Proposed rule may require hedge funds to report own wrongdoing

February 16, 2013 (Press-News.org) Proposed rule may require hedge funds to report own wrongdoing

Article provided by Conforti & Turner, LLP
Visit us at http://www.conforti-turner.com

The Treasury Department's Financial Crimes Enforcement network has proposed a rule that would make it mandatory for hedge funds to self-report wrongdoing in their day-to-day operations. While hedge funds and other corporations are protected from illegal search and seizure and enjoy freedom of speech, they cannot claim Fifth Amendment rights that protect citizens from revealing self-incriminating information.

Proposed rule for hedge fund self-reporting

The proposed rule would expand a provision of Dodd-Frank that requires banks, casinos and other financial institutions to report potential white collar crimes. For example, a bank is required to report suspicious activities like evading taxes, funding terrorist activities or money laundering.

However, when banks report this activity, it almost always involves the behavior of banks' customers, not the behavior of the banks themselves. Since hedge funds are actively involved in the investment decisions of their clients, including hedge funds under the rule would require hedge funds to self-report illegal activity, implicating themselves in crimes.

If made into law, the new rule would apply to hedge funds with over $150 million in assets. These funds would have to register with the Securities and Exchange Commission as investment advisers. Registering with the agency would require hedge funds to report their activities on a regular basis.

Understanding the Fifth Amendment

The Fifth Amendment protects individuals from being forced to provide self-incriminating evidence during a criminal investigation and trial. The protections include the defendant's right not to testify at his or her trial to avoid implicating him or herself in the crime.

The right not to testify is an all-or-nothing protection, meaning that a defendant must decide to not testify at all or to testify and answer all questions. Defendants are not able to pick and choose the questions with which they wish to exercise their Fifth Amendment rights.

While individuals in the United States are able to claim Fifth Amendment rights, historically corporations have not been able to claim protection from self-incrimination. The 1988 Supreme Court case Braswell v. United States established that collective entities are not able to claim Fifth Amendment rights. The reasoning the court gave was that doing so would make it nearly impossible for prosecutors to investigate white collar crimes.

Collective entities include corporations, limited liability companies and partnerships. Since most hedge funds are limited liability companies or partnerships, they are considered collective entities and are not able to claim Fifth Amendment rights. This means that the companies and their employees acting as the companies' custodians cannot resist required reporting under the proposed rule, even it causes the company to implicate itself in a crime.

If passed, the proposed rule has the potential to force hedge funds to turn themselves in to federal regulators if there is even suspicion of wrongdoing until the Braswell v. United States ruling is successfully challenged. To learn more, contact an experienced criminal law attorney.