New California Restrictions on Placement Agents

January 6, 2011

Effective January 1, 2011, California imposes additional restrictions on individuals and entities soliciting business from public retirement plans in California, principally by requiring certain placement agents to register as lobbyists with the State. The broad wording of the rule may require many private fund marketers (whether third party marketers or actual employees of the fund manager) to public retirement systems in California to register as lobbyists, adhere to any applicable local regulations and comply with certain reporting and ethical requirements.

Affected employees and/or third parties may be able to avoid registration if they fall into one of two exclusions from the definition of placement agent:

(1) an individual who spends “one-third or more of his time managing the assets owned, controlled, invested or held by the manager” (the “One-Third Exclusion”). The One-Third Exclusion is available to placement agents who solicit state and/or local public retirement plans.

(2) an employee, officer or director of a manager, or an affiliate of the manager, where the manager (i) is registered as an investment adviser with the Securities and Exchange Commission (“SEC”) (or, if exempt from or not subject to SEC registration, is registered with the applicable state securities regulator); (ii) was selected through a competitive bidding process; and (iii) has a fiduciary standard of care (collectively, the “RIA Exclusion”). Unlike the One-Third Exclusion, the RIA Exclusion is available only to placement agents who solicit investments from state public retirement plans, and not local plans.

If you have any questions concerning California’s new restrictions on placement agents, please contact your primary attorney in the Investment Management Group at Seward & Kissel.