The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

Articles By Topic

By Topic: Lobbying

  • From Vol. 10 No.12 (Mar. 23, 2017)

    K&L Gates Program Addresses State and Local Lobbying; Pay to Play; and Gifts and Entertainment Limitations (Part One of Two)

    Private fund advisers that seek investments from public pension plans enter a minefield of federal, state and local rules, and those that think that compliance with the “pay to play” rules under the Investment Advisers Act of 1940 affords sufficient protection may be sadly mistaken. States, municipalities and even individual government pension plans have a wide array of rules regarding lobbying, political contributions and gifts and entertainment. Further, sensitive information provided to public pension plans in the course of the investment management relationship may be subject to disclosure under public records and freedom of information (FOI) laws. A recent program presented by K&L Gates offered valuable insights into those state and local rules. The program featured Cary J. Meer and Ruth E. Delaney, partner and associate, respectively, at K&L Gates; and Eric J. Smith, managing director and deputy general counsel at PineBridge Investments. This article, the first in a two-part series, covers the portions of the program devoted to lobbyist regulation; political contributions; and gifts and entertainment. The second article will discuss state “sunshine” and FOI laws. For additional insight from Meer, see “How Hedge Fund Managers Can Prepare for SEC Remote Examinations (Part Two of Two)” (May 19, 2016); “Practical Guidance for Hedge Fund Managers on Raising Capital in Australia, the Middle East and Asia” (Oct. 30, 2014); and “Impact of CFTC Harmonization Rules on Alternative Mutual Funds and Other Registered Investment Companies” (Nov. 1, 2013).

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  • From Vol. 6 No.26 (Jun. 27, 2013)

    PLI Panel Addresses Marketing and Brokerage Issues Impacting Hedge Fund Managers, Including Marketing to State Pension Plans, Capital Introduction and Broker Implications of In-House Marketing Activities

    At the Practising Law Institute’s Hedge Fund Compliance and Regulation 2013 program, an expert panel comprised of SEC attorneys and industry practitioners shared insights on topics involving marketing and brokerage issues that impact hedge fund managers.  Among other things, the wide-ranging discussion covered the regulatory perils that accompany marketing to government pension funds, including local, state and federal pay-to-play and lobbying laws; capital introduction programs; the European Union’s Alternative Investment Fund Managers Directive; broker regulations implicated by in-house fund marketing activities; and investment-related regulations impacting broker-dealers and their hedge fund clients, including the Market Access Rule, circuit breakers, the use of dark pools, short selling, securities lending and large trader reporting.  This article summarizes the highlights from the panel discussion that are most pertinent to hedge fund managers.  See also “PLI Panel Provides Regulator and Industry Perspectives on Ethical and Compliance Challenges Associated with Hedge Fund Investor Relations,” The Hedge Fund Law Report, Vol. 6, No. 25 (Jun. 20, 2013); “PLI Panel Provides Regulator and Industry Perspectives on SEC and NFA Examinations, Allocation of Form PF Expenses, Annual Compliance Review Reporting and NFA Bylaw 1101 Compliance,” The Hedge Fund Law Report, Vol. 6, No. 24 (Jun. 13, 2013).

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  • From Vol. 5 No.2 (Jan. 12, 2012)

    STOCK Act Could Expand Insider Trading Laws to Prohibit Trading by Hedge Funds Based Upon Nonpublic “Political Intelligence”

    Last month the Senate Homeland Security & Governmental Affairs Committee passed the “Stop Trading on Congressional Knowledge Act,” or “STOCK Act,” and the House Financial Services Committee held hearings on similar legislation.  The primary purpose of this Act is to close a loophole in the law that may allow Members of Congress to legally trade securities based upon nonpublic “political intelligence.”  However, hedge fund managers should watch this legislation closely as it could have significant, perhaps unintended, implications.  Depending on what provisions (if any) are ultimately enacted, the legislation could alter the way fund managers conduct basic regulatory due diligence in connection with investments.  The legislation could weaken a key provision of Regulation FD, which confirms the “mosaic theory” defense to federal insider trading charges, and impact the way fund managers use employees, expert networks, lobbyists and political intelligence firms to research federal legislative and political activities in connection with their investments.  In fact, the legislation could fundamentally alter the way that fund managers interact with federal employees, including Members of Congress.  In a guest article, Scott E. Gluck, Of Counsel at Venable LLP, discusses: the background of the STOCK Act; relevant insider trading law; specific provisions of the STOCK Act relevant to hedge fund managers; and seven distinct issues for hedge fund managers to monitor, including the potential impact of the STOCK Act on the “mosaic theory” defense to insider trading charges.

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  • From Vol. 4 No.43 (Dec. 1, 2011)

    Third Party Marketers Association 2011 Annual Conference Focuses on Hedge Fund Capital Raising Strategies, Manager Due Diligence, Structuring Hedge Fund Marketer Compensation and Marketing Regulation

    Changing investor expectations and heightened regulation of hedge fund marketing has ushered in a new era for hedge fund managers seeking to raise capital.  Hedge fund managers must continuously keep abreast of the issues that will impact their ability to effectively raise capital, particularly from institutional investors.  Additionally, recent regulatory developments have created new challenges for fund managers that use third party marketers to assist in raising capital.  This “New Normal” was the backdrop of the 2011 annual conference of the Third Party Marketers Association (3PM) in Boston on October 26 and 27, 2011.  This article focuses on the most important points for hedge fund managers that were discussed during the conference.  The article begins with a discussion of how fund managers can enhance their marketing efforts to raise more capital by understanding various aspects of the capital raising cycle, including the changing request for proposal (RFP) process, product positioning, the investor due diligence process and the manager selection process.  The article then moves to a discussion of the regulatory challenges facing hedge fund managers using third party marketers, including a discussion of third party marketer due diligence of fund managers and appropriate compensation arrangements for third party marketers in light of lobbying law changes and pay to play regulations.  The final section discusses impending and existing rules that will have a significant impact on hedge fund marketing.

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  • From Vol. 4 No.20 (Jun. 17, 2011)

    How Much Are In-House Hedge Fund Marketers Paid, and How Will Recent Developments in New York City and California Lobbying Laws Impact the Compensation Levels and Structures of In-House Hedge Fund Marketers (Part Three of Three)

    This is the third article in our three-part series on how recent changes to the New York City and California lobbying laws will impact the compensation and activities of third-party and in-house hedge fund marketers.  The first article in this series described the relevant legal changes in depth and included a chart comparing analogous provisions of the New York City and California laws.  See “Recent Developments in New York City and California Lobbying Laws May Impact the Activities and Compensation of In-House and Third-Party Hedge Fund Marketers (Part One of Three),” The Hedge Fund Law Report, Vol. 4, No. 6 (Feb. 18, 2011).  The second article in the series analyzed the implications of the lobbying law changes for third-party hedge fund marketers.  Notably, the second article examined how hedge fund managers may structure new agreements with third-party marketers, or restructure existing agreements, in light of the ban on “contingent compensation” under the New York City and California laws.  That second article also discussed representations, warranties and covenants called for by the revised laws; due diligence consequences of the revised laws; and – most provocatively – why the lobbying law changes may be moot in light of a broader macro trend impacting third-party marketers.  See “How Can Hedge Fund Managers Structure the Compensation of Third-Party Marketers in Light of the Ban On ‘Contingent Compensation’ Under New York City and California Lobbying Laws? (Part Two of Three),” The Hedge Fund Law Report, Vol. 4, No. 13 (Apr. 21, 2011).  This article is the third in our lobbying series, and focuses on the implications of the lobbying law changes for in-house hedge fund marketers.  In particular, this article details: the typical compensation structures of in-house hedge fund marketers; how much in-house hedge fund marketers are paid, including specific numbers based on conversations with executive search professionals with relevant experience; whether in-house marketers fall within the scope of the California and New York City lobbying laws; specific strategies for structuring or restructuring the compensation of in-house marketers based on the lobbying law developments; exemptions from the “lobbyist” designation that may be available to in-house marketers; a discussion of relevant guidance provided by the California Fair Political Practices Commission in a recent letter; and the related issue of registration of an in-house hedge fund marketing department as a broker, and of the members of such a department as associated persons of a broker.

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  • From Vol. 4 No.13 (Apr. 21, 2011)

    How Can Hedge Fund Managers Structure the Compensation of Third-Party Marketers in Light of the Ban On “Contingent Compensation” Under New York City and California Lobbying Laws? (Part Two of Three)

    An authoritative recent interpretation of New York City’s lobbying law and recent amendments to California’s lobbyist law likely will require placement agents and other third-party hedge fund marketers, in-house hedge fund marketers and, in some cases, hedge fund managers themselves, to register as lobbyists.  Such registration will impose new obligations and prohibitions on hedge fund marketers and managers.  See “Recent Developments in New York City and California Lobbying Laws May Impact the Activities and Compensation of In-House and Third-Party Hedge Fund Marketers (Part One of Three),” The Hedge Fund Law Report, Vol. 4, No. 6 (Feb. 18, 2011).  Most dramatically, both California and New York City will prohibit a registered lobbyist from receiving contingent compensation, that is, compensation that is calculated by reference to the success of the lobbyist’s efforts in persuading a public pension fund to invest in a hedge fund.  Success-based compensation is the primary mechanism used to compensate and incentivize hedge fund marketers.  Accordingly, the legal change in California and the interpretive change in New York will fundamentally alter the economics of hedge fund marketing.  Or to set the stage in simpler terms: Hedge fund marketers will be required to register as lobbyists; hedge fund marketers are paid by commission; lobbying laws prohibit the payment of commissions to lobbyists; so how will hedge fund marketers be paid going forward?  This is the second article in a three-part series intended to address that question.  The first article included a comprehensive chart detailing the provisions relevant to hedge fund managers and marketers of the New York City and California lobbying laws.  This article examines how hedge fund managers can structure or restructure their arrangements with third-party hedge fund marketers in light of the ban on contingent compensation.  Specifically, this article discusses: the relevant provisions of the New York City Administrative Code and the California Code; trends in other states and municipalities; typical components, levels and structures of compensation of third-party hedge fund marketers (all of which were analyzed in depth in a prior article in the HFLR); four specific strategies that hedge fund managers can use to structure new arrangements with third-party marketers, and the benefits and burdens of each; three of the more challenging scenarios that hedge fund managers may face in restructuring existing agreements with third-party marketers, and the relevant legal considerations in each scenario; whether the New York City and California lobbying laws contain grandfathering provisions; special lobbying law considerations for funds of funds; and changes to representations, warranties, covenants and due diligence necessitated by the changes to the lobbying law.  The article concludes with a discussion of a “bigger issue” that has the potential to render the foregoing discussion largely moot.  (The third article in this series will examine related issues with respect to in-house hedge fund marketers.)

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  • From Vol. 4 No.6 (Feb. 18, 2011)

    Recent Developments in New York City and California Lobbying Laws May Impact the Activities and Compensation of In-House and Third-Party Hedge Fund Marketers (Part One of Three)

    Public pension funds represent approximately 16 percent of all institutional investor assets in hedge funds, according to alternative investment data provider Preqin.  However, not all assets invested in hedge funds are equally weighted.  To a hedge fund manager, a dollar invested by a public pension fund generally is more valuable than a dollar invested by a high net worth individual, or most funds of funds, for at least two reasons.  First, that pension fund is likely to stay invested longer, and thus to generate more fees over time.  Second, an investment by a public pension fund often increases the likelihood of other investments because subsequent investors assume, rightly or wrongly, that the public pension fund engaged in rigorous investment and operational due diligence before investing.  Accordingly, public pension funds have long been among the most coveted investors in hedge funds, and that 16 percent figure understates the attention such funds have garnered from in-house and third-party marketers.  However, at least three recent developments have complicated the process of marketing to public pension funds.  The first two of those three developments are discussed in this article.  The third such development is this: an authoritative recent interpretation of New York City’s lobbying law, and recent amendments to California’s lobbying law, likely will require placement agents and other third-party marketers, in-house hedge fund marketers and, in some cases, hedge fund managers themselves, to register as lobbyists.  Such registration will impose new obligations and prohibitions on hedge fund marketers.  Most dramatically, both California and New York City prohibit a registered lobbyist from receiving contingent compensation, that is, compensation that is calculated by reference to the success of the lobbyist’s efforts in persuading a public pension fund to invest in a hedge fund.  In other words, the lobbying laws of both jurisdictions appear to prohibit – or at least complicate – precisely the types of compensation structures most typically found in placement agent agreements and many in-house marketer agreements.  See “What Is the ‘Market’ for Fees and Other Key Terms in Agreements between Hedge Fund Managers and Placement Agents?,” The Hedge Fund Law Report, Vol. 3, No. 35 (Sep. 10, 2010).  Of course, the lobbying laws only prohibit or complicate such compensation structures in connection with solicitation activities directed at public pension funds in California or New York City.  However, those jurisdictions contain public pension funds – notably including CalPERS – whose actions are widely followed by other public pension funds and other institutional investors.  See “CalPERS Special Review Foreshadows Seismic Shift in Business Arrangements among Public Pension Funds, Hedge Fund Managers and Placement Agents,” The Hedge Fund Law Report, Vol. 4, No. 1 (Jan. 7, 2011).  This article is the first installment in a three-part series intended to explore the implications of the New York City and California lobbying law developments for various hedge fund industry participants.  Specifically, this article provides the legal basis on which the analyses in parts two and three will be based.  The core of this article is a proprietary, 14-page chart summarizing the key provisions of the New York City and California lobbying laws, and comparing those provisions side-by-side.  For example, column one of the chart lists a provision (e.g., people and entities whose efforts to influence investment decisions may constitute “lobbying” under relevant law), column two describes the provision under New York City law, and column three describes the provision under California law.  The intent of this layout is to enable subscribers to easily compare the way in which the different jurisdictions handle the same concept.  The specific provisions covered by the chart include: primary legal, regulatory and interpretive resources, and links thereto; affected pension funds; definitions of “lobbyist”; definitions of “client” (NY), “external manager” (CA) and “lobbyist employer” (CA); definitions of “lobbying”; people and entities whose efforts to influence investment decisions may constitute “lobbying” under relevant law; exceptions from the definition of “placement agent”; people and entities, contacts with whom may constitute “lobbying” under relevant law; registration requirements for lobbyists; timing and frequency of required filings by lobbyists of statements of registration; filing requirements applicable to clients of lobbyists; periodic filing requirements applicable to lobbyists; prohibitions on contingent compensation; other prohibitions; recordkeeping requirements; the requirement to attend ethics training courses; penalties for violations of lobbying laws; and the public availability of reported data.  Part two of this article series will examine the implications of these lobbying law developments for the activities and compensation of third-party hedge fund marketers, and part three of this series will examine the implications for in-house marketers.

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  • From Vol. 2 No.28 (Jul. 16, 2009)

    Hedge Funds Increasing Lobbying Efforts, Focusing On Shaping Regulations Rather Than Preventing Them

    The nature and volume of lobbying by hedge funds and groups representing them has changed dramatically in the past year.  Formerly, hedge funds and their representatives engaged in only a limited amount of lobbying, relative to various other industries, and such lobbying as they engaged in was generally focused on preventing legislation or regulation that would require registration of hedge fund managers with the SEC.  Largely as a result of the credit crisis and the flurry of bills and proposals it has engendered, many of which would impact hedge funds and their managers directly or indirectly, hedge fund lobbying has shifted focus.  The new goal of such lobbying is to shape law and regulation, rather than to prevent it.  Specifically, the new lobbying efforts aim to ensure that any law or regulation applicable to hedge funds that makes its way onto the books be more procedural than substantive.  In this view, registration by itself would not be such a bad outcome, but dramatic limits on leverage, frequent public disclosure of positions and restrictions on the industries in which hedge funds can invest (all of which have been suggested in one form or another) might, together with similar substantive limitations, materially undermine hedge fund performance and operations.  We detail the reasons for the changed nature and volume of hedge fund lobbying; the role of the Managed Funds Association; the benefits and detriments of lobbying efforts by individual fund managers; the specific legislative and regulatory areas on which hedge fund lobbying is focusing; and international coordination of lobbying efforts.  Also, for a comprehensive, interactive summary of proposed and final laws and rules applicable to hedge funds from every relevant international jurisdiction, see The Hedge Fund Law Report’s proprietary Regulatory & Legislative Database.

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