Treasury Department Proposes Legislation Requiring Registration of Advisors to Private Funds
| August 5, 2009
| Private Equity Group
On July 15 the Treasury Department proposed the “Private Fund Investment Advisers Registration Act of 2009.” The Act would generally require the vast majority of advisers to hedge funds, private equity funds, venture capital funds and other private funds to register with the SEC under the Investment Advisers Act of 1940. Management companies to private funds would fall within the definition of advisers for purposes of the Advisers Act.
Registration requirements for private fund advisers
The proposed legislation would require registration with the SEC by advisers to “private funds” with more than $30 million of assets under management. The Act does not distinguish between venture, private equity, hedge, real estate or other types of investment funds. The Act would eliminate the current exemption from registration in the Advisers Act that is most commonly relied upon by advisers to venture capital, private equity and hedge funds. Under this current exemption, an adviser who during the course of the preceding 12 months had fewer than 15 clients (i.e., funds that it advised) and that neither holds itself out generally to the public as an investment adviser nor acts as an adviser to any registered investment company is not required to register under the Advisers Act. Generally, advisers to private funds have been able to count each fund that they manage as only one client.
Reports, examinations and disclosures
Investment advisers required to be registered with the SEC under the Advisers Act are currently required to file an initial registration form containing detailed information regarding the names and professional backgrounds of the principals, the nature of the business of the investment adviser, the compensation of the investment adviser and certain financial statements. Once registered, investment advisers are subject to a number of compliance, recordkeeping, reporting and disclosure obligations under the Advisers Act.
The Act would impose new requirements for a registered investment adviser to file with the SEC for each private fund advised by the investment adviser records and reports relating to the amount of assets under management, use of leverage (including off balance sheet leverage), counterparty credit risk exposures, trading and investment positions and trading practices, as well as such other information as the SEC, in consultation with the Federal Reserve, may determine. Under the Act, all records of a private fund maintained by a registered investment adviser would be subject to periodic and special examination by the SEC. The Act would also require registered investment advisers to provide such reports, records and other documents to investors, prospective investors, counterparties and creditors of private funds, as determined by the SEC.
Confidentiality of Reports
The proposed legislation contains provisions that would prohibit the SEC from being compelled to disclose any supervisory reports or information required to be filed with the SEC by advisers to private funds, other than to other governmental, regulatory or judicial officials.