As described yesterday, the U.S. Treasury Department's "Financial Regulatory Reform: A New Foundation" includes numerous proposals to address perceived inadequacies in U.S. financial regulation. Of particular note, the report proposes requiring that investment advisers to hedge funds and other private pools of capital (including private equity and venture capital funds) whose assets under management exceed "some modest threshold" be registered with the Securities and Exchange Commission under the Investment Advisers Act. Registration of such investment advisers would make them subject to recordkeeping and disclosure requirements, including requirements to report to investors, creditors and counterparties, as well as regulators. While the reporting may vary across the different types of private pools of capital, the report proposed confidential reporting to regulators of the amount of assets under management, borrowings, off-balance sheet exposures and other “necessary” information. As stated in the report, "[r]equiring the SEC registration of investment advisers to hedge funds and other private pools of capital would allow data to be collected that would permit an informed assessment of how such funds are changing over time and whether any such funds have become so large, leveraged, or interconnected that they require regulation for financial stability purposes."

These proposals follow similar proposals made by the G20 in the G20 Working Group 1 Final Report released in March of 2009, which also recommended registration of private pools of capital or their managers. The G20 Report also endorsed enhanced disclosure by such entities, including with respect to size, investment type, leverage, performance and participation in “certain systemically important markets.” As well, the G20 report recommended the development of common metrics to assess the significant exposures of counterparties for hedge funds, including prime brokers, given its view that failure of a systemically important fund or group of funds could be spread to the broader financial system through the use of counterparties.

Following the publication of the G20 Report, the European Commission also proposed its own framework for the regulation of managers of “alternative investment funds” on April 29, 2009. The proposed Directive would apply to any European Union domiciled “alternative investment fund manager” (AIFM) with assets under management above $EUR 100 million, or, for funds with no leverage and a lock-in period of five years or more, assets under management above $EUR 500 million. Under the proposed Directive, all AIFMs falling within the scope of the Directive would be required to be “authorized” by the regulator of their home state. Such authorization would impose a wide range of investment adviser type of requirements, including suitability, disclosure, governance, capital and other requirements. Disclosure requirements would relate to reporting on planned activity, identity and characteristics of the funds managed, governance and internal arrangements (including with respect to risk management, valuation and safe-keeping of assets, audits and systems of regulatory reporting). The manager would also be required to report to the relevant authority on the principal markets and instruments in which it trades, its principal exposures, performance data and concentration of risk. Additional disclosure requirements could also apply to managers managing leveraged funds and controlling stakes in companies.