Yearly Archives: 2009

Hedge Fund Manager Registration to Cost Taxpayers $140 Million (at least)

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CBO Calculates Cost of House Hedge Fund Bill

This past week the Congressional Budge Office (“CBO”) released a cost estimate of H.R. 3818, the Private Fund Investment Advisers Registration Act of 2009.  In a number of private conversations I have had about hedge fund registration over the last 9-12 months one of the issues that was continually raised was appropriate funding for the SEC.  As we have seen recently (most notably from the Inspector General’s Madoff report), the SEC’s budget is not large enough to adequately fulfill their investor protection mandate.  Adding hedge fund registration would obviously further burden the cash-strapped agency (for more see Schumer Proposal to Double SEC Budget).  According to the CBO, and based on the SEC’s estimates that it will need to add 150 employees, the estimated outlays over four years will be equal to $140 million.

However, taxpayers should understand that this assumes that registration will only be required for those managers with at least $150 million in assets under management.   At the $150 million AUM level, the CBO expects that 1,300 hedge fund managers would be required to register.  The current draft of the Senate hedge fund registration bill calls for managers with $100 million in AUM to register – lowering the AUM exemption threshold will increase the amount of managers required to register.  Additionally, there are outstanding political issues.  First, it is unclear whether the final bill will require private equity fund managers and venture capital fund managers to register – we do not necessarily understand the arguably arbitrary carve-out for these industries.  Second, it is clear that a majority of the state securities commissions are unable and unwilling to be responsible for overseeing managers with up to $100 million in assets.  Hedge fund managers who would subject to state oversight would rightly want to be subject to SEC oversight (which does not say much for many state securities commissions).  These issues will continue to be addressed during the political sausage-making process.

Of additional interest – the CBO estimates that hedge fund registration is likely to cost around $30,000 per each SEC registrant which is welcome news to investment adviser compliance consultants and hedge fund lawyers!

For full report, please see full CBO Hedge Fund Cost Estimate.

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Other related hedge fund law articles include:

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs the Hedge Fund Law Blog and provides hedge fund manager registration service through Cole-Frieman & Mallon LLP He can be reached directly at 415-868-5345.

Hedge Funds and Insider Trading after Galleon

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By Bart Mallon, Esq. (www.colefrieman.com)

High Profile Case Highlights Issues for Hedge Fund Managers to Consider

Insider trading is now an operational issue for hedge fund managers.  The high profile insider trading case involving RR and the Galleon hedge fund has put the spotlight directly on hedge funds again and has also sparked a debate of sorts on the subject.  Given the potential severity of penalties for insider trading, it is surprising that we still periodically hear about such cases, but nevertheless it is something that is always going to be there – human nature is not going to change.

As such hedge fund managers need to be prepared to deal with this issue internally (through their compliance procedures) and also will need to be able to communicate how they have addressed this issue to both the regulators and institutional investors.  While managers always need to be vigilant in their enforcement of compliance policies and procedures, during this time of heightened insider trading awareness, managers need to be even more vigilant about protecting themselves.  As the Galleon liquidation too vividly shows, a lapse in operational oversight can and will take down an entire organization.

Insider Trading Overview and Penalties

We have discussed insider trading before, but as a general matter insider trading refers to the practice of trading securities based on material, non-public information.  Whether information is material depends on case law.  In general information will be material if “there is a substantial likelihood that a reasonable shareholder would consider it important” in making an investment decision (see TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).  Information is non-public if it has not been disseminated in a manner making it available to investors generally. An insider is generally defined as officers, directors and employees of a company but it can also refer to a company’s business associates in certain circumstances (i.e. attorneys, accountants, consultants, and banks, and the employees of such organizations).  Additionally, persons not considered to be insiders may nevertheless be charged with insider trading if they received tips from insiders – such persons generally are referred to as tippees and the insider is generally referred to as the tipper.  [HFLB note: more information on insider trading generally can be found in the discussion of Regulation FD on the SEC website.]

The penalties for insider trading are potentially harsh – censures, cease and desist orders, fines, suspension and/or revocation of securities licenses are all potential penalties.  Depending on the severity of the insider trading there may be criminal sanctions in addition to the listed civil penalties.  Securities professionals (or other business professionals like an attorney or accountant) may jeopardize their ability to work in their industry if they are caught engaging in insider trading which, for most people, would be a large enough deterrent to engage in such activity.

Addressing Compliance Inside the Firm

Insider trading is usually addressed in the firm’s compliance policies and procedures.  Indeed, Section 204A of the Investment Adviser Act of 1940 requires SEC registered investment advisers to maintainpolicies and procedures to detect against insider trading.

Usually such policies and procedures forbid employees from trading on material non-public information (as well as “tipping” others about material non-public information).  Additionally, employees typically are required to disclose any non-public material information they receive to the chief compliance officer (“CCO”) of the firm.  The employee is generally prohibited from discussing the matter with anyone inside or outside of the firm.  The policies and procedures may require the CCO to take some sort of action on the matter.  There are a number of different ways that the CCO can handle the situation including ordering a prohibition on trading in the security (including in options, rights and warrants on the security).  The CCO may also initiate a review of the personal trading accounts of firm employees.  Usually when the CCO is informed of such information the CCO would contact outside counsel to discuss the next course of action.

Dealing with Regulators

While many large hedge fund managers are registered as investment advisors with the SEC, many still remain unregistered in reliance on the exemption provided by Section 203(b)(3).  With the Private Fund Investment Advisers Registration Act likely to be passed within the next year, managers with a certain amount of AUM (either $100 million or $150 million as it now stands) will be forced to register with the SEC.  Of course, this means that such managers will be subject to examination by the SEC and insider trading will be one of the first issues that a manager will likely deal with in an examination.

As we discussed in an earlier insider trading article, the SEC has unabashedly proclaimed war against insider trading and they will be aggressively pursuing any leads which may implicate managers.

Some compliance professionals believe that the SEC comes in with a view that the manager is guilty until proven innocent.  While I do not necessarily subscribe to this blanket viewpoint, I do believe that managers, as a best practice, should be able to show the SEC the steps they have taken to ensure that compliance with insider trading prohibitions is a top priority of the firm.  The firm and CCO should be prepared to describe their policies and structures that are in place to deal with this issue.

Institutional Standpoint

Potentially more important than how a firm deals with the SEC, is how a firm describes their internal compliance procedures to institutional investors.  The question then becomes, how are institutional investors going to address this risk with regard to the managers they allocate to – what will change?

Right now it appears a bit unclear.  Over the past week I have talked with a number of different groups who are involved hedge fund compliance, hedge fund consulting, and hedge fund due diligence and I seem to get different answers.  Some groups think that institutional investors will be focusing on this issue (as many managers know, one of the important issues for institutional investors is the avoidance of “headline risk”); other groups seem to think that this is an issue that institutional groups are not going to focus on because there are other aspects of a manager’s investment program and operations which deserve more attention.

We tend to agree more with the second opinion, but we still believe that robust insider trading compliance policies and procedures are vital to the long term success of any asset management company.  We also encourage groups to discuss their current procedures with their compliance consultant or hedge fund attorney.

Outsourcing and Technology solutions

Many large managers have implemented compliance programs which have technology solutions designed to track employee trading.  Presumably there will be technology programs developed to address this concern for manager.  Although I do not currently know of any specific outsourced or technology solutions which address this issue, I anticipate discussing this in greater depth in the future – perhaps there is some data warehousing solution.  [HFLB note: please contact us if you would like to discuss such a solution with us.]

Final Thoughts

The Galleon insider trading case could not have happened at a worse time for the hedge fund industry which is trying to put its best face forward as Congress determines its future regulatory fate.  However, increased awareness of this issue will force managers to address it from an operational standpoint which will only help these managers down the road.  While the full effect of this case will not be understood for a while, in the short term it is likely to cost managers in terms of time and cost to review and implement increased operational awareness and procedures.

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Other related hedge fund law articles:

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs the Hedge Fund Law Blog and the Series 79 exam website.  He can be reached directly at 415-868-5345.

Insider Trading Overview

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In light of the recent focus on insider trading, we are publishing the SEC’s discussion on Insider Trading which can also be found here.  The information below contains a broad overview of some of the important aspects which hedge fund managers should understand about the insider trading prohibitions.

For a greater background discussion on the legal precedents which helped shaped the state of law today, please see Insider Trading—A U.S. Perspective, a speech by staff of the SEC.

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Insider Trading

“Insider trading” is a term that most investors have heard and usually associate with illegal conduct. But the term actually includes both legal and illegal conduct. The legal version is when corporate insiders—officers, directors, and employees—buy and sell stock in their own companies. When corporate insiders trade in their own securities, they must report their trades to the SEC. For more information about this type of insider trading and the reports insiders must file, please read “Forms 3, 4, 5” in our Fast Answers databank.

Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include “tipping” such information, securities trading by the person “tipped,” and securities trading by those who misappropriate such information.

Examples of insider trading cases that have been brought by the SEC are cases against:

  • Corporate officers, directors, and employees who traded the corporation’s securities after learning of significant, confidential corporate developments;
  • Friends, business associates, family members, and other “tippees” of such officers, directors, and employees, who traded the securities after receiving such information;
  • Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded;
  • Government employees who learned of such information because of their employment by the government; and
  • Other persons who misappropriated, and took advantage of, confidential information from their employers.

Because insider trading undermines investor confidence in the fairness and integrity of the securities markets, the SEC has treated the detection and prosecution of insider trading violations as one of its enforcement priorities.

The SEC adopted new Rules 10b5-1 and 10b5-2 to resolve two insider trading issues where the courts have disagreed. Rule 10b5-1 provides that a person trades on the basis of material nonpublic information if a trader is “aware” of the material nonpublic information when making the purchase or sale. The rule also sets forth several affirmative defenses or exceptions to liability. The rule permits persons to trade in certain specified circumstances where it is clear that the information they are aware of is not a factor in the decision to trade, such as pursuant to a pre-existing plan, contract, or instruction that was made in good faith.

Rule 10b5-2 clarifies how the misappropriation theory applies to certain non-business relationships. This rule provides that a person receiving confidential information under circumstances specified in the rule would owe a duty of trust or confidence and thus could be liable under the misappropriation theory.

For more information about insider trading, please read Insider Trading—A U.S. Perspective, a speech by staff of the SEC.

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Other related hedge fund law articles include:

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs the Hedge Fund Law Blog and the Series 79 exam website.  He can be reached directly at 415-868-5345.

Hedge Fund Operations During a Pandemic

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Thoughts on Business Continuity Planning

Over the past week, I have attended a couple of interesting panel discussions on the hedge fund industry.  At these events, one of the common themes was that the investment management industry is changing and hedge fund management companies need to make sure that operations are tight – this means that a management company should have developed and robust procedures for disasters including, as the article below indicates, pandemics.  It is expected that this topic will become even more important if the impact of the H1N1 virus does not abate.

The article below was provided by Lisa Smith of Eze Castle Integration, an IT solutions firm for hedge fund management companies. This article is part of our guide to Hedge Fund Business & Technical Issues.

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Business Continuity: A Look at Pandemic Response Planning
By: Lisa Smith, Certified Business Continuity Planner, Eze Castle Integration

As the last several months have unfolded, one thing has become clear: the influenza A (H1N1) virus is not going away.  After the initial panic subsided, fear and concern seemed to diminish even though the World Health Organization and U.S. Centers for Disease Control insist that the threat is not over.  Now, nearly five months since the first case of H1N1 was reported in Mexico, a pandemic has emerged as predicted.

As of November 1, 2009, 199+ countries have reported laboratory confirmed cases of pandemic influenza H1N1 2009, including over 482,000 cases and 6,000 deaths (World Health Organization).  U.S. health officials estimate that the virus could directly and indirectly affect up to 40 percent of the nationwide workforce over the next two years (Centers for Disease Control).

What does this mean for hedge funds?  It is more important than ever to ensure a firm can and will remain functional if you are affected by a pandemic. Particularly, hedge funds must be mindful of the repercussions of the virus, as a decrease in staff could cause potential downtime.

Below are six essential pandemic response steps that firms need to undertake to ensure their businesses remain at peak performance, even if an outbreak occurs in the office.

Begin response procedures BEFORE a disaster strikes.

Organizational resiliency starts by strengthening your organization during normal business operations prior to a disaster such as a pandemic.  It should not take a disaster to compel your firm to evaluate its business continuity and response processes.  One should be in place long before disasters strike.

Identify who will serve as crisis leaders and be in charge of handling situational changes that may occur, including communication to other employees about response procedures and alternative site locations.  An ideal crisis leader is someone who demonstrates good leadership skills during normal business operations and has experience dealing with crises.  Typical crisis leaders are members of the senior management team (i.e. COO, CFO or Portfolio Manager).  Firms must also ensure all employees are mentally and physically able to respond to changes, especially if they are telecommuting.

Also, certify that all employees are cross-trained within the organization; if there is a staff shortage as a result of a pandemic, employees will need to fill additional roles and responsibilities.  Non-critical employees, including business development, accounting and research analysts, may be able to take larger roles and assist during a pandemic response phase.

Develop disaster / pandemic procedures based on a variety of scenarios.

Be proactive.  As part of the planning process, create a list of potential scenarios and define your firm’s response strategies.  Impact scenarios should include both potential internal and external occurrences.

For instance, what is your response if access to your office building is restricted due to extensive H1N1 exposure?  How will you access your email, market data and portfolio management systems?  Where will employees work and how will they communicate with colleagues and counterparties?

Externally, how will you operate if your prime broker or fund administrator contacts are unavailable?  Being prepared will ensure your business operations continue seamlessly and without interruption.

Thoroughly review and modify your business’ Employee Assistance Program (EAP).

An EAP provides assistance and access to counseling services for issues in and out of the workplace.  In the event of a disaster, employees may wish to speak with a professional counselor to deal with any stress or negative emotions that have resulted from the event.  If you cannot provide a physical counseling presence, provide a list of area clinics that offer comparable services.  In advance, consider preparing educational materials that inform employees of the various stress indicators and reactions they may experience as a result of a disaster.  If employees know that support is available prior to a disaster, it will mitigate panic and stress, and they will be better able to adapt to changes in their environment.

You should also inform employees about current sick leave and family support policies in the event that someone is forced to take an extended leave of absence.

In addition to developing and strengthening your EAP, you might also consider having upper management and emergency response team leaders partake in Critical Incident Stress Management (CISM) training, which will provide advanced preparation for responding to critical situations.

Test alternate site and remote access capabilities.

If a crisis situation is directly affecting your physical workspace or your employees, you must be prepared to provide alternatives.  You may choose to move business operations to an alternate site where employees can go without risk.  An alternate site would make sense for crisis situations that are confined to specific areas, such as natural disasters, outages or other situations.

In a pandemic situation – particularly if you have had any outbreaks of illness amongst your employees – you may choose to allow employees to work remotely.  If this is a viable alternative, ensure ahead of time that you have adequate capacity and infrastructure to support multiple virtual private networks (VPN) and remote access capabilities.  Confirm the number of Citrix licenses you have available; if there are not enough to support your complete staff, you may need to consolidate responsibilities.

Review your business response plan and procedures with team members and leaders.

Develop communication notification and escalation procedures for response team leaders and assign internal notification tasks to each leader.  Identify if there are external business partners who need to be notified as well (i.e. investors, service providers, etc.).  Assign a primary and secondary spokesperson in case the public needs to be notified, and ensure the spokesperson(s) has training and experience dealing with the media.  If your spokesperson does not have training, now is the time to arrange for crisis communications training.

Test your pandemic response plan.

It is important to test your company’s response plan with leaders and response team members to ensure there are no glitches or obstacles in the event of a real disaster.  Test internal communication strategies – from response team leaders to staff members.  This can be done manually or through an automatic notification system.  You can also send employees to work at the alternate site or to work remotely to ensure there are no technical issues that can affect productivity.  It is imperative that the teams and employees are able to work together and build trusting relationships today.  A strong foundation that includes good performance and trusting relationships will enable your business to recover from any kind of crisis.

Business Continuity Professionals say that “planning” helps mitigate panic and downtime.  It takes work and resources to develop a resilient organization prior to an interruption or disaster, but it is imperative if businesses want to stay operational.  Businesses cannot function without employees that maintain knowledge and expertise to operate the business, and those employees need to know what to do during an interruption or disaster.  Without a plan, you will spend the entire time chasing the incident instead of recovering from it.

For more information, please see http://www.eci.com.

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Other related hedge fund law articles include:

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs the Hedge Fund Law Blog and the forex registration website.  He can be reached directly at 415-868-5345.

Section 204A | Investment Advisers Act of 1940

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Section 204A — Prevention of Misuse of Nonpublic Information

Every investment adviser subject to section 204 shall establish, maintain, and enforce written policies and procedures reasonably designed, taking into consideration the nature of such investment adviser’s business, to prevent the misuse in violation of this Act or the Securities Exchange Act of 1934, or the rules or regulations thereunder, of material, nonpublic information by such investment adviser or any person associated with such investment adviser. The Commission, as it deems necessary or appropriate in the public interest or for the protection of investors, shall adopt rules or regulations to require specific policies or procedures reasonably designed to prevent misuse in violation of this Act or the Securities Exchange Act of 1934 (or the rules or regulations thereunder) of material, nonpublic information.

Secondary Loan Market | LSTA Conference

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Trends for Distressed Debt Hedge Fund Managers

Distressed debt hedge funds often face a number of legal issues with regard to their investments.  Post-Lehman, understanding the rights and liabilities attached to the actual contracts has become paramount for managers.  The following article, contributed by Karl Cole-Frieman of Cole-Frieman & Mallon LLP, provides some background on a recent conference which discussed the secondary loan market.

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The LSTA Annual Conference and the Secondary Loan Market

On October 29, 2009, we attended the annual conference for the Loan Syndications and Trading Association (the “LSTA”).  Conference attendance was significantly up in 2009 from 2008, reflecting an increase in trading volume in the secondary loan market, and robust market conditions for service providers as a result of the spike in settlement on distressed documentation following Lehman’s collapse in 2008.

Secondary Loan Market Panel

Of particular interest was the panel regarding “Recent Developments in the Secondary Loan Market” moderated by Elliot Gans, Executive Vice President and General Counsel of the LSTA.  Other panelists included:

  • Linda Giannattasio, Director and Counsel in Citigroup’s Office of the General Counsel.
  • Robbin Schulsohn, Karl Cole-Frieman’s former colleague at JPMorgan Chase, where she is Executive Director and Assistant General Counsel.
  • Claire Pierce, Managing Director if Chapdelaine Credit Partners.  Claire was in-house at Bank of America for many years before joining Chapdelaine.
  • Bridget Marsh, Senior Vice President & Assistant General Counsel of the LSTA.
  • Jennifer Tallmadge, Assistant General Counsel at Bank of America.

Notably, the panel lacked a Buy Side perspective, which impacted the topics of discussion.

Buy-In/Sell-Out Provisions (“BISO”)

A relatively recent change in standard documentation for Par Trades is the inclusion in the LSTA Par/Near Par Trade Confirmation of a BISO provision for confirmations beginning February 2009.  The BISO provisions addressed the problem of counterparty risk for failure to settle a trade.   Previously, if a counterparty refused to settle a trade, there was little that the performing party could do short of litigation.  The BISO provisions, which have recently been modified, establish the circumstances under which a performing party in a Par Trade may terminate its obligations under a trade confirmation and effect a cover transaction in respect of the loans.  There is a lot of discussion about adding a BISO provision to the LSTA Distressed Trading Documents.

The panel expressed some mixed views about the success of the Par BISO provisions.  In general, the BISO provisions have been considered successful in reducing settlement times in 2009.  However, the provisions have only been in effect in a rising market, and it remains to be seen what will happen next time there is a systemic downturn in the market.  It is possible that market participants could become overwhelmed sending and responding to BISO notices.

Distressed Documents for Performing Loans

The panel also discussed the phenomenon post-Lehman of trades that settled on distressed documents for performing loans.  After the Lehman bankruptcy the loan prices fell significantly even for performing loans.  Buyers reacted by insisting that trades settle on distressed documents instead of Par documents, causing significant delays in settlements.  Generally the panel, which was dominated by Sell Side representatives, felt the market behaved irrationally in requiring distressed documents for performing loans based solely on price.  One the other hand, the distinction between par and distressed has historically been determined solely by price.  It is not clear what other objective measures loan purchasers can rely on.  From a Buy Side perspective, it might be worth spending an additional $20,000 in delayed compensation to make sure their $200,000,000 is fully protected.

Settlement Times for Loan Trades

Despite the BISO provisions in the Par confirmations, there are systemic problems causing settlement delays in 2009.  Although Linda Giannattasio indicated that 90 percent of Citibank’s par trades are settling in T+7, Elliot Gans provided raw data for 3Q 2009 that shows that problems persist.  For par trades, the average trade settled in 18 days, while the median settlement time was 11 days.  For distressed trades, the average trade settled in 45 days, while the median trades settled in 36 days.  Performing loans that trades on distressed documents post-Lehman are shifting back to Par documents, contributing to the delays.

Shift Date Rule

The LSTA plans to publish new rules for determining the “shift date,” or the date in which loans shift from Par to Distressed, and therefore must settle on distressed documents.  The existing process, which has never worked well, is that the LSTA polls dealers on the shift date.  Under the forthcoming rules, the LSTA will select the shift date and it will be binding on all parties.  Upon request, the LSTA will review trade data and other supporting material to determine the date.  Where unable to make a determination, the LSTA will assemble a Determinations Committee made up of LSTA Board members.  Elliot Gans indicated that some market participants would prefer the LSTA select a random date to the current polling system.  Nevertheless, we expect these new rules to be somewhat controversial when rolled out by the LSTA.

To find out more about the secondary loan market and other topics impacting hedge fund managers, please contact Karl Cole-Frieman of Cole-Frieman & Mallon LLP (www.colefrieman.com) at 415-352-2300 or [email protected].

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Other related hedge fund law articles include:

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs the Hedge Fund Law Blog and the forex registration website.  He can be reached directly at 415-868-5345.

Series 79 Training Materials | Series 79 Study Guide

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Information on Study Materials and Classes for Series 79 Exam

One of the inquires I receive most often about the Series 79 exam involves study materials.  As of right now I have not heard of any groups who have produced a study guide or other materials for this exam.  I know that both Kaplan and STC are working on producing exam study guides and other materials.  STC in particular has been moving forward very quickly with their materials.  The information below was prepared by Gary Fox of the Securities Training Corporation. and outlines the products which they will be introducing over the next couple of months.  We will continue to publish information on Series 79 products as they are released.

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FINRA began administering the Examination on Monday, November 2. As with all other FINRA Examinations, there is little or no guidance as to how topics are being tested other than the outline.

STC’s Series 79 Training Manual and Practice Examinations will be available in December. The Manual will be in printed format, the Practice Examinations will be available in online format.  We will be offering live and virtual training classes starting in January, which will give you the opportunity to complete your reading before classes begin. We strongly recommend attending the class, particularly if you have no prior experience with FINRA Examinations.

We would also like to remind you of the opt-in provisions FINRA offers with the Series 79. If you hold any one of the following registrations-Series 7, 17, 24, 37, 38, or 62, you do not need to sit for the Series 79, provided you file the appropriate opt-in forms with FINRA. You have until May 2 to take advantage of the opt-in provision. We offer training for all registrations.

If you do not hold any of these registrations, and do not want to wait until December for our training program, you could take any one of the previously mentioned examinations, opt-in to the new FINRA registration category, and bypass the need to sit for Series 79. As a reminder, STC does not offer guidance as to which registrations may be appropriate for your firm. Please contact your compliance department or legal counsel for proper registration and the procedure for opting in.

You can sign up for updates regarding our Series 79 Training Program and get more information about all of our programs and your options by visiting www.stcusa.com.

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Other related hedge fund law articles include:

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs Hedge Fund Law Blog and can be reached directly at 415-868-5345.

CTA Lead List Basics

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By Bart Mallon, Esq. (www.colefrieman.com)

“Purchased Lead Lists and How to Use Them”

A good resource for CTAs that are actively trying to raise money are lead lists – lists of names and contact information of potential future clients or investors.  This overview is for the CTA Expo 2009 program entitled Purchased Lead Lists and How to Use Them.  The program was sponsored by Patke & Associates and featured Jacques DeRouen of Pinnacle Alternative Investments.

Jacques started off by telling all of the CTAs that they need to get out and market to investors.  The point is to get your story to willing listening.  He then provided us with a brief background of how he got involved with lists and how he learned to use lists effectively.  The biggest takeaway is that getting good at using lead lists takes time and dedication – but don’t let the list intimidate you.  From here he discussed a number of items about lead lists in general.

Lead Lists in General

There are many different types of lists and the lists come in a variety of different formats and include various different types of information.  CTAs should research exactly what they will get with these lists and some questions which the purchaser should ask include the following:

  • Has the list maker described their list and what they provide?
  • What is the reputation of the list maker?
  • Does the list have references, if no, then why?
  • Is there a free sample?
  • What information is on the list – key contact names, size of the investor, email addresses.

CTA managers should think about making some calls to the investors on the sample lists which are released.  Basically the manager wants to make sure that the list is not something that was simply culled from the phone book – the leads need to be warmer.  If they are providing a general list of investors, this is ok but it will probably take you more time.

Budget

The biggest thing to consider is your budget.  If you don’t have money in the budget to buy a list, then don’t buy it.  A CTA should always be aware of the fees coming in and be able to justify any expenses, which includes a list.

Prepping an Investor Database

When you get a lead list it will typically be in some sort of spreadsheet like excel and it will be up to the CTA to clean up the data and make it user friendly.  There are a number of different ways to establish databases that will work for keeping track of investors contacted and to contact.  After formatting a database or input, the CTA should always back-up the new, manipulated data.  From here the CTA will want to export the manipulated data to a CRM.  There are a number of customer relationship management (CRM) software solutions which allow managers to manipulate large raw sets of data, such as the lead lists. It is very important for the CTA to take good notes about the interactions with the leads.

Notes About Emailing Investors from Lead Lists

Emailing your marketing presentation can be a very effective way to market to some of the investors on the lead lists.  However, CTAs should not send every piece of marketing material that they have.  A CTA may want to think about emailing a summary presentation with bullett points.  A teaser like this sets the plate so that when the CTA follows up with the lead (with a phone call), the lead has a little bit of background on the manager, but is not overwhelmed (or worse, annoyed).  CTAs should be aware that even with the best lead lists there is likely to be some email kickback from natural changes in the composition of the company.  The best systems are likely to have 2-3% kickback, the middle tiered lists are likely to have 5-10% kickback and the lower quality lists are likely to have much more.

Approaching Fund of Fund Investors

While many fund of fund investors don’t actively advertise that they allocate to emerging managers, they do and CTA firms should be calling these managers.  Even if a FOF manager decided not to invest with the CTA manager, calling is still a good way to connect and develop a relationship – potentially that relationship can develop down the line.  Fund of fund managers do like CTA and other emerging managers not only because of the potential returns but also because the FOF managers are likely to be able to negotiate carve-outs of the CTA manager’s future capacity.

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This article first appeared in the CTA Expo Blog run by Bart Mallon, Esq.  Mr. Mallon also runs the Hedge Fund Law Blog and is committed to providing useful and easy to understand information for CTAs and CPOs which can be found in our CTA and CPO Registration and Compliance Guide. For more information on CTA registration or compliance services please contact Mr. Mallon at 415-868-5345.

Another PPIP Closing

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The following Treasury press release can be found here.  Please also see the article on earlier PPIP closings.

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Treasury Announces Additional initial closing of Legacy Securities Public Private Investment Fund

November 5, 2009
TG-357

Treasury Department Announces Additional initial closing of Legacy Securities Public Private Investment Fund

WASHINGTON — The U.S. Department of the Treasury today announced that RLJ Western Asset Management, LP, has completed an initial closing of a Public-Private Investment Fund (PPIF) established under the Legacy Securities Public-Private Investment Program (PPIP).  RLJ Western Asset Management, LP, is a minority-owned partnership between The RLJ Companies, LLC and Western Asset Management.

To date, seven PPIFs have completed initial closings on approximately $4.09 billion of private sector equity capital which has been matched 100 percent by Treasury, representing $8.18 billion of total equity capital.  Treasury has also provided $8.18 billion of debt capital, representing $16.36 billion of total purchasing power for all PPIFs.

Treasury expects initial closings for the remaining two PPIFs to be announced soon.  Following an initial closing, each PPIF has the opportunity to conduct additional closings over the following six months to receive matching Treasury equity and debt financing, with a total Treasury equity and debt investment in all PPIFs equal to $30 billion ($40 billion including private investor capital).  Treasury will continue to provide updates as subsequent PPIF closings occur.

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Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs Hedge Fund Law Blog and can be reached directly at 415-868-5345.