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New Rules Create Jobs for Attorneys at Hedge Funds
New York Law Journal
Lawyers with Dodd-Frank Act and regulatory expertise are being wooed by private equity firms and hedge funds in need of an in-house compliance team.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010, requires private equity and hedge funds to register with the Securities and Exchange Commission if they have at least $150 million in assets under management.
In addition, scores of regulations have been issued under Dodd-Frank and there are more to come. Only one-third of the 398 requirements under Dodd-Frank have been written into rules, according to a Davis Polk & Wardwell analysis. Another third have been written into proposed rules while the final third have yet to be proposed.
"If the pace of new regulation continues the way we've seen in the last year or two, I think more and more [financial services] firms will be adding to their legal and compliance departments," said Adam Reback, a chief compliance officer at hedge fund J. Goldman & Co. "It means more filings, it means more leg work, it means more monitoring. You just need more people to get it done" and more resources.
The SEC reported in October that about 1,500 advisers to hedge funds and other private funds had registered with the agency since Dodd-Frank made it mandatory.
As investment entities "saw these regulations, they started hiring," said Nora Jordan, head of Davis Polk's investment management group, who said she has seen full-time compliance officers with smaller hedge funds that didn't have these positions before.
"There are quite a number of other Dodd-Frank regs that will impact hedge and PE managers that haven't gone into effect yet, but none as far-reaching as the registration rule," said Marc Elovitz, a Schulte Roth & Zabel partner and chair of the firm's investment management regulatory and compliance group.
Among the rules not yet implemented under Dodd-Frank are those relating to record-keeping and certain short-sale disclosures, Elovitz said.
Registration requires designating a chief compliance officer as well as implementing written policies and procedures, maintaining books and records, filing annual updates, and implementing a code of ethics, lawyers said.
Hedge funds and private equity firms must implement and test compliance procedures. While that can be handled by outside counsel, Jordan said, these firms "also need someone internally who knows where the weak points are and can tailor them and test them on a regular basis."
Before Dodd-Frank, many firms would simply name their CFO or COO as their chief compliance officer, said Jordan, but given the quantity and sophistication of the work involved, "very few are willing to take on that role."
Some equity firms have used the compliance opportunity to create their first general counsel position, Elovitz said.
Some of these positions are being filled by experienced lawyers from financial institutions that have contracted, Elovitz said.
"There are lawyers who have gone from financial institutions into hedge funds and private equity firms," he said, while others are coming from government and law firms.
Jordan said clients have tapped several Davis Polk associates. In the last three years, eight of the 10 associates who left Davis Polk's investment management group went to hedge funds.
Many of them landed in the legal department, Jordan said, and some might have a dual role in compliance.
The explanation for increased demand for attorneys in the compliance role is two-fold, Reback said. The first is the continual increase of regulations, and second, the culture of firms has shifted to asking compliance questions first before making business decisions rather than jumping into a decision, he said.
"The role of compliance in funds has evolved from a back office function to more of a middle or front office function" requiring involvement with the investment staff, Reback said.
The regulations have led to more interaction between hedge funds and outside counsel, he said, leading financial firms to pay law firms more in billable hours.
Hiring full-time compliance and legal advisers makes good business sense, said Steven Nadel, a partner in Seward & Kissel's investment management group.
Asset allocators, such as pension funds, "have become more sophisticated and expect more from the infrastructure of the firms they're investing in. They expect there to be some legal type or compliance type filling a role in the firm," Nadel said.
Newly registered firms are also subject to SEC inspections, generally within two years, sometimes followed by "deficiency letters" that detail weaknesses, Jordan said.
"You want to have a lawyer in place to help you prepare for these exams," Jordan said. "Those letters have always generated a re-look at whether the procedures and staffing is efficient."
Gary Watkins, a partner at the ACA Compliance Group, a regulatory compliance consulting firm, said he foresees additional legal hiring by financial entities.
"Increased regulation leads to more responsibilities and in turn firms may look to increase their resources by hiring additional compliance personnel," Watkins said, noting that a majority of people hired into compliance at investment adviser firms are attorneys.
Hedge fund legal recruiter David Claypoole at Parks Legal Placement predicted that over the next 18 months "there is going to be a strong demand for legal and compliance positions at asset managers."
Dimitri Mastrocola, a recruiter who heads the financial services legal search practice at Major Lindsey & Africa, said up to half of the New York searches Major Lindsey has performed in 2012 on behalf of financial services organizations have a compliance focus, either seeking a compliance officer or CCO, general counsel, or staff attorney with compliance background. It wasn't like this a few years ago, he said.
At larger funds with complex investment strategies, a CCO who is an attorney can earn from $750,000 to $1 million, including base pay and bonus, Mastrocola said. A senior associate going in-house to a hedge fund or private equity firm could expect total compensation to be similar as under a law firm, in the $250,000 to $400,000 range, Mastrocola said.
David Sobel, a CCO at broker-dealer Abel/Noser Corp. and former private practice attorney, said as the web of regulations has become more complex, his workload has expanded by about 25 percent.
Walter Zebrowski, chairman of the nonprofit Regulatory Compliance Association, said the new regulations will "translate to tremendous amounts of employment opportunities" for young lawyers and transitioning professionals if they have the right expertise.
"In the last few years, compliance has become a new profession" within financial services, noted Zebrowski, an attorney and CPA who runs an alternative investment firm.