On March 7, Senator Chuck Grassley of the US Senate Committee on Finance attempted to offer an amendment to Section 203(b)(3) of the Investment Advisers Act of 1940. The amendment would have narrowed an existing exemption from registration that is applicable to advisers who have had fewer than 15 clients during the preceding 12 months and neither hold themselves out to the public as advisers nor act as advisers to registered investment companies. This exemption is frequently relied on by managers of hedge funds and other private investment pools.

Citing a backlog of amendments, the Senate bill manager objected to the introduction of Senator Grassley’s amendment at this time. Senator Grassley sought to introduce the amendment as part of the 9-11 homeland security legislation now being debated by the full Senate.

Senator Grassley’s amendment would have authorized the Securities and Exchange Commission to require an investment adviser to register with the SEC as such unless such investment adviser: (i) had $50 million or less in assets under management; (ii) had fewer than fifteen clients; (iii) did not hold himself out to the public as an investment adviser; and (iv) managed the assets of fewer than fifteen investors, regardless of whether the investors were direct clients of the investment adviser or participated in a pooled investment vehicle managed by the investment adviser.

If passed, this amendment would have provided the SEC with the statutory authority to enact rules similar to those struck down by the D.C. Circuit Court of Appeals last June in Goldstein v. Securities and Exchange Commission.

Senator Grassley’s attempt to introduce the amendment comes after a recent pronouncement by the President’s Working Group on financial Markets that there is no need to impose new regulations on the hedge fund industry. It also follows statements by the Bush Administration last month that market discipline and risk awareness are the best ways to protect investors from any problems associated with the growing hedge fund industry. It is unclear whether the amendment might be reintroduced in the future.