01/13/2010

Fund Managers Face Scrutiny From Pensions

A regulatory crackdown on corporate pension plans is putting pressure on hedge fund managers.

The U.S. Department of Labor now requires private pensions to disclose any gifts, entertainment or other perks they receive from hedge funds and third-party marketers. In response, pension administrators are seeking detailed records from fund managers. The initial deadline for pensions to meet the heightened requirements is July 31.

One lawyer who represents hedge funds said several of his clients already are preparing to turn over records of meals and other events at which they picked up the tab for pension officials.

"There is some unease that DOL might not differentiate between legitimate, relationship-building activities and things that clearly don't pass the smell test, like giving someone a yacht," said Steve Rabitz, a lawyer with the New York firm Stroock & Stroock. "There are real questions being raised about what might be reportable and what might not be legal."

Ever since the New York Common Fund scandal came to light early last year, government regulators have been tightening the screws on both public and private pension plans.

"I think people in the private pension space might not have recorded these amounts religiously in the past, but not anymore," said Melanie Nussdorf, a lawyer with Steptoe & Johnson. "In the public space, there isn't anyone giving anything to anyone."

Under the law, any expenditure in excess of $10 must be reported, although pensions don't have to file a report until they receive up to $5,000 in combined perks. Pension fiduciaries and consultants can be prosecuted if they receive a meal, gift or other perk worth more than $250.

The regulations are designed to prevent influence-peddling by asset managers looking for a slice of a pension's business. Thus a day-long conference with a boxed lunch may not have to be reported, while an overnight stay at a ritzy hotel most likely would.

Many hedge funds already have curtailed their spending on pension clients. One pension consultant said most fund managers and third-party marketers are "going Dutch at this point."

"The public pensions are the ones who historically played more golf than anyone else," the consultant said. "They get paid less than the privates, so they always made it up in golf, drinks and events."

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