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Wilson Sonsini Goodrich & Rosati and Cooley Godward, both based in Palo Alto, Calif., are leading the way in creating venture capital-like investment pools for their legions of associates. Now the dozen or so law firms looking to follow are finding the road a bit bumpy. Venture capitalists make it look easy to set up an investment pool, then draw from it at will to get rich. And law firm partners, of course, have been investing in clients for years. But all that’s a much more controlled, clubby way of doing business than what’s coming. Associate investment pools mean “more headaches for managers — they’re going to have to figure how to put together these pools,” said Julie Allecta, a partner at L.A.-based Paul, Hastings, Janofsky & Walker’s San Francisco office. By opening up investment pools to associates, law firms face setting up complex, back-office systems to manage the individual cash contributions of hundreds of lawyers. The funds were already becoming more complex because the ranks of partners investing were growing. And firms could face another layer of regulation because what they’re creating is effectively a new kind of employee benefit. Like a pension fund, the benefit may be available to associates even after they quit the firm. “There is a tremendous administrative burden,” said James Burns Jr., managing partner of San Francisco-based Brobeck, Phleger & Harrison. “What happens after [lawyers] leave, how do you track them? We don’t want to get into the business where we have a bookkeeping subsidiary as part of our operation.” Brobeck is holding off on creating a separate investment pool where associates may contribute out of their own pockets. Instead, partners may boost the amount of profits that the firm invests on behalf of its 520 associates. Brobeck is waiting to see how securities regulators will react to the funds. Wilson and Cooley have been working for several months on getting a green light from the Securities and Exchange Commission. Morrison & Foerster and about a half dozen other large San Francisco Bay Area firms have also begun the process with the SEC. “Anytime you’re setting up an investment pool like this where you’re going to have 100 investors, you’re going to be an investment company potentially,” said R. Darrell Mounts, a partner with Kirkpatrick & Lockhart in San Francisco who specializes in investment companies. The firms are waiting for an exemption from the Investment Company Act of 1940, which governs mutual funds and such pools of varied stocks that are owned collectively by large groups of people. Small funds with fewer than 100 wealthy investors generally slip below the SEC’s radar. That’s why venture capital firms haven’t needed exemptions. But the SEC notices the pools when the number of investors swell or the funds start taking money from less sophisticated investors, like young associates. From the SEC’s perspective, the primary concern for the associates is whether they have access to enough information about an investment, before and after it’s made. “[The exemption] is not something that you just apply for, check a few boxes, and then it comes 30 days later,” said Allecta, who is also an investment company specialist. Still, some law firms want to use the investment funds to help recruit and keep talented lawyers. Trying to compete with high-flying tech companies that can offer stock, the firms are looking to cut associates into the same kinds of opportunities. The investment pools have paid off for some. At Wilson, for example, the partners took home more money on average last year from investments than from the firm’s profits of $835,000 per partner. Some Silicon Valley firms, like Wilson, set up investment pools so litigators or real estate lawyers and the like can share in the investment opportunities that corporate lawyers see almost daily. They siphon off some of the firm’s profits to create the funds and then divvy up the take, based on partnership ownership. Other firms simply let a handful of individual lawyers make personal investments into a pool or to directly invest in clients. Neither of the approaches addresses what happens when the ranks of investors hit the 100 mark, or start to include twenty-somethings with little investment sophistication. Venture Law Group, a Menlo Park, Calif., firm structured to take advantage of investment opportunities, expects to wrestle with the issue soon. Its ranks are about to reach 100 lawyers. But Chairman Craig Johnson said he expects regulators to clear the way for law firms to offer comprehensive investment programs. The Investment Company Act, he said, “isn’t just catching law firms, but it’s catching others that don’t resemble an investment company.” Some technology companies, like law firms, are also looking to cut their employees into investment opportunities. MoFo’s Marco Adelfio, a partner in Washington, D.C. who specializes in investment company law, is ushering several applications for an SEC exemption on behalf of technology companies. “Investment opportunities are no longer coming to investment banks and venture capitalists only,” Adelfio said. “They’re also coming to operating companies.”

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