US Financial Reform: Big Changes for Small-tier Managers

Now that US financial reform in the guise of the Dodd-Frank Wall Street Reform and Consumer Protection Act has become law, some of the smallest members of the financial industry are facing one of the biggest impacts of the new regulation.
Namely, hedge fund and investment managers with less than $100 million in assets will have to comply with US state regulators. Questions of what technological and operational changes will be necessary for compliance come immediately to mind, and will depend wholly on the particular state in which a manager has registered.
Aite Group senior analyst Denise Valentine, discussing this issue with me recently, also noted that many state regulators may prove just as inexperienced and under-resourced when it comes to enforcing the new law as smaller fund managers are regarding compliance issues.
"Someone called me this morning wanting to know which state was going to handle this best, and I really can't answer that," Valentine reported. "We can't make any assumptions. It's about resources and the economy-think of the education curve here."
But state-by-state industry regulation is hardly a new concept; in particular, fund managers and their state regulators can look to the insurance industry as a reference point-in terms of compliance, and potentially of which jurisdictions may provide more "business-friendly" environments for buy-side and hedge funds, and which states carry bigger sticks and smaller carrots.
"It's not like states and managers will be like babes in the woods-they'll have some points of reference," said the analyst. "In terms of technology this will be mostly about audit software."
Of course, compliance, reporting and audit technology vendors have no doubt also begun contemplating the effects of these new regulations. Smaller-tier managers previously off the market for such technologies will soon have to open their wallets, as most of these firms lack the resources to develop their own compliance infrastructures.
As the ramifications of these new requirements become more concrete, we'll be keeping track of developments both online and in the pages of Waters. Stay tuned.

Stewart Eisenhart

Deputy Editor, Buy Side

Waters