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F I S C A L I M P A C T R E P O R T

SPONSOR Ingle

ORIGINAL DATE

LAST UPDATED

2/7/07

HB

SHORT TITLE Contributions to State Agents & Candidates

SB 400

ANALYST Wilson

ESTIMATED ADDITIONAL OPERATING BUDGET IMPACT (dollars in thousands)

FY07

FY08

FY09 3 Year

Total Cost

Recurring

or Non-Rec

Fund

Affected

Total

$0.1

$0.1

$0.1 Recurring General

Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

Relates to SB 445

SOURCES OF INFORMATION

LFC Files

Responses Received From

Administrative Offices of the District Attorneys (AODA)

Corrections Department (CD)

Office of the Attorney General (OAG)

State Investment Council (SIC)

SUMMARY

Synopsis of Bill

Senate Bill 400

prohibits payments, campaign contributions or any other form of gifts exchanged

between managers, their employees or representative agents and investors of public funds as well

as anyone seeking, currently engaging, or wishing to engage at a later date in business with state

investment agencies and any other “state agent", namely, elected or appointed officials with any

influence on the state’s investment process, including, but not limited to: Governor, Lt.

Governor, State Treasurer, State Auditor, Secretary of State, Attorney General, Land

Commissioner and State Legislators.

The SIC interprets the bill to affect the SIC, as managers of New Mexico’s Permanent Funds; the

State’s public pension funds of PERA & ERB; the State Treasurer; and the New Mexico Finance

Authority, as well as the Governor, Legislature and New Mexico’s elected officials.

Senate Bill 400 – Page

2

FISCAL IMPLICATIONS

SB 400 imposes additional enforcement authority on the OAG without providing any

appropriation. The OAG may need additional staff and resources to enforce the provisions of SB

400.

The bill will create a new felony offense; it is likely that criminal prosecutions will be relatively

rare. Therefore, the impact on the courts, district attorneys and public defenders will not be

significant.

SIGNIFICANT ISSUES

SB 400 could have significant impact on the available pool of broker dealers and investment

opportunities for all of the state’s investment agencies. If any employee of any broker dealer,

manager or advisor makes a campaign contribution to a “state agent" as defined in the bill, the

broker is barred from conducting business will all state agencies.

From the bill: “’investment agent’ means a person that receives or the person’s officers or

agents that receive, compensation for providing financial services involving public money or that

invest or provide advice on the investment of public money."

The SIC interprets this definition to include all money managers, financial advisors, investors,

and brokers as well as any employee of a finance/investment related company which may have

current, past or future dealings and/or business relationships with the state. By defining the

company itself as inclusive of all its individual employees, the following becomes likely:

An administrative assistant for Financial Services Company X in Albuquerque contributes $20 to

her state legislator’s reelection campaign. Company X, which is a huge multi-national

corporation based in New York, is on the approved bond trading list for the SIC. The SIC

doesn’t execute trades with anyone Company X’s Albuquerque branch, but with the NY office.

However, under SB 400, because the assistant is technically an employee of Company X, the

corporation will be prohibited from doing business with the State, regardless of its location.

Under SB 400, the state and its investment arms will essentially be barred from working with

any local banks or banks with local branches, in fear that a bank employee, even of lowest rank,

might contribute to his or her candidate of choice for state elected office, thus bringing the

investment agent and candidate into felonious violation of the statute.

SB 400 will also trigger a significant depletion of qualified investment professionals and firms

for the state to partner and work with, as detailed above.

In addition, there is no time frame to indicate when a departing employee might be able to work

for a company that has ever been employed as an investment agent for the state. Investing and

finance are fields that are extremely specialized and experience specific. Such relevant

experience is valued in finance, just as it is with any other professional field. It hardly seems fair

to prevent a former state employee in this field from having to exclude all investment agents who

work on behalf of any state investment agency from a list of potential employers, which will

include an extremely long list of major banks, investment agencies, advisors, financial groups

and the like. Using this same logic, private sector financial agencies in NM will be forced to

Senate Bill 400 – Page

3

look outside our state to recruit employees, should they wish to do any business with the State.

ADMINISTRATIVE IMPLICATIONS

The bill’s wide and in several cases undefined scope leaves open the question of who will

monitor and police contributions for potential conflict. The SIC, and other state investment

agencies, has neither the staff, nor expertise to cross reference campaign reports with hundreds of

broker agents and their thousands of employees. The time and monetary cost of such endeavors

is difficult to quantify.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

SB 400 relates to and somewhat conflicts with SB 445. SB 445 defines “public officer or

employee" differently than SB 400.

TECHNICAL ISSUES

The SIC states that the bill as drafted has several critical flaws that will hinder the ability of the

state’s investment agencies to fulfill their missions, and prevent them from exercising their

statutory obligation to be prudent investors. They provided the following;

First, in section C of definitions, “contribution" is defined extensively, including “…any

other thing of value". This definition is so broad that among other things, it will include

presentation packets, marketing materials, binders, notebooks, CDs, presentation flash-

drives or any other materials often submitted during a standard Request for Proposal

(RFP) process, as well as being relied upon by the investment agencies to make prudent

investment decisions.

Section C (2) excludes as gifts, “…compensation for services rendered or capital invested

that is: … (b) Commensurate with the value of service rendered or the magnitude of the

risk taken on the investment;" This language is ambiguous and confusing, and might

lead one to believe that “riskier" investments somehow allow for higher compensation.

Section C (5) excludes as gifts, “food and refreshments totaling no more than twenty five

($25) per day for food and refreshments at a public reception or other public social

function that are available to all guests equally;" Lack of specificity regarding a “public

reception" and “public social function" will lead to confusion. What exactly does

“public" mean. How many people and/or state agents must be present for it to constitute

a “public social function." Will it only be applicable for events open to all members of

the general public, or will it simply include meetings in a public place. What if the

dinner was held at a country club or private facility.

Limited partner meetings are open only to a Fund’s limited partners who have invested in

a Fund. It is often critical for investment agencies to attend these meetings to evaluate

performance, though these meetings are rarely “public".

Section F defines “investment agent" as: “…a person that receives or the person’s

officers or agents that receive, compensation for providing financial services involving

public money or that invest or provide advice on the investment of public money;"

Senate Bill 400 – Page

4

This broad definition seems to include all employees, contractors, and board members

affiliated with those public funds or providing investment advice to the state.

Section K defines “state agent" as “…a person who is acting in an official capacity…"

and is the Governor, Treasurer, a legislator, etc. However, “acting in an official

capacity" is not defined. Is a state agent in an official capacity every waking moment, or

is it related to specific duties during the work day.

Section 2 of the bill, “Solicitation and Acceptance of Contributions Prohibited", says it is

a felony for “…anyone who solicits funds on the candidate’s behalf to knowingly solicit

or accept, directly or indirectly, a contribution from an investment agent doing business

with a state agent."

The first problem with this section will be the lack of definitions regarding “knowingly",

and “a" state agent. Does the standard for proving someone knowingly solicited a

contribution require actual knowledge, or merely constructive or imputed knowledge.

How is it proven what the solicitor knew at the time of the solicitation. Also, as written,

“a" state agent implies “any" state agent, which will make plausible the following:

Legislator X receives a campaign contribution from a friend, whose wife happens to work

as an administrative assistant for Financial Group Y. The SIC has in the past and

probably in the future, purchased securities from Financial Group Y. The Attorney

General may determine Legislator X committed a felony, and the SIC may no longer use

Financial Group Y as a broker.

Section 3 (A) states “…it is unlawful for an investment agent doing business with a state

agent to make, directly or indirectly, a contribution…" to political candidates. What if

the agent is a member of the advisory board of a charitable organization, and the

organization decides to contribute to a political candidate who is in alignment with their

goals and cause.

Section 3 (B) says: “…If an investment agent who is not doing business with the state has

contributed to, has solicited any person or political action committee to make a

contribution or has coordinated any contribution to a successful candidate for an office of

a state agent that has authority over the investment of public funds or issuance of bonds,

or that has the authority to appoint public officers who have that authority the investment

agent shall not conduct business with the state…"

This section has several problems due to lacking legal definitions. How should

‘solicited’ or ‘coordinated a contribution’ be interpreted. Does this include suggesting to

an investment agent that a candidate is worthy of a contribution. Discussing whether

someone is a good candidate. Naturally this restriction will apply to contributions to not

only legislators, but to board members of PERA and ERB, who have authority to change

laws or appoint public officers with investment authority. This could be interpreted as

preventing state employees at investment agencies from supporting a retirement board or

legislative candidate. A state employee giving a campaign contributions will then not be

allowed to “conduct business" with the state, which, lacking a definition could represent

a necessary termination of employment.

Senate Bill 400 – Page

5

Section 4 reads “…it is unlawful for a state agent to solicit any investment agent doing

business with the state or seeking to do business with the state to: A. appoint a person to a

position of employment; or B. hire a person on contract in any capacity."

Unfortunately, “solicit" is undefined, which could be interpreted as broadly as to include

a recommendation or even merely a citation as a reference by a state agent on a former

state employee’s resume. This presents a potentially criminal problem should a state

agent write a standard letter of recommendation for an employee or former employee

who later uses that letter in an application for employment at a financial agency that has

or is considering business with any state investment agencies.

OTHER SUBSTANTIVE ISSUES

The AODA provided the following:

Section 3A of the bill states: that it is unlawful for an investment agent doing business

with a state agent to make, directly or indirectly, a contribution to: a candidate for the

elective office of a state agent or the candidate's campaign, but the bill does not appear to

provide for a penalty for this particular violation.

The Governmental Conduct Act currently contains Section 10-16-17, Criminal Penalties,

dealing with the penalties for existing violations of the act. In that section it states that,

“Nothing in the Governmental Conduct Act shall preclude criminal prosecution for

bribery or other provisions of law set forth in the constitution of New Mexico or by

statute." A prosecution under the proposed amendment to the Act might, according to

Section 10-16-17, be followed by a prosecution for bribery involving a public officer. It

is possible a court will find a conviction for both offenses will violate double jeopardy

protections for twice convicting for the same conduct.

ALTERNATIVES

The SIC recommends a Joint Memorial to send this issue to the Investments and Pensions

Oversight Committee for further discussion, consideration and refinement.

POSSIBLE QUESTIONS

1.

Since the AGO is the sole agency with discretionary investigatory and prosecuting

powers under the proposed statute, who will prosecute violations under SB 400, should

perpetrators of these campaign contribution violations be employees of the AGO.

2.

Will SB 400 include travel and hotel accommodation reimbursement by a conference

host when a state agent speaks at said conference and represents New Mexico interests.

The state will otherwise reimburse the employee for the costs, but if the conference was

hosted by a financial partner of the state, will that be prevented under SB 400, thereby

costing the State additional revenue.

Senate Bill 400 – Page

6

3.

The issue is the same for limited partner meetings, other due diligence visits and

meetings for companies the state is already invested in and needs to monitor as part of

its fiduciary responsibility. Do the provisions of this bill intend to prevent due-diligence

trips, which are critical to evaluate potential investments.

4.

It is the industry standard, sometimes contractually stipulated and also more logical for

the company seeking or currently investing the state’s dollars to pay oversight expenses

to the agency. Does the bill intend to create a typical situation where the state is paying

a great deal of money to analyze an investment that never gets made.

DW/nt