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The partners of Wilson Sonsini Goodrich & Rosati have been playing the stock market with stakes in clients since before Bill Gates or Steve Jobs hacked their first lines of computer code. Last year, possibly a high-water mark, their investment fund returned $200 million. Any firm grossing that amount in legal fees would have ranked 57th in last year’s Am Law 100. Now the Palo Alto, Calif., firm is betting it’s enough money to grab the attention of its associates, who continue to churn at an alarming rate: 81 left the firm in 2000. To address that retention problem, Wilson is opening up its investment fund to all associates. It may be the first firm in the country to do so, but hometown rival Cooley Godward is right behind. Both firms are currently cutting through the inevitable Securities and Exchange Commission red tape that is triggered by the larger number of investors. This strategy raises a number of questions. Is the memory of last year’s monster return enough to keep the associates? Or has the Nasdaq tech-stock crash diminished the value of the investment opportunity in their eyes? And why worry about losing associates to startups, now that the luster is off their formerly lucrative equity packages? No one pretends to know the answers, but the mood seems to be, “It can’t hurt.” Retention isn’t the only thing on Wilson’s agenda. Another reason for the move is fairness, according to name partner and head of the firm’s investment fund Mario Rosati. Wilson’s investment fund dates back to the 1960s, and it’s been tweaked over the years to ensure a more equitable distribution. In the fund’s early days, the partner who originated the investment opportunity got the lion’s share of the proceeds, a policy that benefited corporate partners working with emerging companies at the expense of litigators and other practice groups. The fund’s structure was changed over the years to ensure wider distribution among the partners. The most recent move started with partners who felt it was only fair to include associates, says Rosati. Enter the SEC. An investment fund like Wilson’s is known, in SEC parlance, as an Employees’ Securities Company (ESC). According to the Investment Company Act of 1940, if more than 100 people participate in an ESC, it’s a mutual fund, and all sorts of regulatory headaches ensue. “Those regulations are very severe,” says Robert Rosenblum, a 1940 Act specialist with Kirkpatrick & Lockhart in Washington, D.C. “A lot of bad things happen when they’re applied.” Those bad things include onerous reporting and disclosure requirements. The inclusion of Wilson’s associates would put its fund participants over 100; so, in order to avoid the resulting regulatory hassles, the firm is seeking an exemption from the SEC. Kirkpatrick has been hired to handle the application. According to SEC rules, an applicant is permitted to open its Employees’ Securities Company once the application is filed; formal approval isn’t necessary. As a matter of practice, however, an ESC usually isn’t opened until the major issues are worked out with the SEC. Wilson crossed that threshold in January, when it reached agreement with the SEC on rules designed to protect associates from the relatively risky nature of the fund’s investments. “The rules are designed to ensure a minimum level of sophistication among the investors,” says Donna Petkanics, managing director of operations for Wilson. Under the projected rules, first-, second-, and third-year associates can invest 5 percent of their salary in the fund; more senior associates can invest 10 percent. The rules also mandate reporting and education requirements for the firm. (Unfortunately, for those thinking of investing, only Wilson insiders are eligible.) Although Wilson is the first firm to allow all associates to participate, the SEC has granted similar exemptions to law firms in the past. In 1996 Boston’s Ropes & Gray got an SEC exemption that permitted participation by associates with five years’ experience and a minimum level of compensation. Nonetheless, the firm didn’t take advantage of the exemption until January. If Wilson and Cooley are right about the continuing appeal of client-equity stakes, then cutting associates in on the action could become another point of recruiting differentiation between the Valley and everywhere else. Then again, maybe this is the start of another race to sweeten first-year offers in several other markets. Either way, big firms are sure to watch as it unfolds. As we reported last summer, an increasing number of firms are taking equity positions with their clients, a trend that has been noticed by the SEC. “In the last two years, we’ve had an enormous number of applications,” says Nadya Roytblat of the SEC’s division of investment management. The tech-stock crash is, of course, the wild card in this recruiting and retention effort. If IPOs remain on hold and stocks stay depressed, fewer lawyers will be leaving for stock options. On the other hand, the crash makes the investment opportunity less compelling, because future returns are unlikely to match Wilson’s $200 million windfall. Despite that, the firms believe that opening their investment funds will have an effect. “There was a lot more interest when the market was booming, but our associates are still interested in making investments,” says Cooley’s Lee Benton. At this point, however, with no hard data to rely on, it’s just a matter of intuition. “On an anecdotal level, my sense is, it still matters,” says consultant Ward Bower of Altman Weil, Inc., of Newtown Square, Pa. At Ropes & Gray, the effect on recruiting and retention is unclear. “My sense is that the associates appreciate the fund, but they haven’t seen any returns yet, so it’s hard to judge the level of enthusiasm,” says Alfred Rose, a Ropes & Gray partner responsible for administering the fund. He expects that the Silicon Valley firms’ new economy-heavy investments will show results more quickly than Ropes’ more diverse allocation, so the effect on retention will be more readily apparent. Many partners in the Silicon Valley firms are relentlessly optimistic about the future of their investments. “If you look at where the Nasdaq is today versus 10-15 years ago, you’ve got to believe there are opportunities out there. These things run in cycles,” says Issac Vaughn, Wilson’s lateral hiring partner. Whether this latest perk works will depend on how many associates share that outlook.

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