Hedge funds face suspicious activity reporting requirement


Banks and brokerages have grown accustomed to laws requiring them to report suspicious financial activity, an area in which they have been forced over the years to invest heavily.

Are hedge funds about to be hit with similar requirements?

Reuters reports 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 rule being crafted by FinCEN, part of the Treasury Department, would force the $2.2 trillion hedge fund industry to police itself in ways similar to banks by filing suspicious activity reports (SARs) regularly. A proposed self-reporting rule for the hedge fund industry could be released for comment in the first half of this year.

Compliance will not be easy nor cheap. Then again, hedge funds have grown accustomed to more regulations, such as Form PF and the more detailed Form ADV Part II, but this one could well prove more onerous. The systems work would be costly, and more staff would definitely be required.

The idea of hiring people to essentially monitor employees, including portfolio managers, and customers may not sit well. This one might generate opposition from the industry, depending on the details.

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