On July 15, 2009, the US Department of the Treasury released a part of President Obama’s financial market reforms in the form of the proposed Private Fund Investment Advisers Registration Act of 2009 (PFIARA). As proposed, PFIARA would eliminate several current exemptions to registration under the Investment Advisers Act of 1940 (Advisers Act), thus requiring nearly all advisers to hedge funds, venture capital funds, private equity funds and other private pools of capital to register with the Securities and Exchange Commission (SEC). PFIARA would also subject all funds to increased recordkeeping, disclosure and regulatory reporting requirements. A copy of PFIARA, as proposed, is now available.

Private Adviser Exemption and Limited Foreign Private Adviser Exemption

Under current law, advisers with fewer than 15 clients in any 12 month period and that do not hold themselves out to the public as investment advisers are not required to register under the Advisers Act (this exemption is generally referred to as the "private adviser exemption"). Since each fund managed by an investment adviser is generally treated as a single client under the Advisers Act, the private adviser exemption has enabled many advisers to avoid SEC registration. Except as discussed in the following paragraph, PFIARA would repeal the private advisers exemption.

While PFIARA eliminates the private adviser exemption for US-based advisers, it does maintain a limited exemption for foreign private advisers. Under PFIARA, a foreign private adviser is an adviser that (A) has no place of business in the United States, (B) does not have either (i) more than 14 clients that are in the United States or (ii) more than US$25 million of assets under management attributable to clients that are in the United States and (C) does not either (i) hold itself out to the general public in the United States as an investment adviser or (ii) advise a registered investment company or a business development company. Under PFIARA, a foreign private adviser would be exempt from registration, the implication being that a previously exempt foreign-based adviser that manages a fund that (Y) has 15 or more clients that are in the United States or (Z) has more than US$25 million of assets under management attributable to clients that are in the United States would be required to register with the SEC.

Intrastate Exemption

Under current law, advisers whose clients are all residents of the same state in which the adviser maintains its principal office and place of business are exempt from registration (this exemption is generally referred to as the "intrastate exemption"). PFIARA would eliminate the intrastate exemption for advisers that manage a fund that (A) is organized under US law or secures more than 10 percent of its investment funds from US persons and (B) uses the "3(c)(1)" (fewer than 100 beneficial owners) or "3(c)(7)" (all investors are "qualified investors") exemptions from registration under the Investment Company Act of 1940.

Recordkeeping and Reporting Requirements

PFIARA also would mandate and authorize the SEC to establish new recordkeeping and reporting requirements, including requirements to report to the SEC 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." This information would be made available to the Board of Governors of the Federal Reserve System and the Financial Services Oversight Council to enable those agencies to assess systemic risk in the financial system.

Conclusion

While PFIARA merely represents the Obama administration’s proposal, and the legislation will undoubtedly be debated and have changes proposed during the legislative processes, it clearly demonstrates an intent by the Obama administration and the US Department of the Treasury to increase regulatory requirements and scrutiny upon private investment fund managers operating in the United States or managing funds provided by US citizens.