Thursday, July 16, 2009

SEC Outlines Options for Increased Regulation of Private Funds

On July 15th, 2009, Andrew Donohue, head of the SEC's Investment Management Division, delivered remarks to a U.S. Senate Banking subcommittee on the options for increasing regulation of hedge funds and other private investment vehicles.

Mr. Donohue expressed the SEC's support for the "Private Fund Transparency Act of 2009" introduced on June 16th by Senator Jack Reed (D-RI). If enacted, the Private Fund Transparency Act of 2009 would require advisers to private funds to register under the Investment Advisers Act of 1940 if they have at least $30 million of assets under management.

In addition to favoring investment adviser registration as a means to increase oversight of private funds, Mr. Donohue suggested that private funds could be required to register under the Investment Company Act of 1940 (the "ICA"), or the SEC could be given stand-alone authority to further regulate unregistered funds. Such additional regulation could take the form of restrictions on fund investments and investor terms, diversification and governance requirements, and other structural rules. Another approach suggested by Mr. Donohue would be for Congress to provide the SEC with rule-making authority which would allow it to condition a private fund's use of the section 3(c)(1) and 3(c)(7) exceptions to the ICA on whatever requirements the SEC finds to be necessary or appropriate to protect investors and enhance transparency.


SEC to Review Rule on Mutual Fund Distribution Expenses

In her July 14, 2009, testimony before a U.S. House of Representatives Financial Services subcommittee, SEC Chairman Mary Schapiro outlined the SEC agenda for addressing the financial crisis.

The agenda includes, amongst other things, a review of Rule 12b-1 under the Investment Company Act of 1940, which permits registered open-end management investment companies to use fund assets to finance expenses connected to the distribution of mutual fund units to investors. These expenses, which include broker-dealer and intermediary service fees, amounted to more than $13 billion in 2008.

The SEC plans to examine the impact Rule 12b-1 has on investor interests in practice, and is expected to consider the need for adjustments to current regulation.

In her testimony, Ms. Schapiro also reiterated her support for the Obama Administration's recommendation that advisers to hedge funds and other private investment funds be required to register with the SEC under the Investment Advisers Act of 1940.