Yesterday, Senator Christopher Dodd, Chairman of the Senate Committee on Banking, Housing and Urban Affairs, released a revised financial reform bill. We are still reviewing the draft legislation, which is over 1,300 pages, but we wanted to provide our private investment fund clients with some immediate information regarding the legislation. Interestingly, an important feature of the bill appears to be to shift some of the regulatory burden from the Securities and Exchange Commission to state regulators.


Venture Fund Advisers and Private Equity Fund Advisers


The proposed bill requires registration under the Investment Advisers Act for hedge fund managers, but includes exemptions from registration for both venture capital managers and private equity managers. The provisions are not identical. The private equity exemption states that the exemption applies to any adviser providing "investment advice relating to a private equity fund or funds" (emphasis added). The venture capital exemption only applies to the provision of investment advice relating to "a fund." It is not clear if this difference is intentional. The exemptions require the SEC to define the terms "private equity fund" and "venture capital fund."


Family Offices


The bill provides an exemption for family offices. The bill would require the SEC to adopt a definition of "family office" that is "consistent" with previous exemptive orders and "recognizes the range of organizational structures and management arrangements employed by family offices." It is unclear how liberal the SEC will be in its interpretation of "organizational structures and management arrangements."


Foreign Private Advisers


There is a new exemption from registration for "foreign private advisers." Some non-U.S. managers will not satisfy the requirements. In order to fall within this exemption, non-U.S. advisers need to (i) have no place of business in the United States, (ii) have fewer than 15 clients who are residents of the United States, (iii) have less than $25,000,000 attributable to United States clients, and (iv) not hold themselves out as investment advisers in the United States. The bill does not appear to require a non-U.S. adviser to look through a non-U.S. fund to count the 15 clients or $25,000,000. Clients should note, however, that the bill specifically authorizes the SEC to make rules regarding definitions in the statute.


New Threshold for Adviser Registration


The bill raises the threshold for registration at the federal level from $25,000,000 to $100,000,000 in assets under management. Currently, advisers registered at the federal level are not required to register with state securities regulators. Because of this increase, some managers with less than $100,000,000 in assets under management may have to de-register with the SEC and may find that they are subject to registration in multiple states.


New Regulation D Requirements


The bill provides that the SEC may except certain Regulation D offerings from being covered securities under Section 18(b)(4) of the Securities Act of 1933 (which exempts such offerings from state registration requirements). If the SEC did exclude certain offerings, then such offerings would be subject to the old “blue-sky” filings and registration requirements that were in existence prior to the National Securities Market Improvement Act of 1996 that generally pre-empted state registration requirements. The bill also requires the SEC to "review" any filings made by an issuer using Regulation D within 120 days of filing. It is unclear what level of review this would entail.


Volcker Rule


The bill does not immediately impose new restrictions on proprietary trading and fund ownership. Instead it requires a study of the proposed restrictions by the Financial Stability Oversight Council. The bill directs regulators to implement regulations for banks barring such proprietary trading based upon the Oversight Council's study and recommendations.