Funds, brokers face U.S. regulatory tsunami: report

WASHINGTON (Reuters) - The biggest regulatory changes since the 1930s are bearing down on the U.S. securities and investment industry and many firms are ill-prepared, says a new study by research firm The Tower Group.

From derivatives and hedge funds to capital standards and short selling, the range of issues facing the sector "encompasses almost every line of business and every functional area," says Tower senior research director Dushyant Shahrawat.

Business models will adapt or perish in the new order, which regulators aim to make more transparent, accountable and globally consistent, says the report released on Tuesday.

Information technology will play a big role for firms in complying with regulators' demands for more disclosure, closer supervision and better asset valuation methods, as well as faster and more centralized clearing and settlement, it says.

"The greatest regulatory attention today is on OTC (over-the-counter) derivatives, structured products, and securitized assets, especially related to improving disclosure, transparency, and valuation of these instruments and the markets they operate in," Shahrawat says.

"Firms can expect to be asked to provide much greater reporting of their involvement in the listed and OTC derivatives markets as well as in structured products."

Hedge funds are under scrutiny and are likely to face new registration and other regulatory requirements. Some hedge fund firms began preparing for this three years ago when it first appeared that tighter oversight was on the way.

But Tower estimates that eight of 10 firms "have yet to start making the required changes. Much of this change will mean hiring more staff in three main areas: IT (information technology) and operations, risk and compliance, and client/regulatory reporting."

Staffing up the back shop will mean higher internal operating costs at a time when many hedge funds can ill afford it, with investment returns down and client redemptions up.

"Indeed, the regulatory pressure may itself cause some firms to close shop as they deem staying in business uneconomic because of current financial conditions and the additional regulatory expense," he says.

"Hedge fund registration will mean a sea change for this business, bringing in greater scrutiny, more transparency, and clarity," he says.

(Reporting by Kevin Drawbaugh, Editing by Chizu Nomiyama)