Financial Reform Forces Transformation on Alternative Investments

The alternative investment management business will undergo major changes, thanks to passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Although no specific rules have yet been written, the Wall Street reform law could impact investment returns, leverage and risk-taking, innovation and transparency of private equity, real estate and hedge fund managers.

“This will change the way alternative investment businesses are run.  They will have to use more capital and less leverage and less risk-taking,” said Henry Kahn, partner in the law firm Hogan Lovells.  “This fundamentally changes what types of businesses financial services are in.”  The large financial services firms now must choose which lines of alternatives business they will keep and how they will be set up.  Smaller firms might have to deal with Securities and Exchange Commission (SEC) registration for the first time.  This will give the world – and regulators – an inside look at their investment strategies, which they do not welcome.

Investors are concerned that increased transparency and greater oversight by the SEC will make investment managers less willing to be innovative because their proprietary strategies will be open to review by regulators and their competitors.  According to Kahn, “Some large institutional clients are concerned that regulations will put additional costs on medium-size advisers and inhibit beneficial innovation in investing.”