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How To Turn a Hedge Fund Into an Informer

The Financial Crimes Enforcement Network is working on a rule that could force hedge funds to blow the whistle on themselves.

Hedge funds may - wait for it - finally be required to report suspicious transactions, like insider information and manipulation of stock prices by employees or outside parties.

Banks, brokerages and mutual funds are already required to file reports if it seems that their clients are involved in possibly financing terrorism, tax evasion or money laundering, as well as insider trading and market manipulation. In fact, between 2003 to 2011, FinCEN received more than 3,500 reports of potential insider trading and more than 8,500 reports about suspected market manipulation, the New York Times notes.

So what is the brouhaha about hedge funds? After all, if they had been forced to report suspicious activity, wouldn’t Galleon have reported Raj Rajaratnam before he was accused of being at the helm of the largest hedge fund insider trading case in United States history?

Well, here’s the difference: aside from the fact that hedge funds generally operate in great secrecy, reports filed by banks and brokers are usually about suspicious activity by clients rather than in their own accounts, the NYT points out.

But since most hedge funds gather money from investors and decide where to invest it, any suspicious activity report is likely to involve disclosing their own potential misconduct, rather than that of others.

The Times notes that however reluctant they may be to disclose information about themselves, hedge funds – unlike private citizens - will not be able to cite the Fifth Amendment’s privilege against self-incrimination as a reason for not reporting suspicious activity.

The new rule also could heighten tensions in the super competitive hedge fund world, Reuters asserts, as it could put firms and their employees in a position to blow the whistle on their rivals.

In any event, full disclosure for hedge funds won’t be happening overnight: they are likely to resist having to file suspicious activity reports on the grounds that it imposes too great a burden on them, the NYT suggests.

Still, given the SEC’s strong drive to focus on white collar crime, hedge funds might ultimately have to click their heels together and comply. And that means spending more money on technology to ramp up their internal monitoring and boost their legal departments while facing the unprecedented – but ethically sound - prospect of blowing the whistle on themselves.

Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio

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