Asking Hedge Funds to Turn Themselves In Hedge funds had long operated under the regulatory radar, with few reporting obligations and a well-deserved reputation for secrecy. Now, the government is weighing whether to require them to report any suspicious transactions, like insider information or manipulation of stock prices. Reuters reported that the Financial Crimes Enforcement Network, an office in the Treasury Department known as FinCEN, is considering a rule that would require hedge funds to file reports about possible wrongdoing in their operations. This would effectively require hedge funds to turn themselves in and invite an investigation of their investment activities. The first step in requiring greater disclosure by hedge funds came from the Dodd-Frank Act's mandate that firms with at least $150 million in assets register with the Securities and Exchange Commission as investment advisers and file regular reports. The potential FinCEN rule would build on the new registration requirement by mandating that investment advisers file suspicious activity reports for any transactions that may involve illegal conduct. Once there is unusual activity that warrants investigation at a firm, it must determine within 30 days whether to file a report with FinCEN. Banks, casinos and other financial companies are already required to file these reports if it appears that customers are engaging in potential terrorist financing, tax evasion or money laundering. The form required for securities and futures firms also includes insider trading and market manipulation in its list of suspicious activities. From 2003 to 2011, FinCEN received more than 3,500 reports of potential insider trading and more than 8,500 reports about suspected market manipulation. Reports filed by banks and brokers are usually about suspicious transactions by customers rather than in their own accounts.. Most hedge funds operate differently because they gather funds from investors and then make the decision about where to put the money, so that a suspicious activity report is likely to involve disclosing their own potential misconduct. If there had been a reporting requirement in 2007, would the Galleon Group have turned over information about its co-founder, Raj Rajaratnam, possibly trading on inside information? One would think that the Fifth Amendment's privilege against self-incrimination would protect against having to turn over information that could lead to being prosecuted. For example, the Supreme Court has held that a gambler is not required to disclose the source of illicit winnings and cannot be charged with failing to pay taxes on gambling income because it would violate the Fifth Amendment to require someone to disclose his own illegal activity. While that would appear to be a good basis to refuse to file a suspicious activity report, there is a wrinkle in the law that prevents a hedge fund from avoiding reporting its suspicious trading. Corporations have a number of constitutional rights, including free speech and protection from unreasonable searches. As Mitt Romney famously observed, "Corporations are people, my friend" - except when it comes to the Fifth Amendment privilege, which the Supreme Court has long denied to businesses. In Braswell v. United States, the Supreme Court confirmed the "collective entity" rule that prevents business organizations from claiming the Fifth Amendment to refuse to turn over incriminating information. The court explained that allowing a company to assert the privilege against self-incrimination "would have a detrimental impact on the government's efforts to prosecute white-collar crime, one of the most serious problems confronting law enforcement authorities." Hedge funds are generally organized as limited liability companies or partnerships, so they fall under the collective entity rule. That means the firms cannot refuse to disclose suspicious activity that comes to their attention, even if it means reporting on their own trading. Nor can an employee resist turning over information controlled by the hedge fund, regardless of whether it might lead to charges against that person. The employee would be acting only as a "custodian" of the firm's records, and so can be compelled to respond on behalf of the company because he is not acting in a personal capacity. Hedge funds are likely to resist any proposal by FinCEN that mandates filing suspicious activity reports on the grounds that it imposes too great a burden on them, but I suspect that argument will fall on deaf ears. The government has put a premium on self-reporting by companies because it does not have the resources to police the markets on its own. Reporting potential insider trading and market manipulation by hedge funds would be another source of information that the S.E.C. could use to monitor how these firms trade in the markets. That means hedge funds would have to beef up their internal monitoring even further and face the prospect of blowing the whistle on themselves.