Bill to Prevent Corruption in Public Pension Systems Passes Assembly

June 2, 2010

In a rare display of bipartisan support, Legislators in the California State Assembly advanced a bill today that would treat placement agents as lobbyists to help protect the integrity of the nation’s two largest public pension funds.  AB 1743, authored by Assemblymember Dr. Ed Hernandez, O.D. (D-West Covina), received the critical two-thirds majority necessary for it to move forward.
“This is not a partisan issue, and my colleagues demonstrated that today.  AB 1743 is about defending the interests of taxpayers and ensuring that the money working Californians have spent their lives earning is handled with integrity” said Hernandez.  “This bill will protect people on Main Street from the worst kind of influence peddlers on Wall Street.”

AB 1743 would place strict limits on placement agents, financial middlemen hired by some money managers to seek investments from public pension funds.  Many of these placement agents do business with California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS).  The bill would require those placement agents to register as lobbyists under the California Political Reform Act of 1974 and they would be prohibited from receiving contingency fees, which are paid based on whether they succeed in convincing the pension funds to commit money. 

Hernandez introduced AB 1743 after investigations last year revealed several placement agents were involved in pay-to-play schemes in New York.  Here in California, allegations of improper payments and gifts have made two former CalPERS officials the target of a civil suit by the Attorney General’s office.  The suit alleges that a placement agent (and former CalPERS Board Member) bribed CalPERS officials with free plane rides, champagne, jobs, and even a condominium in order to curry favor for his Wall Street clients.  Hernandez’ legislation is being sponsored by CalPERS, as well as state Controller John Chiang and Treasurer Bill Lockyer. 

"Today we moved one step closer to providing much needed protection for CalPERS and our members and employers," said Rob Feckner, President of the CalPERS Board of Administration.  "The allegations in the recent Attorney General lawsuit are clear signs why we need this reform to ensure full transparency and accountability when it comes to our investment decisions."

Under AB 1743, placement agents would also be subject to stringent gift limits and campaign contributions prohibitions, required to report quarterly on their fees and compensation, and disclose any honoraria or gifts.  Chiang and Lockyer were pleased to see the bill move out of the Assembly today.

“Lack of transparency, unrestricted gift-giving and bounty-based compensation all are invitations to corruption,” Chiang said.  “This bill will help protect California taxpayers, working families and retirees by ensuring that public pension investment decisions are based on sound information, and not the inappropriate influence of big banks and Wall Street players.”

“I’m glad to see that the Assembly recognizes the urgent need for this reform,” said State Treasurer Bill Lockyer.  “Eliminating contingency fees for placement agents is vital to preventing corruption in our public pension systems.  This legislation will protect taxpayers and retirees by safeguarding the integrity of investment decisions.”

AB 1743 will now move on to the State Senate for consideration there. 

“Every day we see another investigation, another indictment, another blow to the public’s confidence in our retirement systems.  The time to act is now” Hernandez continued.  “As this bill moves along in the Senate, I am hopeful that it will have the same bipartisan support we saw today.  I am not taking anything for granted though, and I know I have some work to do.  The more legislators read and understand what this bill really does, the more of them I think will support it.”