Recent regulations unearthing the legal backgrounds of those who sell private securities could lead to nervousness and layoffs among hedge fund and private equity executives, according to securities lawyers.

The major 2010 Dodd-Frank financial reforms required the Securities and Exchange Commission to adopt so-called "bad actor" provisions, which bar those convicted of financial crimes from selling private securities. The commission adopted these rules earlier in July.

Although only crimes committed after September 2013 will automatically disqualify private fundraisers, the provision still requires investment executives to at least disclose past convictions to investors.

But unsettling disclosures are virtually as effective as an outright ban in scaring away investors, according to Brian Korn, a securities attorney with Pepper Hamilton LLP.

Private investment firms will be very concerned about past convictions, whether they involve settlements, plea deals, misdemeanors or felonies, seeing them as a liability for a firm’s reputation and ability to fundraise, he said.

“Because there’s a disclosure obligation ... it may be a result of these rules certain things come to light that weren’t already known by the employer,” Korn told the International Business Times.

“People have the potential to lose their jobs,” he said. For those employed in the private securities industry, he said, “It could create a lot of very uncomfortable situations. ... It’s fairly possible you’re going to turn up people who are going to have to leave their employment.”

According to Korn, hedge funds, private equity funds and other private investment vehicles are likely to start polling the typically dozen or two-dozen employees involved in any private investment offering, probing their past.

Until now, private investment firms have enjoyed broad discretion over what to disclose about the pasts of certain employees, Korn said. He noted the main exception of broker-dealers registered with the Financial Industry Regulatory Authority, or FINRA, who are obliged to report financial misconduct.

“Firms up until now have had the choice of concluding that, whatever this person did, it wasn’t their fault -- they were dragged into a situation, or they were on a board, and other members of the board committed certain malfeasances,” Korn said.

Jedd Wider, a securities attorney with Morgan, Lewis and Bockius LLP who works with private funds, said that heightened due diligence and job candidate screening by private funds are two immediate effects of the regulatory changes.

“They’re going to have to implement some sort of diligence process,” Wider said of private funds. “You’ll probably see mutual representations and warranties regarding the absence of a bad actor disqualification and likewise begin to see those in employment agreements.”

Wider noted that the incidents covered under the new SEC rules are fairly broad, requiring people to report past court injunctions and restraining orders related to securities, false filings or disciplinary orders, besides serious convictions.

“Employers are going to have to look very carefully to broaden the scope of the underlying comfort they need to obtain” about new hires and their legal history, Wider said.

New rules will require examining existing employees as well as prospective employees, since unfavorable disclosures can be just as damaging as disqualifications, Wider said.

Other securities lawyers doubted that much past wrongdoing by private investment managers existed, even as they acknowledged the relatively light regulation such firms previously faced.

“They certainly were subject to much less oversight,” Sara Hanks, a securities attorney who used to work for the SEC, said of private investment groups. “That’s true. But does that mean a lot of bad guys sneaked in? I don’t know. It’s very hard to say and very hard to measure.

“I have no reason to suppose that the private placement field is any worse than any other field in securities,” Hanks said. “It’s too early to tell.”

Korn, too, said it is unclear how much wrongdoing disclosure rules will unearth but maintained the new requirements could rattle the industry nonetheless.

For Wider, private funds are no more prone to fraud than public offerings. But a recent string of high-profile cases involving private securities fraud have boosted a false perception among the public, politicians and regulators that private funds are “rampant” with fraud, he said.

Various industry groups have lobbied for slightly weaker investor protections in public comments to the SEC.

An October 2011 letter from American Bar Association representatives urged for a disclosure, rather than automatic disqualification, approach to bad actors.

“In some circumstances, issuers and market participants can proactively adjust their management or staffing to address investor protection concerns,” said the letter, hinting at the personnel changes private funds may see in coming months.