Private Fund Investment Advisers Registration Act Of 2009

On November 10, 2009, Senate Banking Committee Chairman Christopher Dodd (D-CT) introduced to the Senate a draft of the Restoring American Financial Stability Act of 2009 (the "RAFSA"). Included within the RAFSA is the Private Fund Investment Advisers Registration Act of 2009 (the "PFIARA"), which is the fifth bill introduced this year aimed at regulating private investment funds, including hedge funds and private equity funds.1

Federal Registration Requirement Currently, many advisers to private investment funds rely upon the private adviser exemption to avoid registering as an investment adviser with the Securities and Exchange Commission ("SEC") under the Investment Advisers Act of 1940, as amended (the "Advisers Act"). In general, the private adviser exemption provides that an adviser with less than 15 clients that does not hold itself out to the public is exempt from registration under the Advisers Act. The PFIARA would eliminate the private adviser exemption by removing Section 203(b)(3) of the Advisers Act in its entirety. Consequently, investment advisers with a requisite amount of assets under management who serve as advisers to domestic or offshore private investment funds, institutional clients, managed accounts, or high net worth individuals, among other types of clients, would be required to register with the SEC regardless of the number of clients to whom the adviser provides advisory services, unless an exemption applies. Such investment advisers would therefore be required to comply with all applicable provisions of the Advisers Act.

Furthermore, under the PFIARA, broker-dealers that provide investment advice that is solely incidental to the conduct of their business as a broker-dealer would no longer be excluded from the definition of "investment adviser" in Section 202(a)(11) and would be required to register with the SEC if they provide advisory services. Currently, many broker-dealers are not required to register with the SEC and are not subject to other provisions of the Advisers Act based on an exclusion from the definition of "investment adviser" for registered broker-dealers who (i) give investment advice that is "solely incidental to their brokerage business, and (ii) receive no "special compensation" for this investment advice. As a registered investment adviser, broker-dealers would be subject to the Advisers Act's rules regarding principal transactions and cross trades, although the PFIARA provides that the SEC...