U.S. House Proposes Registration of Most Private Fund Advisers, Excepting 'Venture Capital Fund Advisers'

Author:Mr Joseph Romagnoli, Amy C. Johnson-Spina and Mayah Judovits
Profession:Torys LLP

On October 27, 2009, the U.S. House of Representatives Financial Services Committee approved out of committee proposed legislation titled the "Private Fund Investment Advisers Registration Act of 2009" (the Proposed Legislation); this is the fifth bill introduced this year to regulate private funds. A vote of the full House and Senate is required for the Proposed Legislation to become law.

A substantially similar (and identically titled) Act proposed by the Obama administration in July 2009 (the July Proposal) is described in Torys' July Private Equity Bulletin.

The Proposed Legislation would eliminate the registration exemption under the Investment Advisers Act of 1940 (the Advisers Act), currently available to all advisers that do not publicize themselves as investment advisers and that have fewer than 15 clients. The exemption would be available only to non-U.S.-based advisers with fewer than 15 U.S. clients and less than $25 million in U.S.-sourced assets under management. As a result, advisers that have until now relied on the private adviser exemption would have to register with the Securities and Exchange Commission (SEC); these include advisers to many types of private investment pools (such as hedge funds and private equity funds).

The most significant departure from the July Proposal is that the Proposed Legislation would exempt advisers to venture capital funds from the requirement to register under the Advisers Act. The bill leaves it up to the SEC to define the term "venture capital fund" and to draft the exemption.

As in the July Proposal, the Proposed Legislation gives the SEC record-keeping, reporting and inspection authority so that it can gather and share information about "private funds" managed by all registered advisers. However, the Proposed Legislation differs from the July Proposal with respect to reporting requirements in

granting the SEC the power to set additional different reporting requirements for different classes of private fund advisers, on the basis of the particular types or sizes of private funds they advise, and to classify persons within the SEC's jurisdiction on the basis of size, scope, business model, compensation scheme or potential to create systemic risks; allowing the SEC to share systemic risk information with any entity that the SEC identifies as having "systemic risk responsibility"; and authorizing the SEC to set record-keeping and reporting...

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