California Law for Asset Managers: An Overview of Lobbying Laws Applicable to Soliciting California Pension Plans and Retirement Systems

On this episode of Ropes & Gray’s California Law for Asset Managers podcast series, asset management counsel Catherine Skulan and Chelsea Childs provide an overview of the lobbying law regime and registration requirements applicable to asset managers seeking investments from California pension plans and retirement systems.

Transcript:

Catherine Skulan: Hello, and welcome to this Ropes & Gray podcast. I’m Catherine Skulan, and here with me today is Chelsea Childs—we’re counsel in the Ropes & Gray asset management group in San Francisco. Today, we’re pleased to present the second of a multi-part series on California Law for Asset Managers. In this podcast, we’ll provide an overview of the California state lobbying law regime and relevant considerations for asset managers navigating this space. This is also good background for dealing with lobbying considerations at the local city and county level in California, which we’ll discuss briefly at the end.

Chelsea, do you want to provide a brief introduction to the topic?

Chelsea Childs: Absolutely. Let’s first take a step back and ask why we—as asset management attorneys—are talking about lobbying laws in the first place. State pension plans and retirement systems are an important source of business for asset managers. California public pension plans and retirement systems have close to $1 trillion in assets that need to be managed in the interest of their beneficiaries. But, before managers reach out to these plans to offer their services, it is crucial to understand the relevant state, local and county lobbying laws that may be applicable to soliciting investments from California public pension plans.

Catherine Skulan: It’s important to note that these laws apply in addition to applicable laws at the federal level, such as the SEC’s pay-to-play rule.

Chelsea Childs: Yes, that’s exactly right. The federal securities laws aren’t in-scope for this podcast, so what we will primarily be discussing today is the California Political Reform Act (the PRA) and related regulations that are issued by California’s Fair Political Practices Commission, which is the regulatory body with primary responsibility for the administration of the PRA. The PRA does not regulate individuals or entities that lobby the federal government, or city, county or other local government agencies, but many local governments have adopted ordinances that complement or track the PRA, and it is the best place to start when discussing California state lobbying laws.

At a high level, this regulatory regime recognizes various categories of lobbyists. The most relevant category for our audience is a placement agent. A placement agent is generally defined as an individual who acts for compensation as a marketer, solicitor or other intermediary in connection with offering or selling to a California state public pension plan or retirement system, investment management services or interests in an investment fund.

Catherine Skulan: So, what this means is that, in addition to thinking about whether an asset manager is engaging external placement agents in the traditional sense, the employees of that manager may themselves be placement agents, and therefore, subject to the lobbyist regulatory regime, absent an applicable exception.

Chelsea Childs: That’s an important point that can be missed when managers solicit California public pension plans. Before soliciting investments from a California state pension plan, a manager should understand which of its employees would be considered a placement agent under the law, because important consequences flow from that. Now, the determination of whether an employee is a placement agent must focus on the facts and circumstances of the employee’s actual duties. For example, employees dedicated solely to fundraising would likely fall within the definition, but “investor relations” personnel may or may not be placement agents depending on the content of their communications or other factors, including whether their communications are more ministerial in nature or play more of a marketing function.

Catherine Skulan: There can be grey areas that require judgment calls when applying facts and circumstances. It could be helpful, then, to speak about some of the more clear-cut rules under the law. Let’s talk a little more about the exceptions to the definition of a placement agent that we referred to earlier.

Chelsea Childs: There are three primary exceptions: (1) the portfolio manager exception, (2) the competitive bidding exception, and (3) the ride-along exception.

Catherine Skulan: Let’s go through each of those in turn. So, the portfolio manager exception (or the “one-third exemption”) applies to employees, officers, directors or other related persons of a manager who spend at least one-third of their time managing securities. This is a helpful exception that permits persons who spend a significant amount of time managing the securities or assets owned or managed by the asset manager to carry out their duties without having to register as a lobbyist. “Managing” for these purposes has to be substantive, meaning engaging in activities that directly relate to directing an investment fund’s investments rather than other firm operations such as administration.

Chelsea Childs: Then, the second exception, the competitive bidding exception, as its name implies, it applies to situations where a manager is participating in an RFP or another competitive bidding process. To rely on this exception, a manager must be a registered investment adviser or a broker dealer registered with the SEC, or, if exempt, any appropriate state regulator. This exception is quite narrowly construed, so it doesn’t necessarily cover communications occurring prior to the start of the formal RFP process.

Managers should also be very careful with follow-up after the RFP is submitted, as that may not be considered part of the RFP process and would therefore push the manager outside of the exception. Importantly, to rely on this exception, the manager must have agreed to abide by the fiduciary standard of care applicable to the public pension plan in managing the plan’s assets. For this reason, we seldom see managers seek to rely on this provision—avoiding the burdens of lobbyist registration just may not outweigh the undertaking to abide by an enhanced fiduciary standard.

Catherine Skulan: Lastly, the third exception—that’s the ride-along exception. This narrow exception applies to employees who are subject matter experts and accompany a registered lobbyist in meetings with a public official. These technical experts would not be considered lobbyists so long as they are only present to provide additional substantive information.

Chelsea Childs: So, while there are exceptions, many employees of a manager may be considered lobbyists under the PRA when soliciting business from a California state public pension plan, which will require that person to register as a lobbyist. Given that, let’s go over the implications of having to register.

Catherine Skulan: Right—there are number of registration and compliance obligations worth noting. At the outset, it’s important to understand that an individual must register as a lobbyist before acting as a placement agent in connection with a potential investment made by a state public retirement system. Not only must the employee register as a lobbyist, but the manager must also register as a “lobbyist employer” and must list such employees as lobbyists on its registration forms. In addition to completing these initial technical filings, lobbyists must also take an ethics education course within 12 months of their initial registration—the lobbyist’s registration will be conditional until the course is completed. Registration must also be periodically renewed—registration is generally valid for two years.

Chelsea Childs: Registration isn’t the only ongoing obligation. Lobbyists and lobbyist employers also have quarterly disclosure requirements on Form 615 and Form 635 that together require registrants to disclose the state agencies lobbied, the amount of related expenses and payments made in connection with those lobbying activities, and details on gifts and campaign contributions to covered state officials. These reports must be made, even if there is no lobbying activity to report, and detailed records supporting the filings must be maintained for four years.

Lobbyists must also comply with limitations on gifts and political contributions to public officials. For example, any placement agent, prior to acting as a placement agent in connection with any potential state public pension investment, must disclose all gifts given by the placement agent to any member of the board during the prior 24-month period. Additionally, any subsequent gift given by the placement agent to any member of the board during the time the placement agent is receiving compensation in connection with a plan investment must also be disclosed. Lobbyists may not make or act as an agent or an intermediary in making a gift or arranging a gift of more than $10 in a calendar month to any legislative official, state agency official or official of an agency listed on their registration statement.

Finally, a lobbyist may not contribute to an elected state officer or a candidate for elected state office if that lobbyist is registered to lobby the government agency for which the state officer is elected or the candidate is seeking election.

Catherine Skulan: Another item to flag is the prohibition on contingency fees as they relate to placement agents. Under California law, no lobbyist may accept or agree to accept any payment in any way contingent upon the defeat, enactment or outcome of any proposed legislative or administrative action. This includes the decision of a state pension plan to invest in a fund. This is not to say that fees may not be paid by an asset manager to placement agents (including their employees) for their services, but if the fee is in any way contingent on the state pension plan investing, then it will run afoul of the law. Consequently, managers should examine their bonus, fees and incentive programs prior to engaging with these public pensions to determine whether they constitute contingent compensation.

Chelsea Childs: At the start of this podcast, we noted that we would focus on the importance of applicable California law to state pension plans. That was not to suggest that the local and county-level plans are not also of importance, but rather, a nod to the reality that any one of them may have varied ordinances or approaches to lobbying. This requires that asset managers who wish to engage with a specific county or city plan consult the applicable regulations first so that no inadvertent errors, which could result in a delay of fundraising or worse, will occur.

This ties to the global takeaway from this podcast: care should be taken when soliciting California public pension plans. Depending on the facts and circumstances, an asset manager’s employees who are interacting with such plans may need to register as a lobbyist, and the asset manager itself then as a lobbyist employer. This entails a not insignificant amount of time and administrative burden, including on an ongoing basis, and managers and their employees should be mindful of interactions with California public pension plans and retirement systems that may trigger these obligations.

Catherine Skulan: We’ve covered a lot of ground at a high level. If you have questions about California lobbying laws, reach out to Chelsea or me or another contact at Ropes & Gray. Be on the lookout for future installments of California Law for Asset Managers, where we’ll discuss other topics of relevance to asset managers with operations or investors in California. You can also subscribe and listen to the series of podcasts wherever you regularly listen to podcasts, including on Apple and Spotify. Thank you again for listening.