Private equity firms and hedge funds with assets under management greater than or equal to $150 million are required to register with the Securities and Exchange Commission (SEC) under the terms of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law July 11, 2010.
The Dodd-Frank Act is enormous in scope, having at least 398 separate requirements and mandating dozens of studies. Roughly, one-third of these requirements have been reduced to rules, with another one-third reduced to proposed rules and the remaining one-third awaiting the attention of regulators. To put this in perspective, the Sarbanes-Oxley Act of 2002 required the SEC to adopt a comparatively miniscule 16 rules and conduct less than 10 studies. Sarbanes-Oxley was widely regarded to be the most broadly sweeping legislation affecting corporations and public accounting since the 1933-34 securities acts.
A Forbes article from July 2003, which recapped the bill’s ramifications, suggested that Sarbanes-Oxley doubled the cost of compliance for the firms affected. One can only imagine the final financial impact of Dodd-Frank. It is premature to attempt to place a number on the cost. Suffice it to say, what we learned from Sarbanes-Oxley, implies the costs will be enormous. A significant portion of these costs will take the form of salaries for the host of lawyers and cadre of Information Technology specialists needed to ensure compliance and create systems that meet regulatory requirements.
Attorneys with regulatory experience and particularly attorneys with Dodd-Frank expertise are in high demand as hedge funds and private equity firms struggle with the regulatory onslaught. Prior to Dodd-Frank, the chief financial officer or chief operations officer frequently shouldered the compliance role. This is no longer a practical option when dealing with reams of complex regulations. Many firms are creating in-house compliance teams and attorneys with regulatory experience will play an integral role. An online search revealed more than thirty positions seeking lawyers with regulatory and/or Dodd-Frank experience. Former Federal Reserve chairperson Alan Greenspan, an outspoken critic of Dodd-Frank, stated,
”It is going to take years to address the unprecedented complexity of final rule-making required in the massive Dodd-Frank bill.”
Yes, years to be sure and the parade of lawyers the regulatory burden demands. Some firms have created their first General Counsel positions in the wake of Dodd-Frank.
If the SEC continues to spew new regulations at its current pace, it is all but certain that financial services firms in general, and hedge fund and private equity firms in particular, will be beefing up their legal and compliance departments. In fact, many smaller hedge funds have brought full-time compliance officers on board when previously they had no such position in the firm. There are many Dodd-Frank regulations affecting hedge funds and private equity firms that have yet to take effect, which strongly suggests a rosy employment outlook for attorneys with the right credentials.
Lawyers with the appropriate background and expertise find themselves in a uniquely favorable situation. Hedge fund and private equity firms can always opt to utilize outside counsel to meet compliance needs, but in choosing that option they continue to create employment opportunities by forcing law firms to hire appropriate talent.
That said, many hedge fund and private equity firms will choose to create internal compliance teams not only in an effort to reduce the expense engendered by billing hours, but also to serve the changing business model. Increasingly, hedge fund and private equity firms are asking the compliance questions first and making the business decisions second.
This change, in concert with the flood of new regulations, may make it more cost effective for hedge fund and private equity firms to have the necessary expertise in-house.