Article by Keith T. Robinson, Karen L. Anderberg, Jennifer O. Wood and Derek B. Newman The Obama administration presented the U.S. Congress with its far-reaching recommendations to overhaul the U.S. financial regulatory system (the "Plan") on 17 June 2009. Among other things, the Plan calls for the registration of investment advisers to private pools of capital, including hedge funds, private equity funds and venture capital funds, with assets under management above a "modest" amount. On 15 July 2009, the Obama administration delivered to the U.S. Congress the Private Fund Investment Advisers Registration Act of 2009 (the "Private Advisers Bill"), draft legislation that is intended statutorily to implement certain aspects of the Plan.1 In addition, shortly before the Plan was unveiled, Senator Jack Reed introduced into the U.S. Senate the Private Fund Transparency Act of 2009 (the "Private Fund Bill" and, collectively with the Private Advisers Bill, the "Bills").2 These two pieces of legislation generally are consistent and, if either is adopted, would significantly expand the number of investment advisers required to register with the U.S. Securities and Exchange Commission ("SEC"), including non-U.S. investment advisers.
The Plan and the Bills are the latest efforts by U.S. politicians eager to subject private funds and their managers to closer regulatory scrutiny.3
The Obama Administration Plan The Plan recommends that investment advisers to private pools of capital whose assets under management exceed some "modest threshold" be required to register with the SEC. Although the Plan does not call for the direct registration of funds, the Plan does recommend that investment funds advised by SEC-registered advisers be subject to recordkeeping requirements and disclosure requirements with respect to investors, creditors and counterparties. Presumably, the investment advisers to these funds would be required to ensure that these requirements are met, and the Plan recommends that the SEC conduct regular, periodic examinations of these funds to monitor compliance.
The Plan also recommends that registered investment advisers be required to report to the SEC information on the funds they manage, and that such information should be sufficient to assess whether any fund poses a systemic threat. The SEC would be required to share this information with the U.S. Federal Reserve Board (the "Fed").
Under the Plan, the Fed is charged with supervisory authority over financial firms posing systemic risks, which may include hedge funds, private equity funds and venture capital funds. The Fed would identify such funds based on criteria to be established by the U.S. Congress, which would likely include the fund's "size, leverage and interconnectedness". Funds that pose a systemic risk would be designated as "Tier 1 Financial Holding Companies" ("Tier 1 Funds") and would be subject to strict capital, liquidity and risk management standards. The possible substantive regulation of Tier 1 Funds represents a break from the current trend in U.S. hedge fund and private equity fund regulatory efforts, which to date have focused on disclosure as opposed to substantive regulation.4
The Private Advisers Bill and the Private Fund Bill Either Bill, if enacted, would amend the U.S. Investment Advisers Act of 1940 (the "Advisers Act") to require: (i) the registration of many investment advisers that have heretofore been able to rely on certain exemptions from SEC registration; and (ii) periodic reporting by advisers of fund-specific information.
Adviser Registration Under the current U.S. regulatory regime, an "investment adviser" is defined as "any person who...