On January 29, 2009, Senators Charles Grassley and Carl Levin introduced the Hedge Fund Transparency Act (HFTA) as a bill in the U.S. Senate. The bill would clarify current law to remove any doubt that the Securities and Exchange Commission (SEC) has the authority to require hedge funds to register with the SEC. HFTA would apply to all entities that rely on the exemptions currently provided by Sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 (ICA) which includes most hedge funds and private equity funds.
If enacted in the proposed form, each private investment fund relying on the current 3(c)(1) or 3(c)(7) exemption with assets of at least $50 million would be exempt from full registration and filing requirements of the ICA, so long as the investment fund meets the following requirements:  (i) SEC registration, (ii) an annual filing, (iii) a duty to maintain books and records required by the SEC and (iv) cooperation with any SEC examination or request for information.  The annual filing would be publicly available and include the following information:
  • the name and current address of each beneficial owner of the fund;
  • the name and address of the primary accountant and primary broker of the fund
  • the fund's affiliations with other financial institutions;
  • any minimum investment requirement; and
  • the current value of "assets" and "assets under management."
HFTA would make certain anti-money laundering (AML) requirements applicable to all funds, irrespective of whether the fund has assets of $50 million, including requirements to:
  • report suspicious transactions;
  • provide account information and documentation to authorities;
  • use risk-based due diligence policies, procedures and controls designed to ascertain the identity of and evaluate any foreign investor (including beneficial owners); and
  • establish AML programs, including at a minimum: (i) development of internal policies, procedures and controls; (ii) designation of a compliance officer; (iii) ongoing employee training; and (iv) an independent audit function.
Although the Senate bill is entitled the "Hedge Fund" Transparency Act, it would amend the ICA in a manner that would capture not only "hedge" funds but private equity funds, venture capital funds, real estate funds, and hedge funds (U.S. or non-U.S., with any U.S. investors), as well as many other private investment vehicles with $50 million or more of assets or commitments that currently are exempt from the ICA under Sec. 3(c)(1) or Sec.3(c)(7).
The exact extent of the registration that will be required and the information that will be required by funds no doubt will change during the legislative process, if indeed the bill advances and becomes law; however, Baker Donelson attorneys have discussed the details of the bill with Senate staff who confirm that the intent of the bill is not to require disclosure of the investors in a fund, despite the "beneficial owner" language currently employed, but only to require disclosure with respect to the fund's managers and advisors and the fund's investments.