As part of its ongoing initiative to implement financial industry regulatory reform , the Obama Administration delivered proposed legislation to Capitol Hill yesterday that would require all advisers to hedge funds and other private pools of capital, including private equity and venture capital funds, to register with the Securities and Exchange Commission (SEC). As noted in the Treasury press release accompanying the Administration’s proposal, hedge funds contributed to the strain on the financial markets by de-leveraging at various points during the financial crisis. Accordingly, in attempt to curb any future liability caused by such entities, the proposal seeks to help protect investors from fraud and abuse, provide increased transparency, and supply information to regulators necessary to assess whether risks in the aggregate or risks in any particular fund pose a threat to the nation’s overall financial stability.
To accomplish these goals, the Administration’s proposal would require advisers to private funds with more than $30 million of assets under management to register with the SEC. In addition to the standard requirements imposed on all registered advisers, adviser to hedge funds and other private pools of capital would be required to provide significant information regarding the assets, leverage use and off-balance sheet exposure of the private funds they manage and provide enhanced disclosure to their funds’ investors, creditors and counterparties. Because of the sensitive nature of this information, this data would be treated as confidential and would not be disclosed to the public. The SEC would, however, share this information with the Federal Reserve and the proposed new Financial Services Oversight Council to help them assess whether any fund or funds advised by the adviser poses such a level of systemic risk as to justify heightened oversight.
The Administration's bill closely mirrors a similar proposal introduced last month by Senator Jack Reed, (D-R.I.), the Private Fund Transparency Act of 2009, which also seeks to require hedge funds and other private funds with assets under management of $30 million or more to register with regulators and to provide the SEC with the authority to collect information from the hedge fund industry and other investment pools, including the risks they may pose to the financial system. However, unlike the Administration’s proposal, the Reed bill does not provide specific details regarding the types of information that would be required and instead merely mandates that advisers “maintain such records and submit such reports as are necessary or appropriate in the public interest for the supervision of systemic risk by any Federal department or agency.”