On December 11, 2009, the House of Representatives passed H.R. 4173, a comprehensive financial regulatory reform bill entitled the “Wall Street Reform and Consumer Protection Act of 2009.”1 The House bill is a composite of several financial regulatory reform proposals that have been circulated in the House since the beginning of the recent financial crisis.2 The House bill is structured similarly to a current Senate proposal introduced by Senator Chris Dodd in November (although Dodd’s proposal contains certain substantive differences from the House bill).3 Certain key aspects of the House bill are as follows: (i) the registration of private fund advisers and increased reporting obligations for such advisers; (ii) the disclosure of incentive-based compensation arrangements for certain financial institutions (including broker-dealers and investment advisers with assets over $1 billion); (iii) the establishment of financial stability and “too-big-tofail” regulations affecting the banking industry; (iv) the establishment of a revised regulatory regime for certain derivatives;4 and (v) the provision of general investor protections (including the establishment of a federal uniform fiduciary duty for broker-dealers and investment advisers) and anti-fraud regulations.5

Investment Adviser Registration and Reporting

Title V, Subtitle A of the House bill, the “Private Fund Investment Advisers Registration Act,” is designed to expand the pool of investment advisers required to register with the Securities and Exchange Commission (the “SEC”). This portion of the House bill affects investment advisers who advise “private funds” (i.e. any investment fund that would be an investment company but for the exemptions provided by Sections 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940), and eliminates that portion of Section 203(b)(3) of the Investment Advisers Act of 1940 that currently exempts from registration investment advisers with fewer than fifteen clients who do not hold themselves out to the public as investment advisers. This portion of the House bill does, however, provide certain exemptions from registration, such as a limited exemption for “foreign private fund advisers.” Foreign private fund advisers are investment advisers who have no place of business in the United States, and who, during the preceding twelve months, a) have had fewer than fifteen clients in the United States; b) have had assets under management in the United States of less than $25 million; and c) have not held themselves out to the general public in the United States as investment advisers. The House bill also provides an exemption from registration for advisers to venture capital funds. The House bill, however, offers little guidance on the qualifications necessary for this exemption, instead delegating to the SEC the authority to define “venture capital funds.”6 As with previous legislative proposals in the House (and Dodd’s Senate proposal), the House bill eliminates the “intrastate exemption” and “CTA exemption” from registration for advisers to private funds.7 The House bill provides an exemption from registration for advisers to private funds having assets under management in the United States of less than $150 million.8 However, the House bill states that any adviser with assets under management below this threshold may still be required to register with the SEC if such advisers are deemed by the SEC to pose systemic risk to the financial system.

Record-Keeping and Reporting Obligations

The House bill also subjects registered investment advisers to certain (i) enhanced record-keeping requirements; (ii) investor, creditor, and counterparty disclosure requirements; and (iii) regulatory reporting requirements (including the reporting of assets under management, borrowing, investment positions and trading practices, each on a confidential basis). These requirements would apply not only to a registered investment adviser, but also to each “private fund” advised by such investment adviser. Also, even certain private fund advisers that may be exempt from registration, including advisers to venture capital funds and advisers with assets under management of less than $150 million, may still be subject to mandatory disclosure requirements if the SEC deems such requirements to be in the public interest.

Compensation Disclosure

Title II of the House bill, the “Corporate and Financial Institution Compensation Fairness Act of 2009,” contains legislative proposals that would require certain non-binding shareholder votes relating to executive compensation arrangements for public companies. However, this portion of the House bill would also require certain “covered financial institutions” to disclose details of their incentive-based compensation arrangements to federal regulators (although details involving the actual compensation arrangements of individuals would not be required to be disclosed). For the purposes of this portion of the House bill, “covered financial institutions” would include broker-dealers and investment advisers, in each case “with assets of $1 billion or more.”9 This portion of the House bill also grants federal regulators the authority to prescribe rules preventing incentive-based compensation arrangements that could have “serious adverse effects on economic conditions or financial stability.”

Financial Stability and Banking Regulations

The House bill creates a new federal agency, the Financial Services Oversight Council, authorized to identify companies that could pose a threat to the financial stability of the economy. The Council will also be authorized to consult with other federal regulators and recommend stricter prudential standards for companies that may pose any threats to financial stability. Among these prudential standards are riskbased capital requirements, recommended leverage limits, and liquidity requirements.

The House bill also contains certain regulatory reforms affecting the banking industry, including (i) merging the Office of Thrift Supervision and the Office of the Comptroller of the Currency to create one regulatory body for both national banks and federal savings associations; (ii) mandating “well capitalized” and “well managed” requirements for bank holding companies and depository institutions; and (iii) establishing a “systemic dissolution fund” to assist with the dissolution of any failed financial company that is deemed to pose a threat to the financial system.

Investor Protection

The House bill contains various regulatory reforms that will affect financial services providers, including broker-dealers and investment advisers. Among these reforms are (i) granting the SEC the ability to prohibit the use of mandatory arbitration clauses in brokerage and investment advisory contracts; (ii) granting the SEC rulemaking authority to impose a uniform fiduciary duty on both broker-dealers and investment advisers; and (iii) establishing certain “whistleblower” protections and granting the SEC the ability to pay “whistleblowers” in connection with regulatory actions that result in monetary sanctions.

Next Steps

The House bill is similar in many respects to the regulatory reform legislation currently under consideration in the Senate. Final action by the Senate on these proposals is not likely to happen until early 2010, and the proposals could undergo significant changes before final passage. Although it is difficult to predict specific items that will be included in any final legislation, the House’s passage of its reform bill and the continued consideration of similar measures in the Senate, confirm a focus on investment adviser registration as a favored method of regulating private investment funds. Moreover, recent SEC rule making actions relating to custody of client funds or securities10, and other reform proposals put forth on both the federal and state level, are likely to require substantial compliance requirements for our clients. If these regulatory reform actions are adopted, as is expected, many currently unregistered investment advisers will be required to register, and those currently registered will be subject to heightened compliance, record-keeping, and reporting responsibilities. Additionally, SEC rulemaking actions following in the wake of final legislative action are likely to result in additional compliance requirements.