On Wednesday, July 15, the Department of the Treasury (“Treasury”) announced proposed amendments to the Advisers Act that would require registration of currently-exempt private fund managers, including advisers to hedge funds, private equity funds and venture capital funds. The bill (the “Bill”), entitled the “Private Fund Investment Advisers Registration Act of 2009,” also would establish significant reporting, recordkeeping and disclosure requirements for all private funds advised by a registered investment adviser. The Bill effectuates a number of the suggested reforms included in Treasury’s white paper issued last month entitled “A New Foundation: Rebuilding Financial Supervision and Regulation.” This white paper was described in our client alert dated June 23, 2009. A copy of the Bill is available here. This client alert reviews the Bill’s proposed amendments to the Advisers Act and their potential effect on private fund managers.  

Policy Considerations  

In its white paper, Treasury laid out concerns regarding the “explosive growth” in the unregistered privately-owned investment funds industry and the effects that these funds have had on the larger markets, particularly in the context of the recent financial crisis. As a result, Treasury believed it was prudent to broaden significantly the registration requirements for private fund managers and the disclosures they are required to make to the SEC, in order to permit the SEC to make “an informed assessment” of (1) how private funds change over time and (2) whether any funds are “so large, leveraged or interconnected that they require regulation for financial stability purposes.” In its press release announcing the Bill (available at http://www.ustreas.gov/press/releases/tg214.htm), Treasury reiterated these concerns and rationalized that the Bill would continue the Administration’s “push to establish new rules of the road” to protect investors, to provide more transparency in the market and to provide the information necessary to assess risks that threaten financial stability.

Registration of Substantially All Advisers to Private Funds  

The Bill would apply the Advisers Act registration requirement to all investment advisers with more than $30 million in assets under management and would repeal the “fewer than 15 clients” exception regularly relied upon by private fund advisers to avoid registration. The Bill would provide a limited exception for “foreign private advisers” (generally those investment advisers with no place of business in the US and which during the preceding 12 months have had fewer than 15 US clients). However, the exception would not be available if a foreign private adviser has assets under management attributable to US clients of $25 million or more (or such higher threshold amount as the SEC may determine). The Bill does not specify whether a foreign private adviser would be required to look-through a foreign fund to count US client money invested in the foreign fund towards the $25 million threshold.  

Additional Reporting and Recordkeeping by Registered Private Fund Advisers

The Bill would authorize the SEC to require registered private fund advisers to submit such regulatory reports of the private funds they advise as the SEC determines necessary or appropriate. The term “private fund” would mean generally an investment company exempt from registration under the Investment Company Act under Section 3(c)(1) or 3(c)(7) of such Act that either (A) is organized or created under the laws of the United States or of a state or (B) has 10 percent or more of its outstanding securities owned by US persons. As specified in the proposed amendments, registered private fund advisers would be required to report to the SEC, on a confidential basis, for each private fund advised by the adviser, information including the “amount of assets under management, use of leverage (including off-balance sheet leverage), counterparty credit risk exposures, trading and investment positions, and trading practices.” Registered private fund advisers also would be required to report such other information as the SEC, in consultation with the Federal Reserve Board, determines is necessary or appropriate.  

In addition, registered private fund advisers would be required to maintain records of private funds they advise and make those records available for SEC inspection. Registered private fund advisers also would be required to make available to the SEC or its staff “any copies or extracts from such records as may be prepared without undue effort, expense or delay” as the SEC or its staff may reasonably request. The SEC would be entitled to share with the Federal Reserve Board and the Financial Services Oversight Council copies of all reports, records and other information filed by a private fund adviser as may be considered necessary for the purpose of assessing a private fund’s systemic risk or whether a private fund should be designated a Tier 1 financial holding company. According to Treasury’s white paper, Tier 1 financial holding companies would be those “firms whose failure could pose a threat to financial stability due to their combination of size, leverage, and interconnectedness.”

The Bill offers no specific description of the nature and frequency of the proposed new reports, or the period of time for which these and any other new records are required to be maintained, but leaves rulemaking authority open to the SEC. In addition, the amendments would give the SEC the authority to ascribe different meanings to terms (including the term “client”) under different sections of the Advisers Act as the SEC determines necessary to effect the purposes of the Act.  

Additional Disclosures by Private Fund Advisers  

The Bill also would authorize the SEC to require registered private fund advisers to make additional disclosures to various parties, including investors and potential investors. More specifically, the SEC would be entitled to require disclosure by registered private fund advisers of “such reports, records and other documents to investors, prospective investors, counterparties, and creditors, of any private fund” advised by a registered adviser as the SEC “may prescribe as necessary or appropriate in the public interest and for the protection of investors or for the assessment of systemic risk.”  


The Bill would require the SEC and the CFTC, after consultation with the Federal Reserve Board, to “jointly promulgate rules to establish the form and content of the reports required to be filed” with the SEC and with the CFTC by investment advisers that are registered under both the Advisers Act and the Commodity Exchange Act. The agencies would be required to promulgate those rules within 6 months after the enactment of the legislation. The rules likely would provide for some grace period before requiring full compliance with any new requirements.