Week in Review
December 10, 2007
Asset Management Firms Hiring More Aggressively
Although the sell side has virtually halted all of its recruiting efforts due to the subprime crisis, the buy side is aggressively hiring, in anticipation of the oncoming wave of retiring Baby Boomers and the increasing internationalization of markets, according to Russell Reynolds.
"This has been an historic year in the asset and wealth management industry," said Russell Reynolds Managing Director Cornelia L. Kiley, who is with the firm's asset and wealth management practice. "The mid-year market turbulence was not a signal to retrench, but, rather, to set the performance bar even higher. The relentless pursuit of alpha has led to upgrades from the C-suite to portfolio management to the back office."
Russell Reynolds found that turnover in the C-suite this year has been 15% higher than in 2006, due to boards' impatience with underperformance, coupled with a large number of executives reaching retirement age.
There is incredible demand for chief investment officers, leading to generous compensation packages. As firms diversify their investment holdings, they are particularly interested in CIOs with experience in a broad array of asset classes.
Emerging markets has also been a hot topic this year, particularly real estate development. "Investment professionals with a track record of high performance in these markets-who understand the real estate aspects of a deal and can accurately underwrite the risk-are exceptionally scarce," according to Russell Reynolds.
In addition, hiring for technology and operations executives continues to be robust, particularly those who can seamlessly connect the back office to the front office. Thus, "there is an increasing emphasis on candidates with firsthand understanding of investment management business processes, ranging from risk management and financial reporting to specific product strategies and portfolio management," Russell Reynolds said.
Rafferty Fined $400K-Plus For Late-Trading Troubles
The Financial Industry Regulatory Authority has fined brokerage Rafferty Capital Markets more than $400,000 for failing to prevent its hedge fund clients from late trading and market timing mutual funds between January 2001 and August 2003. The fine is $350,000, along with $59,605 in restitution that Rafferty must repay to two mutual fund families. In addition, FINRA said, Rafferty helped the hedge fund clients escape detection by opening multiple customer accounts and different brokerage branch codes.
Besides being prevented from opening new mutual fund brokerage accounts for new or existing clients for 90 days, Rafferty must review its compliance and operations procedure to prevent any other occurrences of late trading or market timing, and retain electronic communications and record the times of receipt and entry of mutual fund orders.
"Funds must implement systems to ensure that mutual fund orders processed after the market close reflect orders received from customers during regular trading hours," said Susan L. Merrill, FINRA executive vice president and chief of enforcement. "Otherwise, they can gain an unfair advantage."
Hedge Funds Brace for Government Lawsuits
With New York regulators investigating 30 hedge funds for potential conflicts of interest and insider trading, California attempting to require them to register and the credit markets threatening to wreak further havoc, hedge fund executives are bracing for a wave of action against them in 2008, The National Law Journal reports.
"Anytime a hedge fund blows up, you are going to see class actions, and a lot of cases are going to end up in [SEC] receivership and bankruptcies," said Ross Intelisano, whose law firm, Rich & Intelisano, is representing investors in the now-defunct Bayou Group. "We see this as a growing area of our practice. Absolutely, in 2008, this will continue as more hedge funds sink."
U.S. District Judge Tosses Lawsuit Against Salomon
Judge Paul A. Crotty of the U.S. District Court for the Southern District of New York ruled that defendant Salomon Brothers sufficiently proved that the fees it charged on nine of its mutual funds were justifiable in light of the funds' superior performance and customer service, Dow Jones reports.
In so doing, he dismissed a lawsuit against the investment advisors and distributors to the funds.
"Plaintiffs allege that the performance of these funds was not up to par with other similar funds in the industry,'" the judge ruled. "According to plaintiffs, this failure belies defendants' argument that their superior quality and performance justifies their high fees. Performance is only one measure, however, and plaintiffs fail to allege anything about the array of services offered to fund customers, such as telephone or web assistance or the ease with which transactions are effected," the judge continued. "Instead, they ask the court to extrapolate deficient services from allegedly substandard investment returns."
The lawsuit, originally filed in 2004, said that the fees charged by the funds' distributors were disproportionate, given that they had not been negotiated at arm's length but granted to a transfer agent subsidiary of then-parent company Citigroup.