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Making Hedge Funds And Investment Advisor Firms Safer For Investors


The Dodd-Frank Act has many moving parts, but some knowns affect small hedge funds and investment advisors. The need for compliance professionals -- along with new systems and process -- has been established. Hedge funds with assets above $100 million usually have compliance professionals on staff. Smaller firms, either in the ramp-up phase or single-strategy funds, will have more frequent interaction with regulators, such as the SEC, under the bill.

What does Dodd-Frank mean for compliance professionals?

Concerns about insider trading rightfully concern the SEC and regulators. Vendor firms, purportedly selling fundamental research, may have been selling inside information to hedge funds. In a stagnant or depressed market, making money for investors and principals concerns hedge funds. Unfortunately, trading on inside information -- details about a public company that aren't known to the company's investors -- is illegal.

According to compliance industry consultants, the SEC wants to know about hedge funds' and advisory firms' 10 largest gains/losses, volume transactions, and any unusual transactions or exceptions to the firms' general trading practices.

Compliance professionals will assist risk management initiatives. Compliance pros also help firms prepare for SEC audits by understanding securities laws and regulations, including:

  • The Securities & Exchange Act of 1933
  • The Securities & Exchange Act of 1934
  • The Securities & Exchange Act of 1940
  • The Insider Trading Act of 1984
  • Rule 10b5-1
  • Securities Fraud Enforcement Act
  • Sarbannes-Oxley Act

Clients want to hire compliance professionals with securities experience. Because of the numbers of small hedge funds across the country -- estimated at more than 5,000 firms in all 50 states -- three or four years' experience at a bank, broker-dealer, advisor, financial planner, insurance company or other financial institution is attractive. Recruiters estimate a relative compensation increase of up to three to four years' for compliance professionals making a move in 2011.

Latest Developments


Insider trading concerns continue to plague regulators and investors. For example, up until the 1980s, inside trading could be executed using derivatives rather than underlying securities, such as common stocks. Loopholes were closed to prevent trading in derivatives going into the 1990s.

New regulation in the aftermath of securities markets' and general economic woes seeks to provide greater protections to investors. The Dodd-Frank Act creates the need for greater due diligence from hedge funds and advisory firms prior to trading on potential inside information.

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