On December 11, 2009, the US House of Representatives (the “House”) passed The Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173), a broad-reaching financial reform bill (the “House Bill as Passed”) that includes an amended version of the Private Fund Investment Advisers Registration Act of 2009.
In a client alert dated November 30, 20091, we examined the major features of the Private Fund Investment Advisers Registration Act of 2009 (the “Registration Act”), which is the US legislative proposal to amend the Investment Advisers Act of 1940 (the “Advisers Act”) to require the registration of private fund investment advisers. That alert compared the various versions of the Registration Act pending at the time, including (i) its initial version, as introduced by the US Treasury on July 15, 2009, (ii) the version amended and approved by the Financial Services Committee of the US House of Representatives (the “House”) on October 27, 2009, and subsequently introduced to the floor of the House (the “House Bill as Introduced”), and (iii) the version included in the discussion draft bill introduced by Sen. Christopher Dodd (D-CT), Chairman of the US Senate Banking Committee, on November 10, 2009 (the “Senate Draft”).
The focus of this client alert is the implications the changes contained in the House Bill as Passed have for non-US private fund investment advisers. Before discussing those implications, however, it is useful to examine the changes to the Advisers Act proposed in the House Bill as Introduced in comparison with those in the House Bill as Passed, which we have presented below in tabular form.
The table below summarizes the significant provisions in the House Bill as Passed compared to those in the House Bill as Introduced.
Exemption for “Foreign Private Fund Advisers”
As a result of the amendments to the definition of “foreign private fund adviser” noted above, the House Bill as Passed narrows the exemption from registration available to non- US private fund investment advisers (“Non-US Advisers”) under the House Bill as Introduced, effectively increasing the likelihood that a Non-US Adviser to a fund with US investors will be required to register. As described in the table above, the additional phrase introduced in the House Bill as Passed narrows the exemption for foreign private fund advisers by including in the number of persons advised (and assets under management) not just “clients” but also “investors in the United States in private funds advised by such investment adviser” and their assets under management for purposes of determining whether the 15-client and US$25 million thresholds are each met. (This change also has the effect of being a specific exception to the specified general limitation on the SEC’s ability to interpret the term “client” in the Advisers Act to include the underlying investors of a private fund.)
Under the House Bill as Introduced with the specified limitation on “looking through” to a private fund’s underlying investors, a Non-US Adviser would be exempt from registration if it (a) manages only private funds that are not US entities (regardless of whether such funds included US investors), (b) has less than 15 “clients” in the United States (including private funds that are US entities) and (c) has assets under management (“AUM”) attributable to private funds that are US entities of less than US$25 million. However, under the House Bill as Passed, due to the inclusion of the phrase “and investors in the United States in private funds advised by such investment adviser” in the definition of “foreign private fund adviser,” a Non-US Adviser would be required to register (a) if it has more than 14 investors in the United States in one or more non-US private funds that it manages, (b) if US$25 million or more of the assets in non-US private funds it manages consist of assets attributable to one or more investors in the United States, or (c) unless another exemption is available.
Exemption for Private Fund Advisers with AUM in the United States of less than US$150 million
Under the House Bill as Introduced, a private fund investment adviser would be exempt from registration if each private fund that it manages has less than US$150 million in AUM in the United States. The House Bill as Passed closes this potential loophole by reformulating this exemption to include only investment advisers that solely provide advice to “private funds” and have less than US$150 million in aggregate AUM in the United States (the “Small Private Adviser Exemption”). Consequently, Non-US Advisers who manage private funds with AUM in the United States of US$150 million or more would be required to register under the House Bill as Passed. Note that the House Bill as Passed contemplates “looking through” to the underlying investors of a private fund: the exemption refers to AUM in the United States and not to “clients”. This is consistent with how the definition of “foreign private fund advisor” was amended in the House Bill as Passed.
Application of Specified Exemptions under the House Bill as Passed
In cases where the “foreign private fund adviser” exemption does not apply to a Non-US Adviser, such Non-US Adviser should consider whether another exemption under the House Bill as Passed would apply. For example, a Non-US Adviser that is unable to rely on the foreign private fund adviser exemption from registration could nonetheless rely on the Small Private Adviser Exemption if its AUM in the United States is less than US$150 million and it solely manages private funds. Note, however, that notwithstanding the exemption from registration under the Small Private Adviser Exemption, such Non-US Adviser would be subject to potential reporting requirements. What is not addressed in the House Bill as Passed is what examination rights the SEC has with respect to a Non-US Adviser that is not required to register under the Advisers Act, but is required to maintain certain records and file annual reports with the SEC.
The focus now shifts to the US Senate, which will start debating the Senate Draft when the Senate re-convenes on January 20. Soon after introducing the Senate Draft, Senate Banking Committee Chairman Christopher Dodd (D-CT) estimated that the Senate would not vote on its version of a financial reform bill until April or May at the earliest. Whether this prediction will come to pass is unclear: Dodd, who has led the Democratic party’s financial reform efforts in the Senate, has since announced his intention not to seek re-election, a move that may further delay any progress in that house of Congress. On the other hand, a recent bipartisan announcement of agreements on several key issues may indicate that a final Senate bill will emerge even sooner than Dodd initially indicated and his announced retirement may make him impervious to business-as-usual and therefore less willing to engage in customary, politically-driven compromising and negotiating that would delay a vote.
Even after the Senate passes its version of a financial reform bill, the road to effectiveness is still long. After a financial regulatory reform bill has been approved by the US Senate, it will need to be reconciled with the House Bill as Passed. The reconciled bill will then need to be passed by both houses of Congress. Only then will the bill be sent to President Obama’s desk to be signed into law. The House Bill as Passed currently provides for a one-year implementation period and so, it is possible that private fund managers may not be subject to registration any earlier than mid-2011.
Importantly, even after a reconciled bill is signed into law, much of the detail of such enacted law may be left to be prescribed by the SEC since all versions of the bills grant broad powers to the SEC to define and ascribe meanings to certain key terms; to determine registration and examination procedures for certain private fund investment advisers; and to determine what levels of reporting and additional information is required from private fund investment advisers.