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New Rule Could Turn Hedge Funds Into Fraud Informers



The rule being crafted by FinCEN, part of the Treasury Department, would force the $2 trillion hedge fund industry to police itself in much the same way banks, brokerages and mutual funds are required to do by filing suspicious activity reports (SARs) with the unit.

Reuters news reports U.S. financial regulators are pushing to turn hedge funds into informers on the white collar crime beat.

The Financial Crimes Enforcement Network (FinCEN) is working on a rule that would require U.S. hedge funds to file formal reports notifying U.S. authorities of any suspicious trading by employees or outside parties, the regulatory agency said.

The rule being crafted by FinCEN, part of the Treasury Department, would force the $2 trillion hedge fund industry to police itself in much the same way banks, brokerages and mutual funds are required to do by filing suspicious activity reports (SARs) with the unit.

But the rule, which would cover activities such as insider trading and money laundering, will force funds to spend more money on building out their compliance and legal departments.

Hedge fund lawyer Ron Geffner said he expects many in the industry will oppose the new rule as being both intrusive and costly.

The measure also could heighten tensions in the hyper-aggressive hedge fund world as it could put firms and their employees in a position to snitch on their competitors.

FinCEN’s move is not entirely new. In 2003, the agency began looking at imposing a SARs requirement on hedge funds, but eventually withdrew a proposed rule in 2008 after deciding it was too hard to define a hedge fund and enforce the requirement.

The agency now believes the new mandate in the Dodd-Frank financial reform law that requires U.S. hedge funds to register as investment advisers gives it the ability to require hedge funds file SARs.

Many hedge funds maintain relatively small compliance and legal departments, often preferring to hire outside contractors to perform that work.

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