DealBook: With Ban on Ads Lifted, Hedge Funds Test Waters

DealBook: Two More Hedge Funds Scoop Up Stakes in J.C. Penney

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DealBook: Hedge Funds Win Ruling in Argentina Bond Case

DealBook: Public Funds Take Control of Assets, Dodging Wall Street

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DealBook: Pension Reform Could Disrupt Investment Funds

DealBook: Hedge Fund’s Suit on Fannie and Freddie May Spell Trouble for U.S.

City Council Adds Funds to Patch Hole in DA's Budget

The Philadelphia District Attorney's Office saw a $450,000 hole in its budget patched in the spending plan passed by City Council on Thursday. But the funding may not be enough to keep in place two programs that divert defendants from the justice system.

Fair Game: S.E.C. Plan for Money Market Funds Takes Some Baby Steps

Given the onslaught of lobbying against Ms. Schapiro’s efforts, it is perhaps not surprising that Ms. White’s proposal is much more incremental than her predecessor’s.

Money market funds need tighter regulation because both individual and institutional investors rely on them as bank-account alternatives. These investors have come to believe that their holdings will never decline in value; $1 in will always be $1 available for redemption. But unlike banks, money funds do not have to set aside capital for either redemptions or losses. Therefore, money funds can be vulnerable to runs when shareholders stampede for the exits.

This is what happened after Lehman Brothers failed in 2008. The Reserve Fund, an enormous, institutionally held money fund that owned some of the brokerage firm’s debt, had to halt redemptions in an investor run. Recognizing that the potential for problems wasn’t limited to that fund, the federal government offered insurance to money funds during the crisis.

To prevent a future run on these funds, the new, nearly 700-page S.E.C. proposal offers two possible regulatory fixes. One would require some funds to abandon the fixed $1-a-share asset price and require the price to float, based on fluctuations in their holdings.

The idea here is to dispel the myth that each share of a money fund is worth precisely $1 at the end of every business day. That fiction has lulled investors into complacency about the funds’ safety and predictability.

But only prime institutional funds — which account for almost 40 percent of the overall market — would have to show floating net asset values under the rule. Money funds that invest mostly in government securities and those aimed at individual investors would be exempt. The S.E.C. said this was because government portfolios and retail funds hadn’t run into redemption problems.

The S.E.C.’s proposal “targets precisely the funds that ran the most in 2008,” said Norm Champ, director of the S.E.C. division of investment management, in an interview. “The S.E.C.’s staff economic study showed that institutional investors redeemed from money market funds at a much higher rate than retail investors during the 2008 financial crisis.”

It’s likely, though, that the panic would have spread to retail funds if the government hadn’t stepped in with its insurance program.

The proposal offers another attempt to prevent a run: a redemption charge. If any fund’s so-called weekly liquid investments fell below 15 percent of its total assets, the fund could impose a 2 percent fee on all redemptions. (Weekly liquid assets are typically cash, United States Treasury securities and instruments that convert into cash within seven days.) Once a fund crossed the 15 percent threshold, its overseers could also halt redemptions for as long as a month, allowing an orderly sale of assets as well as time for panicked investors to cool down.

The fund industry may not like some of this, but it is sure to be delighted about what is absent from the S.E.C.’s proposal. Unlike last year’s version, this one does not require money market funds to set aside capital to protect against mass redemptions.

Setting aside capital is the best way to protect shareholders from funds that take excessive risks, as well as from the perils of a panic, says David S. Scharfstein, a professor of finance and banking at Harvard Business School and an expert on money funds.

“The run doesn’t just come from a fixed net asset value,” he said in an interview last week. “It comes from the underlying assets that are illiquid.” He prefers a capital requirement of between 3 and 4 percent.

The industry, which sees required capital set-asides as anathema because they crimp profits, would have fought such a provision as fiercely as it did the last time. The S.E.C. may have found it preferable to propose a rule that was workable, not dead on arrival.

Another criticism of the rule, Mr. Scharfstein said, is that while it purports to provide investors with a true market value for a fund’s holdings, it offers significant leeway in determining those valuations. It would not require funds to assign prices based on market transactions on securities that come due in 60 days or less. The fund could value those at the cost it paid to buy them, so long as the fund’s directors thought that the prices represented fair value.

But those valuations may not reflect what a fund would really receive in a sale. “Most money market fund assets mature in less than 60 days,” Mr. Scharfstein said. “This could allow them not to mark to market a fairly large fraction of their portfolios.”

The greatest strength of the S.E.C.’s proposed rule is that it would require greater transparency, bringing money funds out of the Dark Ages where disclosures are concerned. It would require funds to divulge material matters, such as when the 15 percent threshold is crossed for liquid assets or a relatively large holding goes into default. And what if a fund gets into trouble and requires the financial support of its parent? Investors would be told.

Finally, under the rule, the funds would have to report their holdings within five days of each month’s end, rather than the two months they can wait now.

“The proposal would require funds to disclose information that investors have never had access to before,” Mr. Champ said. “It will be a major step to increasing investor knowledge and understanding of the product.”

Now that the rule has been proposed, the S.E.C. will field comments for 90 days.

Could the rule be stiffened? Probably not by the S.E.C. Dennis Kelleher, president of Better Markets Inc., a nonprofit advocating effective financial regulation, said regulatory proposals usually weren’t expanded beyond their initial outlines.

But, he said, there is a possibility that the Financial Stability Oversight Council, the regulatory group created under the Dodd-Frank law, may toughen the rule. In November, after the S.E.C. failed to come up with an acceptable proposal, the stability council suggested three money fund reforms. They went beyond the S.E.C.’s rule, proposing either a floating net asset value for all money funds, or capital buffers.

“The F.S.O.C. has the power and authority it needs to address systemic risks,” Mr. Kelleher said. “If the final rule is weak and deficient and leaves a significant systemic risk to the financial system unaddressed, they have the duty to act under the law.”

Whether they will is another issue. Clearly, the battle for safer money funds is far from over.

DealBook: A Social Media View of the Davos of Hedge Funds

Michael Nelson/European Pressphoto AgencyThe night scene on the Las Vegas Strip outside the Bellagio Casino.

A look at some of the social media dispatches from SALT conference in Las Vegas. The SkyBridge Alternatives Conference brings together more than 1,800 wealthy investors and hedge funds for four days of conferences, concerts and revelry.

Peter Lattman of DealBook called the Anthony Scaramucci, the host of the event, a PT Barnum in a Ferragamo tie. While the event brings together senior money managers and Washington power brokers, it is also highlights the bacchanalia which Wall Street has tried to avoid since the financial crisis.

At Hedge Funds and Private Equity, Lucrative Paydays

We rely on filings required by the Securities and Exchange Commission for public companies. That means we are missing entire categories of businesses: privately held corporations, most hedge funds and many private equity firms. Some sleuthing shows that payouts given to private equity titans and hedge fund managers were often significantly higher than that of the mere mortals on our list.

Four of the largest private equity firms — the Carlyle Group, Apollo Global Management, the Blackstone Group and Kohlberg Kravis Roberts & Company — went public in recent years, a move that required them to begin disclosing executive pay. Their executives don’t show up on our main list because we look only at companies with total revenue of more than $5 billion. Unlike executive pay at most corporations, much wealth here is derived from their ownership stakes in these firms, and, each year, they get payouts based on their stakes.

Distributions at private equity firms are analogous to dividends corporations pay shareholders, said Victor Fleischer, a professor at the University of Colorado Law School and a columnist for DealBook. Private equity executives may also hold direct ownership stakes in the funds managed by the firm, so distributions from those funds wouldn’t necessarily show up in the public data, he noted.

If all of the distribution payouts were factored in, some of these executives’ pay packages would dwarf those on our list.

Consider Leon Black, C.E.O. of Apollo Global Management, among the largest private equity firms with $2.86 billion in 2012 revenue. He took in more than $125 million last year. A tiny piece — $287,000 — was from salary and other base compensation. The bulk was from distributions based on the 92.7 million shares he owns in the firm, according to Equilar calculations.

Steve Schwarzman, founder and chief executive of the Blackstone Group, took in $8.4 million in compensation last year, and his distributions earned him an additional $204 million. “Mr. Schwarzman has a salary and does not take a bonus,” said Peter Rose, a Blackstone spokesman, in response to Equilar’s research. “He gets dividends on his Blackstone stock, just like the public, and he gets his share of the gains in the funds he invests in. His interests perfectly match up with our fund investors and our public shareholders.”

The wealth of executives at Kohlberg Kravis Roberts was harder to determine, because it disclosed only distribution payouts on common units and not on the convertible ownership units held by top executives. But even excluding those payouts, the two co-chiefs at K.K.R., Henry R. Kravis and George R. Roberts, made more than $35 million each in compensation.

These large payments would not be obvious to the casual reader of proxy statements. Only the salary, bonuses and certain other pay like stock grants are listed plainly on the annual compensation tables in S.E.C. filings. To determine the big dividend payouts, Equilar pieced together information in other parts of the company’s annual report.

A spokesman at Apollo Global declined to comment on its compensation, and representatives for Carlyle and K.K.R. did not reply to requests for comment.

HEDGE fund managers typically prize secrecy. Only a handful of hedge funds — including Och-Ziff, Fortress Investment and Oaktree Capital Management — are publicly traded and thus required to disclose their executive pay packages.

Each year, AR magazine estimates hedge fund managers’ pay based on the fees they charge clients as well as the change in value of their personal stakes. In 2011, Ray Dalio, the founder of Bridgewater Associates, had an estimated payday of $3.9 billion (yes, billion with a “b”), according to AR magazine. The activist investor Carl C. Icahn was estimated to have earned $2.5 billion in 2011. The 2012 list will be published in the coming weeks.

By comparison, the publicly traded hedge funds paid their C.E.O.’s relatively meager amounts. Oaktree Capital’s president, Bruce Karsh, made about $12.2 million in base compensation and about $64 million in distributions in 2012. (Forbes estimated his net worth at $1.65 billion.)

To be fair, many hedge fund managers have most of their wealth tied up in the funds themselves. For instance, Steven A. Cohen, one of the consistently top-paid hedge fund managers, owns more than half of the estimated $15 billion in assets managed by his firm, SAC Capital.

Professor Sues Columbia, Alleging Misuse of Funds

A tenured professor at Columbia University’s Graduate School of Journalism and co-director of that school’s business program filed a lawsuit on Tuesday accusing the university of misdirecting $4.5 million in funds over the last decade.

The professor, Sylvia Nasar, who is the John S. and James L. Knight professor of business journalism at Columbia and author of the book “A Beautiful Mind” that inspired the movie of the same name, charges in the suit that the university mishandled funds from a $1.5 million endowment provided by the Knight Foundation to improve the school’s business journalism. The suit, filed in State Supreme Court in New York, also claims that Nicholas Lemann, the dean of the journalism school, “intimidated and harassed” Ms. Nasar for making complaints about the funds.

Elizabeth Fishman, a spokeswoman for the journalism school, said in an email that “we don’t comment on matters in litigation.” Mr. Lemann was not immediately available for comment.

The lawsuit comes at a time of transition for Columbia’s Journalism School, which on Monday named Steve Coll its new dean. He succeeds Mr. Lemann, who led the school through a turbulent decade as journalism underwent fundamental shifts. Mr. Lemann announced last fall that he planned to step down by the end of the academic year.

According to the 27-page complaint, the journalism school created a professorship called the Knight chair in 1998, with a $1.5 million grant from the Knight Foundation, a nonprofit organization that seeks to support quality journalism. Columbia was expected to match the grant.

Terms of the agreement called for Columbia to pay the professorship’s salary on its own, and use Knight Foundation funds for additional salary and benefits, like research.

In 2000, the university hired Ms. Nasar, who is a former reporter for The New York Times, without outlining the details of how her position was to be paid for. According to the lawsuit she was given a base salary, which the university paid for out of Knight Foundation funds, and was asked to pay most of her additional expenses out of her own pocket.

According to the suit, when Ms. Nasar asked to reduce her course load to focus on research and a book she was working on, she had to take a pay cut, even though the Knight Foundation grant provided for such circumstances. Ms. Nasar noted in the suit that over time she spent $174,000 of her own money for research and other expenses. She is asking for punitive damages.

Ms. Nasar said in an interview that September 2010 she received an e-mail from the university listing more than $70,000 in what she described as “phantom I.T. charges” — expenses attributed to her that she says she never incurred. Ms. Nasar said that when she looked into the matter, she learned that the misspending expanded to include “the fruit of the endowment,” meaning that it went beyond the technology charges and included Knight’s $1.5 million gift, Columbia’s $1.5 million match and the income earned on the endowment over the decade.

She said that she contacted the Knight Foundation about the disparities and they hired the accounting firm KPMG to audit the endowment. Court papers say that KPMG calculated that Columbia’s “misappropriations and defaults” added up to as much as $4.5 million. The audit also revealed that the endowment had not been used for its original purpose — “to supplement the salary and benefits of the holder of the Knight chair and to subsidize her research and service.”

After the audit, the university and the Knight Foundation reached an agreement to forgive Columbia the $4.5 million and to release the university from its obligation to match the $1.5 million grant. In return, the university promised to spend future income generated by the endowment in ways “consistent with the purpose of the chair.” Ms. Nasar’s reimbursement for research expenses was limited to $20,000 a year.

Eric Newton, senior adviser to the president of the Knight Foundation, said in a statement about the lawsuit, “We have broad guidelines for our endowment grants, for example, they generally aren’t intended to pay core salaries, but we don’t prescribe details.”

In the lawsuit, Ms. Nasar said that after she complained about the misspent funds, Mr. Lemann “intimidated and harassed” her by telling her that the Knight Foundation “was dissatisfied with her performance as Knight chair because Knight objected to her work on books.”

Ms. Nasar said she was filing the suit now because she felt that Columbia had not listened to her complaints or addressed its shortcomings. She is currently doing research and is not receiving pay from the journalism school, even though she remains the Knight chair.

In early January, Ms. Nasar filed a notice of intent to sue which was not as extensive as the lawsuit filed on Tuesday.

New Rules Create Jobs for Attorneys at Hedge Funds

Lawyers with Dodd-Frank Act and regulatory expertise are being wooed by private equity firms and hedge funds in need of an in-house compliance team.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010, requires private equity and hedge funds to register with the Securities and Exchange Commission if they have at least $150 million in assets under management.

In addition, scores of regulations have been issued under Dodd-Frank and there are more to come. Only one-third of the 398 requirements under Dodd-Frank have been written into rules, according to a Davis Polk & Wardwell analysis. Another third have been written into proposed rules while the final third have yet to be proposed.

"If the pace of new regulation continues the way we've seen in the last year or two, I think more and more [financial services] firms will be adding to their legal and compliance departments," said Adam Reback, a chief compliance officer at hedge fund J. Goldman & Co. "It means more filings, it means more leg work, it means more monitoring. You just need more people to get it done" and more resources.

The SEC reported in October that about 1,500 advisers to hedge funds and other private funds had registered with the agency since Dodd-Frank made it mandatory.

As investment entities "saw these regulations, they started hiring," said Nora Jordan, head of Davis Polk's investment management group, who said she has seen full-time compliance officers with smaller hedge funds that didn't have these positions before.

"There are quite a number of other Dodd-Frank regs that will impact hedge and PE managers that haven't gone into effect yet, but none as far-reaching as the registration rule," said Marc Elovitz, a Schulte Roth & Zabel partner and chair of the firm's investment management regulatory and compliance group.

Among the rules not yet implemented under Dodd-Frank are those relating to record-keeping and certain short-sale disclosures, Elovitz said.

Registration requires designating a chief compliance officer as well as implementing written policies and procedures, maintaining books and records, filing annual updates, and implementing a code of ethics, lawyers said.

Hedge funds and private equity firms must implement and test compliance procedures. While that can be handled by outside counsel, Jordan said, these firms "also need someone internally who knows where the weak points are and can tailor them and test them on a regular basis."

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DealBook: Geithner Urges an Overhaul of Rules on Money Market Funds

Andrew Harrer/Bloomberg NewsTreasury Secretary Timothy F. Geithner said changes in the rules for money market funds were “essential for financial stability.”

Treasury Secretary Timothy F. Geithner on Thursday urged the regulatory team that he leads to push ahead with new rules aimed at money market funds, which manage $2.6 trillion.

In a letter to the Financial Stability Oversight Council, a committee of senior regulators formed after the 2008 financial crisis, Mr. Geithner said the changes were “essential for financial stability.”

The Securities and Exchange Commission, which is the primary regulator for money market funds, had proposed the main changes favored by Mr. Geithner in his letter.

But the commission dropped its attempt at a money market fund overhaul last month after it became clear that a majority of its commissioners would not vote for the measures. Large mutual fund companies fiercely opposed the changes, saying they were unnecessary and could harm a type of investment fund that was popular.

“You can be sure that the firms on the receiving end won’t take this passively,” said Jay G. Baris, a lawyer at Morrison & Foerster, which represents money market funds.

During the 2008 crisis, investors fled money market funds, which worsened the credit freeze that gripped the banking system. The funds received a big bailout from the Treasury and the Federal Reserve.

Before the Dodd-Frank Act was passed, efforts to change the money market fund industry probably would have died after the commission dropped them. But the Financial Stability Oversight Council, set up by Dodd-Frank, can choose to take over from the commission.

In his letter, Mr. Geithner laid out a number of ways the council, which meets Friday, can act.

He urged it to gather public comments on a range of changes and then make a final overhaul recommendation to the S.E.C. The commission would be required to adopt those changes, or explain why it did not. Mr. Geithner said the council’s staff was already working on recommendations and said he hoped they would be considered at the council’s November meeting.

The recommendations would include two changes supported by the commission. One would require money market funds to hold loss buffers. The other would end the money market funds’ practice of valuing investors’ shares at $1 even when the funds’ assets should reflect a value slightly less than $1.

Mr. Geithner said in his letter that, while the S.E.C. is best positioned to regulate money market funds, the Financial Stability Oversight Council could proceed without waiting for the commission. The council, he wrote, could designate certain money market fund entities as systemically important and subject them to regulation by the Federal Reserve, which could then impose an overhaul.

Mr. Baris, the lawyer, said that designating a money market fund as systemically important could make it hard for it to stay in business. “Who would want to invest in a fund that has been designated by the federal government in this manner?” Mr. Baris said.

“It will drive investors away.” Mr. Baris said he believed that Mr. Geithner might face resistance on the council if any new rules were aimed at specific money market funds.

In addition, the council could designate money market fund activities as critical to the working of the financial system’s plumbing. That would allow regulators to impose heightened risk management standards on the funds.

Mr. Geithner wrote that without the changes, “our financial system will remain vulnerable to runs and instability.”

If the council acts, the mutual fund industry will almost certainly fight back. The industry’s lawyers will probably contest the council’s interpretation of Dodd-Frank and perhaps even the council’s authority to act.