The Obama Administration has sent Congress draft legislation that would require advisers to certain types of private investment funds, including hedge funds, private equity funds, and venture capital funds, to register with the SEC under the Investment Advisers Act of 1940. The proposed Private Fund Investment Advisers Registration Act of 2009 follows the recommendations outlined in the Treasury Department’s recent white paper on financial regulatory reform and is modeled after the Private Fund Transparency Act of 2009, S. 1276, introduced by Senator John Reed in June.
The President’s legislation would require registration by removing the current exemption for private fund advisers and by excepting private fund advisers from the current exemption for intrastate advisers. It also would add a new exemption for “foreign private advisers,” which would include any adviser who has no place of business in the United States and who during the preceding 12 months has had fewer that 15 clients in the United States and less than $25 million in assets under management attributable to such clients. In addition, the legislation contains provisions that would:
- Authorize the SEC to require advisers to keep such records of and submit such reports regarding their “private funds” “as are necessary or appropriate in the public interest and for the assessment of systematic risk” by the Board of Governors of the Federal Reserve System and the President’s proposed Financial Services Oversight Council, and to make available to such Board and Council those reports and records or the information contained therein.
- Require that the requisite records and reports include, at a minimum, the following information for each private fund: amount of assets under management, use of leverage (including off-balance sheet leverage), counterparty credit risk exposures, trading and investment positions, and trading practices.
- Subject all records regarding an adviser’s private funds to such periodic, special, and other examinations as the SEC may prescribe.
- Require advisers to provide “such reports, records and other information to investors, prospective investors, counterparties, and creditors,” of their private funds as the SEC may prescribe by rule “as necessary or appropriate in the public interest and for the protection of investors or for the assessment of systemic risk.”
- Permit information required to be filed with the SEC regarding private funds to be shared with Congress and any federal agency or self-regulatory organization requesting the information for purposes within the scope of its jurisdiction.
- Clarify the SEC’s rulemaking authority, including the authority of the SEC to ascribe different meanings to terms (including the term “client”) used in different sections of the Advisers Act.
The proposed legislation surprised some for its scope, covering not only hedge fund advisers but also advisers to private equity funds and venture capital funds, as well as potentially offshore funds with investors in the United States. It also has raised a number of issues. For example, some have expressed concern over the proposed authority of the SEC to meddle in the affairs of private funds by mandating reports and other disclosures to “investors, prospective investors, counterparties, and creditors,” while others have expressed concern that the legislation does not do enough to protect proprietary information that private funds may be required to provide in reports filed with the SEC. It remains to be seen how the legislation will be received by Congress.