Hedge Fund Registration: How Much Will it Cost?
Registration of all the unregistered hedge fund investment advisers under the financial reform package…. how much will this cost?
That is a question that is puzzling both law-makers and the industry. For hedge funds, it is a personal question: how much will registration cost me? For law-makers and industry representatives, the question of course is a macro one for the industry as a whole.
To break it down on an individual level, and then aggregate up industry-wide, let’s look at the components of cost for a fund adviser that will be required to register under the proposed Dodd bill as it currently stands today (May 13, 2010). Here’s a look at categories of costs that will need to be covered. We won’t attempt to assign numbers at this point.
1. Cost of preparing the registration forms (the Form ADV): Do it yourself? Outsource to a law firm or consultant? Costs depend on degree of complexity of the fund group, and are not necessarily related to assets under management. In addition, there are on-going costs in this category related to the updating and annual amendments to these forms, as well as distribution costs.
2. Cost of hiring a Chief Compliance Officer: Add a new person to your payroll? Outsource the role? Assign it to someone within the organization as an “extra” duty? These are the choices, and costs vary accordingly. And of course, this is an on-going expense.
3. Cost of Preparing and Implementing Compliance Program: This will be a big ticket item. First there’s the cost of actually writing a compliance manual. Again, do it yourself? Outsource to a consultant or law firm? Then, there’s the cost of implementing the program, which is the real heart of the matter. This is a cost that is not so easily quantifiable. How much time will it take? How many people? What would they have been doing if they weren’t doing this?
4. Cost of Record-Keeping and Reporting Data to the Government: The Dodd bill contains requirements to report additional data to the SEC (or other designated agency). Costs here are associated with time spent to generate that data, as well as costs of reporting (EDGAR, etc). There are details here that are being left to be determined by the SEC, so it is early to be able to fill in the blanks in this category. Record-keeping in advisers that are currently unregistered will typically need to be improved, probably resulting in some incremental costs to systems and expended time.
5. Cost associated with Exams by the SEC: These can range from extensive on-site in-depth reviews, to a couple of hours work for the CCO to prepare a written response. Costs in this category vary accordingly.
6. Cost Associated with Changes in Service Providers: Some hedge fund advisers may find that they have to switch auditors or custodians in order to comply with the requirements of the law. Lots more expense in this category if that becomes necessary.
7. Lost Investors: The Dodd bill calls for the possible implementation of a higher net worth standard for eligible investors, obviously narrowing the universe of possible investors.
8. State Registration? The Dodd bill raises the suggestion that advisers that aren’t federally registered with the SEC will instead somehow be forced to register with their state. State regulations vary, but many roughly follow the federal registration, so we can assume for sake of discussion that costs are same as above.
Total tab for an individual hedge fund adviser?? As is evidenced above, that number is going to vary widely. Each adviser would have to assess their costs in each category, and add it up for their personal total.
Industry-wide total?? This depends on knowing a number that no one really has a handle on at this point: the number of advisers that are currently not registered that will need to be. Perhaps we will only know this number after the fact, as hedge funds are coaxed out of unregulated territory.
Link to the Dodd Bill: http://banking.senate.gov/public/_files/ChairmansMark31510AYO10306_xmlFinancialReformLegislationBill.pdf
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