Finance And Law: Hedge-Fund Opportunities For Attorneys
The U.S. Securities and Exchange Commission is the best friend of unemployed attorneys right now.
Contemplating greener pastures.
The U.S. Securities and Exchange Commission is the best friend of unemployed attorneys right now. As part of its mandate to help deal with systemic risk in the financial system post-2008, the SEC has adopted a variety of new mandates under the powers of the Dodd-Frank Act. For the alternative-investments industry, the most important changes on this front are the new registration requirements related to Title IV, and the SEC’s muscular approach to compliance issues that have long plagued many funds in the industry. Those new regulations are particularly problematic for hedge funds and private equity firms. This is where the attorneys come in.
I previously worked for a top 10 hedge fund, and I currently work regularly on a consulting basis with the SEC as well as various hedge funds. These experiences form the basis of my opinions below. As in any industry, some hedge-fund firms have governance and compliance issues, while others do not. Statements below are not intended to refer to any specific fund.
Law Firm Business Development Is More Than Relationship Building
When I first started working in the hedge fund industry roughly 15 years ago, funds were often considerably leaner than they are today. My first hedge fund job was with a $12 billion fund that had a total of five employees. That level of employee-to-AUM ratio would never be sustainable today. These days the SEC has very specific expectations regarding compliance and behavior at hedge funds. In work I have done with the agency, it is clear that the SEC expects a robust set of policies that will protect investors and mitigate any potential conflicts of interest. Attorneys who are well-versed in finance are often well-suited to serve in such compliance capacities.
Compliance within hedge funds is particularly important because of a variety of types of challenges that are common at many funds. These include side-by-side management, cherry picking of trades, discrepancies in onshore versus offshore fund treatment, side letters, selective redemption, failure to properly disclose fees, improper asset valuation, and a host of other concerns. A separate column could be written about each of these issues on their own, but suffice it to say that there is ample fodder for the SEC to examine at many funds, and that creates a risk-mitigation need that attorneys can help fulfill in a compliance role.
While many areas of the law are struggling as technology advances, hedge funds and private-equity firms are a new area that is emerging. Numerous firms in both industry verticals have found themselves the target of the SEC inquiries, sometimes resulting in multimillion-dollar fines. In 2015, the SEC conducted 807 investigations resulting in enforcement actions and collected $4.2 billion in fines. In every case, an attorney could have helped to mitigate those issues had they been qualified to help ameliorate compliance issues at hedge funds.
Fortunately for unemployed attorneys, this opportunity shows no signs of abating. The SEC is showing every intention of continuing its aggressive pursuit of conflicts within the alternative-investments space. The hedge fund industry is also expanding rapidly. Hedge fund assets under management (AUM), a common metric for size within the space, rose from roughly $1.7 trillion in 2009 to $3.1 trillion today. In other words, the industry is expanding at the same time that the new regulatory regime is creating greater demand for compliance services. Unemployed attorneys (or those tired of working long hours and looking for greener pastures) should be cheering and preparing their résumés.
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Michael McDonald is an assistant professor of finance at Fairfield University in Connecticut. He holds a PhD in finance. Michael consults extensively with organizations ranging from Fortune 500 companies to start-up businesses on financial matters through Morning Investments Consulting. Michael has served as an expert witness in legal disputes, and is an arbitrator with the Financial Industry National Regulatory Authority (FINRA). Michael can be reached at [email protected].
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