Presentation at the Canadian Law and Economics Association annual meeting  on September 29, 2013 in Toronto:  

The Impact of Compliance Cost of Financial Regulation ­- Evidence from

the Private Fund Industry


Wulf A. Kaal


A common complaint about financial regulation is that it predominantly affects smaller firms because the cost of compliance brings increasing returns to scale. Many studies have shown that an inverse relationship exists between the size of regulated firms and the per-unit cost of compliance.Anecdotal evidence suggests that Title IV of the Dodd-Frank Act, mandating hedge fund adviser registration and increased disclosures, affects mostly smaller hedge fund advisers. To estimate the effect of Title IV on smaller hedge fund advisers, this study evaluates survey data collected after the registration effective date for hedge fund advisers under Title IV.

The author finds no evidence of an inverse relationship between the size of regulated hedge fund advisers and the per-unit cost of compliance.The size of hedge fund advisers as measured by assets under management (AUM) is associated with the cost of Title IV compliance and other independent variables. These findings are inconsistent with the hypothesis that the cost of financial regulation affects smaller firms more than larger firms. Adviser size may not matter as much for policy adjustments and SEC rule making as the hedge fund industry claimed.


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