11 August 2009

A Comparison of Proposed Investment Adviser Legislation


David Guin
Partner | US

Over the past several months in the wake of the Madoff, Stanford and other scandals involving investment funds and advisers, numerous proposals have been put forward in an attempt to impose enhanced regulation on private investment funds and private investment advisers. While still speculative, if any one of these proposals are finalized and enacted they may have a significant impact on investment advisers, funds and fund sponsors. Parties who may be affected by these proposals should be aware of the various recommended changes in the proposed legislation outlined below.

Hedge Fund Advisers Registration Act of 2009

Introduced in the House on January 27, 2009 by Representatives Capuano (D, MA) and Castle (R, DE)


  • Removes the current exemption from registration under the Investment Advisers Act of 1940 (“Advisers Act”) for investment advisers with fewer than 15 clients.



  • Eliminating the “private adviser” exemption would require currently exempt advisers, both foreign and domestic, to register with the SEC and registration would subject such advisers to SEC oversight.



  • Registered investment advisers must comply with provisions relating to record keeping, compliance programs, advertising and marketing, solicitation arrangements and annual disclosures.



  • No alternative standard for “private advisers” included in this bill.



Hedge Fund Transparency Act

Introduced in the Senate on January 29, 2009 by Senators Grassley (R, IA) and Levin (D, MI)

Removes the current exclusions from the definition of “investment company” under the Investment Company Act for funds with fewer than 100 investors or all of whose beneficial owners are “Qualified Purchasers” by deleting Sections 3©(1) and 3©(7) of the Investment Company Act.

Replaces Sections 3©(1) and 3©(7) with new Sections 6(a)(6) and 6(a)(7). Under new Sections 6(a)(6) and 6(a)(7), a fund with $50 million or more in assets or assets under management would be exempt from full regulation as an investment company only if (a) either (i) the fund had less than 100 investors or (ii) all of the fund’s beneficial owners were “Qualified Purchasers” and (b) if the fund complies with new Section 6(g).

New Section 6(g) requires SEC registration, maintenance of books and records as required by the SEC, cooperation with any request for information or examination by the SEC; and filing of an annual information form with the SEC that would be publically available in electronic, searchable format. As a result of conflicts between the text of the proposal and subsequent public statements made by the proposal’s sponsors, it is not possible to say with certainty what, if any information would be required in the annual information form concerning the beneficial owners of fund interests. However, the proposal contemplates that the annual information form would include the following:


  • The primary accountants and primary brokers used by the fund.



  • An explanation of the structure of ownership interests in the fund.

  • Information on any affiliation that the fund has with another financial institution.

  • A statement of any minimum investment commitment required of a limited partner, member, or other investor in the fund.

  • The total number of any limited partners, members, or other investors in the fund.

  • The current value of (i) the assets of the fund, and (ii) any assets under management by the fund.

This proposal also requires funds to establish anti-money laundering procedures and to report suspicious transactions as is currently required by other financial institutions.

Private Fund Transparency Act of 2009

Introduced in the Senate on June 16, 2009 by Senator Reed (D, RI)

Removes the current exemption from registration under the Advisers Act for investment advisers with fewer than 15 clients.

Adds new definition of “Foreign Private Adviser” as follows:


  • No place of business in the United States.



  • Fewer than 15 clients in the US

  • Assets under management (“AUM”) attributable to US clients of less than $25 million.

Requires all domestic “private advisers” with AUM in excess of $30 million and all foreign “private advisers” who do not meet the definition of “Foreign Private Adviser” to register as investment advisers under the Advisers Act.

Registration subjects such advisers to SEC oversight.

Registered investment advisers must comply with provisions relating to record keeping, compliance programs, advertising and marketing, solicitation arrangements and annual disclosures.

Strikes subsection © of Section 210 from the Advisers Act that currently prohibits the SEC from requiring the disclosure of an investment adviser’s clients raising the prospect that the bill is intended to require investment advisers to disclose their client lists and private investment funds to disclose the identity of their investors.

Investor Protection Act of 2009

Released by US Treasury Department, July 2009

Broker-dealers and investment advisers are currently subject to different regulatory standards. The Treasury Department has stated its belief that investors do not distinguish between the recommendations of broker-dealers and investment advisers and these differing legal standards “are no longer meaningful.” Accordingly, this proposal grants broadly defined rulemaking authority to the SEC to, among other things:


  • Adopt rules establishing a uniform fiduciary duty standard for both broker-dealers and investment advisers when providing investment advice.



  • Adopt rules to facilitate the delivery of “simple and clear” disclosures regarding the investor’s relationship with broker-dealers and investment advisers.



  • Adopt rules prohibiting sales practices, conflicts of interest and compensation schemes for financial intermediaries, such as broker-dealers and investment advisers that the SEC “deems contrary to the public interest and the interest of investors.”



  • Require a summary prospectus including disclosure of fees and costs prior to the completion of the purchase of shares.



Private Fund Investment Advisers Registration Act of 2009

Released by the Obama Administration on July 15, 2009

Removes the current exemption from registration under the Advisers Act for investment advisers with fewer than 15 clients.

Adds new definition of “Foreign Private Adviser” as follows:


  • No place of business in the United States.



  • Fewer than 15 clients in the US.



  • AUM attributable to US clients of less than $25 million.



Requires all domestic “private advisers” with AUM in excess of $30 million and all foreign “private advisers” who do not meet the definition of “Foreign Private Adviser” to register as investment advisers under the Advisers Act.

Registration would subject such advisers to SEC oversight.

Registered investment advisers must comply with provisions relating to record keeping, compliance programs, advertising and marketing, solicitation arrangements and annual disclosures.

Strikes subsection © of Section 210 from the Advisers Act that currently prohibits the SEC from requiring the disclosure of an investment adviser’s clients raising the prospect that the bill is intended to require investment advisers to disclose their client lists and private investment funds to disclose the identity of their investors.

Gives the SEC authority to require investment advisers to maintain records and submit reports of information relating to both the adviser and funds it manages.

Gives the SEC authority to require investment advisers to provide disclosure to investors, prospective investors, counterparties, and creditors, for the protection of investors or the assessment of systemic risk.

Permits the SEC to keep confidential any information in reports required to be filed with the SEC, except pursuant to requests from Congress or other federal agencies.

Corporate and Financial Institution Compensation Fairness Act of 2009 Released in the House on July 21, 2009 by Representative Frank (D, MA)

Primarily focuses on compensation for public companies, but includes compensation structure reporting requirements for investment advisers and broker-dealers.

Conclusion

At this point, it is too early to tell which of the proposals outlined above will be enacted. However, it is generally believed that enhanced regulatory requirements in one form or another will be imposed upon currently exempt investment advisers and/or investment funds. As change is imminent, it would be prudent for investment professionals to prepare for some form of registration (and the policies and procedures required to be implemented in connection therewith) and consider any restructuring alternatives in advance of legislation.

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