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Regulation and Compliance > Federal Regulation

Registration Could Spell Good Times for Some

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SUMMIT, N.J. (–David Claypoole is enthusiastic about the effects that the Securities and Exchange Commission’s new rule requiring the registration of most hedge funds will have on his firm.

Mr. Claypoole is founder of Parks Legal Placement LLC, which recruits attorneys and other compliance professionals for hedge funds, other financial institutions and law firms.

“I have seen an uptick in the demand for compliance professionals. Clients are coming out of the woodwork!” he said. He anticipates that business will continue to increase as February 2006 approaches. “There’s a significant increase in the amount that compliance officers are being paid also,” he added.

There are many hedge funds to which rule 206(4)-7 has not until now applied, he explained. That’s the rule requiring registered advisers to formalize policies and procedures to address their fiduciary and regulatory obligations. Among other requirements, the rule requires the designation of a single chief compliance officer.

A management firm can’t just single out one of its accountants and say, “you’re the chief compliance officer,” Mr. Claypoole said. The CCO must be a position of sufficient seniority and authority within the organization to compel others to adhere to compliance policies. The rule includes key requirements intended to keep the CCO independent of those he will have to monitor. The officer must serve at the pleasure of the fund’s board and must be selected with the approval of a majority of the board’s independent directors. He must report directly to the fund’s board and must meet with the independent directors in executive session at least once a year. The law also prohibits managers from directly or indirectly taking any action to coerce, manipulate, mislead or fraudulently influence the CCO.

As they’re realizing this, fund managers are coming to Mr. Claypoole, he said, so he can help them find and hire a qualified person for this role.

Mr. Claypoole describes himself as “one of the few people” in the placement industry, “who focus specifically on compliance officers for financial institutions.” He did similar work for the law firm of Cadwalader, Wickersham & Taft LLP earlier in his career.

Kate Dressel, the principal in Strategic Compliance Solutions LLC, St. Croix, U.S. Virgin Islands, also expects a boost in consulting business from registration, but she isn’t as bullish about it as Mr. Claypoole, in part because she doesn’t believe registration, or the compliance officer requirement it triggers, will prove to be especially disruptive to fund managers.

“They won’t have to go out and buy a CCO, although that’s one option,” she said. It might be less burdensome to promote someone in-house to the position, with an appropriate training program.

But might this not be, as critics of the plan such as Federal Reserve chairman Alan Greenspan have suggested, the opening wedge of a movement toward greater regulation, and stricter compliance requirements?

“Maybe it is,” said Ms Dressel, “but I don’t think they’re going to move on anything more immediately, not until the industry settles into the new requirements.” She believes that fund managers ought to be concerned about business-continuity, disaster-recovery issues and is enthusiastic about EVault Inc., Walnut Creek, Calif., a leading provider of solutions in that field.

“They have a wonderful program,” she said, “with a platform that’s similar to Windows, so it’s very easy to use.”

Lisa Roth is the president of another service provider, ComplianceMAX Financial LLC, San Diego, Calif. that will be affected by the registration requirement. Asked whether she thought this rule was the opening volley of additional regulatory burdens, she replied: “I think this is going to be ‘it’ for awhile. And I think it’s enough. It may be more than enough.”

Contact Bob Keane with questions or comments at: [email protected].