On October 1, 2009, Representative Paul Kanjorski (D-Penn.), Chair of the House Capital Markets Subcommittee, released draft legislation entitled the "Private Fund Investment Advisers Registration Act of 2009," which is designed to expand the pool of investment advisers required to register with the Securities and Exchange Commission (the "SEC"). The draft legislation eliminates that portion of Section 203(b)(3) of the Investment Advisers Act of 1940 (the "Act")1 that currently exempts from registration investment advisers with fewer than fifteen clients who do not hold themselves out to the public as investment advisers.2 Representative Kanjorski’s draft legislation is substantially similar to proposed legislation that was released by the Obama Administration in July, with the exception of the treatment of investment advisers to venture capital funds (as further discussed below).
Representative Kanjorski’s draft legislation targets investment advisers who advise "private funds" (i.e., any investment fund that would be an investment company but for the exemptions provided by Sections 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940, including hedge funds and private equity funds). Additionally, like the Obama Administration’s proposed legislation, the draft legislation eliminates (i) the "intrastate exemption" from registration under the Act; and (ii) the "CTA exemption" from registration under the Act.3
The draft legislation would also subject registered investment advisers to certain (i) enhanced record-keeping requirements; (ii) investor, creditor and counterparty disclosure requirements; and (iii) regulatory reporting requirements (including the reporting of assets under management, borrowing, investment positions and trading practices, each on a confidential basis). These requirements would apply not only to a registered investment adviser but also to each “private fund” advised by such investment adviser.
Finally, the draft legislation adds additional clarification relating to the SEC’s rulemaking authority, including the ability to ascribe different meanings to terms used in the Act (e.g., the term "client").
As noted above, the draft legislation contains a carve-out from the registration requirements for investment advisers who advise "venture capital funds." The draft legislation, however, avoids specific details on the qualifications necessary to meet this exemption, and provides the SEC with the authority to define the term "venture capital fund." Notwithstanding that such advisers would be exempt from registration, the draft legislation directs the SEC to mandate certain record-keeping and reporting requirements for advisers to venture capital funds.
While there are certain differences (e.g., the elimination of the intrastate and CTA exemptions for advisers who advise "private funds," and the exemption from registration for advisers to venture capital funds), the draft legislation is similar to the “Private Fund Transparency Act of 2009,” which was introduced in the U.S. Senate by Senator Jack Reed (D-Rhode Island) on June 16, 2009 and is currently under consideration by the Senate Committee on Banking, Housing, and Urban Affairs.4
Viewed together with other recent legislative actions, the draft legislation reveals a focus on investment adviser registration as a favored method of regulating private investment funds. However, current legislative actions, including the draft legislation, also place a regulatory focus on pooled investment vehicles, in addition to the investment advisers that manage such vehicles. For investment advisers who advise venture capital funds, it remains to be seen whether an exemption from registration will be included in any future Senate proposals, especially considering recent statements from hedge fund and private equity lobbying groups that support registration for advisers to all private pools of capital, including venture capital funds.
As we have noted in previous alerts, investment advisers to pooled investment vehicles (particularly unregistered investment advisers) should prepare now for anticipated regulatory requirements that could be imposed by current legislative actions on both the state and federal levels by conducting detailed reviews of their current compliance and operating policies and procedures.