Synopsis: On March 15, 2010, Senator Chris Dodd (D-Conn.) introduced the latest version of his proposal for comprehensive financial reform, entitled the "Restoring American Financial Stability Act of 2010." The bill, which is broadly similar to the previous Senate financial reform proposal introduced in November 2009, proposes sweeping financial industry regulatory reforms including: (i) the establishment of a Consumer Financial Protection Agency to regulate consumer financial transactions; (ii) the establishment of a Financial Stability Oversight Council to monitor systemic risk within the economy and to recommend regulations to govern banks and other financial institutions; (iii) a requirement that non-binding shareholder votes be taken on executive compensation for certain issuers; (iv) the establishment of a federal fiduciary duty for broker-dealers; (v) the restructuring of the system of bank regulation; and (vi) new requirements of central clearing and exchange trading for certain derivatives products.

The new Senate bill largely leaves unchanged from previous Senate bills the proposed "Private Fund Investment Advisers Registration Act," which would eliminate the portion of Section 203(b)(3) of the Investment Advisers Act of 1940 that currently exempts from federal registration those investment advisers that have fewer than fifteen clients and do not hold themselves out to the public as investment advisers. The proposed legislation would, however, add specific new exemptions from federal registration for certain "foreign private advisers," advisers to "venture capital funds," advisers to "private equity funds," and advisers who manage less than $100 million in assets, and would remove "family offices" entirely from the purview of the Advisers Act, all as to be defined by the SEC. Although excepted from the registration requirements, the proposed legislation would still require private equity fund advisers to be subject to certain record keeping and reporting requirements. In addition, the proposed legislation contains numerous other directives, including: (i) specifying items to be included in private fund reports to the SEC; (ii) requiring the SEC to conduct investment adviser examinations according to a schedule established by the SEC; and (iii) potentially increasing the dollar thresholds in the "accredited investor" standard in Regulation D under the Securities Act of 1933 to reflect inflation.

In addition to the new registration requirements for investment advisers, the bill also includes a variation of the "Volcker Rule" proposed by the Obama Administration that would limit proprietary trading and investments in hedge funds and private equity funds by banks and their subsidiaries (see summary of the "Volcker Rule" below). Under the Senate proposal, federal banking agencies would be directed to promulgate regulations restricting most banks from (i) trading in stocks, bonds, options, commodities, derivatives and other financial instruments for their own accounts, and (ii) investing in or sponsoring hedge funds and private equity funds. The bill would have the proposed Financial Stability Oversight Council conduct a six month study to determine how best to tailor such restrictions to the stated purposes of the bill, and the regulations would take effect within nine months of the bill's passage. The bill appears to provide regulators with discretion to limit, rather than ban outright, the trades and investments contemplated in this section. However, the Obama Administration has expressed its preference for strict regulation in this area, and may seek to independently promulgate additional restrictions to supplement any less stringent regulations implemented under the Senate proposal.

Status: This most recent revision of the bill was proposed by Senator Chris Dodd (D-Conn.) on March 15, 2010, and approved by the Senate Committee on Banking, Housing and Urban Affairs on March 22, 2010. The full Senate is scheduled to begin debate on final passage of the bill when Congress returns from its spring recess on April 11, 2010. The House of Representatives passed a substantially similar bill on December 11, 2009. Any bill passed by the Senate would have to be reconciled with the corresponding House bill and voted on by both houses of Congress before a final bill would be eligible to be signed into law by the President. The full text of Senator Dodd’s most recent proposal is available here.