Private Fund Adviser Registration Proposed
The proposed Private Fund Investment Advisers Registration Act of 2009 (the “Registration Act”), issued on July 15th by the Treasury Department, is the next step in the Obama Administration’s efforts to increase transparency in the capital markets. If the legislation is voted into law, the Registration Act will require most unregistered investment advisers managing more than $30 million in assets, including private equity, venture capital, and hedge funds managers, to register as advisers with the SEC. The legislation would accomplish this goal by: (a) Removing from the Advisers Act the exemption from registration for advisers with fewer than 15 clients that do not hold out to the public; and (b) Requiring the registration of a new category of advisers to “private funds.”
The Registration Act defines a “private fund” as a pooled investment vehicle that would be an investment company but for the exceptions contained in sections 3(c)(1) or 3(c)(7) of the Investment Company Act and is either domiciled in the U.S. or is more than ten percent owned by U.S. persons. Thus, advisers that are currently not registered, but manage funds that rely on the section 3(c)(1) or 3(c)(7) exemptions, would have to register if the Registration Act is signed into law in its current form. CFTC registered Commodity Trading Advisors that manage a private fund would generally lose their exemption from registration under the Advisers Act pursuant to this legislation as well.
Many foreign advisers would also be forced to register pursuant to the Registration Act proposed amendments. Any investment adviser that satisfies the definition of a “foreign private adviser” would not have to register with the SEC. The Registration Act defines a “foreign private adviser” as any adviser that:
· Has no place of business in the United States;
· During the preceding 12 months has had fewer than 15 U.S. clients and less than $25 million in assets under management attributable to clients in the U.S.; and
· Neither holds itself out generally to the public in the U.S. as an investment adviser, nor acts as an investment adviser to a registered investment company or a company that has elected to be a business development company.
It isn’t clear how the SEC would define “place of business” for purposes of the foreign private adviser exemption, but we note that “place of business” is currently defined under the Advisers Act as any office at which the investment adviser regularly provides investment advisory services, solicits, meets with, or otherwise communicates with clients. If a similar definition is used, foreign advisers that manage only foreign funds would potentially have to register, even if they maintain only a small office in the U.S.
The Registration Act would also authorize the SEC to require registered advisers to maintain certain records and provide information regarding any private funds they manage. Such information would include, at a minimum, assets under management, use of leverage, counterparty credit risk exposure, trading and investment positions, and trading practices. The SEC would be instructed to adopt rules that would require advisers to provide investors and counterparties with certain reports and other documentation. Finally, the section of the Advisers Act permitting investment advisers to generally withhold the identity of their clients from the SEC would also be removed under this legislation.
In a nod to the 2006 Goldstein v. SEC case that invalidated the SEC’s prior attempt to register most hedge fund managers, the Registration Act authorizes the SEC to “ascribe different meanings to terms (including the term ‘client’)…as the Commission determines necessary….”
Considering that the White House and the SEC both support the legislation, and that three similar bills have already been introduced in Congress, we expect that the Registration Act, or some variation thereof, will be sent to the President’s desk before the end of the year.
If you have any questions related to these issues, contact an ACA compliance consultant, Damon Zappacosta in ACA’s Morristown, NJ office at (973) 631-1085, or Dee Stafford in ACA’s Boca Raton, FL office at (561) 988-3310.