House Proposes Private Fund Adviser Registration

Private Fund Investment Advisers Registration Act of 2009

On October 1, 2009, Congressman Paul E. Kanjorski (D-PA) introduced in the House of Representatives a draft of the Private Fund Investment Advisers Registration Act of 2009 (the “PFIARA”), which is the fourth bill introduced this year aimed at regulating private funds, including hedge funds and private equity funds. The three prior bills introduced earlier this year were (1) the Hedge Fund Adviser Registration Act of 2009, (2) the Hedge Fund Transparency Act, and (3) the Private Fund Transparency Act of 2009.

Registration Requirement and Exemptions

Currently, many advisers to private 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 (“Advisers Act”). In general, the exemption provides that an adviser with less than 15 clients that does not hold itself out to the public is exempt from registration. The PFIARA would eliminate the private adviser exemption by amending Section 203(b) of the Advisers Act to exclude from the registration exemption an investment adviser to any “private fund.”

The PFIARA defines a “private fund” as a fund that is “organized or otherwise created under the laws of the United States or of a state” or “has 10% or more of its outstanding securities by value owned by U.S. persons,” and would be deemed an “investment company” under the Investment Company Act of 1940 (“1940 Act”), but for the exceptions in Section 3(c)(1) or Section 3(c)(7) of the 1940 Act. Investment advisers to private funds would therefore be required to register with the SEC and comply with all applicable provisions of the Advisers Act.

As currently drafted, the PFIARA would require all advisers to private funds to be registered as of the date the bill is signed into law. It is possible that the PFIARA could be amended to provide a grace period to enable such investment advisers to register. Alternatively, the SEC may issue a temporary exemption under Section 206A of the Advisers Act to provide a registration grace period.

The PFIARA would exempt advisers to “venture capital funds” from the requirement to register, but has tasked the SEC with defining the term “venture capital fund” and crafting the exemption.

The PFIARA would exempt “foreign private fund advisers” defined as investment advisers that have no place of business in the U.S., do not generally hold themselves out to the public in the U.S., have fewer than 15 clients in the U.S. during the preceding 12 months, and have less than $25 million in assets under management that are attributable to U.S. clients.

Recordkeeping, Reporting and Examinations

The PFIARA would require investment advisers to private funds to maintain certain information including, for each private fund, the assets under management, the use of leverage, counterparty credit risk exposure, and trading and investment positions, among other things. The records and reports of a private fund that are maintained or filed by its adviser would be deemed to be the records of the adviser. The PFIARA would also provide the SEC with broad authority to require investment advisers to maintain records and to submit reports to the SEC to enable the SEC or another federal department or agency to supervise systemic risk. The SEC would be required to consult with the Board of Governors of the Federal Reserve System (the “Board”) when determining what records an investment adviser to a private fund is required to maintain and the reports they are required to file.

The PFIARA would provide the SEC with broad authority to examine the records of advisers to private funds and the records of the funds. The SEC could also request that advisers make available to the SEC copies or extracts of such records.

The SEC would be required to share with the Board or any other federal agency having systemic risk responsibilities copies of all reports, documents, records and information filed with the SEC. The SEC would keep such information confidential and, subject to certain limited exceptions, could not be compelled to disclose it. Finally, the PFIARA would authorize the SEC to require advisers to private funds to provide such information as the SEC deems necessary or appropriate in the public interest to investors, prospective investors, counterparties and creditors.