The National Law Review‘s winner of the Fall Student Legal Writing Contest is Karol C. Sierra-Yanez of Suffolk University Law School. Karol’s article provides some background on the hedge fund industry and where experts think regulation of this industry may be going. Read on:
This paper aims to provide the reader with a better understanding of what the term hedge fund means, their history and development, and how hedge funds differ from traditional investment vehicles, such as mutual funds. It will focus on the future of the hedge fund industry, specifically, the changes proposed in the Hedge Fund Transparency Act. While some critics and experts in the financial industry see this Act as a way to regulate an investment vehicle capable of affecting the economy, others see it as an invasion into the freedom of hedge fund advisers to develop creative strategies to hedge the risks of their investments and enhance returns.
I. WHAT IS A HEDGE FUND?
To begin with, there is no universally accepted definition of hedge funds. The various definitions refer to hedge funds as private investment vehicles that are subject to less regulation in comparison with more traditional forms of investment, such as mutual funds. Hedge funds are not defined by the Securities and Exchange Commission (SEC), in fact, there is no regulatory or statutory definition of hedge funds.
While the first hedge fund was started in 1949 when Alfred W. Jones developed a system to protect investments against market risk that incorporated various techniques including the use of leverage and short selling, other financially creative hedge fund managers also came along and developed new hedging strategies such as the use of futures and options, strategies that did not exist when Jones developed his fund. With the use of these new strategies, hedge funds started to generate favorable returns again and increasingly grew in popularity, to the point that by 2002, there were an estimated 6,500 hedge funds operating in the United States, managing approximately $600 billion in capital.
II. HOW DO HEDGE FUNDS DIFFER FROM TRADITIONAL INVESTMENTS?
To begin, a major characteristic difference between hedge funds and mutual funds is that mutual funds and their managers are required to register with the United States Securities and Exchange Commission (SEC), whereas hedge funds are unregistered investment vehicles.  Mutual funds must register as investment companies under the Investment Company Act of 1940 and their managers must register under the Investment Advisers Act of 1940; these funds are considered to be “public” investment funds, meaning they are open to the general public and any investor possessing the required capital may invest, regardless of their net worth or level of sophistication.  Hedge funds, on the other hand, are considered “private” investment funds, and are not registered with any government body, and are only open to qualified or accredited investors, including high-net-worth investors, institutions, endowments, family offices and pension programs.
From a sales and marketing standpoint, mutual funds can be purchased in any number of ways, with common examples including directly through a fund management company (e.g. Fidelity), through a mutual fund ‘supermarket’ (e.g. Charles Schwab) or through a broker or financial planner (e.g. Ameriprise Financial). Advertisements for mutual funds can often be found in a variety of published sources, including magazines, newspapers, and on the internet.Hedge funds, meanwhile, are much different in terms of sales and marketing; to be free from certain restrictions, “hedge funds limit access to investors who regulators deem rich and savvy enough to handle the risk.” This is closely related to the fact that hedge funds are referred to as “private placement” vehicles, which refers to the offer and sale of a security not involving a public offering and therefore not subject to filing a registration statement with the SEC under the Securities Act of 1933.
From the standpoint of fees and expenses, mutual funds have what is called an “expense ratio”, which is the percentage of fees paid by investors to the company to cover the costs of managing and operating the fund, as well as marketing and distribution costs.  The expense ratio is the total fee that the investor will pay, besides any transaction costs that are incurred at the time of purchase or sale of the shares. The average equity mutual fund charges an expense ratio somewhere between 1.3% and 1.5%.  Hedge funds, meanwhile, in addition to a management fee (similar to the expense ratio of mutual funds), also charge a percentage of profits earned by the fund. The popular fee arrangement in the hedge fund industry, commonly referred to as “2 & 20”, is to charge 2% of assets under management (the management fee) as well as 20% of profits over a stated benchmark (the performance or incentive fee). 
Any person who possesses the required capital is generally allowed to invest in the mutual fund of their choice, and most funds have a minimum investment of $1000, making them a relatively accessible investment for most people. In addition, mutual funds stand ready to redeem an investor’s shares at any point in time, a concept called liquidity, making it relatively easy for an investor to get their money back when they would like. Minimum investments for hedge funds are quite steep, and vary from fund to fund, ranging from $100,000 to $1,000,000 or more.  Liquidity, or the ability of an asset to be converted into cash quickly,is quite different between hedge funds and mutual funds. With mutual funds, a net asset value (or “NAV”) is computed every single business day, and investors can redeem their shares at the NAV on a daily basis.  Based on a review of several articles, with hedge funds, like mutual funds, the liquidity depends on the frequency with which they issue and redeem shares, but just much less frequently. Most hedge funds have monthly liquidity with a 35-day notice period, but some are much less liquid, depending on the type of assets invested in and the strategies employed by the fund. Hedge funds are also subject to a “lock-up period”, which is the time period that an investor must hold their assets within a fund before they can be removed. In other words, mutual fund shares have a readily ascertainable market and a fair price, while hedge fund investors have a contract with the manager that essentially allows the manager to dictate the frequency and manner of redemption.
Traditional mutual funds are generally segmented into a few basic categories, such as stock (growth, value, blend), bond (municipal, corporate, government), and money market (cash, t-bills), according to the types of investments they will make as outlined in their prospectus. They do not deviate from their prescribed investment approach, and are generally limited to the types of investments they can make. Hedge funds, however, generally employ sophisticated trading methods, including short selling (when the investor sells borrowed securities), options (financial contracts between two parties), and leverage (the use of borrowed capital to purchase additional assets with the objective of increasing returns). 
According to a Morningstar Methodology Paper published in 2007 titled “The Morningstar Category Classifications for Hedge Funds”, hedge fund managers typically focus on specific areas of the market and/or specific trading strategies. Morningstar states, as an example, “that some hedge funds buy stocks based on broad economic trends, while others search for arbitrage profits by pairing long and short positions in related securities.”
III. PRESENT REGULATORY FRAMEWORK
As discussed briefly in the section outlining the key differences between hedge funds and more traditional investment vehicles, regulatory differences, most of which stem from the fact that participation in hedge funds is mainly the “preserve of sophisticated investors who possess the required knowledge to assess the risks associated with investing in this asset class” are of the utmost importance. Under this sophistication premise, it is maintained that wealthy investors can better fend for themselves and are thus more suited for hedge fund investments, whereas the everyday, less sophisticated investor may not be.
Two of the primary statutory exclusions for hedge funds from the definition of “Investment Company” come from the Investment Company Act of 1940: §3(c)(1) and §3(c)(7). The §3(c)(1) exemption is satisfied when the issuer sells their securities to no more than 100 persons and does not make or will not plan to make a public offering of those securities; the §3(c)(7) exemption, meanwhile, is satisfied when the securities are being sold only to “qualified purchasers” and also like §3(c)(1) the issuer does not make or does not plan to make a public offering of those securities. As one may note, §3(c)(7) makes no reference to the number of investors in a fund in the manner that §3(c)(1) does, and this is where the Securities Exchange Act of 1934 comes into play. Under §12(g) of the Exchange Act, it states that an issuer must “register, disclose information and submit periodic reporting” if the issuer has $10 million or more in assets under management and 500 or more investors. Due to this fact, it comes as no surprise that many hedge funds elect to issue securities to less than 500 investors in order to avoid triggering this requirement. Similarly, those fund managers that operate as Commodity Pool Operators (“CPO”) are able to rely on regulations contained in the Commodity Exchange Act (“CEA”) that “provide an exemption from registration to CPOs that engage in limited commodity futures activities and sell interests solely to certain qualified individuals and that sell interests to highly sophisticated pool participants.
Finally, the Investment Advisers Act of 1940 (not to be confused with the Investment Company Act of 1940), which regulates the activities of investment advisers, also contains one registration exemption that hedge funds commonly rely upon. The registration exemption is called the “private adviser exemption” and is found under §203(b) of the Advisers Act and states that the exemption is satisfied if the adviser “1) has fewer than fifteen clients during the preceding twelve months; 2) [nor] holds himself out to the public as an investment adviser nor acts as an investment adviser to any investment company.” This exemption at first may seem rather difficult to achieve, as it would seem that most hedge funds would have 15 or more investors, but there is a catch. Under the law, hedge fund advisers are able to meet this exemption by satisfying a safe harbor whereby they treat each legal entity (e.g. a single fund, limited partnership, etc) as a single client and are able to invoke the small adviser exemption. As such, many hedge fund advisers avoid registering with the SEC by relying on this de minimis exemption and have fewer than 15 “clients” during the preceding 12 months and do not hold themselves out to the public as investment advisers. This specific exemption will be touched upon further in the paper as it has been the focal point of recent regulation changes affecting the hedge fund industry.
IV. PAST PROPOSED HEDGE FUND REGULATIONS
While hedge funds themselves have been around for decades, they did not grow to such prominence until much more recently. For example, during the post-technology bear market era around 2000 through late 2002 the popularity of hedge funds grew very quickly, and by 2006 there were approximately 8,000 hedge funds globally with assets under management in excess of $1 trillion compared to 1990 when there were only 600 hedge funds with under $40 billion in combined assets under management.
This tremendous outgrowth, which directly results in a significant amount of power and influence within the capital markets, is one of the factors often cited by the SEC as rationale for regulatory action against the hedge fund industry. Other factors include the fact that government agencies generally lack meaningful and reliable data and information about the hedge fund industry as well as the increased “retailization” of hedge funds. An example of such “retailization” would be the fact that U.S. hedge fund of funds that do not meet the aforementioned exemptions and are registered with the SEC do not need to require that all investors be accredited and may accept investments for as little as $25,000. Pension plans, university endowments, and charitable organizations have been investing money in hedge funds, sometimes exposing unsophisticated investors to risky investment strategies. This has led to concerns that unsophisticated investors have invested in vehicles they do not understand.Besides, some hedge funds have been using television commercials to advertise their investment services to unsophisticated investors.
In response to these factors, a 2003 SEC Staff Report investigated the hedge fund industry and concluded that the SEC should require hedge fund advisers to register under the Advisers Act. The SEC had concluded that a number of existing hedge funds were using the private adviser exemption in contradiction of its intended purpose and that a change of the interpretation of the term “client” was justified. Accordingly, in 2004, the SEC, by a vote of 3-2, adopted regulation 203(b)(3)-2, which was an amendment to §203(b)(2) of the Advisers Act, which would require many hedge fund advisers to register with the SEC for the first time. This amendment is referred to as the 2004 Hedge Fund Rule, and defined each investor within a private hedge fund as a “client” for the purpose of determining whether the adviser satisfied the previously discussed private adviser exemption. This Rule applied a “look-through” to hedge funds (in contrast to the previously mentioned safe harbor rule which counted each fund or legal entity as a “client”), whereby each individual investor would be counted as one client, thereby many hedge fund advisers were no longer able to satisfy the private adviser exemption under the Advisors Act and were legally required to register with the SEC. Not surprisingly, the SEC, in support of the passing of this amendment, argued that the registration of hedge fund advisers is necessary “to protect investors in hedge funds and to enhance the Commission’s ability to protect our nation’s securities markets.”
It seemed, however, that from the very beginning there were those who felt the passing of the “Hedge Fund Rule” would do little to no good in actually improving the hedge fund industry. One of the articles used for this research states that “the implementation of this mandatory disclosure will probably have little or no impact in practice” and even continues by saying that “the implementation of this rule might ultimately be counterproductive to the SEC’s goal of the abolishment of the “retailization” of hedge funds.
Unfortunately for the SEC, their efforts aimed at hedge fund regulation were short-lived, as in 2004 hedge fund manager Philip Goldstein, his firm Opportunity Partners LLC, and their general partner Kimball & Winthrop filed suit against the SEC, arguing that the “Commission lacked any power to regulate the hedge fund advisor industry and that only Congress may change the Advisers Act. In doing so, Goldstein et al challenged the enforcement of the recently passed Hedge Fund Rule, arguing that Congress “unambiguously intended the term “client” to mean the fund, and not the investors in the fund. The challenge also claimed that the SEC “drastically exceeded the term’s “probability of meaning” and the SEC’s adoption of the rule was arbitrary and capricious. A three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit heard arguments in the case of Goldstein v. SEC, and in 2006 they vacated and remanded the Hedge Fund Rule and held that the SEC’s interpretation of the word “client” was “outside the founds of reasonableness”, “arbitrary” and “inconsistent with Congressional intent.” Adding insult to injury, the court even went as far as to say that “the Hedge Fund Rule came close to violating the plain language of the Advisers Act.”
V. RECENTLY PROPOSED HEDGE FUND REGULATIONS
Despite a lack of early success, the U.S Government did not give up on the subject of hedge fund industry regulation. Looking back at the many concerns related to the hedge fund industry and the financial industry overall, the use of the term “systemic risk” has become rather commonplace when describing the perceived risk inherent in hedge funds. In a paper entitled “Unnecessary Reform: The Fallacies With and Alternatives to SEC Regulation of Hedge Funds”, author Evan M. Gilbert defines systemic risk as “the potential for a modest economic shock to induce substantial volatility in asset prices, significant reductions in corporate liquidity, potential bankruptcies and efficiency losses.” Many including regulators are concerned that the sudden and powerful downfall of large and influential investment funds and/or firms could have drastic and far-reaching effects throughout the entire financial system.
As such, and particularly in the wake of the financial crisis that occurred between 2007 and 2008, regulators sprung into action in 2009 and quickly introduced new measures aimed at the hedge fund industry. The first came on January 29, 2009, when two United States politicians, Senators Chuck Grassley of Iowa and Carl Levin of Michigan, introduced the “Hedge Fund Transparency Act of 2009.” This act would amend the Investment Company Act of 1940 and aim to regulate hedge funds in two specific ways: first, it would require any funds with assets equal to or greater than $50 million to register with the SEC and second it would impose more stringent anti-money laundering obligations. The Act would encompass all §3(c)(1) and §3(c)(7) exempted funds, not just “hedge funds” per se; as such, all privately-held investment funds ranging from hedge funds to venture capital and private equity funds would be affected.
As mentioned, all “large” funds with $50 million or more in assets would be required to register with the SEC; in addition, they would be required to maintain books and records with the SEC, and also comply with any requests for information or examination by the SEC. Finally, periodic electronic reporting (minimum once per year) to the SEC would also be required of all funds.
Besides the Hedge Fund Transparency Act of 2009, other regulatory developments were underway in 2009. In a paper published in March, 2010 entitled “New Developments in Securities Litigation”, author Elizabeth P. Gray, a partner at Willkie Farr & Gallagher LLP, states that “financial regulation of advisers to hedge funds and other private funds is expected to increase substantially during 2010.” She goes on to add that “financial reform bills that would require the registration of advisers to hedge funds as investment advisers with the SEC under the Advisers Act appear to have significant momentum behind them.” Of particular interest is a bill that was sponsored by Congressman Paul Kanjorski of Pennsylvania and approved by the U.S. House of Representatives in December, 2009 which would, if enacted, effectively eliminate the private adviser exemption from registration under §203(b)(3) of the Advisers Act. This particular bill is clearly reminiscent of the previously discussed, and unsuccessful, Hedge Fund Rule of 2004 in that it seeks to amend the meaning of “client” under the Advisers Act and forcibly require advisers with 15 or more clients to require with the SEC. In doing so, these changes in regulation would have many effects similar to those proposed within the Hedge Fund Transparency Act as well as those presently in place for funds abiding by §3(c)(1) and §3(c)(7) of the Advisers Act. Such regulatory requirements would include, among other things, extensive record-keeping requirements, disclosure requirements, rules of conduct, subjectivity to examination processes, and standing ready to provide information to the SEC about the adviser themselves and the funds they manage.
VI. THE FUTURE OF HEDGE FUND REGULATION
While it is difficult to say with any real certainty at this time exactly what the future holds for the hedge fund industry, no less trying to predict what future regulations may or may not be enacted, it can certainly be said that many experts and academics alike favor some degree of regulation or another. Long before the term ‘systemic risk’ became everyday vernacular from Wall Street to Main Street, progressive minds felt new regulation would be done. If and when it was done, most would likely agree that future regulation “must reduce the likelihood and potential costs of the failure of systemically important hedge funds whilst at the same time preserving the wider market benefits of hedge funds’ ongoing activities.” It is important that any regulation that is enacted in the years ahead should somehow provide additional transparency, awareness, protection and overall risk management while at the same time allowing hedge fund companies and managers to invest and operate with the degree of anonymity which they deserve and to contribute to overall market efficiency. While some feel that new hedge fund regulations would “create a stable regulatory environment, bring parts of the industry in from the cold, and help lift the veil of secrecy that currently surrounds hedge funds,” others still maintain their rightful concerns.Take for example former US Federal Reserve Board Chairman Alan Greenspan. With his traditionally “laissez-faire” approach to financial markets, he for one might be more inclined to believe that “hedge funds should not be regulated at all because of the efficiency they provide to the financial system.”In a paper he published recently for The Brookings Institute entitled “The Crisis”, Greenspan continues down the “less is more” path, adding that “regulation by its nature imposes restraints on competitive markets. The elusive point of balance between growth and stability has always been a point of contention, especially when it comes to financial regulation. Others, while cognizant of the systemic implications associated with the failure of one or more large hedge funds, agree, too, that the benefits hedge funds provide to the financial system are substantial and that “the trading behavior of hedge funds can improve market efficiency, price discovery and consumer choice. Going even further, and somewhat contrary to what others may say or feel, some believe that “hedge funds may help in alleviating financial crisis.
Others, meanwhile, are taking a much more middle-of-the-road approach, with beliefs that hedge fund regulations can and will help both sides. David Langguth, of EACM Advisors, LLC, a leading investment advisory firm and subsidiary of BNY Mellon Corporation, was quoted in a hedge fund roundtable as saying that “while regulatory initiatives such as increased transparency or registration may affect hedge funds, we do not anticipate measures that will significantly limit most managers’ ability to implement their strategies. Clearly, well designed measures intended to limit potential market abuses generally will be positive for market participants, including hedge funds.”
Looking back again at the failed 2004 Hedge Fund Rule, some feel that “it would be an understatement to say that the Goldstein ruling was a setback for the SEC,” and I cannot say that I disagree. Author Joshua Hess, in a paper entitled “How Arbitrary Really Was the SEC’s Hedge Fund Rule?” argues that the Goldstein decision resulted in a regulatory black hole to which the SEC found itself inadequately able to regulate a financial industry whose continuing growth will have a substantial impact on U.S. financial markets. And, following the series of recent events that have roiled global financial markets, including the outright collapse of Lehman Brothers, the rescue of Merrill Lynch, countless lending institution bankruptcies, and bailout after bailout by central government banks, it feels to many that something, anything, needs to be done. Furthermore, Evan Gilbert, in his paper entitled “Unnecessary Reform: The Fallacies With and Alternatives to SEC Regulation of Hedge Funds” writes that “there appears to be a strong emotional component behind the calls for subjecting hedge funds to SEC registration and disclosure requirements…this fear-based response is understandable, especially in light of the growing number of established institutions either on the brink of collapse, or in some cases actually failing.Once again, something, anything, needs to be done.
Two main ideas that I have come across in my research that stand out as possible solutions include: First, to establish legal limits and/or regulations related to the amount of credit that can be extended to hedge funds by financial institutions. Previously mentioned author Gilbert in his “Unnecessary Reform” paper states, “one of the more straight-forward solutions would be to limit the amount of credit public financial institutions are permitted to extend to hedge funds. Perhaps the most significant concern expressed by those critical of the hedge fund industry is systemic risk…one of the principal causes of systemic failure is failure amongst credit institutions, or more specifically, banks…if banks are limited in the credit they are permitted to extend to hedge funds, any failure of such funds would be less likely to instigate a liquidity crisis.” As previously discussed in the earlier stages of this paper, financial leverage is something specifically available to hedge funds, and a variety of the well-known hedge fund collapses have been attributed to excess amounts of leverage. Therefore, some believe that limiting the amount of credit extended to hedge funds, which is then used to achieve leverage, could help stem systemic risk.
The second recommendation I have come across that I also agree with would be to impose more strict requirements for so-called “accredited investors”. Author David Schneider in his papered titled “If at First You Don’t Succeed: Why the SEC Should Try and Try Again to Regulate Hedge Fund Advisors” argues that the SEC could discourage hedge funds from allowing investors to invest in the hedge fund by changing the definition of an accredited investor. By definition under the Securities Act, an accredited investor is any individual with a net worth that exceeds $1 million or any person with an income in excess of $200,000 in each of the two most recent years. Amazingly, however, Schneider points out an almost unbelievable fact, which is that this net worth/income benchmark has not changed since 1982, and that due to the presence of inflation (rising prices, incomes, etc) and increasing net worth, more and more investors have been satisfying the accredited investor benchmark. It seems to me that it would be worthwhile to adjust the “accredited investor” threshold every year based on inflation rates, so that as incomes and net worth levels continue to rise, more and more individuals do not suddenly qualify as potential hedge fund investors. The income and net worth thresholds should be increased each and every year, so that it remains equally difficult with each passing year for individuals to become qualified as hedge fund investors.
Apart from the aforementioned recommendations, there is one additional point that continues to stand out as something that the government, at least it would appear, should tend to be more concerned with. As I have come to recognize through my research, hedge funds were originally an activity generally for the ultra rich – those with upper-tier income levels, high net worth, and money to spare, and lose. It was the last condition – the fact that they could essentially bare to lose some part of their net worth – that made them suitable hedge fund investors. But yet, over time, so-called institutional investors, such as pension plans, endowments, foundations, schools, hospitals, and so on, have all started to gradually wade further and further into the hedge fund waters. Institutional investors have pensioners and retirees to take care of, and if hedge fund investments go too far and returns go too astray, then those depending on the long-term benefits their retirement assets will provide are the ones who will lose. As such, I believe it is the government’s responsibility and duty to make sure that pension plans and other institutional investors, both public and private, have a strong handle on their investment choices and that they are fully informed as to the possible risks that hedge funds can present.
Hedge funds have enjoyed almost complete anonymity for a number of years, and it has become very evident over the past few years that while hedge funds are not to blame for the various problems our financial system has been dealing with, they certainly do play a very large part. Having more information about them, their actions, their clients, their assets, and so forth, will only help to add a much needed layer of transparency within our fragile financial system. There is also a need to let the financial system be a free flowing system, one that is not encumbered by over-bearing rules and regulations.
Houman B. Shadab, The Challenge of Hedge Fund Regulation, Regulation, Vol. 30, No.1, Spring 2007, at 36, 41.
 Mark J. P. Anson, CAIA Level I: An Introduction to Core Topics in Alternative Investments 119 (John Wiley & Sons 2009).
Id. at 2. See also James E. McWhinney, A Brief History of the Hedge Fund,http://www.investopedia.com/articles/mutualfund/05/HedgeFundHist.asp.
Financial leverage is essentially the borrowing of capital in order to invest additional assets in a company, hoping that the company’s return is higher than the loan’s interest rate, thus generating excess return on equity. Gabelli, supra, at 2. See also, The Layman’s Finance crisis Glossary,http://news.bbc.co.uk/2/hi/uk_news/magazine/7620678.stm(last updated Sept. 19, 2008).
After reading about short selling and put in rather simple words, short selling is the act of borrowing assets (such as securities) from a third party after which point they are sold in the hope that the value of the assets will go down before repurchasing them again after which point they are then returned to the third party, thus making a profit on the price difference. Securities and Exchange Commission, http://www.sec.gov/news/press/2008/2008-235.htm(last visited Oct. 1, 2008) (Statements of the SEC regarding short selling and issuer stock repurchases. The SEC was explaining the implication of short selling in the light of the current financial crisis and actions taken to control operation).
Implications of the Growth of Hedge Funds, Sep. 2003,http://www.sec.gov/news/studies/hedgefunds0903.pdf.
Id. at 11.
Slutz, supra, at 179.
Craig T. Callahan, Hedge Funds vs. Mutual Funds (2009), http://www.iconadvisers.com/WebContent/Public/PDFDocuments/Hedge_vs_Mutual_Funds.pdf.
Id. at 2.
WSJ.com, http://guides.wsj.com/personal-finance/investing/how-to-buy-a-mutual-fund/ (last visited Apr. 6, 2010).
Alistair Barr, How to Buy…Hedge Funds, Sept.11, 2007,http://www.marketwatch.com/story/how-to-buy-hedge-funds.
Lee McGowan, What is a Mutual Fund Expense Ratio?,http://mutualfunds.about.com/od/mutualfundglossary/g/expense_ratio.htm(last visited Apr. 6, 2010).
Investopedia.com,http://www.investopedia.com/university/mutualfunds/mutualfunds2.asp(last visited Apr. 6, 2010).
Mark Hulbert, 2+ 20, and Other Hedge Fund Math, Mar. 4, 2007,http://www.nytimes.com/2007/03/04/business/yourmoney/04stra.html?_r=1.
Sec.State.MA.Us, http://www.sec.state.ma.us/sct/sctprs/prsamf/amfidx.htm(last visited Apr. 6, 2010).
Ben McClure, Taking a Look Behind Hedge Funds,http://www.investopedia.com/articles/02/111302.asp(last visited Apr. 19, 2010).
Callahan, supra, at 2.
Lock-up period is basically the time period that you must hold your assets (“lock-up” your money) within a fund before they can be removed. What is a Lock-Up Period?, http://www.eurekahedge.com/database/faq.asp#16(last visited Apr. 19, 2010).
Callahan, supra, at 2.
Richard Loth, Mutual Fund Categories,http://www.investopedia.com/university/quality-mutual-fund/chp3-invest-obj/mf-categories.asp(last visited Apr. 19, 2010).
Slutz, supra, at 194.
Morningstar.com,http://corporate.morningstar.com/US/documents/MethodologyDocuments/MethodologyPapers/MorningstarHedgeFundCategories_Methodology.pdf(last visited Apr. 19, 2010).
Vikrant Singh Negi, Legal Framework for Hedge Fund Regulation,http://www.hedgefund-index.com/Legal%20Framework%20for%20Hedge%20Fund%20Regulation.pdf(last visited Apr. 19, 2010).
Tamar Frankel, Private Investment Funds: Hedge Funds’ Regulation by Size, 39 Rutgers L.J., 657, 661 (2008).
Negi, supra, at 3.
David Schneider, If at First You Don’t Succeed: Why the SEC Should Try and Try Again to Regulate Hedge Fund Advisers, 9 J. Bus. & Sec. L. 261, 276 (2009).
Id. at 273-274.
Negi, supra, at 5.
Schneider, supra, at 277-278.
Thierry Olivier Desmet, Understanding Hedge Fund Adviser Regulation, 4 Hastings Bus. L.J. 1, 15 (2008).
Id. at 8.
Justin Asbury Dillmore, Leap Before You Look: The SEC’s Approach to Hedge Fund Regulation, 32 Ohio N.U. L.Rev. 169, 177 (2006).
Desmet, supra, at 9.
Id. at 10.
Schneider, supra, at 280.
Janie Casello Bouges, Why the SEC’s First Attempt at Hedge Fund Adviser Registration Failed, J. of Alternative Investments, Vol. 9, No.3, 89 (2006).
Schneider, supra, at 280.
Id. at 281.
Franklin R. Edwards, New Proposals to Regulate Hedge Funds: SEC Rule 203(b)(3)-2, http://www0.gsb.columbia.edu/faculty/fedwards/papers/New%20Prop%20to%20Reg%20Hedge%20Funds%2001.pdf(last visited Apr. 27, 2010).
Dillmore, supra, at 182.
Desmet, supra, at 22.
Schneider, supra, at 281.
Desmet, supra, at 22.
Evan M. Gilbert, Unnecessary Reform: The fallacies with and Alternatives to SEC Regulation of Hedge Funds, 2 J. Bus. Entrepreneurship & L. 319, 328 (2009).
Anita K. Krug, The Hedge Fund Transparency Act of 2009,http://www.law.berkeley.edu/files/Hedge_Fund_Transparency_Act_Comments_A.Krug.pdf(last visited Apr. 27, 2010).
Elizabeth P. Gray, Heightened Government Prosecution and Anticipated Regulation of Private Hedge Funds, 2010 WL 894714 (aspatore).
Id. at 2.
 The Future of Hedge Fund Regulation: Q & A with Ezra Zask and Gaurav Jetley of Analysis Group,http://www.analysisgroup.com/uploadedFiles/News_and_Events/News/AnalysisGroup_Release_Zask_Jetley_HedgeFunds_2009-07-16.pdf((last visited May 13, 2010).
Taylor, supra, at 7.
 Alan Greenspan, The Crisis,http://www.brookings.edu/~/media/Files/Programs/ES/BPEA/2010_spring_bpea_papers/spring2010_greenspan.pdf(last visited May 13, 2010).
Taylor, supra, at 2.
 Id.at 3.
Hedge Fund Roundtable,https://privatewealth.mellon.com/en_US/public_content/Resources/documents/CIONewsHedgeFundArticle.pdf(last visited May 13, 2010).
Joshua Hess, How Arbitrary really was the SEC’s “Hedge Fund Rule”? The Future of Hedge Fund Regulation in Light of Goldstein, Amaranth Advisors, and Beyond, 110 W. Va. L. Rev. 913, 940 (2008).
 Gilbert, supra, at 343.
Id. at 345.
 Schneider, supra, at 308.
© 2010 Karol C. Sierra-Yanez
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From the featured guest bloggers from the Center for Public Integrity. John Solomon and Laurel Adams share some insight on how federal tax dollars meant for legal aid for the poor took a detour down in the Bayou State.
The head of a Louisiana legal aid group funded by the federal government routinely dined at a private club and drove a leased vehicle for personal use at taxpayers’ expense, according to an audit that exposes significant fringe benefits inside a profession dedicated to helping the poor.
The Legal Services Corp. (LSC) inspector general, the chief watchdog for federal funds given to local legal aid groups nationwide, challenged $318,768 in expenditures by the Capital Area Legal Services Corp.in Baton Rouge, La., that were charged to taxpayers.
The group provides legal aid to poor residents in a dozen Louisiana parishes and received $1.5 million from Legal Services Corp. in 2009.
Many of the questioned expenditures involved the legal aid group’s executive director, James A. Wayne, Sr., who routinely submitted meals for reimbursement as “business expenses” even when he dined alone and on weekends.
The watchdog report, released earlier this month, concluded Wayne charged his legal aid group $33,150 for meals he claimed were business-related from Jan. 1, 2005 to May 31, 2009.
“The Executive Director frequently dined (breakfast, lunch, and dinner) at a private business club and restaurants in Baton Rouge,” Inspector General Jeffrey Schanz said in his report. “Many of the meals were lunches and dinners where the Executive Director dined alone, and some meals took place on weekends.”
Wayne acknowledged that he routinely dined at the Camelot Club, an exclusive dining club in Baton Rouge where an annual membership runs close to $2,000, but he disputed the audit report’s portrayal of the spending as inappropriate.
Utility giant Entergy Corp., a donor to Wayne’s nonprofit legal aid group, paid for his Camelot Club membership and meals, he said. That meant Wayne only charged taxpayers for the meal of his guests. The arrangement, he said, may have left the auditors with a false impression he was dining alone.
“I’m a very visible nonprofit director, so my meal is paid for,” Wayne told the Center in a telephone interview. “The other person wasn’t.”
The Camelot Club, located atop a downtown office building, describes itself as one of Baton Rouge’s “most prestigious clubs” with panoramic views of the Mississippi River, the state capitol building, and Louisiana State University. The club overlooks a city where about 24 percent of residents live in poverty, according to U.S. Census Bureau data.
When asked by the Center about the private club membership, New Orleans-based Entergy said it has temporarily suspended funding for the Baton Rouge group.
“We provided funding to the organization for low-income advocacy issues. We are aware of a pending investigation against the organization and have suspended any funding until it is resolved,” Entergy said in a statement to the Center. “We have no knowledge or control over how the donations were spent by the organization once they were received.
Wayne said he did not believe the inspector general’s criticisms were warranted. “None of it has any merit. We’ve been through this before,” he said.
EXPENSES LACKED DOCUMENTATION
The audit concluded that $11,462 of Wayne’s meal reimbursements paid by federal tax dollars lacked proper documentation to show they were justified by business purposes.
In fact, the inspector general concluded that Wayne sometimes charged his legal aid group and taxpayers for personal meals under a loose reimbursement system that often sought to justify expenses after the fact. In some cases, Wayne added the names of guests or the business purpose of a meal to receipts more than a month later.
“Personal expenses are being inappropriately charged to the grantee and decisions on allowability of the charges are being made after the fact rather than on contemporaneous supporting documentation,” the inspector general concluded.
The Capital Area Legal Services Corp. is promising to revise its internal financial controls in response to the watchdog report, but disputes the assertion that there was anything wrong with Wayne’s meal reimbursements.
“CALSC maintains that it has provided evidence that the expenditures reviewed by the OIG meet the criteria set out in” federal regulations, the legal aid group said in a written response that was attached to the watchdog’s report.
A lawyer for the group, Vicki Crochet, told the Center in an e-mail that while certain expenses were questioned, CALSC “looks forward to the opportunity to show that it has properly accounted” for all Legal Services Corp. funding received. The expenses challenged by the inspector general are being submitted to the Legal Services Corp. for a final decision.
A Legal Services Corp spokesman told the Center that if it confirmed that funds were misspent, the federal agency could ask for the money to be repaid or could attach conditions to any future federal funding for Capital Area Legal Services Corp. “We take the inspector general’s reports very seriously and the Office of Compliance and Enforcement will give this a lot of attention,” Legal Services Corp spokesman Steve Barr said.
The inspector general also suggested the legal group’s problems might also extend to the Internal Revenue Service and state tax authorities.
“CALSC appears to have also improperly recorded transactions dealing with fringe benefits …, membership dues, lease payments, subscriptions, and client trust fund interest [and] may be liable for additional payments to the Internal Revenue Service and may be subject to sanctions from the State of Louisiana,” the inspector general warned.
LEASED CAMRY, BUILDING RENT QUESTIONED
Among those transactions, the watchdog questioned why Wayne charged taxpayers more than $78,555 over more than four years for a leased vehicle that he used both for business and personal transportation, and warned it might have violated tax laws.
Wayne said the leased vehicle was a Toyota Camry, and that he got a new model each year. “They change the cars out every year,” he said.
The inspector general challenged the need for a taxpayer-funded car.
“The Executive Director used the vehicle for both business and personal use without prior approval from LSC and without adequate documentation identifying when the vehicle was used for business and when the vehicle was used for personal reasons. Also, the Executive Director did not maintain and provide CALSC any records to document the use of the vehicle as required by the Internal Revenue Service,” the watchdog report concluded.
“Lacking adequate records, CALSC did not report to IRS as required the value of all use of the vehicle by the Executive Director as wages.”
Wayne said the car was leased for his business travel but that he began taking it home after the vehicle was vandalized in the legal aid group’s parking lot. The IRS recently gave him permission, Wayne said, to start reimbursing his nonprofit group $100 a month for personal use of the car.
Other practices at Capital Area Legal Services Corp. were questioned, including travel reimbursements for Wayne, LSC-funded payments of $144,646 to a fundraising consultant, and rent charged to the Legal Services Corp. even though the Baton Rouge group owned the building where its offices were located.
The rent payments appeared to charge taxpayers to help cover the group’s building mortgage, the inspector general said. “It is not reasonable and necessary for a single entity to pay itself rent in order to occupy a building that it already owns,” it concluded.
Wayne told the Center that the Legal Services Corp. approved the purchase of the building and was aware of the billing situation. He also asserts that the going rate for the rent was $900 per month, and Capital Area Legal Services Corp. only charged $750 per month, the same amount as its previous rent.
The Louisiana audit is the latest example of trouble inside the Legal Services Corp., the federally chartered corporation funded by Congress to provide legal assistance to the poor so they can access the civil courts. LSC provides tax dollars to local groups to do the work.
Members of Congress, including Republican Sen. Charles Grassley of Iowa and GOP Rep. Darrell Issa of California, and Democratic Sen. Barbara Mikulski of Maryland, are questioning whether LSC is doing enough to monitor the way groups spend the federal money to ensure it really helps the poor.
The Center reported in July that LSC has been struck by a rash of fraud cases in which tax dollars aimed at the poor were diverted to personal uses, including a Baltimore legal aid group executive accused of stealing more than $1 million, spending much of it, investigators said, on prostitutes and gambling.
Reprinted by Permission © 2010, The Center for Public Integrity®. All Rights Reserved.
The National Law Review is proud to announce one of three winners of our Fall Student Legal Writing Contest. Yicun Chen is is an LL.M candidate at American University Washington College of Law in Washington DC and she has provided an interesting perspective and explanation of Intellectual Property Right enforcement in China and other developing countries:
Since October 2007, the United States, Europe and a few close allies have been negotiating a new intellectual property enforcement treaty, Anti-Counterfeiting Trade Agreement (ACTA). Although China is identified as the main target of counterfeiting activities, it has not been invited to the negotiation table of ACTA. It appears that ACTA negotiating partners have deliberately opted for a plurilateral approach to circumvent possible opposition from developing countries such as China, Brazil and India. However, the long–term aim of ACTA is to establish it as a global standard for intellectual property right (IPR) enforcement and developing countries will face a great pressure to adhere to the treaty. Therefore it is necessary to analyze ACTA in China’s perspective and discuss its potential impacts on China and other developing countries.
This paper will analyze ACTA’s impact on China in both legislative and practical perspectives. Part I will take a text analysis of ACTA and compare it with Chinese intellectual property (IP) law. Part II will discuss the practical problem of IP enforcement in China and the potential impact of ACTA on it. Part III will give the conclusion that ACTA will not improve the IP enforcement in China even if it becomes a global standard.
I. Legislation—Text Comparison of ACTA and Chinese IP Laws
The main body of the draft ACTA has four sections, making provisions on “Civil Enforcement”, “Border Measures”, “Criminal Enforcement” and “Intellectual Property Rights Enforcement in the Digital Environment.” The following paragraphs will analyze the key issues in these sections and compare them with the corresponding parts in Chinese IP laws.
A. Intermediary Liability
The draft text of ACTA proposes to impose intermediary liability on Internet service providers (ISPs) and other third parties. This provision is broadly criticized for its threat to free speech and access to information. Moreover, some worry that governments would take advantage of this provision for censorship.
Similar to ACTA, China also imposes the intermediary liability on ISPs and adopts “notice and take down” system. The main legislation regulating Internet piracy and liability of ISPs is Measures for the Administrative Protection of Internet Copyright of China (MAPIC). Effective on May 30, 2005, the MAPIC provides that an ISP will be liable for administrative penalties if it clearly knows an Internet content provider’s copyright-infringing act through its network or if it fails to remove copyright infringed material upon the request of a copyright holder.  Different from ACTA, to balance the rights between copyright holders and Internet content providers, MAPIC also provides that where any ISP removes relevant content in light of the notice of a copyright owner, the Internet content provider may send a counter-notice to both the ISP and the copyright owner, stating that the removed content does not infringe upon the copyright. After the counter-notice is sent, the ISP may immediately reinstate the removed content without liabilities for the reinstatement.
However, MAPIC then provides that if an ISP fails to take measures to remove relevant content after it receives the copyright owner’s notice and meanwhile the content damages the “public benefits,” it may be punished by administration departments. But the content providers do not have equal remedy when the ISP ignores theirs counter-notice. Thus, the law induces ISPs to perform in favor of copyright holders’ interests. Moreover, the definition of “public benefit” under MAPIC is very ambiguous and it often used by government as justification for censorship. Accordingly, people worry that if ACTA put liability for file sharing on ISPs, then they will be forced to create their own censorship campaigns, especially in the countries with a lack of democracy. The facts in China prove that such anxiety is not groundless. The burden on ISPs to act as gatekeepers is likely to be onerous. Their liabilities are not limited to IP infringement but also cover defamation, privacy and sensitive political content. With the limited resources of ISPs and special political environment in China, the intermediary liability makes Chinese ISPs play an active role in censorship but rather ineffective role in IPR protection.
With respect to damage assessment, ACTA would require courts to consider certain measures of damage submitted by the right holder, including “the lost profits, the value of the infringed good or service, measured by themarket price, [o]r the suggested retail price.” Compare to ACTA, the assessment of damage in Chinese IP laws is more general and abstract. Chinese IP laws (including copyright, trademark and patent law) only provide that the damage awards are based on the losses suffered by the right holders or the profit obtained by the infringers. But no provision in these laws provides the specific measures to determine the losses and profits. Thus in practice, different courts and different cases in the same court share different criteria when determining the amount of damages. The recoveries are also usually quite low by Western standards. That is an important reason for West claiming weak IPR enforcement in China.
However, the damage assessment based on market price or suggested retail price as proposed in ACTA is also unreasonable, especially in developing countries like China. The IPR holders from developed countries always complain about the great losses they suffer in China. The lost profits they claimed are based on the market price of a genuine item multiplied by the number of illegal copies sold in Chinese market. But they may ignore the fact that the number of consumers of genuine items cannot be as many as the consumers of fake ones. For example, suppose the market price of genuine software is $ 100, while the price of the pirated one is only $ 5. Then suppose ten million consumers would buy the pirated software, but you cannot imagine the same amount of consumers in China can afford the genuine ones. Therefore, the normal measure of damage in China’s court is usually based on the defendant’s illicit gains rather than the plaintiff’s own losses due to the uncertainty associated with calculating theoretical losses. Since the infringers usually sell their illegal copies at a much lower price than the market price charged by IPR holders, such illicit gains is often modest compared to the lost profits the right holders claim.
C. Criminal Liability
Article 61 of TRIPS requires that criminal liability should be applied “in cases of willful trademark counterfeiting or copyright piracy on a commercial scale.” China applies this provision to its domestic laws providing that infringers shall be prosecuted for his criminal liability for IPR infringement on a commercial scale where circumstances are serious. By clarifying “serious circumstances,” Chinese IP laws raise the threshold for criminal prosecution—the illegal profits gained from trademark counterfeiting or copyright piracy must exceed $8,500 and the burden of the proof rests on prosecutors or police. Thus in practice, the criminal enforcement of IPR infringement is rare and unusually, and most IP cases continue to be handled through the civil procedure or administrative system. Developed countries often criticize the high threshold for China to initiate criminal enforcement. However, it is groundless to say Chinese IP law is beyond the scope of TRIPS since “commercial scale” under TRIPS means “counterfeiting or piracy carried on at the magnitude or extent of typical or usual commercial activity with respect to a given product in a given market.”
In contrast, ACTA dramatically lowers the bar for individuals to be found criminally liable for a variety of offences. As Kimberlee Weatherall summarizes, ACTA “redefines ‘commercial scale’ to include: 1. Any IPR infringement for purpose of commercial advantage or private finical gain (no matter how low the number); and 2. Significant willful infringement without motivation for financial gain.” Since ACTA asserts to target at criminal and commercial activities rather than private acts, then there is no justification for extending criminal liability beyond large scale infringement that is direct and intentional.
Nevertheless, were China forced to adopt criminal provisions as ACTA provides, there would still be flexibility in enforcement. The definition of “significant willful” in ACTA is ambiguous, thus signatory parties have discretions to detail their own criteria to determine the infringers’ “significant willfulness.”
D. Border Measure
In terms of border measure, TRIPS only applies custom measures to copyright piracy and trademark counterfeiting. However, ACTA expands the provision to patent infringement. Many people question the practicability of this provision since patent infringement is usually less obvious compared to trademark counterfeiting. As Kimberlee Weatherall points out, for trademark- infringing goods, such as fake Louis Vuitton bags, the infringing nature is clear on the face of the goods. For patent-infringing goods, the infringement is not so obvious on surface and thus it would impose heavy burden on custom resources.
Similar to ACTA, the border measures in China include trademark, copyright as well as patent infringement. But in practice, the great majority of cases dealt with by Chinese Customs involved trademarks, with only a few cases related to copyrights or patents. One key reason is the relative ease of discovering and distinguishing infringing trademarks.
II. Practice—The Impact of ACTA on the IP Enforcement in China
After having access to WTO, China has made great progress in IP law legislation. And according to the above text comparison, we can see the gap between ACTA and Chinese IP law is much narrower than many people’s imagination. However the effective enforcement of IPR has been little explored in China. Therefore, it is important to explore not only legislative but also practical cause of the problem and evaluate the impact of ACTA on China’s IPR progress. Examining the history and reality in Chinese society, there are three rooted reasons leading to the enforcement deficiency of IP law: China’s cultural uniqueness, innovation insufficiency and institutional impediments.
A. Culture Uniqueness
In contrast to individualism in the West, collectivism — a traditional and socialist value — substantially influences the cultural, social and legal areas in China. Collectivism has a long tradition based on Confucianism, which prioritizes the needs of the group over the rights of individuals. Historically, there was little protection of individual rights, especially in the intellectual property field.Copying and sharing created works without any compensation was widely accepted in traditional China. Moreover, intellectuals, much esteemed in Chinese society, wanted their work to be copied because the highest form of admiration is in the imitation and recreation of writings, art, or other works.
With the establishment of Socialist China in 1949, the Chinese government set up a political and legal system based on the Soviet model, which deemed individual property rights to be the antitheses of socialist principles. As China Expert Dr. Robert Weatherley has pointed out, for the sake of maintaining a stable and harmonious community, Chinese citizens are strongly promoted to abandon any rights in favor of the society. IPR, as a form of individual right, is often sacrificed in favor of collective interests. Thus collectivist ideology is bound to erode the foundation of IPR protection. In a word, communal property is a part of Chinese culture that dates from the teaching of Confucianism through the birth of Communism. Questioning the idea of public property and recognizing the importance of private property takes great resources and social will.
However, collectivism has been facing new challenges since 1979, when the Chinese government initiated economic reform. The dramatic transformation in the economic, cultural and social areas fundamentally reshaped the mind of Chinese citizens. Unfortunately, the government did not bring political reform in line with its economic reform. A consequence has been that “individual aspirations of the citizens are fostered and fulfilled without a corresponding regulatory system.” The increasing social and political problems, due to the unbalanced economic growth, frustrate the effort of ordinary Chinese citizens to earn their living through normal channels. In order to survive in such disordered society, people have to try every possible approach. Ironically, the money worship that socialist society criticized over decades ago now has been upheld as a recognized credo of many people,  who are shameless to earn money even through illegal ways like piracy and counterfeiting. Therefore, traditional values have been dramatically diminished and replaced by extreme pragmatism, which gives rise to moral vacuum and thus undermines the ethical foundation of IPR protection.
From the analysis above it is evident that the problematic IPR enforcement in China results from its cultural and political uniqueness. Now China has been moving towards establishing a legal system that increasingly seeks to restrain the power of the state, and promises individuals the ability to assert their rights and interests in reliance on law. Chinese authorities note that China is “trying to achieve in a dozen years what it had taken the Western world a century to do.”In only a quarter century, China has evolved from a country with no IP protection to one with a broad system of IP laws. However, Rome was not built in a day. The standards developed in ACTA in protection and enforcement of IPR are much higher than what already exists under the TRIPS Agreement and IP laws in most developing countries. As Professor Peter Yu points out, developing countries have struggled to meet their obligations under TRIPS Agreement. It is unreasonable to require them to abide by the much more stringent ACTA standards. Moreover, the efficient enforcement of law depends on healthy political and legal environments; it is impossible for a society with upheaval and extreme pragmatism to perfectly enforce a stringent treaty like ACTA. As the largest developing country in the world facing many challenges, such as political reform, adopting ACTA to improve IPR enforcement is unpractical and unlikely to be the top priority in China.
B. Innovation Insufficiency
As scholars John R. Allison and Lianlian Lin observed, “China has followed the typical pattern of a developing nation by depending heavily on foreign investment and imported technology before being able to generate substantial internal growth and technological advancement on its own.” Due to the lack of technological innovation in China, strict IPR enforcement cannot bring great benefit to current Chinese companies. In contrast, it means many Chinese companies have to pay a large sum of royalties to foreign proprietors, thereby resulting in increasing production costs. Correspondingly, the Chinese government finds neither political will nor domestic pressure to substantially enforce IPR.
Moreover, the enforcement of the international IP agreements like ACTA is difficult for many developing countries partly because the developed countries have set the intellectual property standards. Although commentators and policymakers in developing countries have questioned the fairness of the agreement, developed countries won the negotiation game by forming coalitions among themselves and by convincing their less-developed counterparts to join them. However, since China and many other developing countries lack technological innovation, the incentives provided by IPR (for investment in research and development) are not meaningful.
Admittedly, it is necessary to create home-grown intellectual property in China. Although imitation provides many Chinese companies with great short-term profits, it discourages domestic innovation, which is a long-run driver of economic growth. However, as Yu point out, the linkage between IP protection and innovation ability depends on whether the intellectual property system is struck at the right balance. If the IP system overprotects, it will limit public access to needed knowledge and eventually impede innovations based on existing technologies. Unfortunately, ACTA is a treaty that prioritizes enforcement of IP through a strong penalty scheme without the essential protection like fair use that provide much needed balance. Therefore, enforcing such treaty will favor foreign rights holder at the expense of the local constituents.
C. Institutional Impediments
Intellectual property protection in China follows a two-track system. The first is the judicial track, where complaints are filed through the court system. The second and most prevalent is the administrative track, where an IPR holder files a complaint at the local administrative office. Unfortunately, the lack of legal formalism in judicial system and ambiguous responsibility in administrative agencies contribute to inefficiencies in IPR enforcement. Accordingly, if these specific problems are not solved, the adoption of ACTA will still be inefficient in improving the IRP enforcement in China.
The lack of judicial independence, which results in local protectionism, greatly harms the efficiency of IPR enforcement. Although China’s Constitution gives a textual commitment to an independent judiciary, the practical operation of the institutional system precludes any true independence. Judges are subject to removal by the local congresses, which create political pressure to rule in favor of local agencies and businesses rather than foreign rights holders.
Another element that harms the efficiency of IPR enforcement is overlapping jurisdictions among national ministers and between central and local government administrations. Effective enforcement of IPR protection requires reasonable arrangement of responsibility and resources among different authorities. However, China’s vertical administration system not only results in overlapping jurisdiction between enforcement administrations, but it also causes parallel enforcement mechanisms.
Although China’s IP enforcement through judicial and administrative tracks is imperfect, it is by no means a good way to solve the problem by adopting the uniform rules of ACTA. Because of differences in political, economic and cultural conditions, laws that work well in on country do not always suit the needs and interests of another. Many westerners believe the main cause of IP infringement is that the penalties in developing countries are too light to prohibit the infringing activities. Thus many provisions in ACTA provide civil and criminal liabilities. However, according to China’s specific condition, it is more important to establish judicial independence and arrange reasonable responsibilities between different IP authorities, without which other strategies are meaningless. In a word, people in different countries should decide by themselves what laws they want to adopt to make the legislation process more accountable to the local conditions.
The goal of ACTA is to create a new standard of intellectual property enforcement above the TRIPs Agreement, and then establish the treaty as global standard. However, the universal provisions of ACTA ignore the uniqueness of different countries, especially the unique conditions in developing countries. The extremely high standards provided in ACTA for IPR enforcement are beyond the ability of China and many other developing countries. And for developed countries, strong IP protection in treaties with weak enforcement in global practice is meaningless.
The negotiating parties include: the United States, the European Community, Switzerland, Japan, Australia, the Republic of Korea, New Zealand, Mexico, Jordan, Morocco, Singapore, the United Arab Emirates and Canada
Measures for the Administrative Protection of Internet Copyright of China, Admin Regs. §5 to 6 (2005).
Id. § 7.
See Copyright Law of China, §48, Trademark Law of China, §56; Paten Law of China, § 60.
. See Copyright Law of China, § 47; Trademark Law of China, § 59.
Kimberlee Weatherall, ACTA in April 2010: Summary of Concerns,http://works.bepress.com/cgi/viewcontent.cgi?article=1019&context=kimweatherall
See generally Border Measure, Regulations, 2010.
See William P. Alford, To Steal a Book is an Elegant Offense: Intellectual Property Law in Chinese Civilization 10, 12 (1995).
Robert Weatherley, The Discourse of Human Rights in China: Historical and Ideological Perspectives 93, 104 (1999)
Wei Shi, Incurable or Remediable? Clues to Undoing the Gordian Knot Tied by Intellectual Property Rights Enforcement in China, 30 U. Pa. J. Int’l L. 541, 550(2008)
Mark Landler, At Forum, Leaders Confront Annual Enigma China, N.Y. Times, Jan 30,2005
Yu, Peter K. Six Secret (And Now Open) Fears of ACTA, June,14 2010. Southern Methodist University Law Review, Vol. 63, 2010
John R. Allison & Lianlian Lin, The Evolution of Chinese Attitudes Toward Property Rights in Invention and Discovery, 20 U. Pa. J. Int’l Econ. L. 735, 774 (1999)
Yu, supra note 17
John F. Duffy, Harmony and Diversity in Global Patent Law, 17 Berkeley Tech. L.J. 685, 707-08(2002).
© 2010 YICUN CHEN
About the Author:
Yicun Chen is an LL.M candidate at American University Washington College of Law. She has broad legal background with in-depth experience in intellectual property, media and business law. Prior to her move to Washington, DC, she worked as an assistant professor at Zhejiang University City College in China, researching and publishing intellectual property papers in both Chinese and English. She also supported local municipality with projects on intellectual property and media law. In addition, she was an experienced attorney, supporting and advising corporations, non-profit organizations, and governmental agencies on licensing issues, patents, corporate compliance, and negotiating / closing high-value deals.
Weekly guest bloggers at the National Law Review this week are from the Center for Public Integrity. Author Amy Biegelsen reviews how a federal government ban on Holocaust survivors suing to collect on European insurance policies from that era may be on a shaky legal footing.
A federal government ban on Holocaust survivors suing to collect on European insurance policies from that era may be on a shaky legal footing, according to memos accidentally released by the Justice Department in a Freedom of Information Act (FOIA) request. The department wants the memos back and is trying to keep them from circulating.
However, the documents were used in Congressional testimony last month by Samuel Dubbin, an attorney representing Holocaust survivors and their families, and full copies were entered into the official public record.
The memos relate to a federal lawsuit Dubbin lost earlier this year when a federal appeals court rejected a U.S. citizen’s attempt to collect on insurance policies his father purchased in Europe before surviving imprisonment in Auschwitz and Dachau during World War II.
That court ruled Dubbin’s client, Dr. Thomas Weiss, could not bring his case to court. The decision was based, in part, on the Justice Department’s assertion that U.S. foreign policy requires special, non-adversarial agencies be used as the “exclusive forum” to help victims recover such claims.
The memos that Dubbin obtained in his FOIA request were intended as private correspondence among department officials discussing what advice to give to the court to clarify U.S. foreign policy. They reveal the Justice Department had some reservations about whether or not that policy could pre-empt a domestic lawsuit.
JUSTICE DEPT. WANTS COPIES DESTROYED
In a Sept. 24 e-mail to Dubbin, Deputy Assistant Attorney General William Orrick III, said the department had “inadvertently and erroneously” sent him the memos in response to his FOIA request. Dubbin gave a copy of the e-mail to the Center for Public Integrity.
The e-mail landed in Dubbin’s in-box two days after his Sept. 22 testimony in front of a congressional subcommittee hearing on a bill that would make it easier for victims and their families to file suits. A stack of the photocopied documents sat on a table inside the hearing room, available for anyone attending to take.
The Justice Department e-mail instructs Dubbin to “immediately cease using or disclosing the above documents; return the documents to the Department of Justice; and destroy all copies of these documents in your possession.” It also orders him to retrieve any copies he may have circulated and advises him to ask a Holocaust survivors group to remove them from their web site.
Dubbin has refused to return the documents despite the Justice Department’s argument that the documents are confidential under the attorney-client privilege and that he has an ethical obligation to give them back. The department did not respond to Center requests for comment.
Lucy Dalglish, the former director for the Reporters Committee for Freedom of the Press advocacy group, says it’s rare for a government agency to revoke records it has already released in a FOIA response. That’s especially true for the Justice Department, she added, because “they very seldom give out any documents.”
MEMOS SHOW MISGIVINGS
The memos illuminate some of the discussions — and misgivings — department officials had about their response to the New York-based Second Circuit Court of Appeals before it ruled in Dubbin’s case earlier this year.
On behalf of the State Department, the Justice Department sent the appeals court two separate memos, one in 2008 and another in 2009 to explain the U.S. foreign policy issues underlying the case. Its position changes from one to the next. The mistakenly released documents come from internal department discussion before each was sent.
The 2008 memo said that the State Department policy cannot necessarily pre-empt a court case. The 2009 memo was much firmer and told the appeals court that it was “in the foreign policy interests” of the United States for an international commission “to be the exclusive forum for the resolution” of Holocaust survivors’ claims against European insurers.
Among the documents that the government wants returned is a memo written by former assistant to the Solicitor General, Douglas Hallward-Driemeier. He wrote it before the 2008 memo was sent to the court, and it says that he had “reservations about the legal theory” underlying the advice that citizens cannot sue. A year later, before the 2009 memo was sent, Hallward-Driemeier wrote to his department colleagues that the Justice Department lawyers “should refrain from addressing the question whether the government’s foreign policy provides a basis for holding the plaintiffs’ claims preempted.”
Hallward-Driemeier, now a partner with the law firm Ropes & Gray, says he “can’t comment on attorney-client memos that should never have been released.”
Early this year, the Second Circuit ruled in favor of the Italian insurance company Assicurazioni Generali and rejected Dubbin’s attempt to help his client collect on a life insurance policy held by a Holocaust survivor. Dr. Thomas Weiss, a Miami Beach opthamologist born in 1949, has spent years trying to obtain the insurance benefits for a policy purchased by his father, Paul Weiss, in 1937 from Generali.
The appeals court’s ruling “was a direct result of the fact that DOJ hid the ball,” Dubbin told the House committee in September.
SPECIAL PANEL HANDLES EUROPEAN INSURANCE CLAIMS
Why can’t a U.S. citizen go to court to fight a European insurer over an insurance policy benefits? The answer is rooted in an agreement the United States entered into with Germany in 1999. The two countries decided at that time that it would be better to settle these insurance disputes through an international agency funded by European insurance companies, the International Commission on Holocaust Era Insurance Claims (ICHEIC).
As part of that arrangement, the federal government agreed that when cases of U.S. citizens suing German companies came up, it would file briefs with the judges informing them of the foreign policy interest. The agreement was not a treaty and doesn’t carry the force of law, so the U.S. cautioned the European governments that whether or not the cases would be thrown out would still be up to the courts.
These claims are particularly difficult because few death certificates were issued in extermination camps and Nazis routinely confiscated or destroyed contracts, deeds and other records. ICHEIC agreed to relax its standards for evidence, but it closed in 2007, the year before the Weiss suit arrived in federal court. Supporters of the commission say that other non-adversarial avenues still exist and site agreements from the insurance companies that participated in ICHEIC to voluntarily continue to process such claims.
When faced with the Weiss case, the Second Circuit Court of Appeals wanted to know if ICHEIC was still the forum for resolution, or if policy-holders were barred from even suing in US courts. It asked the State Department to clarify, kicking off the discussions accidentally disclosed to Dubbin this summer.
This month, the U.S. Supreme Court declined to hear the case. A dozen law professors specializing in international and constitutional law filed a brief with the high court in support of the case, including American University law professor Steven Vladeck.
“While not affirmatively misrepresenting the government position,” Vladeck says, the memos that the Justice Department gave the court “obfuscated it in a way that made it difficult for the court to know what’s going on.”
Reprinted by Permission Center of Public Integrity
Reprinted by Permission © 2010, The Center for Public Integrity®. All Rights Reserved.
Search and You’ll Be Found – Two Recent Lawsuits Allege that ISP's Violated Privacy by Sharing Referrer Data.
From the National Law Review’s Featured Guest Blogger(s) this week Damon E. Dunn and Seth A. Stern of Funkhouser Vegosen Liebman & Dunn Ltd – some interesting insight on some recent lawsuits pending against Google and Facebook:
Two recent lawsuits allege that internet service providers violated users’ privacy by sharing “referrer data” containing potentially identifying information.
A former technologist with the Federal Trade Commission filed a privacy complaint(link via WSJ) against Google with his ex-employer. The complaint alleges that Google does not allow users to easily prevent transmission of information that allows website operators to determine the search terms used to access their sites. It claims that this constitutes a deceptive business practice by Google because “if consumers knew that their search queries are being widely shared with third parties, they would be less likely to use Google.”
Google has allegedly tested products that deleted search terms from the referrer data visible to webmasters but discontinued them after receiving complaints and posted reassurances that search terms would remain visible. Apparently Google now offers an SSL encrypted search engine at https://www.google.com which protects search terms from being intercepted, but the complaint notes that this is not the default setting and it is not linked from the regular Google site. It also notes that Google provides search term protection to Gmail users searching their inboxes.
The merits of the complaint may hinge on whether search terms should be considered “personal information.” The complaint notes that the New York Times was able to indentify supposedly anonymous AOL searchers in 2006 when AOL leaked a dataset of search queries.
The second suit alleges that, from February through May, Facebook transmitted referrer information to advertisers about users who clicked on their ads. It alleges violations of the federal Electronic Communications Privacy Act and Stored Communications Act as well as California computer privacy and unfair competition laws and common law claims of breach of contract and unjust enrichment.
The suit claims that “Facebook has caused users’ browsers to send Referrer Header transmissions that report the user ID or username of the user who clicked an ad, as well as the page the user was viewing just prior to clicking the ad . . . For example, if one Facebook user viewed another user’s profile, the resulting Referrer Headers would report both the username or user ID of the person whose profile was viewed, and the username or user ID of the person viewing that profile.”
Although some tech executives have been quick to sound the death knell for online privacy, consumers – even those who are products of the Internet generation – continue to disagree. A recent poll shows that 85 percent of teens believe social media sites should obtain their permission before using their information for marketing purposes.
Excerpted from FVLD’s blog, http://www.postorperish.com, which regularly discusses these and other issues facing online publishers.
© Copyright 1999-2010, Funkhouser Vegosen Liebman & Dunn Ltd. All rights reserved.
The National Law Review’s Business of Law guest blogger this week is Vera Djordjevich of Vault Inc. Vera describes the findings of a recent Vault / MCCA Minority Corporate Counsel Association survey which show how law firm’s efforts to diversify have slowed down dramatically during these challenging economic times. Read On:
Law firms had been making steady, if slow, progress in diversifying their ranks. Recent data collected by Vault and the Minority Corporate Counsel Association (MCCA), however, suggests that some of the profession’s advances have come to a virtual standstill.
This spring, as part of the annual Law Firm Diversity Survey, more than 260 law firms, including many of the largest and most prestigious law firms in the country, completed a detailed questionnaire on their diversity initiatives, programs and demographics. The results have been released in the Law Firm Diversity Database.
The data reveals how the economic crisis has affected law firm hiring, promotion and retention as a whole, and particularly highlights its impact on attorneys of color. While everyone felt the recession, the survey data suggests that minorities were, as many have feared, disproportionately affected.
Among the survey’s major findings:
Law firm hiring declined across the board
While it’s clear that law firm jobs are far scarcer now than they were two or three years ago, the data shows just how dramatic the change has been. For example, the size of the 2L summer associate class dropped by some 20 percent since 2008. In addition, far fewer of those summer associates were offered permanent positions than in the past: whereas nearly 93 percent of 2Ls were offered jobs in 2007 and 87.83 percent received offers in 2008, just 72.85 percent of 2Ls received permanent offers in 2009. Law firms also cut back drastically on the recruitment of experienced attorneys, with lateral hiring falling by more than 40 percent from 2008 levels.
Minority recruitment fell
Law firms have been primarily relying on increased minority recruitment to diversify their populations. What’s particularly troubling about the latest survey data is that not only did the overall number of attorneys hired drop in 2009, but also the percentage of those attorneys representing racial/ethnic minorities fell.
In fact, recruitment of minority lawyers declined at all levels — from law students to lateral attorneys. Of all lawyers hired in 2009 (including starting associates as well as laterals), less than 20 percent (19.09 percent) were minorities; a considerable drop from 2008 (21.77 percent) and 2007 (21.46 percent). And the 2009 2L summer class had the lowest percentage of minority students of the last three years: 25.19 percent (compared to 25.66 percent in 2008 and 25.91 percent in 2007).
Looking at specific racial groups, the most notable decline in hiring was among African-American students. In 2007, 7.32 percent of 2L summer associates were African-American; in 2009, that percentage fell to 6.42 percent. The percentage of Asian American 2Ls also declined, from 12.83 percent in 2007 to 11.74 percent in 2009. Meanwhile, the number of Hispanic students and multiracial students (those who identify with two or more races) inched upward a few tenths of a percent.
Minority lawyers continue to leave in high numbers
Meanwhile, as the number of minority lawyers entering firms has decreased, the number of minority lawyers leaving firms has increased. This is especially striking with respect to minority women. At every level of associate, the percentage of minority women who left their firms (voluntarily or through layoffs) has increased by at least two percentage points since 2007. For example, of third-year associates who left in 2009, 16.64 percent were minority women (compared to 13.98 percent in 2008 and 14.36 percent in 2007). In 2007, 12.83 percent of fourth-year associates who left their firms were minority women; by 2009, that number had climbed to 15.46 percent.
Overall, minority men and women represent 20.79 percent of attorneys who left their firms in 2009 — even though they represent just 13.44 percent of the overall attorney population at these same firms. Moreover, for the first time in three years, the percentage of minority attorneys hired was lower than the percentage of minority attorneys who left. In other words, firms are losing their minority attorneys faster than they can replace them.
Retention becomes more critical as recruitment drops
Given the likelihood that law firm recruiting will not return to pre-recession levels any time soon, there’s a danger that even a one-time drop in minority recruitment could have a long-term impact on overall law firm populations. In order to fend off this risk, firms will need to put greater effort into retention and professional development. Retention has long been a problem among large law firms, but the new economic reality makes progress in this area critical. More effective mentoring and mentoring, better monitoring of attorneys’ progress, overcoming unconscious biases, and ensuring that all have equal access to significant opportunities will help law firms build, and maintain, a talented and diverse workforce.
© 2010 Vault.com Inc.
About the Author:
Vera Djordjevich is senior law editor at Vault.com, where one of her areas of focus is diversity in the legal profession. She oversees the research and publication of information about law firm diversity initiatives and metrics for the Vault/MCCA Law Firm Diversity Database. She also edits Vault.com’s content related to law practice in the UK and co-authors Vault’s law blog, which provides career news, advice and intelligence to the legal community. Prior to joining Vault, Ms. Djordjevich was an editor at American Lawyer Media and practiced law in a small litigation firm in New York. She has a law degree from New York University School of Law and a bachelor’s degree from Stanford University. www.vault.com / 212-366-4212
NAWL’s Sixth Annual General Counsel Institute, is targeted to women general counsel and senior in-house counsel who want to build top-tier professional and management skills to improvetheir interaction with C-suite executives and the functioning of their legal departments. The Institute provides a unique opportunity for women corporate counsel, in a supportive and interactive environment, to learn from leading experts and experienced legal colleaguesabout the pressure points and measurements of success for general counsel.
Who should attend?
Senior corporate counsel of public, private, large and small companies, non-profits, government, and educational institutions.
Registration is limited to in-house counsel. Scholarships are available; see “Upcoming Events” at www.nawl.org for a full conference schedule and more details.
Questions about the program?
Contact: Jonathan Becks, Program Coordinator, NAWL: 312.988.6186, email@example.com
A new post from the National Law Review’s featured guest bloggers Neil M. Rosenbaum and Seth A. Stern of Funkhouser Vegosen Liebman & Dunn Ltd details some of the legal pits falls of social media platforms. Read On:
The rise of online media means that many businesses are doubling as publishers, with all the attendant benefits and risks. Every day, courts and lawmakers face the challenge of applying legal principles conceived in the era of periodic publications featuring bylines and mastheads to the unlimited, instantaneous, and often anonymous content communicated via the Internet.
Below are brief synopses of some of the issues facing online publishers that courts have discussed in recent months.
Federal law generally precludes defamation liability for websites based on third-party content. This, however, does not mean that third-party content cannot land a webmaster in court. Plaintiffs often issue subpoenas to websites for identifying information regarding anonymous commenters. While companies may be reluctant to spend their money protecting someone else’s First Amendment right to speak anonymously, website operators — particularly those that have promised to protect users’ privacy — may face liability for turning over identifying information.
Businesses that have themselves been anonymously defamed and seek to identify the defamer must jump through a number of procedural hurdles designed to protect the commenter’s constitutional right to speak anonymously. Some courts have suggested that these hurdles may be easier to clear when the anonymous defamer acted for commercial purposes.
Internet postings can be accessed anywhere and courts have suggested that Internet posters can therefore be sued anywhere. A federal appellate court sitting in Chicago recently rejected the Arizona domain registrar GoDaddy’s argument that, absent specific intent to direct its Internet activities toward Illinois, Illinois courts should not hear a cybersquatting suit against it.
Additionally, at least three recent appellate courts have held that online defamers can be sued in states other than the one from which the content was published. This means that companies with online presences must be prepared to defend themselves in jurisdictions that may apply varying legal standards. Savvy plaintiffs are sure to choose the jurisdiction most favorable to them.
Privacy and Confidentiality
Many social media users assume that by setting posts to “private” they control their audience. This is not always the case. A New York court recently held that “private” Facebook and MySpace posts are discoverable during litigation and that there is “no legitimate reasonable expectation of privacy” in such posts. Additionally, the United States Supreme Court decided this year that an officer’s privacy rights were not violated when the police department searched his text messages while auditing the department’s texting plan. But some courts have found privacy violations where employers used false pretenses to access employees’ “private” content.
In another recent case a federal court decided that a company’s client list could not be protected as a trade secret because the same information could easily be found on sites such as LinkedIn.
While website operators can limit their copyright liability for third-party content by following statutory procedures, websites’ own content is fair game. Online publishers, particularly bloggers, often quote and expand on content created by others. While some perceive this as an opportunity to reach new audiences, others denounce the practice as free-riding. Some media outlets have sold their copyrights to companies that have filed hundreds of suits against alleged online infringers. Others have threatened to sue bloggers formisappropriation of “hot news.”
Courts have suggested that those who misuse an entity or individual’s name to bring attention to online gripes, for instance by impersonating their target, may be liable under trademark statutes, particularly when acting with a profit motive. California has banned “e-personation” outright.
A federal court dismissed an employee’s suit alleging that her employer subjected her to a “hostile work environment” by failing to act after coworkers posted inappropriate comments regarding her race on a personal Facebook page. The court left open the question of whether a company can be liable for improper comments on a company-monitored social media site.
Excerpted from FVLD’s blog, http://www.postorperish.com, which regularly discusses these and other issues facing online publishers.
© Copyright 1999-2010, Funkhouser Vegosen Liebman & Dunn Ltd. All rights reserved.
Picking the Perfect Jury:What Should Be Done About the Problem of Race-Based Exemptions ABA Teleconference & Live Audio Webcast – October 21st
The National Law Review would like to make you aware of an upcoming ABA Teleconference and Live Webcast which has been approved for Elimination of Bias Credits in applicable jurisdications as well as CLE credit — Picking the Perfect Jury:What Should Be Done About the Problem of Race-Based Exemptions:
As recently reported in the New York Times, “Today, the practice of excluding blacks and other minorities from Southern juries remains widespread” and, according to the Equal Justice Initiative and defense lawyers, is “largely unchecked.” There is a continuing indifference to prosecutors’ race-based exclusions of prospective jurors. Prosecutors have learned how to claim that their exclusions are race-neutral, even where they do not exclude white jurors whose answers during jury selection are indistinguishable from those of jurors of color whom the same prosecutors do exclude.
At this program, the renowned Executive Director of the Equal Justice Initiative, Bryan Stevenson, will discuss his organization’s June 2010 report on this subject (a report which was the basis for the Times story and other media reports) and will join with other expert panelists and discussing the report’s implications and what those who attend this program can do to rectify this situation. There will be special focus on Tennessee, Alabama, Arkansas, and Mississippi.
NY-licensed attorneys: This non-transitional CLE program has been approved for experienced NY-licensed attorneys in accordance with the requirements of the New York State CLE Board for 1.0 total NY CLE credits.
Elimination of bias credit has been requested in states with elimination of bias requirements.
The following states accept ABA teleconferences for CLE credit:
AL, AK, AR, AZ, CA, CO, FL, GA, IA, ID, IL, KY, LA, ME, MN, MO, MS, MT, NC, ND, NH, NM, NV, NY, OK, OR, RI, SC, TN, TX, UT, VA, VI, VT, WA, WI, WV, WY.
*States currently not accrediting ABA teleconferences: DE, IN, PA, KS, OH
Teleconference / Live Audio Cast Hours:
4:30 PM-5:30 PM Eastern
3:30 PM-4:30 PM Central
2:30 PM-3:30 PM Mountain
1:30 PM-2:30 PM Pacific
To Register or for More Information:
Register by Phone: 800.285.2221 / Monday – Friday
8:30 AM – 6:00 PM Eastern Event Code: cet0rbe http://bit.ly/dkP9EQ