On January 29, 2009, Senators Chuck Grassley (R-IO) and Carl Levin (D-MI) introduced a bill in the Senate that would require most private investment funds with assets of at least $50 million to register with the SEC and to comply with certain other requirements. If enacted, the Grassley-Levin bill (S. 344), known as the “Hedge Fund Transparency Act,” would impact not only hedge funds, but all private funds with assets of $50 million or more that currently rely on Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act, including private equity funds, venture capital funds, and certain insurance company separate accounts. The bill comes in the wake of the Madoff ponzi scheme scandal and failed rulemaking by the SEC to require hedge fund manager to register.

The bill would eliminate the exclusions from the definition of “investment company” under Sections 3(c)(1) and (7) upon which most private funds currently rely, and would amend Section 6(a) of the Investment Company Act to exempt from nearly all provisions of the Act any fund that meets substantially the same criteria as currently set forth in Section 3(c)(1) or Section 3(c)(7). A fund with assets of $50 million or more, however, would be so exempt only if the fund: (i) registers with the SEC; (ii) files annual disclosure form with the SEC providing certain basic information about the fund, (iii) maintains such books and records as the SEC may require, and (iv) cooperates with any SEC information or examination request. A fund that fails to comply with these requirements would become subject to the extensive provisions of the Investment Company Act, including the limits on leverage and fund governance requirements, as well as the Act’s normal registration and filing requirements.

Although not directly addressed in the bill, it appears the bill would also effectively require managers of private funds with assets of $50 million or more to register with the SEC as investment advisers because the exemption from registration normally relied upon by such managers is not available to managers of registered investment companies. The bill would also direct the U.S. Treasury to finalize rules requiring hedge funds to establish anti-money laundering programs.