However, Massachusetts has asked the banks to disclose a list of the firms, since 2009, that GS and other banks have assisted in this manner. William Galvin, the financial regulator in Massachusetts is examining the relationships between banks and their recruiting of financial professionals for hedge funds. Problems he may look at include receipt of gifts, disclosures and violations of securities laws.
Here are excerpts from the two articles:
Wall St. Banks Help Hedge Funds Recruit
By Susanne Craig and Azam Ahmed - DealBook
Wall Street banks often boast that they hire the best and the brightest. Now, scrambling to bolster profits, they have become full-time headhunters for some of their biggest hedge fund clients, a role that is rife with potential conflicts.
Big banks have long provided extra benefits to hedge funds, including finding office space for firms and raising money for new portfolios. They have even acted like informal recruiters for their premier clients by passing along résumés or making introductions to industry professionals.
But those once-ancillary placement services have become established practices as Wall Street struggles to make up for profit centers that have been lost to new regulations and a weak economy. Since the financial crisis, Goldman Sachs, Morgan Stanley, Deutsche Bank, Bank of America and others have become powerful recruiting forces for hedge funds. In an effort to secure lucrative brokerage and trading business, the banks scout finance executives, accountants and receptionists free. Goldman calls the practice “talent introduction.”
Without the necessary disclosures and appropriate restrictions, the staffing services could prove controversial.
For one, Wall Street firms risk provoking the ire of a client if they poach hedge fund talent or compete for the same potential employees. It also raises a question of loyalty; hedge fund executives may be swayed to direct business to the Wall Street firm that hired them rather than the bank that makes the best sense for investors.
“We get put in this situation every day,” said Stuart Hendel, global head of prime brokerage at Bank of America Merrill Lynch, which offers recruiting as part of its hedge fund services. The banks, he said, have “to walk a tight rope.”
Banks say they have strict rules to prevent conflicts. Bank of America says it will not poach active employees of a current client.
“All we’re doing is providing a clearinghouse for managers to meet prospective employees,” Mr. Hendel said. “We don’t go looking for people, people seem to find us. And we make it very clear we’re not providing recommendations.”
Goldman said it disclosed its consulting services to clients and had “robust policies and procedures” to prevent conflicts of interest. “We are not in the headhunting business,” a spokeswoman for the firm, Andrea Raphael, said. “We do not solicit employees of one client to work at another client.”
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Massachusetts Asks Banks for Details on Recruiting
In a letter of inquiry sent to Bank of America, Goldman Sachs, Deutsche Bank, UBS and Morgan Stanley, William F. Galvin, the secretary of the commonwealth of Massachusetts, asked the firms to give a list of the clients they had provided employment referrals to since January 2009. Mr. Galvin said his letter was aimed at putting the firms “on notice that these are issues that need to be explored.”
The request comes the day after an article in The New York Times explained how Wall Street firms had established staffing services in an effort to attract and retain brokerage and trading business.
Press officers for Goldman, Morgan Stanley, UBS, Bank of America and Deutsche Bank declined to comment about the inquiry.
As hedge funds have become more prominent, they have become a significant driver of banks’ earnings. The industry accounts for as much as 35 percent of all trading revenue on Wall Street, according to the research firm Sanford C. Bernstein & Company.
In the wake of the financial crisis, such profit centers have proved all the more important, prompting Wall Street banks to sweeten their services. Big banks, previously informal recruiters, now have entrenched practices to help hedge funds find financial executives, accountants and other professionals.
Mr. Galvin is exploring the scope of the relationships. While he does not yet know what direction the inquiry may take, if any, he already sees some potential avenues of exploration. For instance, he said firms might be offering the service only to select hedge funds, which could violate Massachusetts securities laws.
He also said he planned to look at whether the Wall Street recruiting broke rules regarding gift-giving. These laws prohibit Wall Street firms from giving gifts valued at more than $100 a year to individuals who are in a position to direct business to them.
The staffing services could also raise questions about disclosure. It is unclear whether hedge funds detail the nature of the relationships to their investors. The concern is that the money managers could be directing business to banks in exchange for recruiting, at the expense of their investors.
Earlier this year, Mr. Galvin’s department fined Goldman Sachs $10 million for hosting so-called trading huddles in its stock research department. At these meetings, analysts developed short-term trading ideas to share with the biggest clients.
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