Stewart Eisenhart: Poaching from the SEC

Reports of the hedge fund industry’s demise at the hands of overbearing regulators appear to be greatly exaggerated. Despite years-long saber-rattling from the Securities and Exchange Commission (SEC), the Obama Administration, the US Congress and European Union regulators, hedge fund managers have more or less regained their footing following the credit crisis.

By one indicator, the Dow Jones Credit Suisse hedge fund index, the industry has not only recovered but surpassed its pre-crisis benchmark: The index has gone up more than 1 percentage point from its previous high-water mark in mid-2008, recovering from a nearly 20-percent decline during the intervening months.

For those managers that have weathered the storm, things are looking up. Even though US and European regulators have established new requirements such as SEC registration and greater transparency, such rules could have been much more prescriptive and cumbersome than their finalized iterations. Despite highly vocal warnings and protestations by the Managed Funds Association, the Alternative Investment Management Association and other industry trade groups about how too heavy a regulatory reaction to hedge funds’ opaque operating habits would wreck the industry, managers have had more than four years now to gear up for SEC registration, and calls for more transparency have come just as strongly from institutional and pension fund investors as from governments.

Shrewd Moves
Much has been made of requirements for hedge fund managers to hire or appoint chief compliance officers under new regulatory regimes, but in this instance some industry players have found a rather ingenious way around that hurdle—poaching compliance staff directly from regulatory bodies.

According to the website Compliancereporter.com, two hedge funds have recently poached compliance staffers from the SEC’s New York office. First, Hudson Bay Capital Management nabbed Scott Black, assistant director of enforcement at the SEC’s New York division, as its new general counsel and chief compliance officer; Black stated to the website that the hiring “shows Hudson Bay management’s commitment to compliance.”

Second, Fortress Investment Group recently hired Andrew Walsh, an accountant at the regulator’s New York examination office, to work on compliance issues.
Compliancereporter.com also notes that former SEC examiner Martin Towey, now an executive at Fortress, has joined hedge fund Fir Tree Partners as chief compliance officer.

The ability of deeper-pocketed hedge fund managers to lure staff away from the regulators targeting their operations, while certainly not a new development, is nonetheless telling in a period in which power has supposedly shifted to those regulators’ advantage. If the moves by Fortress and Hudson Bay foretell a wider trend of SEC personnel jumping ship to join the ranks of the industry they are meant to police, that speaks to the if-you-can’t-beat-’em-join-’em problem hindering effective securities law enforcement at the Commission throughout most of the past decade. During the Bush Administration, observers—including yours truly—lamented the SEC’s lack of resources necessary to ensure proper and responsible market conduct, as well as its obvious pro-business slant that prevented any meaningful regulatory oversight of firms that went on to assist in wrecking the global economy.

Now with the onset of the Age of Compliance, that dynamic may not have changed significantly. How various regulatory developments—SEC registration, short-selling, high-frequency trading curbs, and centralized derivatives exchanges to name a few—will ultimately impact hedge funds has yet to fully play out, but for now managers remain in the driver’s seat. As long as they have the resources to win over staff from the regulators policing them, managers will retain the upper hand when it comes to compliance.

Indeed, who better to navigate the regulatory requirements facing managers than those who had a hand crafting and enforcing those requirements in the first place?