On July 15, 2009, the Obama Administration delivered proposed legislation to Congress that is designed to further its regulatory reform agenda announced last month.1 The Administration’s “Private Fund Investment Advisers Registration Act of 2009” would expand the pool of investment advisers required to register with the Securities and Exchange Commission (the “SEC”) by eliminating that portion of Section 203(b)(3) of the Investment Advisers Act of 1940 (the “Act”) that currently exempts from registration investment advisers with fewer than fifteen clients that do not hold themselves out to the public as investment advisers.2 Since managers to private investment funds are currently able (generally) to count each “fund” as a single client, many such managers currently rely upon the exemption provided by Section 203(b)(3) to avoid registration under the Act.

In cases where an investment adviser advises a “private fund” (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, including hedge funds, private equity funds and venture capital funds), the proposed legislation also eliminates (i) the “intrastate exemption” from registration under the Act and (ii) the “CTA exemption” from registration under the Act. The intrastate exemption concerns the current exemption available to advisers whose clients are residents of a single state where such advisers maintain their respective principal office and place of business. To rely upon such exemption, an investment adviser also must not furnish advice or issue analyses or reports with respect to securities listed, or admitted to unlisted trading privileges, on a national securities exchange. The CTA exemption concerns the current exemption available to advisers that are registered with the Commodity Futures Trading Commission as Commodity Trading Advisors. To rely upon such exemption, such advisers’ business must not consist primarily of acting as an investment adviser and such advisers must not act as an investment adviser to any registered investment company.

The Administration’s proposed legislation would also subject registered investment advisers to the following: (i) enhanced record-keeping requirements; (ii) investor, creditor and counterparty disclosure requirements; and (iii) regulatory reporting requirements (including the reporting of assets under management, borrowings, investment positions and trading practices on a confidential basis). Such record-keeping and reporting requirements would apply not only to a registered investment adviser but also to each “private fund” advised by such investment adviser.

Finally, the proposed legislation also (i) adds additional clarification relating to the SEC’s rulemaking authority, including the ability to ascribe different meanings to terms used in the Act (e.g., the term “client”) and (ii) removes the current prohibition on the SEC from requiring an investment adviser to disclose the identity of its clients, under certain circumstances, provided by Section 210(c) of the Act.

While there are certain differences (e.g., the elimination of the intrastate and CTA exemptions for advisers that advise “private funds”), the proposed legislation is substantially similar to the “Private Fund Transparency Act of 2009,” which was introduced in the U.S. Senate by Senator Jack Reed (D-Rhode Island) on June 16, 2009 and is currently under consideration by the Senate Committee on Banking, Housing, and Urban Affairs.3

Viewed in conjunction with recent legislative actions such as the Private Fund Transparency Act of 2009, the Administration’s proposed legislation reveals a focus on investment adviser registration as a favored method of regulating private investment funds. However, current legislative actions, including the proposed legislation, also place regulatory focus on pooled investment vehicles themselves, in addition to investment advisers that manage such vehicles.

Based upon the proposed legislation and other current legislative actions on both the state and federal levels, investment advisers to pooled investment vehicles (particularly unregistered investment advisers) should prepare for anticipated regulatory requirements now by conducting detailed reviews of their current compliance and operating policies and procedures. Such reviews should also focus on current record keeping and custody practices.4