On July 15, the Obama administration announced proposed
legislation entitled the "Private Fund Investment Advisers
Registration Act of 2009" that would amend the Investment
Advisers Act of 1940 (the "Advisers Act") in a number of
ways, with the effect of requiring all U.S.-based investment
advisers with more than $30 million in assets under management to
register with the SEC. This would affect managers of hedge funds,
private equity funds and venture capital funds, and many foreign
fund managers that would not fall within narrow exemptive
provisions.
The bill would eliminate the "private adviser" exemption
currently available to an investment adviser with fewer than 15
clients that neither holds itself out generally to the public as an
investment adviser nor acts as an investment adviser to any
registered investment company. In place of the private adviser
exemption, the bill would create a new exemption for a
"foreign private adviser" that (i) has no place of
business in the United States; (ii) has fewer than 15 clients in
the United States; (iii) has assets under management attributable
to clients in the United States of less than $25 million; and (iv)
neither holds itself out generally to the public in the United
States as an investment adviser, nor acts as an investment adviser
to any registered investment company.
The bill would also eliminate for any investment adviser that
manages a "private fund": (i) the intrastate exemption
from registration available to an investment adviser whose clients
are all residents of a single state and who does not furnish advice
or issue analyses or reports with respect to securities listed on
any national securities exchange, and (ii) the exemption from
registration available to an investment adviser that is registered
with the CFTC as a CTA whose business does not consist primarily of
acting as an investment adviser and that does not act as an
investment adviser to any registered investment company. The
bill's definition of "private fund" would include
hedge funds, private equity funds and other pooled investment
vehicles that are excepted from the definition of investment
company under Sections 3(c)(1) or 3(c)(7) of the Investment Company
Act of 1940, including a fund organized outside the United States
if 10% or more of its outstanding securities are held by U.S.
persons.
If passed in its current form, a U.S.-based investment adviser with
a single client (unless falling under the narrowed intrastate
exemption), or that manages a single private fund, would be
required to register with the SEC if the investment adviser has
more than $30 million under management.
The bill also proposes to give the SEC the authority to require any
registered investment adviser to submit to the SEC reports about
the private funds it advises. The reports would require information
prescribed by the SEC through rulemaking, which could include,
without limitation, assets under management, use of leverage,
counterparty credit risk exposures, trading and investment
positions and other information deemed necessary or appropriate in
the public interest, to protect investors or to assess systemic
risk. The bill would require the SEC to consult with the Federal
Reserve Board in determining the scope of information to be
reported, and would authorize the SEC to make such reports
available to the Fed and the Financial Services Oversight Council
for purposes of assessing systemic risk and determining if a
private fund should be designated a "Tier 1 financial holding
company." The reports submitted to the SEC are to be
confidential and excepted from application of the Freedom of
Information Act.
The proposed amendment would further require that registered
investment advisers provide certain reports, records and other
documents (to be prescribed by the SEC through rulemaking) to
investors, prospective investors, counterparties and creditors of
any private fund it advises and specifies that the records of the
private fund are deemed records of the investment adviser subject
to the recordkeeping requirements of the Advisers Act.
The proposed amendment clarifies the SEC's rulemaking authority
to include the ability to determine the new reporting requirements
and related definitions, and to ascribe different meanings to terms
used in different sections, including the term "client,"
which the U.S. District for the D.C. Circuit decided in the
Goldstein decision the SEC did not have legislative authority to so
interpret.
Finally, the bill proposes that within six months after the bill is
passed, the SEC and the CFTC, after consultation with the Board of
Governors of the Federal Reserve System, shall jointly promulgate
rules to establish the form and content of reports required to be
filed with the SEC and the CFTC by investment advisers that are
registered both under the Advisers Act and the Commodity Exchange
Act.
The Treasury's proposal appears to be based on the
"Private Fund Transparency Act of 2009" introduced in the
Senate by Senator Jack Reed on June 16.
To view the text of the bill click here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.