On January 29, Sens. Chuck Grassley (R-Iowa) and Carl Levin (D-Mich.) introduced S. 344, "The Hedge Fund Transparency Act of 2009" ("S. 344"), which is primarily aimed at requiring a larger number of hedge funds, private equity funds, and other private investment funds to register with the Securities and Exchange Commission ("SEC"). The proposal would revise the definition of investment company to include funds that are currently excluded from the definition of "investment company" under Sections 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 (the "'40 Act"), but would not apply the full scope of compliance obligations under the Investment Company Act on these funds.

S. 344 would require funds with assets under management of $50 million or more to meet several requirements in order to maintain their exemption from full registration under the '40 Act. These requirements would include filing an annual public disclosure form, maintaining books and records specified by the SEC, and cooperating with any SEC information requests or examinations. Funds would be required to list on their public disclosure forms the name and current address of each of their investors, their total number of investors, their current assets under management, and the names of their primary accountant and primary broker. S. 344 would also require funds (even if they do not have $50 million or more in assets under management) to comply with the same anti-money laundering laws financial institutions must follow, requiring them to report any suspicious transactions to federal authorities.

This proposal is Sen. Grassley's second attempt to close what he has described as a loophole left open in June 2006 by the Goldstein decision, in which the D.C. Circuit Court of Appeals overturned an SEC rule that had required an investment adviser to a private fund to consider each of the underlying investors of such a fund as a client, rather than solely the private fund itself. Unlike the "Hedge Fund Registration Act of 2007" proposed in May of 2007, which sought to amend the exemption from investment adviser registration set forth in Section 203(b)(3) of the Investment Advisers Act of 1940, S. 344 seeks to require funds to adhere to certain rules in order to remain exempt.

Though Sen. Grassley's prior efforts to advance related legislation requiring investment adviser registration were unsuccessful in the last Congress, the current financial crisis has changed the political landscape surrounding the various players in the financial markets and accelerated the debate on greater transparency within those markets. To that end, the House Financial Services and Senate Banking Committees are likely to consider broader financial services regulatory reform in 2009, including, but not limited to, legislation introduced by Rep. Michael Castle (R-Del.) in the House of Representatives yesterday. Rep. Castle's proposal, in addition to compelling fund managers to register with the SEC like S. 344, would also force pension plans to disclose their hedge fund investments. The issues raised by S. 344 and Rep. Castle's proposal will undoubtedly draw additional attention in congressional hearings and other public policy forums as this debate develops. On January 29, Congress' Troubled Asset Relief Program ("TARP") Oversight Panel released its legislatively mandated report on financial services regulatory modernization. This report calls for hedge and private equity funds to be held to the same regulatory principles as other money managers generally, and explicitly for fund managers to register as investment advisors.

The introduction of S. 344, Rep. Castle's proposal, and the release of the TARP panel's report represent the beginning of a long and complex legislative debate on hedge fund regulation. Sonnenschein is actively engaged in these issues and will provide additional updates as events warrant.

A copy of the bill is available at http://levin.senate.gov/newsroom/supporting/2009/hedgefundsbill.012909.pdf.