After some five years of controversy, Congress seems prepared to enact legislation that would require most U.S.-based advisers to private investment funds (including hedge funds and private equity funds) to register with the U.S. Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940 (Advisers Act). Proposals to require registration of these advisers and/or the funds they advise have been advanced in Congress for several years following a decision of a Federal Court of Appeals in 2006 holding that the SEC lacked authority to require registration under its existing statutory authority.[i]
Most recently, the Obama administration opted for investment adviser registration as part of its comprehensive regulatory reform and restructuring legislative initiative and forwarded specific legislation, entitled the “Private Fund Investment Advisers Registration Act of 2009” (Treasury Bill) to Congress on July 15, 2009. The administration’s broader proposals also provide an additional level of regulatory oversight of those private investment funds that, based on reports to be provided to the SEC under the Treasury Bill, are deemed by reason of their size or otherwise to be systemically significant.
This memorandum contains a brief summary of the principal provisions of the Treasury Bill and contrasts several of its more important provisions with those contained in bills introduced by members of Congress,[ii] as those bills may be reviewed by the relevant congressional committees as they act on the Treasury Bill. We expect that both the House Committee on Financial Services and the Senate Committee on Banking, Housing and Urban Affairs will ultimately approve the Treasury Bill, perhaps with amendments, as there appears to be little private sector opposition in principle to adviser registration, in contrast to other proposals that would require the private investment funds, themselves, to register. While the Treasury Bill is likely to be approved as a separate measure by each committee, we currently expect that it will be combined with other components of the administration’s regulatory reform package, including possibly the proposal to establish a consumer financial products commission.[iii]
[i] In Goldstein v. SEC, 451 F.3d 873 (D.C. Cir. 2006), the Federal Court of Appeals for the D.C. Circuit vacated the SEC’s “hedge fund rule” requiring hedge fund advisers to register with the SEC under the Advisers Act if the funds they advise have 15 or more investors. Rule 203(b)(3)-2 promulgated under the Advisers Act contains the “private adviser” exemption, which allows advisers with less than 15 “clients” over the past 12 months to avoid registration. Prior to creating the “hedge fund rule,” a fund, itself, was deemed a single client. Upon creation of the rule, though, the SEC equated each individual investor as a client. However, the court in Goldstein rejected the SEC’s position holding that the adviser’s duties run to the fund and not the individual investors, thereby vacating the “hedge fund rule.”
[ii] The Private Fund Transparency Act of 2009, S.1276, was introduced by Senator Reed (D-RI) on June 16, 2009 (Reed Bill); the Financial System Stabilization and Reform Act, H.R. 1754, was introduced by Congressman Castle (R-DE) on March 26, 2009; and the Hedge Fund Study Act, H.R. 713, was introduced by Congressman Castle (R-DE) on January 29, 2009.
[iii] Such proposal is contained in a bill entitled, the Consumer Financial Protection Agency Act of 2009, H.R. 3126, introduced by Congressman Frank (D-MA) on July 8, 2009 (CFPA). A hearing on this bill is scheduled for the latter part of September 2009.