Wednesday, November 4, 2009

Update: Private Fund Registration Act Advances

On October 27, the U.S. House Financial Services Committee passed H.R. 3818, the Private Fund Investment Advisers Registration Act (the "Bill"), introduced by Congressman Paul E. Kanjorski (D-Pa.). The Bill, which would require advisers to hedge funds and other private funds to register with the SEC and would impose certain recordkeeping and regulatory disclosure requirements, received almost unanimous support in the Committee as it was passed with a 67-1 vote.

If enacted, the Bill would remove the "private client" exemption of section 203(b) of the Investment Advisers Act of 1940, as amended (the "Advisers Act"), which exempts advisers from registration if they have had fewer than 15 clients during the preceding 12 months. The version of the Bill cleared by the Committee includes several amendments to the original proposal which alter the potential registration obligations of advisers.

  • Advisers to offshore funds are no longer exempt from registration under the Bill. Under the Bill's revised definition of "private fund," an adviser may be subject to registration if it advises any fund which would be considered an investment company but for its reliance on the exemption provided by section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940, as amended.

  • The amended Bill provides an exemption from Advisers Act registration to a private fund adviser if each of the private funds it manages has assets under management ("AUM") of less than $150 million. It is not yet clear, however, whether the AUM test will be calculated once or periodically, and whether it will be based on committed or invested capital. Advisers to venture capital funds (as defined by the SEC) continue to remain outside the scope of registration, as envisaged by the original proposal. Although they will be exempt from Advisers Act registration, advisers to funds with AUM of less than $150 million or venture capital funds will nevertheless be required to maintain records and provide the SEC with annual reports or other data the SEC deems necessary or appropriate.

  • Advisers who solely advise small business investment companies ("SBICs") licensed under the Small Business Investment Act of 1958 would also be exempt from registration under the amended Bill. Advisers relying on the SBIC exemption would not be required to maintain records or provide reports to the SEC.

  • The Bill includes a transition period of one year following enactment before its provisions become effective. This would give advisers who would become subject to registration time to implement the appropriate internal systems and controls.
According to Rep. Kanjorski, the newly introduced reporting costs are expected to be in the range of $5,000 to $15,000 for most hedge funds, while they could exceed several hundred thousand dollars for more complicated hedge funds.

The bill is expected to go to a full House vote in November.