The current economic crisis has increased the likelihood that hedge funds (and other private investment companies such as venture capital funds) and their managers will be subjected to greater federal regulation. So far this year:
- The world leaders at the G-20 London Summit issued a statement calling for globally consistent regulation of "systemically important hedge funds" (April 2);
- The Obama administration in introducing its "framework for regulatory reform" called for registration with the SEC of hedge funds and other private equity funds (meeting certain asset size requirements) and their advisers (March 26);
- The Chairman of the SEC has announced that it is considering calling for legislation that would require registration of hedge fund investment advisers and possibly of the hedge funds themselves (March 26); and
- Senators Carl Levin (D-Michigan) and Charles Grassley (R-Iowa) have introduced the Hedge Fund Transparency Act of 2009 (the "HFTA") which would require hedge funds and other private investment companies having assets of $50 million or more to register with the SEC (January 29).
The HFTA is the only one of these proposals for which we currently have any specificity regarding the scope of contemplated regulation. It would expressly require that a private fund meeting the $50 million asset size threshold (1) register with the SEC; (2) file with the SEC specified information that would be made publicly available; (3) maintain books and records as required by the SEC; (4) cooperate with any request for information or examination by the SEC; and (5) comply with the federal anti-money-laundering provisions that apply to other financial institutions. The HFTA may also have the effect of requiring the investment advisers to these funds to register with the SEC.
We believe that a new regulatory scheme for hedge funds (and possibly other private investment companies) is likely and may be enacted during 2009. There are, however, a number of important issues that must be resolved. For example, will only an asset test be used to determine which funds will be subject to regulation, and if so, at what level will it be established? There would appear to be significant differences between those funds that might be considered "systemically important" and all funds with assets of $50 million or more.