Tag Archives: California pay to play

California’s Hedge Fund "Pay to Play" Laws Updated

New Lobbyist Requirements Apply to Hedge Fund Placement Agents

With the enactment of AB 1743 (effective January 1, 2011) and SB 398 (effective October 9, 2011), California has imposed new requirements on persons who market investment managers and their funds to California pension plans – that is, California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS). The laws, similar to the recently passed SEC pay to play rules, are designed to prevent “pay-to-play” activities to increase transparency and accountability by prohibiting a person from acting as a “placement agent” in connection with any potential investment by CalPERS or CalSTRS.

Placement Agents Deemed to be Lobbyists

Placement agents—generally persons that are compensated to act for an external investment manager in connection with securing an investment by CalPERS and CalSTRS—are considered lobbyists under the new laws. SB 398 clarifies that placement agents include those that market interests in any type of private investment fund (not just marketing investment management services), including private equity funds, hedge funds, venture capital funds, and real-estate funds. There are two exclusions from being considered a placement agent under the laws:

“(1) an employee, officer, director, equityholder, partner, member, or trustee of an external manager who spends one-third of his or her annual time managing the assets held by the external manager; and

(2) any employee, officer, director or affiliate of an external manager, if that external manager is: (a) registered with the SEC or a comparable state securities regulator; (b) selected for investment through a statutorily defined competitive bidding process; and (c) willing to be subject to the fiduciary standard of care applied to the retirement fund board.”

Placement Agent Registration Requirements

Placement agents must register under the Political Reform Act of 1974 (PLR) prior to acting as a placement agent. Additionally, among other things, placement agents:

  • Must not make gifts to a person totaling more than $10 in any calendar month if that person works for CalPERS or CalSTRS;
  • May not make a political contribution to any elected state officer or candidate for elected office if the agent is registered to lobby the governmental agency for which the candidate is seeking election (e.g. CalPERS Board Member, CalSTRS Board Member, Supt. of Public Instruction, State Treasurer, or the State Controller; and
  • May not receive fees that are contingent on the outcome of any proposed legislative action or administrative action, including investment decisions.

Local Lobbyist Regulations

The new laws also subject placement agents to “applicable” local lobbyist regulation if the agents market to local government plans. Before marketing to any California city or county retirement system, investment managers should evaluate the relevant local lobbyist ordinances to determine which, if any, local requirements may apply.


Cole-Frieman & Mallon LLP is an investment management boutique law firm.  The firm’s clients include hedge fund managers, hedge fund investors and other groups within the investment management industry.  Bart Mallon can be reached directly at 415-868-5345.