What Financial Regulatory Reform Means to Private Funds

On July 21, 2010, President Obama signed HR 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Act"), which puts in place a substantial regulatory overhaul for business, especially in the financial industry. The Act includes various new laws affecting fund managers, the most notable of which is "hedge fund registration," whereby advisers to hedge funds, as well as private equity funds, real estate funds and venture capital funds, will be required to register with and/or report to the SEC. Hedge fund registration, or "private fund registration," will substantially enhance compliance costs for fund managers. While the Act generally affects larger funds, it contains a number of provisions that will be troubling for middle-sized and even smaller funds, as well as additional record-keeping requirements and reporting requirements for investment advisers to private funds. The Act also creates additional challenges and opportunities for private investment funds, including (i) limiting bank involvement in the private fund space, (ii) introducing new corporate governance reforms and (iii) regulating the trading of swaps.

Andrews Kurth has worked with clients in the past in these areas and is continuing to follow the developments affecting private funds. This e-alert summarizes the key components of private fund registration, as well as the other challenges that may be of interest to private funds.

Overview of New Registration/Regulation Requirements

The Act eliminates (i) the "private investment adviser" exemption under Section 203(b)(3) of the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and (ii) the intrastate registration exemption for investment advisors with any private fund client, thereby requiring a number of advisers to private investment funds, including hedge funds, private equity funds and real estate funds1, to register with the SEC as an investment adviser and be subject to heightened regulation and examination by the SEC.

The Act creates a sliding scale of regulation, with different types of funds with different asset levels subject to varying degrees of regulation, as follows:

Advisers to hedge funds, private equity funds and real estate funds with assets under management ("AUM") equal to or in excess of $150 million will be required to register, although certain "mid-sized funds" would be subject to streamlined registration and reporting requirements. Advisers to hedge funds, private equity funds and real estate funds with AUM equal to or in excess of $100 million (and lower in certain states that do not require registration and examination) and less than $150 million will not be required to register, but will be required to maintain such records and make such reports to the SEC that the SEC determines necessary or appropriate in the public interest or for the protection of investors. Advisers to all private funds with AUM equal to or in excess of $30 million and less than $100 million that are not required to be registered with the state in which it resides will not be required to register but will be subject to certain reporting and books and records requirements. Advisers to venture capital funds will not be required to register, but will be required to maintain such records and make such...