U.S. Treasury Secretary Timothy Geithner's testimony yesterday before the House Financial Services Committee summarized the Obama Administration's priorities for regulatory reform to the U.S. financial system. Most importantly to private fund managers, Mr. Geithner recommended that all advisers to private funds over an unspecified threshold be required to register with the Securities and Exchange Commission. Mr. Geithner made it clear in his testimony that private equity and venture capital fund advisers should not be excluded, as has previously been the case, from the registration requirements.
In addition, Mr. Geithner stated that the information reported to the Securities and Exchange Commission should include (on a confidential basis) "information necessary to assess whether the fund or fund family is so large or highly leveraged that it poses a threat to financial stability". Some of the factors he suggested that should be used in determining whether a private fund could pose a threat to U.S. financial stability included: (i) the financial system's interdependence with the firm, (ii) the firm's size, (iii) the amount of leverage used by the firm and (iv) the firm's importance as a source of credit for businesses and households. Mr. Geithner suggested that if a private fund firm was determined to be a systemically important then "robust" capital requirements should be imposed on such a firm.
Importantly, Mr. Geithner also stated that advisers to private funds should be subject to "investor and counterparty disclosure requirements". This presumably means that funds would need disclose their investors and trading partners.
The Chairman of the Securities and Exchange Commission, Mary Schapiro, also testified yesterday before the Senate Committee on Banking. Similar to Mr. Geithner's testimony, Chairman Schapiro stated that the SEC is considering asking Congress for legislation that would require the registration of hedge funds and "possibly the hedge funds themselves." This is similar to existing Congressional proposals to require registration of either the advisers to hedge funds and/or the funds that they advise. She also stated that they were studying whether to ask for legislation to break down the different statutory regimes that apply to advisers and broker dealers. Finally, she stated that they were preparing a proposal that would require investment advisers with custody of client assets to undergo annual third party unannounced audits. This proposal is obviously a response to the issues raised by the Madoff custody failures.
We will continue to monitor these and any new proposals that are relevant to our private fund clients.
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