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?
,” 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
,” 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.