I. Introduction.Recently, the City of New York Office of the City Clerk notified numerous businesses and organizations that beginning in January 2011 certain individuals, businesses and organizations – including hedge fund managers, private equity managers and other investment managers and their employees, placement agents and solicitors – who attempt to influence investment decisions made by the pension funds and retirement systems of New York City will be subject to the New York City Lobbying Law (“Lobbying Law”). The City’s five pension systems are: (1) the New York City Employees’ Retirement System, (2) the New York City Police Pension Fund, (3) the New York City Fire Department Pension Fund, (4) the New York City Teachers’ Retirement System, and (5) the New York City Board of Education Retirement System (collectively, the “Pension Systems”).
Parties who attempt to influence investment decisions made by the Pension Systems and who have (or reasonably expect to have) over $2,000 in annual compensation and expenses for “Lobbying” (as defined below) are required to comply with the requirements of the Lobbying Law. As summarized in greater detail below, these requirements include, among others, that such parties make certain annual and periodic filings with the City Clerk, not enter into contingent compensation arrangements for Lobbying activities and keep certain records. The current deadline for submitting applicable filings and fees is February 15, 2011. The City Clerk, through its Lobbying Bureau, is responsible for administering and enforcing the Lobbying Law. Parties that fail to comply with the Lobbying Law will be subject to the penalties described below. In addition to the Lobbying Law requirements, the City Comptroller’s Office and the boards of trustees of the Pension Systems have implemented certain policies and procedures for investment managers seeking to do business with the Pension Systems, including a prohibition on the use of placement agents, solicitors or other third party marketers (collectively, “Placement Agents”) in connection with securing a commitment by the Pension Systems to any private equity fund.
As a result of these developments, New York City has joined other jurisdictions (including California) that recently have enacted or applied similar laws and rules in response to a number of well-publicized prosecutions and enforcement actions that have shed light on payments allegedly received by Placement Agents and officials of public pension plans in order to influence the investment decisions of those officials.
II. Application of the Lobbying Law.
A. Key Definitions and Interpretations.Who is a Client? “Client” means every person or organization who retains, employs, or designates any person or organization to carry on Lobbying activities on its behalf. As set forth below in paragraph II.B, an investment manager may be considered a Client under more than one scenario.
Who is a Lobbyist? “Lobbyist” means every person or organization retained, employed, or designated by a Client to engage in Lobbying. The term Lobbyist includes Placement Agents, but may also include investment managers to the extent described below in paragraph II.B.
What is Lobbying? “Lobbying” means any attempt to influence several activities in New York City, including, but not limited to (i) any determination made by an elected City official or an officer or employee of the City concerning (a) the procurement of goods, services or construction, including the preparation of contract specifications, (b) the solicitation, award or administration of a contract, or (c) the solicitation, award or administration of a grant, loan, or agreement involving the disbursement of public monies, and (ii) any determination of a City board or commission. The term Lobbying includes any attempt to influence decisions made by the board of trustees of the Pension Systems (or members of their staffs) or the City Comptroller (or members of his staff) about the investments of the Pension Systems.
B. Investment Manager Status under the Lobbying Law.Under the Lobbying Law, an investment manager may be a Client, a Lobbyist or both. For example, an investment manager that retains a Placement Agent to Lobby the Pension Systems on its behalf would be considered a Client. The same investment manager would also qualify as a Lobbyist if it were retained to conduct Lobbying activities with respect to the Pension Systems on behalf of another party. Finally, if an investment manager engages in Lobbying of the Pension Systems on its own behalf (such as through its own marketing staff), it would be considered both a Lobbyist and a Client with respect to such Lobbying activities. If an investment manager qualifies as a Lobbyist and/or a Client under the Lobbying Law, it will be required to comply with the filing requirements described below in paragraph II.C to the extent applicable.
C. Filing Requirements.
1. Filing Requirements for Lobbyists. Statement of Registration. A Lobbyist is required to file a statement of registration (“Statement of Registration”) with the City Clerk each calendar year for each of its Clients; provided, however, that no filing is required for any year in which the Lobbyist does not incur, receive or expend more than $2,000 in total compensation and expenses for Lobbying. The $2,000 threshold includes the aggregate compensation that a Lobbyist receives from, and the aggregate expenses that it incurs with respect to, all of its Clients, and is not applied on a per Client basis. In addition to providing certain information in the Statement of Registration about itself, the Lobbyist must include information concerning all of its employees who engage in Lobbying activities (except support staff). Also, when the Statement of Registration is filed, the Lobbyist is required to either mail a copy of the written retainer agreement between the Lobbyist and Client (or, if there is no written retainer agreement, a written statement summarizing the terms of any oral agreement between the parties) to the City Clerk or upload it via the City Clerk’s e-Lobbyist website. However, when the Lobbyist and Client are the same party, such as where an investment manager Lobbies the Pension Systems exclusively through its internal marketing staff, a written retainer agreement (or written summary statement, as applicable) is not required to be provided.
The annual Statement of Registration is required to be filed on or before January 1 of each year by any Lobbyist who reasonably anticipates exceeding the $2,000 threshold for such year and who was retained as a Lobbyist on or before December 15 of the prior year. For example, ordinarily a Lobbyist would be required to file its Statement of Registration for calendar year 2011 on or before January 1, 2011,if the Lobbyist reasonably anticipates that it will exceed the $2,000 threshold for 2011 and was designated as a Lobbyist on or before December 15, 2010. In the event that a Lobbyist is retained after December 15 of the prior year and reasonably anticipates that it will exceed $2,000 in total compensation and expenses for Lobbying for the upcoming year, it must file a Statement of Registration for the upcoming year no later than the earliest to occur of either the 15th day after being retained or the 10th day after actually exceeding the $2,000 threshold for the upcoming year. Any change in information contained in a Statement of Registration requires that a prompt amendment be filed with the City Clerk within 10 days after such change occurs. Filing fees of $150 for the first Client registered and $50 for each additional Client registered are due when filing a Statement of Registration.
Periodic Reports and Lobbyist Annual Report. A Lobbyist who is required to file a Statement of Registration for a calendar year also is responsible for filing six bi-monthly periodic reports (“Periodic Reports”). The initial bi-monthly Periodic Report must be filed by the 15th day following the end of the bi-monthly reporting period in which the Lobbyist filed the Statement of Registration. Subsequent bi-monthly Periodic Reports must be filed by the 15th day following the end of each bi-monthly reporting period thereafter. The Lobbyist annual report (also known as the sixth Periodic Report) (“Lobbyist Annual Report”) for a calendar year must be filed with the City Clerk by January 15 of the following year.
Fundraising and Political Consulting Reports. Lobbyists who solicit contributions for a candidate running for a City office or who, for compensation, participate in the campaign of a candidate running for a City office or who provide political advice to the mayor or certain other City offices are required to file fundraising and political consulting reports, as applicable, with the City Clerk.
Notice of Termination of Lobbyist. Within 30 days after a Client terminates a Lobbying arrangement or agreement with a Lobbyist, both the Client and the Lobbyist must submit a written notice of termination to the City Clerk. The Lobbyist remains obligated to submit a Periodic Report for the reporting period(s) in which Lobbying occurred prior to the termination. In addition, both the Lobbyist and the applicable Client must file a Lobbyist Annual Report and a Client Annual Report, respectively, for the calendar year in which the termination took place.
2. Filing Requirements for Clients.Client Annual Report. If a Client incurs, receives or expends more than $2,000 in total compensation and expenses for Lobbying in a calendar year, it must file a Client annual report (“Client Annual Report”) for such calendar year with the City Clerk by January 15 of the following year. However, a Client that acts as a Lobbyist on its own behalf is not required to file a Client Annual Report with respect to such Lobbying activities, provided that it complies with the filing requirements for Lobbyists described in the following paragraph.
Lobbyist-Client Filings. A party that Lobbies on its own behalf (e.g., via its own marketing staff) and expends over $2,000 annually in reportable compensation and expenses for such Lobbying is considered a Lobbyist-Client and must comply with the Lobbyist filing requirements described above in paragraph II.C.1 with respect to such Lobbying activities. In that case, the party would include itself as both a Lobbyist and a Client in its Statement of Registration and other required filings concerning such Lobbying activities. As mentioned in the preceding paragraph, such Lobbyist-Client would not be required to also file a Client Annual Report with respect to such Lobbying activities covered by such Statement of Registration. Such party would be required to file a Client Annual Report, however, concerning any other Lobbying activities conducted on its behalf by a third-party Lobbyist (i.e., a Placement Agent) that are subject to a separate Statement of Registration.
3. Filing Requirements Generally. The Statement of Registration, the termination notice and all of the reports mentioned above are required to be filed electronically via the City Clerk’s e-Lobbyist website and are available for inspection by the public. In addition, as part of its enforcement powers under the Lobbying Law, the City Clerk will conduct random audits of the Statements of Registration and reports required to be filed by Clients and Lobbyists. In that connection, the City Clerk may require the production of witnesses and records relevant to the preparation of such audited Statements of Registration and reports.
D. Other Requirements and Restrictions; Penalties for Violations.
1. No Contingent Retainers.Under the Lobbying Law, Clients are prohibited from retaining or employing any Lobbyist if the rate or amount of compensation owed to such Lobbyist is partly or wholly contingent or dependent upon the results that the Lobbyist obtains in influencing any City legislative, executive or administrative action (including any action related to the Pension Systems). In addition, Lobbyists are not permitted to accept any such contingent retainer, employment or designation. Currently, it is unclear whether a bonus payment to a Lobbyist employee who engages in Lobbying activities as part of his or her employment would be considered as a form of prohibited contingent compensation under the Lobbying Law. The City Clerk has indicated that it may issue an advisory opinion providing guidance on this subject in the future.
2. Recordkeeping Requirements.Lobbyists and Clients must keep, for at least five years, a detailed and exact account of:
3. Penalties for Violations of the Lobbying Law.The penalties for violating the Lobbying Law, which may be severe in certain cases, are summarized below.
III. Additional Restrictions Concerning Certain Pension System Solicitations.In addition to the Lobbying Law requirements, effective July 1, 2010, the City Comptroller’s Office and the boards of trustees of the New York City Employees’ Retirement System, New York City Teachers’ Retirement System and New York City Board of Education Retirement System have implemented the following policies and procedures for investment managers seeking to do business with such Pension Systems:
An investment manager is required to provide written acceptance of the policies outlined above prior to the commencement of any diligence on the investment manager (or fund managed by such investment manager) by such Pension Systems and re-affirm such acceptance in connection with its appointment to provide investment management services to the Pension Systems. Such written acceptance must include an acknowledgement that such Pension Systems may terminate any investment contract or commitment, including any obligation to pay future capital calls or management or performance fees, for violation of such Pension Systems’ Placement Agent policy and related disclosure requirements.
IV. Other Issues for Investment Managers Related to the Lobbying Law.
A. Potential Ramifications Regarding Private Placement Exemption under Regulation D.The mix of criminal penalties under the Lobbying Law and certain provisions of the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) may pose a serious risk to private funds of not being eligible for the most widely utilized private placement exemption under the Securities Act of 1933, as amended (i.e., Rule 506 of Regulation D). Specifically, Section 926 of the Dodd-Frank Act requires the adoption of “bad boy” rules that, among other things, would disqualify any offering or sale of securities pursuant to Rule 506 of Regulation D by a person convicted of a felony or misdemeanor in connection with the purchase or sale of securities. This disqualification provision may be triggered in the event that a private fund’s investment manager is guilty of a misdemeanor for a violation of the Lobbying Law. Although currently it is not known whether and to what extent the City Clerk may seek enforcement of the misdemeanor penalty for violations of the Lobbying Law, the potentially serious consequences stemming from Section 926 of the Dodd-Frank Act, in addition to the monetary penalties for violations of the Lobbying Law outlined above in paragraph II.D.3, should further incentivize investment managers to private funds to ensure that all filings required under the Lobbying Law are made in a timely manner and are complete and accurate.
B. Potential Ramifications Regarding Form ADV.The Dodd-Frank Act will effectively require most investment advisers to register under the Investment Advisers Act of 1940, as amended (“Advisers Act”), or with one or more state securities authorities no later than June 2011. Form ADV (which includes, as a result of recent amendments to Form ADV, Parts 1A, 1B, 2A and 2B) is the uniform form used by investment advisers to register with the Securities and Exchange Commission (“SEC”) under the Advisers Act and with state securities authorities under state law. SEC-registered advisers must file publicly Parts 1A and 2A with the SEC, while Part 2B is not required to be filed, but must be provided to clients of the adviser. State-registered advisers must file publicly Parts 1A and 1B and, depending on the state, may also be required to file publicly Part 2A and distribute Part 2B to clients. Form ADV requires, among other things, disclosure concerning disciplinary history and legal violations for the adviser and its advisory personnel. This is significant to investment advisers who are registered or will soon be registered under the Dodd-Frank Act, and that are subject to the Lobbying Law, because a violation of the Lobbying Law which results in a misdemeanor penalty may be required to be disclosed on Form ADV.
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Please contact the authors with any questions or comments you may have regarding the subject matter covered by this Alert.
 The Lobbying Law is codified in Title 3, Chapter 2, Subchapter 2 of the New York City Administrative Code and Title 51 of the Rules of the City of New York.
 The City Clerk, via notice dated December 29, 2010, informed numerous businesses and organizations about recent written guidance, dated March 31, 2010, provided to the City Clerk by the New York City Law Department. The New York City Law Department opined that placement agents, other third parties retained by investment managers and employees of investment managers are considered to be engaged in Lobbying activities under the Lobbying Law when such persons attempt to influence decisions made by the board of trustees of the Pension Systems (or members of their staffs) or the City Comptroller (or members of his staff) about the investments of the Pension Systems.
 For a summary of the applicable California law concerning the regulation of placement agents and lobbying, please see our Client Alert entitled “California Regulates Investment Managers’ Placement Agents and Solicitors as Lobbyists” by clicking here.
 The City Clerk has granted a one-time extension to file Statements of Registration for calendar year 2011 and Client Annual Reports, Lobbyist Annual Reports and Fundraising/Political Consulting Reports for calendar year 2010, by no later than February 15, 2011 (rather than January 1, 2011).
 The six bi-monthly reporting periods are as follows: (1) January 1 – the last day of February; (2) March 1 – April 30; (3) May 1 – June 30; (4) July 1 – August 31; (5) September 1 – October 31; and (6) November 1 – December 31.
 Campaign contributions under the City’s campaign finance reform law are limited as follows: $250 to City Council candidates per election cycle; $320 to Borough President candidates per election cycle; and $400 to candidates for City-wide office per election cycle.
This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer.