The Department of Treasury released its proposed legislation in increase the regulatory oversight on private investment funds: Private Fund Investment Advisers Registration Act of 2009. The Administration’s legislation would require that all investment advisers with more than $30 million of assets under management to register with the SEC.
This is presumably the Obama plan and becomes the fourth piece of legislation proposed this year to regulate private investment funds. It joins the Hedge Fund Adviser Registration Act of 2009, the Hedge Fund Transparency Act of 2009 and the Private Fund Transparency Act of 2009.
Disclosures to the SEC:
The legislation would grant broad power to the SEC to require the disclosure of information about the fund “as are necessary or appropriate in the public interest and for the assessment of systemic risk by the Board of Governors of the Federal Reserve System and the Financial Services Oversight Council, . . ” This includes:
- amount of assets under management
- use of leverage (including off-balance sheet leverage)
- counterparty credit risk exposures
- trading and investment positions, and
- trading practices
Of course is also requires the private fund to allow examinations by the SEC.
Disclosures to Investors:
The legislation would grant broad power to the SEC about the disclosures that need to made by private funds to investors, prospective investors, counterparties, and creditors, of any private fund. The SEC would be able to require disclosure “as necessary or appropriate in the public interest and for the protection of investors or for the assessment of systemic risk.”
Defining Clients (updated)
The legislation would all the SEC to “ascribe different meanings to terms (including the term ‘client’) used in different sections” of the Investment Advisers Act. This is an attempt to address the demise of the Hedge Fund Rule and allow the SEC to define the investors in private investment funds as “clients” of the fund manager. The courts had ruled that the SEC overstepped their authority when they tried this definition on their own.
I am not a big fan of this approach. The Act would better amending 203(b)(3) to exclude the new term “private fund” from the 15 client rule exemption. I don’t like the idea that a limited partner investor in a private fund could be deemed a “client” of the adviser in addition to the fund itself.
CFTC
The legislation calls for the SEC and CFTC to establish joint rules for investment advisers who are already subject to the CFTC and would now also be regulated by the SEC.
Summary
This legislation is very similar to the Private Fund Transparency Act of 2009 proposed by Senator Reed. It pushed most of the decision-making onto the SEC for the Commission to come up with the disclosure requirements. At this point, it is not clear which of the competing acts will end up becoming law, if any.
References:
- Private Fund Investment Advisers Registration Act of 2009 by Burt Mallon of Hedge Fund Law Bog
- Text of the Private Fund Investment Advisers Registration Act of 2009 (.pdf)
- Press Release from the Department of Treasury
Actually, the definition of ‘client’ is key – that was the roadblock that the Court used in Goldstein vs. SEC back in 2004 to stop the SEC from redefining client to look through the fund to its investors, which would have let the SEC get past the under 15 investor exception in the Advisers Act. The Court ruled that the SEC did not have the authority to redefine client, so it could not require the funds to register. The proposed act would change that.
More of my thoughts are in a posting at hedgefundregs.com.
Ron –
You are right. I thought the Act was trying to get rid of the 15 client rule exemption for private funds. That is the approach in Hedge Fund Adviser Registration Act of 2009. Instead it is taking the kludgy approach of redefining the word “client.”
I updated the “Defining Clients” section of the post.
Doug,
I understand your preference, more specificity in the proposed language would make it both easier to comply going forward and clearer what the real intent of the Act was – right now this part remains a bit opaque.
Inferring the genesis of the proposed language from its structure, the amendment is specific about hedge funds being subject to the information gathering capabilities that the proposed Financial Services Oversight Council, the FRB and other agencies will likely need for their planned roles – probably at their request. On the other hand, it merely tries to clear any roadblocks to let the SEC address its own roles and concerns via their rulemaking process – as they also probably requested.
Perhaps, the second objective should have been clearer and more specifically set in the proposed language, but in the current push to legislate they may not have wanted to take the time to determine the right scope of coverage (by AUM, clients, other factors, or a mix). When a court interprets a statute, it’s always possible for Congress to “clarify” the meaning as the proposal would do, although so far it is of course just the Executive Branch proposing to keep the authority to set details within its own agency. We’ll see how Congress responds.
From a theoretical perspective, there is a case for using the rulemaking powers of an agency to address complex topics that require more expertise and/or flexibility than the Legislative Branch can devote – and this topic may well qualify. Nevertheless, it would have been good to be more specific if this is the intent.