The White House proposed legislation to Congress last week that would require investment advisors to private equity, venture capital and hedge funds with more than $30 million in assets under management to register with the Securities and Exchange Commission (SEC). The proposed legislation marks the most extensive effort to date to register and oversee the private equity, venture capital and hedge fund markets. Currently, only certain advisors are required to register with the Commodity Futures Trading Commission (CFTC). Advisors to just these types of private investment funds currently are not required to register with the SEC, although some advisors choose to do so voluntarily.
The proposed legislation includes not only mandatory SEC registration for advisors to funds with over $30 million in assets under management, but also includes substantial reporting and other oversight provisions. According to the U.S. Department of Treasury, which joined the White House in submitting the proposed legislation, the new law would include:
- Substantial regulatory reporting requirements with respect to the assets, leverage, and off-balance sheet exposure of their advised private funds
- Disclosure requirements to investors, creditors, and counterparties of their advised private funds.
- Strong conflict-of-interest and anti-fraud prohibitions.
- Robust SEC examination and enforcement authority and recordkeeping requirements.
- Requirements to establish a comprehensive compliance program.
The proposed legislation also requires that the funds managed by these advisors satisfy certain recordkeeping, investor disclosure and reporting requirements themselves. In response to the current financial crisis, the reporting requirements for both advisors and the funds they manage would include “confidential reporting of amounts of assets under management, borrowings, off-balance sheet exposures, counterparty credit risk exposures, trading and investment positions and other important information relevant to determining potential systemic risk and potential threats to our overall financial stability.” The SEC would also conduct regular examinations and share its findings with the Federal Reserve and the Financial Services Oversight Council in order to track the overall risk associated with the private equity, venture capital and hedge fund industry as a whole.