Senators Grassley and Levin introduce the Hedge Fund Transparency Act

Senators Charles Grassley (R-IA) and Carl Levin (D-MI) introduced the Hedge Fund Transparency Act (“HFTA”) on January 29, 2009. Despite its name, the HFTA also would apply to private equity funds, venture capital funds, real estate funds and other private investment vehicles (“Private Funds”) with at least $50 million in assets or assets under management. If enacted, the bill would require these funds to register with the Securities and Exchange Commission (“SEC”).

Under current law, Private Funds typically are excluded from the definition of “investment company” under either Section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940, as amended (the “1940 Act”). The bill would define Private Funds as “investment companies,” but would exempt them from compliance with the full spectrum of 1940 Act requirements.

In a departure from current law, HFTA would subject Private Funds to full SEC oversight, even though they would be exempt from many of the provisions that apply to other types of investment companies, such as mutual funds and closed-end funds. The bill would require the funds, rather than their investment advisers, to register with the SEC.

Registration and Other Conditions for Exemption from the 1940 Act

Under the HFTA, in order to remain exempt from the substantive provisions of the 1940 Act, Private Funds would have to:

1. register with the SEC;

2. maintain books and records as prescribed by the SEC;

3. cooperate with any SEC information request or examination; and

4. file an annual disclosure form, to be made publicly available, containing the following information:

  • names of the companies and natural individuals who are the beneficial owners of the Private Fund along with an explanation of the ownership structure;
  • names of any financial institutions with which the Private Fund is affiliated;
  • the minimum investment commitment required of an investor;
  • the total number of investors in the Private Fund;
  • the name of the Private Fund’s primary accountant and broker; and
  • the current value of the Private Fund’s assets and assets under management.

The bill would require Private Funds to file this information electronically with the SEC in an electronically searchable format, available to the public at no cost. HFTA would also authorize the SEC to require additional information as it deems appropriate.

Anti-Money Laundering Obligations

The bill also directs the U.S. Department of the Treasury to issue a final rule, within 180 days of enactment of the HFTA, requiring Private Funds to establish anti-money laundering (“AML”) programs and, in particular, to guard against allowing suspect offshore funds into the U.S. financial system. In October 2008, the Treasury had withdrawn proposed rules that would have imposed similar requirements on Private Funds.

Conclusion

HFTA calls for greater transparency of Private Funds but primarily focuses on their ownership structure and affiliation with other financial institutions. HFTA does not require Private Funds to disclose their investment strategies, industry focus, leverage or exposure to counterparties. While HFTA subjects Private Funds to SEC oversight, it is unclear how the SEC will exercise its powers to request information or conduct examinations.

Substantial opposition to the disclosure of beneficial ownership interest should be expected.