "lbbyist," the "lbbying firm," r the "lbbyist's" r the "lbbing firm's" emplyer.8 Deceive r attempt t deceive any elected state fficer, legislative fficial, "agency fficial," r state candidate with regard t any material fact pertinent t any pending r prpsed legislative r "administrative actin."9 Cause r influence the intrductin f any bill r amendment theret fr the purpse f thereafter being emplyed t secure its passage r defeat.10 Attempt t create a fictitius appearance f public favr r disfavr f any prpsed legislative r "administrative actin" r t cause any cmmunicatin t be sent t any elected state fficer, legislative fficial, "agency fficial," r state candidate in the name f any fictitius persn r in the name f any real persn, except with the cnsent f such real persn.11 Represent falsely, either directly r indirectly, that the "lbbyist" r the "lbbying firm" can cntrl the fficial actin f any elected state fficer, legislative fficial, r "agency fficial."12 Accept r agree t accept any payment in any way cntingent upn the defeat, enactment, r utcme f any prpsed legislative r "administrative actin."13 This prvisin will prevent "lbbyists" and "lbbying firms" that are "placement

5 agents" frm receiving cntingent fees when attempting t influence the decisin by any state agency t enter int a cntract t invest state public retirement assets n behalf f a state public retirement system. Kenneth W. Muller (kmuller@mf.cm) is a partner f Mrrisn & Ferster LLP and currently serves as a c-chair f its Private Equity Fund Grup and Private Equity Buyut Grup. Mr. Muller represents private equity funds, venture capital funds, leveraged buyut funds, real estate funds, debt funds, and emerging grwth cmpanies in all aspects f their enterprises. Mr. Muller frequently writes and lectures n private equity, tax, securities, and limited liability cmpany issues. Thmas Devaney (tdevaney@mf.cm) is a partner f Mrrisn & Ferster LLP and is a member f the firm's Private Equity Fund Grup. Mr. Devaney cunsels the management teams and spnsrs f dmestic and internatinal private funds with respect t fundraising, securities laws and regulatry matters, and fund administratin and peratins generally. He als frequently represents institutinal investrs, gatekeepers, and funds f private equity funds and funds f hedge funds with respect t their investments in private funds and ther types f private placements. Mr. Devaney is a frequent speaker at legal and business cnferences. Seth Chertk (schertk@mf.cm) is a senir assciate at Mrrisn & Ferster LLP and is a member f the firm's Private Equity Fund Grup. Mr. Chertk has advised private equity clients n the general partner fund frmatin side and n the limited partner investr side, and has authred many publicatins in the area f crprate, securities, and investment law. Mr. Chertk was the recipient f the Lefever Prize fr the best paper in law and ecnmics at the University f Pennsylvania Law Schl. The authrs wuld like t thank Steve Frankenstein fr his research assistance, and Elaine Garceln fr her input. 1Sectin (a). 2Sectin (b). 3Sectin Sectin Sectin Sectin Sectin Sectin 86205(a). 9 Sectin 86205(b). 10 Sectin 86205(c). 11 Sectin 86205(d).

6 12 Sectin 86205(e). 13 Sectin 86205(f).