California’s placement agent-related bill, AB 1743, would add another layer of regulation, forcing agents to comply with two sets of registration, and could limit their dealings with limited partners in other states. The bill is currently under consideration in the state senate.
The bill, which would require placement agents to register as lobbyists, was proposed before the US Securities and Exchange Commission issued federal rules on placement activities in June.
“From the perspective of a placement agent, one of the biggest drawbacks is that there would be two sets of registration, reporting and compliance, increasing costs without really increasing public safety,” said a source familiar with the matter.
At this point, much of the thrust of AB 1743 is covered by federal regulation or state disclosure provisions.
The SEC’s rules require placement agents to be registered as broker dealers if they wish to deal with public pension plans. The final ruling was significantly scaled back from its initial form, in which firms would have been barred from hiring any placement agents to interact with public pensions. The SEC's original proposal triggered hundreds of letters to the SEC from the industry defending the role of “legitimate” placement agents, as opposed to those who simply “grease palms”. Instead, the SEC unanimously approved banning unregistered placement agents.
“Some of the momentum behind the proposed California regulation has bled away now that the SEC and [the Financial Industry Regulatory Authority] have set definitive guidelines for the oversight and regulation of private equity placement agents recently,” said the source. “At this point, much of the thrust of AB 1743 is covered by federal regulation or state disclosure provisions.”
In every state with a law like AB 1743, a placement agent would have to set up a separate compliance and registration regime.
“These rules would not necessarily conflict – an organisation could be registered as both – but the vast bulk of the oversight would be duplicative,” said the source.
It would be dire, however, if other states went ahead with similar bills.
“It could be worse if other states were to adopt similar regulations because the lobbying provisions are set state by state, not on a national basis as is done with the SEC and FINRA,” he said. “In every state with a law like AB 1743, a placement agent would have to set up a separate compliance and registration regime.”
California politicians have had trouble getting the bill passed.
The bill failed in a vote in the State Assembly’s appropriations committee in June. The bill has passed unanimously in two other Assembly committees and currently sits in the state senate log as active, but no action has been taken.
CalPERS co-sponsored AB 1743 in the wake of allegations that a former member of the pension’s board had been paid millions of dollars in fees to solicit commitments from the pension for Apollo Management and other firms. It is not clear why Apollo needed the assistance of the placement agent, Alfred Villalobos, despite being partially owned by CalPERS.
The $210 billion pension fund performed a massive review of placement agent fees paid by its managers, and also reviewed its relationship with Apollo. The Apollo review led to the firm agreeing to slash some of its fees in the structured products it manages for CalPERS.