Wednesday, March 17, 2010

Senator Dodd Unveils Financial Reform Legislation: Implications for Investment Funds

A revised version of the "Restoring American Financial Stability Act" (the "Bill"), originally presented in November 2009, was unveiled by Senate Banking Committee Chairman Chris Dodd (D-CT) on March 15, 2010. The investment adviser registration provisions of the Bill are essentially unchanged in from the November version of the Bill. As previously reported, the Bill would require advisers to hedge funds and other private funds who manage more than $100 million to register with the SEC and comply with certain reporting requirements that will allow the SEC to assess systemic risk. Advisers that fall beneath this threshold would be subject to State regulation.

In contrast with its House counterpart, the Bill maintains an exemption from registration as an investment adviser with the SEC for both venture capital and private equity fund advisers. Both terms remain to be defined by the SEC for the purposes of the exemption. In addition, the Bill continues to exempt "family offices", as defined by the SEC, from the definition of an "investment adviser" pursuant to Section 202(a)(11) of the Investment Advisers Act of 1940.

An important departure from the November version of the Bill is the inclusion of the so called "Volcker Rule". The rule would prohibit banks and their subsidiaries from engaging in proprietary trading or investing in or sponsoring a hedge fund or private equity fund. The Bill defines the term "sponsoring" in this regard as (i) serving as a general partner, managing member, or trustee of the fund; (ii) in any manner selecting or controlling (or having employees, officers, directors, or agents who constitute) a majority of the directors, trustees, or management of the fund; or (iii) sharing with the fund, for corporate, marketing, promotional, or other purposes, the same name or a variation of the same name.

Finally, the Bill directs the SEC to increase the financial threshold applicable for an investor to be considered "accredited" under the Securities Act of 1933 to reflect the price inflation since the currently applicable figures were determined. The Bill would require the SEC to adjust such figures at least every 5 years, while also requiring the U.S. Comptroller General to conduct a study on the appropriate criteria for determining the financial thresholds or other criteria needed to qualify for accredited investor status and eligibility to invest in private funds.

According to Dodd's statement released ahead of the Bill, a full markup of the Bill should begin in the Banking Committee next week.