On July 15, 2009, the Obama administration submitted to Congress the Private Fund Investment Advisers Registration Act of 2009 (the “Act”), which would require many investment advisers to private equity, venture capital and hedge funds to register with the Securities and Exchange Commission as investment advisers, and would impose significant information reporting requirements on all registered investment advisers to “private funds”.
Registration Requirements
In its current form, the Act would amend the Investment Advisers Act of 1940 (as amended, the “Advisers Act”) to require advisers to private equity funds and other private pools of capital (including hedge funds and venture capital funds) with assets under management in excess of $30 million to register with the SEC if the funds are “private funds”. A fund is a private fund if:
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the fund would be an investment company (as defined in Section 3 of the Investment Company Act of 1940, as amended) but for the exceptions in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act; and
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the fund either (A) is organized or otherwise created under the laws of the United States or of a state or (B) has 10 percent or more of its outstanding securities owned by U.S. persons.
The Advisers Act currently exempts from registration with the SEC any investment adviser that has fewer than 15 “clients” and that neither holds itself out generally to the public as an investment adviser nor acts as an investment adviser to any registered investment company or business development company. As a fund is generally counted as one “client,” most unregistered advisers to private funds currently rely on this so-called “private investment adviser” exemption and are not required to register. The Act proposes to effectively eliminate the private investment adviser exemption for all advisers to private funds with assets under management in excess of $30 million.
Foreign private advisers would be exempt from the registration requirements of the Advisers Act only if they have no place of business in the United States and, in the last 12 months, had fewer than 15 clients and had assets under management attributable to clients in the United States of less than $25 million (or such higher amount as the SEC may determine). To be exempt, a foreign private adviser cannot hold itself out generally to the public in the United States as an investment adviser, nor act as an investment adviser to a registered investment company or a business development company.
Information and Reporting Requirements
It is important to note that the Act would not impose registration or disclosure requirements on the private funds themselves. However, the Act would require registered advisers to such funds to report to the SEC, on a confidential basis, at least the following information with respect to private funds advised by such advisers.
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amount of assets under management;
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use of leverage (including off-balance sheet leverage);
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counterparty credit risk exposures;
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trading and investment positions;
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trading practices; and
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such other information as the SEC, in consultation with the Board of Governors of the Federal Reserve System, determines necessary or appropriate in the public interest and for the protection of investors or for the assessment of systemic risk.
In addition to the foregoing, the Act would impose the following additional requirements on all registered investment advisers to private funds:
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all records of private funds maintained by a registered investment adviser would be subject to periodic, special and other examinations by the SEC;
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the SEC could make available to the Board of Governors of the Federal Reserve System and the Financial Services Oversight Council copies of such records and reports as are necessary for assessment of the systemic risk of a private fund or assessing whether a private fund should be designated a Tier 1 financial holding company. All such information provided by the SEC would be kept confidential; and
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registered investment advisers would be required to provide to investors, prospective investors, counterparties and creditors of any private fund advised by such registered advisers, such reports, records and other documents as the SEC, by rules and regulations, may prescribe as necessary or appropriate in the public interest and for the protection of investors or the assessment of systemic risk.
Other Requirements
Although investment advisers to private funds are already subject to the anti-fraud rules of the Advisers Act, registration will also subject such advisers to other provisions of the Advisers Act, including rules relating to required disclosures to clients, adoption of compliance procedures and codes of ethics, custody rules for client assets, performance fees, record keeping and contents of advisory agreements.
Conclusion
If enacted in its present form, the Act will require many investment advisers in the private equity, venture capital and hedge fund industries to register with the SEC for the first time and will impose significant new information and reporting requirements, even for investment advisers that are already registered.
The Private Equity Council announced in testimony to Congressional subcommittees that it supports administration and congressional proposals to require advisers to private equity firms to register as investment advisers with the SEC. Given the current climate, it appears that the chances of the Act’s passage are high, though the time frame is uncertain and it will likely be subject to amendment as it moves through Congress and the industry has a chance to provide feedback.
